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No meaningful boost to consumption from FX debt deal, says City

The mortgage debt deal designed to ease debt service costs to distressed FX loan holders "will have no meaningful impact" on the consumption outlook for 2011/2012, London-based emerging markets analysts said on Wednesday.

In a research note titled "Flirting with moral hazard", BofA Merrill Lynch Global Research said that while households that will opt in the government scheme will benefit from lower monthly repayments, their overall debt will not decrease; in fact it will modestly increase.

As a result, until the labour market turns around more forcefully and real wages return to positive territory on a sustainable basis, "we expect the majority of households to continue to increase precautionary savings".

The lifting of the foreclosure ban is "a welcome step forward", but the cap on the permitted property sale "appears low".

More importantly, the scheme runs the risk of fuelling moral hazard and boosting NPLs among mortgage holders since the National Asset Management Company will be allowed to buy the underlying property and rent it back to the debtor. Even if in the end the conditions were to prove unfavourable for the debtor, lack of clarity on this front and the low quota for repossessions may in any case reduce households' appetite to service their loans, knowing that the risk of losing the house in the near term is low, BofA Merrill Lynch Global Research said.