The world is in recession today…largely because of unpaid/non-performing debt. For example, Greece owes a substantial amount of money, and cannot service its debt. Until this debt is rescheduled (or written off), it will prevent the Greek economy from recovering, in any substantial way.
My question: how is this different from depreciation in industry? Suppose GM builds a factory in 1990 (e.g. Saturn), and because of market failure, and obsolescence, this factory becomes worthless by 2010…$20 billion is (effectively) gone. Yet, GM continues in business. The same is true of PCs-the best PC available in 2000 is worthless today-so has it’s value been effectively lost?
Maybe what the world needs is to have non-performing debt written off like depreciation?
Depreciation is the expected reduction in value of a fixed asset due to normal wear and use. PC’s and computer equipment are expected to depreciate quickly due to obsolescence. Factories are expected to depreciate much more slowly. If a factory suddenly becomes worthless due to changing market conditions or something it would not become suddenly “depreciated” to valueless, but would be written off.
Loans are not expected to become non-performing in quite the same way. Instead, a company that holds many loans would expect some percentage of them to become non-performing and would have a reserve to handle that. As each individual loan becomes non-performing it would be written off against the reserve. If the accountants had not correctly estimated the percentage of loans that would be non-performing, the company could be in danger of bankruptcy.
First, that’s an accounting question, not an economics question.
Second, depreciation is not the same as debt. Depreciation is simply the decrease in value of an asset.
I believe non-performing debt would be actual debt (money owed) on an asset that is not being paid.
Depreciation is unavoidable. Everything depreciates. Non-performing debt is avoidable.
That happens all the time. But probably not in the manner you think. The banks and other entities that invested in Greece debt have probably written it off already. They don’t expect to be repaid in full, so they have marked it down to its market value which is pennies on the dollar. Greece could begin buying back its own bonds at these reduced values.