60,000 of Croatia's poorest will have all of their debts cancelled

Croatia is trying something innovative to alleviate poverty: it’s cancelling debts.

Under an agreement Croatia’s government made with “major local banks, leading telecom operators, the four biggest Croatian cities and several public utility companies,” according to Reuters, the debt burden of about 60,000 of Croatia’s poorest citizens will be wiped — without reimbursement to the banks, telecoms, and utility companies. The program will reach about 1.3% of Croatia’s 4.4 million citizens.

Debt has become a huge issue for the Croatian economy, and this move may not even go far enough to put a dent in the problem. 317,000 Croatian citizens, or around 7.2% of the population, had blocked bank accounts because of outstanding debts as of last July, according to Reuters. (As a proportion of the population, this is roughly equal to the 7.7% of Americans that are unbanked.)

This is how the program is supposed to work. In order to qualify, a person must have

  • Debts worth 35,000 kuna (about $US5,150)
  • Either qualify for welfare or make less than 1,250 kuna per month (about $US184)
  • Not have any other assets or savings

The big question is what happens now.

In the short term, this will clear about 2.1 billion kuna ($US319.26 million) worth of debt, according to Reuters, and allow a lot of people back into the banking system in Croatia. They will have a fresh start, which effectively amounts to a stimulus package being funded by Croatia’s financial institutions.

But what about the other people still locked out of the banking system?

It seems weird to have an absolute threshold: if you make 1,249 kuna, you get to start again. If you make 1,251 kuna, you are left with the entirety of your debt. If the figures are correct, there will still be more than 250,000 people without access to their accounts.

And if banks expect this kind of policy to become the norm, they may very well increase interest rates for everyone, making going into debt even more expensive in the future for everyone.

It’s an interesting experiment, but, it seems, doomed to fail.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.