“Current asking prices suggest that 200,000 households are in negative equity, the majority of 270,000 people who bought between 2005 and 2008. Figures from June show 36,000 mortgages were in arrears of three months or more, with collective arrears of just over half a billion euro. These figures do not account for tens of thousands who have renegotiated, switched to interest-only repayments or obtained a reduced repayment schedule for a period of time”
From a letter to the Irish Times by finance, economics and mortgage experts in November 2010
In the past two decades Ireland has implemented innovations that have marked the country out as progressive and ballsy. We banned smoking in bars and other workplaces in 2004, we introduced a €0.22 levy on plastic bags in supermarkets, in the 1990s we saw the potential for low corporate tax rates to provide a compensating boost to employment and wealth, in 1996 we set up the Criminal Assets Bureau in the wake of journalist Veronica Guerin’s assassination so that wealthy individuals without visible sources of wealth could face confiscation of ill-gotten gains. And for the most part, today we look back fondly on these innovations There have been a few less fondly remembered – in 2002 the government distributed iodine tablets to every household in the land so that if “the terrorists” got their hands on Britain’s Sellafield nuclear power station and there was a release of radioactive iodine which breezed over onto Irish shores then we could all take the so-called “stable” iodine tablets handed out by the Irish government to prevent thyroid cancers! The use of cheese as a means of combating poverty raised a few well-deserved chuckles last year. The jury is still out on the famous social partnership between government, employers and workers.
And now, as a nation, we face another problem articulated by the economists who wrote to the Irish Times last November, whose letter extract is shown at the top above. We have 800,000 mortgages in the State, an estimated 200,000-plus are in negative equity, 5%+ are in arrears over 90 days, another 5% have been restructured and are mostly on interest only repayments. Property prices have collapsed and are reckoned to be 35-60% less than peak prices, depending on which index you consult. And given our penchant for re-mortgaging during the boom, it wasn’t just actual purchasers of property that are now left nursing massive negative equity, it was practically anyone who re-mortgaged at the peak. And that released equity was largely blown; not an insignificant number of households became three-car families with an executive saloon, a sporty run-a-round and a jeep mostly bought on credit. Others invested in property abroad -Bulgaria,Cape Verde,Spain were popular. Or we invested in banks shares that were seen as blue-chip punts. And we spent – back in the 1990s, nouveau riche Russians used to ask shop-assistants in Moscow if they hadn’t anything more expensive to sell, in the 2000s in anonymous boutiques in Mullingar we were asking the same question. So for a mix of profligacy, recklessness but also conservative caution in not wanting to be priced completely out of the property market, for better or worse, we have this heavy yoke of debt around our necks, or to be more precise around the necks of a significant enough proportion of the country, that it affects us all to a greater or lesser extent.
There doesn’t appear to be a suggestion from any quarter that things are going to get better anytime soon in terms of property at least, in fact the betting is that things will get worse before they get better.
The problem is a financial one in that a significant number of people cannot afford to repay their loans. It’s also an economic problem because people are paying down debt which is not being matched with new lending by Irish banks which have colossal deleveraging targets, and because the whole mess is draining confidence from those who do have savings but are deterred from spending now. And it’s a societal problem with a large beggared section of society barely keeping their heads above water financially.
So will have spring another rabbit from the hat with an innovative Irish solution or will we wander off on a cheese and iodine tangent?
Morgan Kelly yesterday called for debt forgiveness for Irish mortgage payers and is reported to have said the cost of a program would be €5-6bn; I don’t have the speech but the Irish Times reports “in such a scheme mortgages would be reduced to a level “deemed affordable” while others would be allowed to leave their properties “without being pursued for outstanding debts”. In June 2011, RTE’s Frontline programme also explored debt forgiveness particularly for mortgage borrowers. Last November 2010 a group of finance, economics and mortgage experts wrote an article for the Irish Times in which they argued for some form of mortgage debt forgiveness based around an arbitration process. Perhaps because of the nature of the medium used, the proposals advanced so far lack detail, and are usually followed by reactive arguments about recklessness, profligacy, moral hazard and “I didn’t buy into the madness”. So these no-doubt well-intentioned contributions dangle the simulacrum of a solution before the eyes of many in this country who are in desperate straits, but without the detail of any proposed scheme, people are left confused, anxious and understandably enough, envious about a potential free gift for their neighbour.
But it’s worse than that, for those in desperate financial straits it’s just plain cruel.
It holds out the hope that there will be a gift from the Man, a no-strings attached free lunch, which will effortlessly transport those struggling with debt repayment to a Nirvana where the debt slate is wiped clean or debts will magically become manageable once more. It’s a lovely idea, up there with universal health screening, third-level education for all who want it and a crime-free country. Trouble is that whatever solution is advanced is (1) very expensive and (2) lacks meaningful detail.
But we really don’t need to re-invent the wheel in Ireland. Other fully functional economies have debt resolution mechanisms which have worked for decades if not a century or more. Importing a template from the UKor US and then making some minor modifications to fit the template into Irish legislation is not a Herculean task. And even in our own country, the Law Reform Commission has published what many people think is a sensible set of reforms to bring our bankruptcy laws into the 21st century. Instead of meaningful reform however, we have a half-hearted proposal to introduce some interim measures in 2012, the main feature of which revealed thus far is the reduction of the bankruptcy period from 12 to five years! When the IMF and EU/ECB troika are next in town for a review in October 2011, I do hope they are vigorously quizzed by the media as to their view on the pace of progress in reforming our backward bankruptcy laws, given that such reform is mandated as part of the bailout programme.
The basic principles of bankruptcy don’t seem to change much from country to country – property dealings prior to bankruptcy are examined to ensure the bankrupt is not defrauding creditors, property owned jointly with a spouse may become part of the pot to repay creditors but the spouse is entitled to protection of their share, property needed so that you can carry on a business is given a special status and may be protected depending on how much it’s worth, creditors cut the best deals they can, and basic pensions and family homes have limited protection. Unencumbered wealth is liquidated to repay creditors, in other words, your credit union deposits and your shares are sold to pay back the mortgage company. Someone is officially appointed to act as a referee between you and your creditors and to sort out your finances and ensure creditors are repaid on an equitable basis from the assets. Bankruptcy lasts a period of time during which the process of assessing your assets and repaying creditors takes place, and during which time, anything other than a basic salary is paid into the bankruptcy pot. And that period is typically between six months and two years. And that’s it. There’s no magic to it, it’s not rocket science, it’s tried and tested. It takes account of the needs of creditors and debtors and society. It doesn’t offer free lunches, it takes account of the indebted’s ability to pay, it doesn’t endlessly kick the can down the road, it’s humane and ultimately it supports a capitalist society where confidence can return generally, and where the indebted can quickly become economically productive. It seems we just need get our external bailout masters to twist arms in our government to implement the reforms.
There were nine (yes, nine, one less than 10) bankruptcies in the Republic of Ireland in 2010 (UPDATE: 23rd August, 2011. The figure of 9 relates to 2005. According to William Fry solicitors, the number was 17 in 2009 and 30 in 2010). That’s less than the number in a single working day in Northern Ireland which has less than half the population of the Republic. (the North recorded 902 bankruptcies PLUS 542 Individual Voluntary Arrangements in the FIRST SIX MONTHS OF 2011). No wonder property prices in Northern Ireland have dropped 44% from peak whereas the plethora of can-kicking measures in the Republic has meant that our over-supplied, badly planned, credit-fuelled mess of a property market has still only fallen 42% from peak according to the State’s main index from the Central Statistics Office.
That we desperately need a reform of our debt laws is unquestionable. There may additionally be the opportunity for an Irish innovation to recognise the colossal scale of indebtedness, particularly on property which has collapsed in value. But we should first quickly implement a standardised reform, be that a template from another country or the proposals of our own Law Reform Commission. Perhaps once those reforms are implemented we can look at extraordinary or emergency measures, such as those apparently being offered by Professor Kelly.