Archive for November 10th, 2011

This morning Ireland’s Central Statistics Office (CSO) has released its inflation figures for October 2011. The headline Consumer Price Index (CPI) was up 0.3%  month-on-month and 2.8% year-on-year (up from 2.6% in September 2011). The biggest driver of inflation in the past 12 months continues to be the CSO category of housing-related costs, and within that, the most significant component is mortgage interest* which has risen a hefty 18.1% in the past 12 months as domestic bank-driven interest rate rises take effect. Whilst the Financial Regulator and Taoiseach have called on banks to ease interest on mortgages, the banks have effectively offered both the finger. Junior finance minister Brian Hayes yesterday branded some of the banks “pathetic” for not passing on the recent ECB cut in its main lending rate – some might think that a Government which has significant stakeholdings in much of the banking sector and is needed to guarantee lending to banks, and which has enacted draconian legislation to give it control over banks, is itself “pathetic” for not being able to enforce its will.

Mortgage interest comprises nearly 7% of the CPI “basket” so the effect is significant.

Elsewhere it seems that private rents are stabilizing and indeed, showing signs of inching up – there was a monthly rise of 1.3% in October 2011, and an annual rise of 2.2%. By the way, private rents are one component of the “rents” shown above, the other is local authority rents. It seems that in our financial crisis, the big correction in rent took place in 2009 with a 19% maximum decline, compared to a decline of just 1.4% for all of 2010. Since the start of 2011 there has been a 3.7% increase (mostly recorded in February and October 2011). So on that basis, I think it fair to characterise rents as stabilising. There is a view however that rents are artificially elevated at present as a result of the social welfare rent assistance programme. Although it is the case that many properties that are advertised for rent will not accept rent-assistance claimants, it is arguable that landlords for these properties still reference their prices to rent assistance provided by the State, which by the standards of other countries, is seen as generous (the latest allowances are available here) Over the summer and again in recent days, Minister for Social Protection, Joan Burton has strongly signaled that there will be substantial cuts to rent allowance in Budget 2012, set to be unveiled on 6th December, 2011. We currently spend €516m annually on rent assistance and 96,000 households receive the benefit.

*The CSO notes the following in respect of mortgage interest “In line with normal practice for a fixed base price index, the current approach to measuring mortgage interest in the CPI reflects the situation in the base reference period December 2006 when the standard variable rate was dominant. Subsequently, tracker mortgages have become more popular. This did not give rise to any difficulties while the standard variable and tracker mortgage interest rates moved broadly in line with one another, which would be the normal expectation. However, the decoupling that has taken place since August 2009 has resulted in dramatically different trends emerging. For example, between September 2009 and September 2010 the standard variable rate increased from 2.93% to 3.66% whereas the tracker rate did not change. The Mortgage Interest component of the CPI, which is largely determined by the trend in the standard variable rate, increased by 25.1% as a result and contributed +1.25% to the overall change in the All Items index. It is crudely estimated that the latter impact would have been reduced by between 0.2% and 0.5% had the Mortgage Interest component been calculated on a current weighting basis. Users should take this “weighting effect” into account in interpreting the mortgage interest related movements in the index”


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Given the range of greetings cards that are available these days for practically any event, it’s surprising that there isn’t a whole genre devoted to bankruptcy – “Sorry to hear..” in the early days, “Nil illegitimi carborundum” as the process gets into full flow and “Congratulations – welcome back to financial freedom” when the bankruptcy comes to an end. Of course in Ireland, we have a tiny number of bankruptcies – just 30 in 2010, which is slightly higher than, though still consistent with, previous years – so the market for such greetings cards wouldn’t be huge, though that may be set to change with what appears to be a renewed commitment by the current Government to reform the archaic and largely impractical bankruptcy laws.

However in the neighbouring UK, the bankruptcy business is thriving; in fact it’s so successful that some Irish folks are applying for bankruptcy there. And who can blame them – compared to Ireland the UK bankruptcy process is quick, cheap and seemingly efficient. The UK has a number of processes available depending on the financial condition of the person facing financial challenges – the main ones are bankruptcy, debt relief orders (DROs) where you have small debts of less than GBP15k and practically no assets, and individual voluntary arrangements (IVAs) which are big business in the UK and mean that you work with your creditors for three years to pay them back as much as you can and they agree to write off the remainder. By comparison, the approach to bankruptcy in Ireland is still draconian, even taking into account the Civil Law (Miscellaneous Provisions) Act 2011 which reduced the bankruptcy period from 12 years to a conditional five years.

Last year, NAMAed developer John Fleming (pictured here) applied to the UK courts for bankruptcy, having previously established residency and commercial connections, and during the past 12 months he has been subjected to the process, but all being well he will have awoken this morning as a financial “new born” – his creditors should no longer have any hold over him, and whatever wealth and income he generates from today is his, and his alone. For details of what UK bankruptcy involves, take a look here at the UK government’s own Insolvency Service.

There’s nothing to stop the 61-year old unleashing his entrepreneurial skills and generating substantial wealth on the back of his skills, experience and contacts and his former creditors will have no legal call on that wealth. Seems painless? Hardly, the process is rigorous, John has reversed transfers including a transfer of assets to a trust in 2009 and his assets have been repossessed; it is not clear how many times he has had to meet with the bankruptcy officials. But he is married to Noreen who has presumably wealth in her own right, he keeps pension entitlements – it is not clear how wealthy the wife is, but I think it’s fair to say that John won’t be going hungry or homeless in the marriage anytime soon. It should be said that if the bankruptcy official considers John to have acted “dishonestly, or is blameworthy in some other way” it may impose restrictions on John for 2-15 years which means he has to declare his bankruptcy if getting credit and he might be disqualified from being a company director or take part in the “promotion, formation or management” of a company without getting permission from the court. But assuming John has been forthcoming, he should not be affected by any of that.

John seems to be generally regarded as a “decent skin” in the property development world and has been responsible for large-scale residential development in Cork (much of which has been on the market for some time), hotel development in Ireland including the Fota Island resort but he also has had fingers in other pies including alternative energy production in the US. You can view the Fleming bankruptcy legal documentation (partial) at thestory.ie here; this includes a list of assets and liabilities.

Of course it shouldn’t be forgotten that even though John is set to emerge from bankruptcy today, that creditors, including NAMA and NAMA banks which we mostly own, are likely to still be nursing losses; large losses – creditors were said to have been owed over €1bn but it not clear to what extent these debts have been satisfied; given the collapse in property prices in Ireland, I think it’s fair to say the losses will be substantial. It seems from the bankruptcy documentation that it is only the banks, Homebond and a private landlord who rented a property in the UK to the Flemings, that have lost out as unsecured creditors. It was the banks, and now NAMA, that will seemingly shoulder the greatest losses. So, not a day for celebration all-round, but it seems that an entrepreneur has done the capitalist thing, faced up to his losses, accepted the consequences in the UK, and can now seemingly get on with life.

I wonder if others are set to follow in John’s footsteps…

UPDATE: 30th March, 2012.  Barry O’Halloran in the Irish Times today reports that NAMA has applied to the British courts for a so-called “income purchase order” which would allow the Agency to garnish any income that John earns in the three years following his discharge from bankruptcy. It is not totally clear why NAMA would be entitled to such an order but the report says that such orders are available to creditors who were not originally part of the bankruptcy arrangement. This is curious because both Anglo and AIB and their receivers were part of the arrangement and you might have expected that the banks’ assignment of loans to NAMA would have assigned their involvement also. Anyway, the Irish Times reports that NAMA made the application last year before John was discharged from bankruptcy (though elsewhere the report says NAMA made the application this week), that there was a hearing this week and that the case has been adjourned for 10 weeks.

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