Can’t Pay, Won’t Pay

The debate on debt may go down as the defining debate of this decade. Everyone is painfully aware that after a borrowing-fuelled consumption and property bubble, Ireland is now reeling from the hangover.

The government is over-indebted, businesses are over-indebted, and families are over-indebted. Even the banks themselves are over-indebted, mandated by the troika to shrink their balance sheets, reining in credit for everyone else as a result. As a nation, we are among the world’s leaders in the borrowing race, total private sector credit standing at over 300% of GDP, even after IFSC activities are stripped out, and general government debt nearing 120% of GDP.

This debt overhang is undoubtedly undermining investment, job-creation and economic growth. Everyone is spending less, borrowing less, investing less and busy paying down loans to ‘repair their balance sheets’. Even though Ireland’s savings rate has increased markedly in recent years to about 11%, investment as a proportion of GDP is only 10%, near record lows and about half of where it needs to be at to retain and improve the country’s production capacity.

Household debt in Ireland is double disposable income and nearly a third of total household assets, both measures having roughly doubled since 2003. 1-in-9 mortgages on family homes were in arrears of more than 90 days by the end of September 2012. This rises to nearly 1-in-5 for investment properties. Half of all mortgages are estimated to be in negative equity.

That’s the problem. What’s the solution?

It is a simple statement of fact that debt that can’t be repaid, won’t be repaid and will eventually be written off. For many firms, families and financiers across the country, this is an inescapable reality. Already, the banks have been stuffed chock-full of taxpayers’ money so that they can withstand the inevitable, but they are dragging their heels, thus far impervious to the authorities’ moral suasion. While it cannot be excluded that the banks will need more capital in the future, the economy has not deteriorated quite so much as the worst-case scenario envisaged when they were last recapitalized in 2011. The banks have enough money to do the necessary.

As well as burning bondholders and foreign depositors, Iceland offered mortgage relief to anyone whose mortgage was more than 110% of the value of their property. A blanket writedown of mortgage and other debt in Ireland, however, would be unwise and badly targeted, if not impossible. Even though such a drastic approach would provide a fillip for the economy, the cost would ultimately be borne by Irish taxpayers, now proud owners of a significant chunk of the banking system. Typically, debt levels are correlated with income and wealth levels – so a blanket writedown would benefit the wealthy most in relative and in absolute terms, as happened in Iceland. Such a perverse distribution outcome must surely be considered intolerable in Ireland.

We need to face up to the reality, and the unfairness, of ‘moral hazard’ or ‘strategic default’. Hard-pressed taxpayers can’t be expected to foot the bill for those who don’t want to pay as well as those who can’t pay. Insofar as possible, we need to distinguish between these two groups, providing relief to the latter and penalties for the former. There is an important difference between a family with reduced means struggling to meet home mortgage repayments and investors with a string of properties trying to game the system.

Legislation needs to be introduced to facilitate repossession as a last resort. If collateral cannot be repossessed, then the whole concept of mortgage lending breaks down. Some landlords are taking in rent, but refusing to pay their mortgage, in the knowledge that the banks are unwilling or unable to repossess and in the hope that their debt will be written down.

In line with the EU Commission’s sensible advice, the €3m ceiling on eligible debt under the personal insolvency legislation should be significantly reduced. Ultimately, all taxpayers will foot the bill for debt writedowns, and the inclusion of multiple investment properties and trophy homes under the legislation may further skew the benefits in favour of property speculators over struggling families.

For those who truly cannot, and likely will not be able to, repay the mortgage on their family home, swift, compassionate, action by lenders is of the essence. Herculean forbearance simply forestalls the inevitable and prolongs the misery. Certainly, innovative solutions like equity-sharing arrangements should be encouraged, but not at the expense of resolute action.

Debt relief targeted where it is needed, and as quickly as possible, is the right thing for the economy, the right thing for society, and the right thing by taxpayers.  To speed things along, we need to see a little less jaw-jaw and a little more war-war from the authorities.

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