THE BANKS AND THE PUBLIC
By the time you read this,
several issues should be clear. Apart from knowing who won the All Ireland, we
should know the terms and extent of the government’s renewed guarantee to the
Irish banks and we should have some idea of the government’s attitude to the
potential social time bombs of mortgage arrears and negative equity.
September 2008, with a metaphorical gun to the head,
the government moved to guarantee the assets and liabilities of the major Irish
financial institutions. The alternative was a financial meltdown, or, at any
rate, such a threat of one as to leave little option. The guarantee was total,
with a two year duration. And it worked, after a fashion. The economy has
tottered on, without the (feared) Iceland effect, and, despite several scares,
without also falling to the depths of Greece. The government’s strategy since,
whatever you think of it, has been clear– to prop up the banks and aim to
restore a viable banking system, and subsequent measures have been to that
However, just when the issue of bank bail-out had been thought
sorted it resurfaced. The latest disturbing revelations were half year losses of
around $10 billion posted by Anglo Irish Bank, the now nationalised bank which
many consider the Celtic Tiger’s nemesis. To date around $30 billion of
taxpayers’ money has been committed to help write off Anglo’s bad loans, more
than the other banks put together. With the latest losses the revelation that
more money will be required for Anglo at a time when the country is on its
uppers and as a direct consequence of a guarantee shortly set to expire has
prompted a heated debate on what to do next about the bank.
be a psychological tipping point. The Irish public is heartily sick of the
banks. It was all very well to commit funds to rescue the two main high street
banks, if this was what it took to get them (and the country) going again. But
this has not happened. The cost of rescue proved many times the original
estimates. The resuscitated banks have reverted to type and are turning the
screw on small businesses and other debtors. They would be acting similarly
towards mortgage holders in difficulties if they were let or thought it
worthwhile. Anglo Irish was not a high street bank and bailing it out has always
sat unhappily with the public.
relationship between the banks and the public has become an uneasy one as the
recession has taken hold. There are no friendly bank managers where money is
tight. An expert group on mortgage arrears and personal debt is set to deliver
its second report. Its earlier one, on measures to help those with mortgage
arrears, appeared in July. It in effect threw those in difficulties a temporary
lifeline by suggesting a moratorium on repossessions pending a negotiating
process but left the banks the final option of repossession. The second report
will concentrate on negative equity and could touch on the ticklish issue of
The latest figures on mortgage arrears emphasize the
growing extent of the problem. The number in arrears of 90 days or more is now
36,438, or roughly 5% of all residential mortgages. Much more worryingly the
number in arrears for 6 months or more is now 24,797, a figure which looks set
to rise. There is no chance that any economic recovery will come in time, or be
extensive enough, to help those in this group. The issue looks set to come to a
head before the end of 2011 as the moratorium expires.
The worst case
scenario – the government doing nothing – is not one to be relished. The current
trickle of repossessions will become a flood. Selling off the repossessed
properties will depress property prices even further. The banks will seek to
chase up borrowers for the balance owing; many if not most will face bankruptcy.
Guarantees given by parents will be called in, widening the circle of those
affected. There will be no winners, only losers. Even the banks themselves
don’t appear to relish this prospect; but banks are banks and on past form we
should not expect any favours from them.
Could Irish society deal with
a crisis of this dimension – 25,000 repossessions, thousands of bankruptcies?
These are uncharted waters. But so was the situation re the banks two years ago.
There are no easy options. Any official action to assist those in mortgage
trouble would represent a radical new departure and would, like the bank
bailout, require new legislation. And there are inhibiting factors. Public
opinion on the property situation remains ambivalent. Many of those affected
were first time buyers with no other option; others were would be investors
(seen now as get rich quick merchants).
Some of those who did not
venture are now taking the moral high ground and suggesting that those in
financial difficulties have only themselves to blame. The phrase “moral hazard”
is being heard .A popular line is that mortgages are another form of credit,
representing future consumption brought into the present, and therefore cannot
be written off. There is clearly also a difficulty with those locked in
negative equity with large mortgages but who are managing to pay up. If some
are to be helped, where is the line to be drawn? And why should the prudent pay
for the others? (This last was not heard when bailing out the banks!) It is
worth pointing out here that the cost of bailing out 25,000 mortgages at
$300,000 or so (something no one is suggesting) would come to under $10 billion,
much less than the monies thrown at Anglo.
We are in an unprecedented
situation. The government may have to be proactive and even radical. Ireland
has come to earth with a bang. Who would have thought even two years ago that
the taxpayer would have had to rescue the banks, and at what cost? The
residential loan books of the banks are just as compromised (i.e. overvalued) as
were their toxic commercial loans – now largely going or gone to NAMA. Can a
situation be permitted where nothing is done to relieve personal debt while the
other side of the balance sheet is cleared up by the taxpayer? It is all very
well to strike a moral tone re debt, but the primary task of government is to
look after its citizens – not its banks.
As well as considering what the
state could do, there could and should be a dialogue with the banks to explore
options such as, among others, shared equity (and shared equity loss), more
flexible mortgage terms (this for all in negative equity) and even the notion of
some debt forgiveness. There could even be a fit-for -purpose second NAMA to
deal with those in hock to the banks. There is still time to look further into
this. Ultimately there may be a requirement for some tough talking to the
banks. They owe us! And one thing is certain. This would be one move by the
government guaranteed to have strong popular support.