Avoiding “moral and social collapse”

StubbsGazette Editor

If there are four words that stand out from the admirably clear and concise report of the Inter-Departmental Mortgage Arrears Working Group published this week, they are “all solutions carry consequences”. In short, someone always has to pay – but the process of allocating the debt threatens to cause turmoil in the economy and wider society.

The words over “consequences” sum up the intractable problem that faced the Group – and now faces the government – as it moves to deal with the most destructive and emotive issue in the country.

Sovereign debt is by comparison an abstract problem. Mortgage debt – literally – hits home.

But it is not just those in hopeless negative equity or whose livelihoods have been taken away from them who are exercised on the subject. It is also the vast majority of individuals who are – despite the most trying of circumstances – are making the payments each month.

Extreme circumstances have conspired to set the interests of these two groups against each other like never before. True, many of those who find themselves in the fortunate position of having affordable mortgages are not by definition unsympathetic to those in difficulties – in many cases these unfortunates may well be known as friends and family. But it is a fact that, if debt forgiveness is to be the solution, someone else must pay. As we know, “all solutions carry consequences”.

Sensibly, the Mortgage Arrears Working Group rules out blanket debt/negative equity forgiveness and instead suggests that the issue of mortgage difficulty can only be considered on a case-by-case basis having regard to the individual circumstances.

This is just as well and this recommendation, combined the consistent utterances of the Taoiseach and the government to the same effect over the past few months, may at least have put an end to the increasing level of “strategic default” that is known to be a factor in the market: those people who “can pay” but, hoping for blanket forgiveness or some other sort of relief, decide they “won’t pay”.

Yet the situation deteriorates daily. Arrears are growing and there are now over 45,000 households with some 55,000 mortgage accounts which are now 90 days past due with their mortgage payments. There are approximately 56,000 households with some 70,000 mortgage accounts with restructured loans. Indicators confirm expectations that the trend in arrears is still upward.

Things would of course be much worse were it not for a historically low interest rate environment that has been sustained by the crisis in Europe which one supposes is a type of silver lining in that darkening cloud. If and when Europe has the latitude to follow its inclination to increase rates, this could be the tipping point for the 88 per cent of those who are making their repayments – and this is something now recognised by the Financial Regulator who has cautioned the banks against making further increases to standard variable rates.
There are now some 300,000 households in negative equity. Of course, there is not necessarily a link between negative equity and mortgage arrears (write-down of the negative equity would help a mortgage holders in arrears but in many cases it is unlikely to create an affordable mortgage) but certainly being in a state of deep negative equity is not recommended for peace of mind. The Central Bank estimates that only 10 per cent to 13 per cent of those in negative equity are in arrears

The principle reason advanced by the Working Group against blanket debt forgiveness is that it is estimated that it would cost in the region of €14 billion to clear the negative equity in the Irish mortgage portfolios
Even if forgiveness was confined to a more targeted population – say, mortgages taken out between 2006 and 2008 – this would cost in the region of €10 billion.

In this affordability question, the Working Group is very much of the same mind as the Government. But there is a massive hole in the argument of unaffordability. This is caused by the government’s adherence to the catastrophic and dysfunctional effects of the bank guarantee that will see up to €70 billion of taxpayers’ money used to forgive the debts of the country’s banking system – effectively bailing out major European banks.

The consequence in this case was forcefully expressed by economist Constantin Gurgdiev on RTE programme The Frontline this week, who spoke of the “moral and social collapse” that is becoming the legacy of this crisis in general and the guarantee in particular.

“The government has clearly chosen to put the priorities of professional risk takers such as bondholders ahead of the priority of the real economy which is the households of the economy,” said Gurgdiev. “And that has the long-term effect of delegitimising democracy in the country, delegitimising the economy, creating cynicism, creating at attitude where people do not want to obey the law, do not want to pay the taxes and they are fully justified in that attitude.”

It is this “moral and social collape” that could well undermine the best efforts of government to sustain an orderly credit regime. The stakes will be heightened once the first repossessions of thousands start to take place.

With the prospect of a draconian budget to come in December, unless the government can persuade the people of the equity behind its plan, or it can persuade our EU partners to share more of the country’s debt burden, the prospect of the country being catapulted back to the bad old days of a rampant black economy are only too real.