THE banks must do deals with tens of thousands of homeowners struggling to pay their mortgages, the country's most powerful civil servant has demanded.
Our economy will end up crippled for years unless banks grapple with the thorny issue of mortgage debt write-offs, Department of Finance secretary general John Moran said.
Householders who are "hopelessly" in debt, with no chance of getting on top of the situation, need to have debt written off, Mr Moran warned.
He told bankers at the annual conference of the Irish Banking Federation that households with "unsustainable debts" they simply could not repay were a drag on the economy.
His intervention came after blistering criticism of the banks by senior Central Bank regulator Fiona Muldoon, who accused them of being like spoiled teenagers and being "in denial" about the extent of the mortgage crisis.
She revealed that close to 50,000 investors were struggling to pay their mortgages. This is made up of 37,000 buy-to-let mortgages which are in arrears -- where payments are three months or more behind.
Another 11,000 investor mortgages have also had to be modified as the owners can't meet repayments.
Ms Muldoon -- the Central Bank director of banking supervision -- warned that the banks could cripple the country for a second time unless they tackled the debt timebomb.
"When I deal with banks I have not found humility," she told hundreds of bankers at the event in Dublin.
She revealed that close to 50,000 buy-to-let mortgages were in trouble, around a third of the total.
Ms Muldoon told a room of bankers that a culture of leadership was still missing in their industry, as had been the case when the housing bubble was allowed to inflate.
And she was backed up by Central Bank Governor Patrick Honohan speaking at a separate event later.
At the banking conference, Mr Moran said it was the view of the Department of Finance that high levels of personal debt were a greater risk to the economy than the growing number of householders in negative equity.
This was because, while the numbers in negative equity were growing, the vast number of mortgage holders were still able to meet their mortgage obligations every month.
A bigger problem, he said, was the households that were not in arrears but were also not spending in the economy.
This was a trend that was keeping the domestic economy from returning to growth.
Mr Moran told the Irish Banking Federation conference that banks were nervous of lending but needed to help get those households back spending if the economy was to recover.
Restoring the confidence of financially viable households would stimulate the wider economy, he said. This was a "very large prize" worth winning.
"While the level of arrears is continuing to rise, the pace of the increase is falling and it is estimated that arrears will stabilise at the end of 2012, albeit at a high level," Mr Moran told the bankers.
The country needed "to see solutions that involve a much more dramatic write-off of debt in respect of households that are really in non-sustainable situations and have an inability to pay", he said.
Some 30pc of home loans by value are in arrears or have been modified, the Central Bank told the conference.
The Government has pumped €64bn into the banking system and nationalised five of the six biggest domestic lenders.
"It is critical now that the banking sector move speedily and in a determined fashion to resolve all of the arrears situations by enforcing mortgages where people can pay and by resolving excessive debt in other situations," he said.
He said banks must start providing credit to viable borrowers.
And Mr Moran said they also must find solutions for totally unsustainable levels of debt, and for those people with temporary financial problems that were the result of job losses.
He said those two solutions were not necessarily the same, which was why forbearance was not the answer.