Hi °C | Lo °C SPEAK softly and carry a big stick, the saying goes. And, it might add, if you haven't got a big stick, speak loudly.
The Central Bank has been speaking loudly for quite some time about the tardiness of the banks in dealing with mortgage arrears. It also claims to have a big stick which it could apply to the banks' posterior. The banks do not seem terribly impressed.
At last week's Central Bank conference on distressed property markets, Governor Patrick Honohan suggested the stick was ready for use. Sometimes this weapon takes the form of making the banks retire their precious capital if they don't use it to alleviate mortgage debt; sometimes it is suggested that the banks can simply be ordered to act.
This is what most people probably think should happen. We own the banks, don't we? Well, we don't own BoI and, while we do own AIB/EBS, the role of even a majority shareholder in making a firm do things is a bit more circumscribed than one might suppose.
Bank of Ireland is going to be a problem anyway. Its capital is now its own, and it may well not want to use it helping its distressed homeowners. But it will not be possible to deal with that until something starts happening in the state-owned bank.
It is not all a one-way street for the Government. The politics are nasty. Prof Honohan said, quite correctly, that negative equity will not be a reason for debt relief, but try being a TD telling that to underwater constituents. And try explaining to someone who doesn't qualify for relief at all why so and so up the lane does.
Then there are the finances. The great prom note deal saved €2bn over the next three years – €4bn in all by most estimates. Some calculations say the banks would need twice that much in new capital if they embarked on a serious assault on the one in five mortgages in arrears, which would undo all the good budgetary work.
Then there was the headline over one report of the conference: "Failure to repossess homes 'crazy.'" We can safely assume that this is not what Environment Minister Phil Hogan means when he talks about mortgage-debt relief – yet more repossessions (especially in the buy-to-let sector) are an inevitable part of debt re-structuring.
In fact, despite the talk of "ramping up" Central Bank engagement with the banks, the conference could be interpreted as Dame Street talking a bit more softly, rather than wielding a stick. There was a good deal of trying to persuade people of the merits of mortgage-debt relief, as distinct from the necessity.
The USA was held up as the shining example. In the private sector, household debt is back to pre-bubble levels. America's recovery has been anaemic so far, but this improvement in domestic balance sheets could well be the key to something better.
By the same token, the lack of progress on Irish domestic debt means the drag on the economy remains, just as the basic conditions for recovery appear to have arrived. They will not lead to much unless Europe's economy recovers (hope and pray) and private debt is reduced (let's get on with it).
Mortgage debt is now the biggest threat to the Government's intended return to the dangerous waters of the bond markets. We at home may fret about the size of the public debt, but markets seem willing to bet that Europe will finesse that in the end.
They may not be so sanguine about private debt, both in terms of its effect on future growth and the risks of yet more public borrowing to cover bank losses.
The best way to get on with it may be to work backwards. To do any good to the economy or individuals, the relief will have to be substantial. How much relief would use up all the capital which the banks received ostensibly for this very purpose?
In both fairness and logic, debt re-structuring should be confined to ability to pay. A maximum figure of a third of disposable income based on median earnings always seemed to me to be about right, given the historical behaviour of house prices. I would like to know how much it would cost to make that the maximum such a household would be expected to pay.
It might work out to be more than the banks can cover with their present levels of capital. That raises the intriguing question as to whether the country as a whole would be better off if the Government borrowed more – and maybe used the Anglo savings – to provide more funds for the banks, rather than making budgets easier.
That's the trouble. The protests would be incandescent – even from those who might expect to benefit.
Irish Independent
