News Analysis

Wednesday 24 September 2014

Time for ministers to show gumption and stand up to the banks

Published 07/10/2012 | 17:00

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Let's replace AIB with a lender that will help rebuild the economy, says Stephen Donnelly

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ON Thursday last in the Dail, Eamon Gilmore was asked by Shane Ross if he saw any problem with AIB paying out a billion euro to bondholders on Monday, and then jacking up variable mortgages rates two days later -- the second such rate hike in just a few weeks.

His response was astonishing. The Government had no intention of involving itself in the commercial activities of one of the "pillar banks". Gilmore assured us though, that "the Government is firmly on the side of people who are having difficulty meeting their mortgage payments".

That sentiment won't ring true for many, so let's just see if the facts back up this spectacular contradiction:

• This crisis has been rumbling on for four years and no viable solutions for mortgage holders with unsustainable debts have been agreed.

• €7.5bn was made available to the banks last year, specifically to deal with distressed mortgages. They have passed virtually nothing on to borrowers.

• The Keane report, which suggested various solutions (though none particularly attractive to borrowers) has disappeared into an "inter-departmental review group".

• The banks continue to increase their variable mortgage rates at the same time as the ECB reduces its own. Between September 2008 and February 2011, the gap between the ECB and Permanent TSB's rate increased from 1.7 to 4.2 percentage points. The gap for AIB was less, though it too grew during that time, and is now playing catch-up.

• The recent Government announcement that the banks were going to pay for accountants to advise borrowers in distress turned out to be something rather different -- the accountants are only allowed to discuss proposals made by ... the banks!

• A growing number of people are complaining of the heavy-handed approach of AIB as it tries to squeeze further money from borrowers who have no chance of paying back the full amounts.

I could go on.

And what has the Government done? Nothing.

The evidence says that Eamon Gilmore is talking nonsense. Neither this Government, nor the last, has had the gumption to stand up to the banks and represent people. At every stage they have put the interests of the banks first. The results are plain to see -- one in five mortgages is now in trouble, and that number is rising quickly.

Even the Tanaiste's insistence that the Government won't involve itself in commercial decisions of AIB is patently untrue. When AIB collapsed, the Fianna Fail government poured €7bn into it. The Fine Gael/Labour Government has splashed out a further €11bn. Our Governments have no problem involving themselves in decision-making in AIB, but only, it seems, when it involves giving them our money.

Gilmore explained that the Government's aim is "to ensure our banks serve our economy and our people". But they don't. We surrendered our sovereignty to save the banks, and in return, they continue to suck money from the economy. They increase charges and interest rates whilst refusing to lend to viable businesses.

'We gave away our sovereignty to save the banks, and in return, they suck money from the economy'

So, what can we do about it?

First, let's recognise the banks for what they are. They are capitalism in its purist form. They are profit-maximising entities that buy and sell money. Their senior managers are legally bound to return value to shareholders, and so that is exactly what they are trying to do.

The welfare of citizens and of Ireland is not their job. We should not be shocked when they try to extract every last penny from mortgage holders unlucky enough to lose their jobs or buy a house in the wrong year. We should expect it, and respond accordingly.

Second, let's get the Personal Insolvency Bill right. The Bill is impressive, but it is designed for an economy in normal times. Here's an incendiary analogy; the Personal Insolvency Bill comprises smoke alarms, fire blankets and handheld fire extinguishers, an excellent set of tools to install in your house. But our house is on fire and we need the fire brigade.

The debt settlement and bankruptcy periods need to be two years, not six. And banks should not have a veto on any proposal. Once the unsustainable debt has been cleared, the two-year period could then be moved to six. This longer period would then act as an excellent disincentive to people borrowing too much in the future.

Third, let's shut down AIB and set it up as a national reconstruction bank.

Such a bank is in the programme for Government, but 18 months into this Government and there's no sign of it. This would involve giving AIB a dual mandate -- to make money (or lose as little as possible), and contribute to the rebuilding of our economy.

This includes lending to businesses and surrendering a hold on private debts which are not going to be paid. Germany did this very successfully some years ago, and the British have just done the same.

Fourth, let's examine the possibility of a one-off write-down of all mortgages to 110 per cent of market value.

This sounds radical, but it works. Both Iceland and Norway did it successfully in recent years. An IMF debt expert I met said that based on a review of the last 100 years of countries dealing with too much private debt, it seemed to be the only thing that worked.

It is possible to ensure that nobody profits by stipulating the following: if in the future the property is sold for more than the new lower mortgage level, then anything above the reduced amount goes back to the bank. It would also be possible to solve the tracker mortgage problem by insisting that all written-down tracker mortgages move to a fixed or variable rate.

Fifth, let's set up a junior ministry in charge of banking or private debt resolution. Peter Matthews of Fine Gael and Arthur Spring of Labour both have banking experience which could be well deployed here. This office could be used to get a set of agreed solutions out there, which would provide clear guidelines for the vast majority of cases of unsustainable debt.

The current approach to the banking crisis has not worked -- it is bleeding our economy dry. The banks need to stop losing money, but they can't do that without stuffing their customers and society at large. The holders of distressed mortgages are not going to be able to pay them back. We need them to stop paying money into the banks, where it is not used, and to start spending again in the domestic economy.

What is suggested here is not radical. It has been tried and tested in other countries, and it works. Crises are not solved by everyday solutions. It is high time the Government realised that and started putting the interests of the citizens ahead of the balance sheets of the banks.

Sunday Independent

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