News Brendan Keenan

Thursday 28 August 2014

There may be safety in numbers, but we're a long way from 'normal'

Published 13/03/2014 | 02:30

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STICK with the herd. That was my advice back in the early days of the bailout. A small vulnerable economy dare not become isolated, anymore than a small vulnerable animal out on the plains.

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Several big beasts of the herd were in town last week for the meeting of the European People's Party group in the European Parliament. Of course, they could have held it anywhere – even in Athens – but there was still a distinct feeling that Ireland was again trotting along with the rest.

Mr Barroso, president of the Commission, even said that Ireland was again a normal country. It was easy to agree with him, as they all swirled around the glitzy convention centre, and easy to forget that the centre, for all its charms, encapsulates much that was abnormally worst about the property mania.

Indeed, normality seems to be gathering pace. That great construct of the crash, NAMA, is getting ready to de-commission itself early by selling most or all of its loans even before the due date of 2020.

It could have waited longer than that, until normality really had resumed, but after the liquidation of IBRC (formerly Anglo), the feeling is that the sooner all these painful constructs are gone, the better.

Something similar is happening with the government stakes in the banks, especially AIB. Get shot of them as soon as possible, rather than waiting for a possible better price later, seems to be the strategy. There are arguments both ways, but it is certainly normal-style politics.

There was a bit of an irony, then, in the fact that, even as the great and good flew in, Mr Barroso's Commission was pointing out the ways in which Ireland is not normal.

Mind you, there was the comfort of finding that we are not alone. There is a growing herd of countries which are not normal by the definitions laid out in EU rules.

Three states, Croatia, Italy and Slovenia, were put on notice of possible action, such as fines, for missing budgetary targets, in the first use of the strengthened Stability and Growth Pact.

They are expected to act "swiftly and decisively" with comprehensive and detailed policy measures in the National Reform and Stability and Convergence programmes which all states have to submit annually.

If they do not, the commission warned that, having reassessed the situation in June, it will propose any steps it sees necessary to the member state governments.

As the EPP met, the left-wing People's Movement held protests outside the convention centre about precisely this kind of procedure.

As usual, the protests were small but it remains to be seen whether the issue they raised gets bigger. That is the political underpinning – or rather the lack it – for all these new fiscal, banking and competitive rules and regulations.

The European union and its inner currency zone will somehow have to get a lot more "normal" in the end also. For now, the bulk of the herd consists of 13 states defined as having imbalances.

Germany, is unique in having an imbalance on the other side – too big a surplus. Only Denmark, Malta and Luxembourg pass the test, although the first two failed last year.

As a country which has borrowed bailout funds, Ireland gets extra surveillance, but it is not clear that this will make much practical difference.

There may be safety in numbers, but there is a danger that we will forget just how unbalanced Ireland's imbalances are, as compared with most others in the group.

The Commission cited the well-known list. Public and private debt remain very high. The extent of of non-performing loans leaves the financial sector vulnerable. "Long-term and youth unemployment remain elevated," the commission notes.

As for non-performing loans, last week also saw the latest data on mortgage loans and an intriguing new survey on mortgage debt from the European Central Bank covering 15 euro states. Unfortunately, Ireland, along with Estonia, was not included.

But it will be surveyed next time and we already know enough to make some rough comparisons.

We are up there with the Netherlands, Spain and Portugal in having mortgage debt which is more than 200pc of household income. The typical level is less than 150pc, although the Austrians have borrowed only 70pc of their income.

Nearly half of all Dutch households hold mortgage debt, while only one in ten Italian households do. The Portuguese pay the lowest interest rates but presumably will be joined by those lucky Irish borrowers on trackers. The typical Euro zone rate is 4pc.

Few will argue with the ECB conclusion that national institutions help explain differences in household debt patterns across euro area countries. One would like to think that normality would involve a shift in Irish policy toward stability and affordability, rather than enriching lenders and builders while fooling people into thinking that they are being helped to buy houses.

The most striking finding is that ease of re-possession is the main factor in explaining different levels of mortgage debt in different countries. It seems that banks are less willing to lend if it is difficult to re-possess in the case of non-payment.

That does not appear to fit the Irish case, where re-possession tends to be a last resort but, even before the bubble, mortgage debt was substantial.

The legacy of past abnormalities was on view in the loan data from the central bank. Progress is being made, but at a glacial pace.

There were more of those "firsts" we see all the time nowadays, with arrears over 90 days down for the first time since the statistics began. There should also be the sound of one hand clapping for the fact that mortgage re-structuring has moved away from interest-only payments (19pc) to arrears capitalisation and term extension (40pc).

The alarm bells rang over the only category of arrears to show an increase in the last three months of 2013. This was mortgages, which are more than two years in arrears. The total involved is a not inconsiderable €2.3bn and it is quite a shock that the figure is still rising.

Analysts called for "realistic sustainable solutions" to be put in place but Trevor Grant, chairman of the Association of Expert Mortgage Advisers, said these long-term problem loans seemed to be unmanaged, or perhaps unmanageable.

One would have to conclude that these cases will end in a lot of re-possessions. Perhaps more frequent seizure of collateral will become part of the new normal. Along with the writing-off of debts which are not covered and cannot be repaid.

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