Tracker mortgages are damaging the economy -- it's time to deal with them
Published 24/12/2013 | 02:30
MICHAEL Noonan's best day as Finance Minister would go something like this: have a decent-sized breakfast, announce the State's shares in its 'pillar' banks are being bought by Europe's bailout fund, the European Stability Mechanism (ESM), at a reasonable rate, pay down Ireland's debt with the proceeds by 11am, then a few photo ops, a spot of lunch, perhaps a cheeky pint in Buswells, and then by 3pm announce a deal with the European authorities to cope with the nearly €48bn worth of tracker mortgages currently strangling the banks' balance sheets. After that, a light dinner, take in a show, and then bed by 10pm, teddy in hand.
Which announcement is more important? The trackers by some significant distance.
Following Commission President Jose Manuel Barroso's rather caustic remarks on Friday about the Irish banking system creating problems for the euro, the public would be forgiven for thinking any ESM deal was off the table for the foreseeable future. This may or may not be the case, but it does show how vulnerable Ireland's chances of making significant progress are in the European arena. Given this, if I was advising the Government, finding a solution to the tracker problem would be top of my agenda.
In 2006 and 2007, a tracker mortgage was an asset to any bank, when the ECB base rate, which the trackers obviously track, was around 4pc. Now the ECB base rate is closer to 0pc, and the banks' costs of capital are much higher than in 2007, so every tracker is costing them money, every month. Today, the trackers represent a huge liability. The existence of tracker mortgages on their balance sheets forces banks to heavily charge variable-rate debtors and depositors and other customers to compensate.
If you're reading this thinking "so what, who cares about the pillar banks, they needed 41pc of the nation's output just to keep their doors open", you might be missing the point -- the banks' roles as providers of credit into the real economy will remain damaged until the tracker issue is sorted, either by everyone deciding to pay off their mortgages in one big go -- it is Christmas, let us be fanciful -- or by the Government moving the trackers off the balance sheets of the pillar banks. The damage to the economy from a long period of deleveraging, where the banks try to get rid of their loans and increase their deposits, is incalculable.
In retrospect, the perfect moment to 'sort' the tracker situation (from the point of view of the banks) was when IBRC, the shell bank created from Anglo Irish Bank and Irish Nationwide, was being liquidated. The trackers could have been moved from the pillar banks to IBRC, as it was still a bank, and either on to a special-purpose workout vehicle, a new state bank, or into NAMA. Be under no illusion: the transfer would have been very difficult technically, but in principle there is no difficulty in what I have described. It is a transfer of blocks of loans across balance sheets.
The advantages of a manoeuvre like this are simple to see: at once our private banks can access international credit lines much more easily as the last big worry hanging over them has disappeared, and with their balance sheets cleansed, lending can resume, albeit at lower levels than during the boom, and so the real economy can recover. The Government, as the ultimate holder of the tracker loans, can finance these loans in the usual way or through direct access to European monies, and sell its shares in the banks as they appreciate in value as a result of the move to compensate for any increase in debt levels.
Even better, with the Government as holder of these loans, pressure to move households from their trackers would evaporate, helping those struggling at the moment.
The rearrangement has beneficial outcomes for the real economy only if credit creation resumes in earnest, so banks would have to be incentivised to lend in proportion to the degree they were helped by the State.
The new year will bring chances to make large and real changes to the financial architecture of the country.
The trackers represent one of the last large parts of the construction boom the State hasn't addressed.
They will continue to damage the real economy into the future unless a solution is found.
STEPHEN KINSELLA IS SENIOR LECTURER IN ECONOMICS, UNIVERSITY OF LIMERICK