Business Irish

Wednesday 22 November 2017

We ignore the awful social costs of the financial crisis at our peril

By refusing to act on debt problems, lives will be destroyed and the banks will simply get nothing, writes Paul Raleigh

ALL actions and behaviours have consequences -- sometimes positive, sometimes negative. Positive consequences tend to reinforce a certain type of behaviour while negative ones should discourage it. We see this in action every day and, for the most part, it seems to work.

As adults, bonus payments and incentives, promotions and demotions provide powerful consequences to get us to do things in the workplace. Cause and effect, action and reaction, they are powerful concepts that must be better incorporated into Irish corporate life.

As communities grow, behaviours and consequences tend to become more complicated and difficult to address, as more people are both directly and indirectly affected by behaviour. Consequences of actions, however, must remain an inherent element to business, political and legal practices. The consequences for the people involved in the planning scandals, for example, were (or should have been) jail sentences and heavy fines in order to discourage this behaviour.

Unfortunately, the knock-on consequences for thousands of people are that they overpaid for houses in overcrowded estates with inadequate services and green areas for their children to play. This is a lasting legacy and the real sin of those who were involved in planning scandals.

Our more recent financial crisis and associated scandals also give rise to long-term consequences which, again, will be extremely difficult for us to rectify. The first, and most significant, is the prospect of an entire generation emigrating again.

As we saw in the 1980s, the social consequences for families, and the social fabric of the country, are enormous. Communities, sports and social organisations wither and everyone in the country is worse off as a result.

For a community or business to succeed, it has to be able to sustain itself and, as a country, it looks like we are going to fail on that front. That is why it is so important for employers and unions to get behind the Government's employment and internship initiative so that we can maintain and sustain as many of our young people as possible. The consequences of losing a generation are not worth thinking about.

Another legacy of the financial crisis is the personal debt crisis facing so many people. Much of the commentary on this issue has been focused on the numbers -- the number of people and the amounts involved, the impact on the banks. Like the planning scandals, the real consequence is the effect on people's day-to-day lives, the damage it does to families, neighbours and friends who have to try to carry on as normal, in abnormal circumstances.

The pressure on people caught up in the debt crisis is horrific. Imagine the impact on the relationship between husband and wife, how that feeds into the family unit, the effect on children at school, social standing, not knowing if you will have a roof over your head in a month's time or how to pay the next electricity bill.

As a community, we urgently need to address this. We need to find a productive, proactive and results-driven way to help people who find themselves in difficulty. Even the best-intentioned actions can have catastrophic consequences; and, as a society, we need to have structures in place to ensure people don't pay for mistakes (their own or others) disproportionately.

'The system needs to separate those people who cannot pay from those who simply will not pay,

or those who try to abuse the system'

In the UK there is a scheme known as an Ind-ividual Voluntary Arran-gement (IVA), where ind-ividuals can reach an agree-ment with their creditors in a protected process. About 90 per cent of those who seek an IVA are employed and two-thirds of those are homeowners. Most IVAs are for people between the ages of 25 and 44 -- young, middle-class families for whom the burden of debt is simply too much. In the UK, where the personal debt mountain is not as high as ours, there were 55,000 IVAs and more than 100,000 bankruptcies in 2010 alone.

There are valid concerns that this could become a free-for-all. To protect against this, the system needs to separate those people who cannot pay from those who simply will not pay, or who try to abuse the system. The overall objective is to find a way for those genuine cases where the debt burden is simply too high to write down their debts to a manageable level. By incentivising people to work with their creditors to find a solution, we will create the environment for thousands of ordinary families to have a life while, at the same time, allowing the creditors and banks to achieve some recovery on their debts.

The consequences of not taking action are that people will eventually give up hope, lives will be destroyed, the banks will get nothing and nothing will change. As a society, we will all suffer damage for years to come. If we are not motivated to initiate change for social reasons, it's worth pointing out that research in the UK estimates that the cost to society, through ill health and stress, of their personal debt problem is €26bn per annum. In Ireland, in 2011, surely that should be reason enough?

Paul Raleigh is managing partner at Grant Thornton

Sunday Indo Business

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