Patrick Honohan warns banks not to be ‘too lenient’ on borrowers
THE state could be saddled with intolerably high levels of debt if banks are too lenient on borrowers, the governor of the Central Bank of Ireland has warned.
Patrick Honohan said not enough has been done by banks to restructure people's loans and make sure those in arrears who are now in a position to get back on track do so.
"Too lenient an approach to loan recovery will result in an intolerably heavy bill for the Exchequer and hence the taxpayer and the user of public services," Mr Honohan said.
"Too much reluctance to face up to reality about unsustainable debts will also delay the economic recovery."
At an Oireacthas Finance Committee hearing, the governor said new personal insolvency legislation was a welcome measure to help distressed mortgage borrowers find a solution.
But he warned the new laws, which include a requirement for banks and lenders to help struggling homeowners with a debt write-down and to protect them from repossession, was an untested process.
"It would be better for all if the banks could still get ahead of the curve and resolve the bulk of the cases without them having to go through what is still, of course, an untested process," Mr Honohan said.
He added that the Central Bank would work closely with banks to make sure they have their own policies and procedures in place to support struggling borrowers.
The new personal insolvency legislation, which passed through parliament last month, reduces the bankruptcy period from 12 to three years.
In some cases, it could also allow debts of up to 3 million euro to be written off.
In his first address to the committee since last March, Mr Honohan warned that the European Central Bank (ECB) could make Ireland "very uncomfortable" if the state does not repay billions owed for the controversial promissory notes.
Ireland is due to pay 3.1 billion euro (£2.5bn) of its outstanding 28 billion euro (£23bn) debt on March 31.
It is just one lump of a total 31 billion euro (£26bn) secured by the last Government and used to recapitalise the failed former Anglo Irish Bank - now called the Irish Bank Resolution Corporation.
"There are a number of ways which the ECB, if it chooses could find to make us in a graduated way uncomfortable," Mr Honohan said.
He said he had to "think around the corner" and that not paying back Ireland's debts would be a very serious matter.
"We can't just say, 'Sorry, we didn't pay'. This would be taken very, very badly - not only by the ECB, but by other international markets and so forth," he added.
The governor said there was no chance of a complete debt write-off, but said a restructuring of the repayments would be advantageous.
Mr Honohan said paying back the debt over a longer period of time would be beneficial. He dismissed suggestions that lengthening the term would result in greater interest payments because the rate would be relatively low.
"It will allow a slower and better path to the debt going forward," he said.