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Bankers alone can't be trusted to resolve crisis

By now you are confused. The Government either is or isn't in favour of some kind of "debt forgiveness". It categorically won't be blanket, even though nobody actually suggested it should be blanket. Fine Gael is either totally against it (Brian Hayes and Michael Noonan) or slightly for it (Michael Noonan) or against it again (Michael Noonan). Labour is against it (Eamon Gilmore -- anyone remember him?) or kind of for it, in a pragmatic way (Joan Burton).

In fact, you'd almost wonder if the confusion was deliberate, except the Government is not really organised enough to create deliberate confusion. Basically, what appears to have happened is that the resurrection of the debt forgiveness thing caught the Government by surprise, and apart from the odd person like Joan Burton, it has been consistently behind the curve on it.

So while Brian Hayes was trotted out like a good little German to tell us initially that the banks couldn't afford debt forgiveness and that it could create moral hazard, his boss Noonan then had to frantically back-pedal on that last week, saying that of course the banks have money put aside to absorb mortgage write-downs. This was of course ages after everyone else had pointed out that we have actually given the banks billions in capital, some of which was precisely to offset planned and anticipated bad mortgage debts.

So Noonan flip-flopped from saying there could be no debt forgiveness to saying the banks had money for debt forgiveness to taking a kind of meaningless position by the end of last week which was essentially both of the above.

The other clumsy trick that everyone in Government pulled was to blur the whole thing by arguing mainly against something no one was suggesting in the first place, something that came to be known as "blanket debt forgiveness". This seemed to become kind of a holding position while they panicked about what to do or say. By last Thursday, this mythical blanket forgiveness that Noonan was definitely against had become a "free for all", a "lottery", that would "open the floodgates" to everyone queuing up looking for free money.

Enda Kenny, meanwhile, was saying nothing much except to reiterate how in touch he and his people are with this issue. This is a huge priority, the Government kept telling us. So much so that as soon as an expert report comes out at the end of September, it will then act promptly. Ah yes, the expert report, the last refuge of the procrastinating Government.

We have actually already had an expert report on the mortgage crisis. Two in fact. The Mortgage Arrears and Personal Debt Group produced both an interim and a final report last year. In the interim report the experts basically recommended communication between lenders and borrowers and said it would go on to consider debt forgiveness next.

This group didn't think that the Loan to Value issue (ie negative equity) was a huge problem because negative equity only became a problem if someone had to sell their house. In its final report in November, the group said it had considered debt forgiveness, and it would not recommend it.

And now, nearly a year later, and we need another expert report before the Government can act. Lucky the situation isn't urgent or anything. Lucky the value of people's homes hasn't collapsed further since the last report, and lucky tens of thousands more people haven't lost their jobs. Lucky they all had another year to sit back and think about it and lucky the Government is happy to wait for the recommendations.

But in the meantime, confusion reigns. One of the main points of confusion is that many people in the Government seem to be under the impression, or else are trying to create the impression, that anyone who doesn't want to pay their mortgage is expecting massive write-downs.

In fact, a broader write-down of mortgage debt would not be unreasonable or unprecedented, given that this is common practice in the world of commercial property, where the bank is regarded as a partner in the risk taking and thus takes a hit if the deal doesn't work. No one is really expecting a broad write-down in the residential sphere.

The grim reality is that many people in negative equity will be able to continue on as before. Their house is their home and while they may not like feeling underwater, and while it may have a "poverty effect" on them that stops them from spending as much as they might, thus leading to a drag on the domestic economy, they can keep going. As long as they don't need to move and as long as they can pay their mortgage, they just keep going.

Last year's expert group was only half right when it dismissed negative equity as a limited issue and said it only became a problem if you wanted to move. The moving part, is, of course, true. People can need to move for many reasons. The most common example given is when people want to start a family and are stuck in an apartment from which they expected to be able to trade up, but they suddenly find themselves deeply in negative equity with that apartment and unable to move on. We will perhaps never know the real effects of that in terms of people being unable to start or grow their families and in terms of people becoming ill, or worse, from stress.

But there can be harder, more directly economic reasons why people need to move also. For example, as the economy recovers, job creation will happen in specific areas and people who wish to avail of newly created jobs will wish to live in these areas. But negative equity will mean that labour is not mobile and people will not be able to move to take up new jobs -- a further drag on economic recovery.

But when negative equity really becomes "negative equity hell" is when people are unable to pay their mortgages, essentially when people lose their jobs. And between the last expert group report and this next one, tens of thousands more people will have lost their jobs.

We saw unemployment rise to 14.4 per cent last week and we heard that, during August, 10 companies a day went bust in Ireland. So more and more, that hellish combination of negative equity and not being able to pay the mortgage is becoming a reality for more and more people. Without unemployment, those people could continue paying their mortgage, without negative equity they could sell up and move on. But negative equity coupled with unemployment leaves them trapped in that proverbial hell.

So while we should be considering broader mortgage restructuring now, what needs to be dealt with most urgently is those in real trouble.

And the Government waits, meanwhile, for another expert group which is apparently going to tell us what everyone knows already, what Patrick Honohan said again on Friday, that the major form of debt forgiveness will involve a case-by-case analysis and it will have to involve people giving up equity in their homes.

And it is generally accepted, too, that those who do lose their houses should be few and far between if at all possible, and that those who do lose their homes should not be pursued to the ends of the earth for the balance of the mortgage. Because maybe, just maybe, losing their home will be enough pain to inflict on them.

So roughly speaking, everyone is coming to a ballpark agreement on what we need to do. The real question now is how it gets done and that's where we have to make sure the Government doesn't pull a fast one on us. You may have noticed what's been going on in the last week in terms of banking propaganda. There have been strategically placed stories about how the banks are in reality forgiving debts; they just aren't advertising it. Patrick Honohan made the same noises on Friday, and even said that the Central Bank in fact supports this practice.

These stories have been one half of a pincer movement. The other half of that pincer movement is people from the Government constantly hinting that this is not an issue for Government or society but rather an issue for the banks to deal with. After Noonan said initially that the banks had the money to do this, he then rolled back last Thursday and put in a but, saying the banks must be prudent.

In other words, what the Government is trying to do is to put this all back on the banks, and possibly make them the bad guys. Which would be fine except that no one in this country trusts the banks.

The banks have shown time and again that despite being bailed out by the taxpayers of this country, they feel no obligation to the taxpayers of this country, but only to their own balance sheets and the rebuilding thereof. Even when the banks had already ruined this country, they consistently lied and lied to the government, creating even more disaster. And despite being handed billions in capital from us, and despite us buying all their bad loans off them, they haven't felt the remotest sense of duty to struggling Irish business people or homeowners.

It is not an option for the Government now to wash its hands of the mortgage crisis and say the banks will deal with it. We own the majority of banks in this country and the rest of them trade here at the pleasure of our regulator. Indeed, the ones we don't own have apparently been far more realistic about dealing with crisis mortgages.

The Government needs to get in there and get its hands dirty and work with the banks on dealing with this issue. The banks will need Government cooperation anyway in dealing with a case-by-case analysis of distressed mortgages because it will need financial information from Revenue and Social Welfare.

What the Government is potentially building up to telling us as their "solution" to all this is that people need to go and engage with their lenders when in trouble. But in fact, the Government needs to mediate that process and have an agency with real clout and with real regulations backing it up, to oversee it. That is the only acceptable response to this crisis now. We cannot throw the tens of thousands of people who are in trouble to the wolves that the Irish banks have shown themselves to be.

Sunday Independent