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Brendan O'Connor: We've all been sucked into black hole that is other people's debt

WITHOUT meaning to be twee about it, sometimes it is perhaps more productive to look at what we all have in common rather than what sets us all apart. It was perhaps logical that we would all start turning on each other once things got tight in this country.



People in the private sector saw people in the public sector get what looked like guaranteed jobs and guaranteed pay while they were losing jobs and pay, and they weren't happy. People in the public sector saw the professional classes still seeming to clean up, with medical and legal people all still doing well from the fat of the land, and they weren't happy.

And now, even within the public sector, new entrants are turning on their older colleagues because they think that they are being made to pay to keep their older colleagues in the style, and the pensions, to which they are accustomed. More broadly, the latest rift developing in this country is an intergenerational one, whereby the younger generation are feeling slightly cheated by their elders.

One of the issues that has fed this internecine feuding has been the seeming reluctance by various groups to give up any of their current income or privileges. We have seen it across all sectors. Incumbents in the civil service have been reluctant to give up any of their allowances or pensions, though they will tell you they have taken a 14 per cent pay cut, some of which is being eroded by incremental pay rises.

We saw that many judges, who were on what people would have thought were very good salaries, were reluctant to take a voluntary pay cut, to share the pain everyone else was feeling. There have been all sorts of instances of people appearing to dig in their heels, despite the fact that they seemed to be doing quite well, and despite the fact that they were under serious pressure to take cuts. We have even seen college presidents telling us why they deserve their healthy wedge.

And, of course, the reason for that, the reason why everyone is so reluctant to give up anything, is the very thing that binds them all together -- public sector, private sector and professional classes. Most of them are up to their necks in debt. And this is what has led people to take up such entrenched positions. It's not that most people are out living the life of Reilly with their money. Most of them are just trying to desperately pay down debt that they took out based on two fatal assumptions -- that their incomes would continue to rise, and that the value of property would continue to rise.

We know what happened property and no one can control that. In fact, the spiralling down of property prices has led people to perhaps the greatest sense of a lack of control over their own lives that most of them have ever felt. Just as in the boom, people sat smugly in their homes thinking about how the very fact of owning them was making their wealth increase by anything up to 20 per cent a year; for the last five years people have sat in their houses listening to how their wealth is declining by anything up to 20 per cent a year, while they are powerless to do anything about it or to get out.

So no one can control the property side of the equation, but people felt they had some small control over the income side of it. Incomes may no longer be increasing, but most people desperately tried to hold on to what incomes they had. Because they had made decisions based on that income.

People are in varying levels of trouble here. At the basic level is, say, a young teacher or guard or tech worker who "got on the property ladder" encouraged by mum and dad and everyone else. Those who did so by buying an apartment in Dublin at the peak have seen the value of that apartment decline by a staggering two-thirds, according to the latest CSO figures released last week. Most of these people, if they are still in work, will have seen their income decline so they could be struggling to pay a mortgage that seemed affordable a few years back. No wonder they don't want to give up any of their income.

The latest deal on offer came out last week with announcements of new negative equity mortgages, whereby people can carry their negative equity on to their next property, giving up some of their tracker mortgage, and taking on a loan to value of up to 165 per cent. You read that right. These people could owe 165 per cent of the value of their new homes. Which could be in some way manageable if anyone thought the value of property was going to start rising significantly again, but no one really thinks that. Certainly it will get people out of unsuitable homes and allow them to move on with life, but at what cost?

On another level are those who bought property as an investment, a pension, something to leave their kids. In this category you are probably looking at people who were higher up in the public sector, the kind of people with good solid jobs, whom the banks were willing to give mortgages to in the last while.

You are also looking at professionals such as doctors and lawyers, who got into investment properties based on their incomes continuing at their high rates, and based, again, on the value of property continuing to rise. At the fancier end of the scale, we saw a lot of legal and medical people getting involved in various other property and investment Ponzi schemes. Again, no one can blame these people for not wanting to relinquish any of their incomes.

The Irish Independent reported on Thursday that there are 200,000 buy-to-let mortgages in this country. That is not to suggest that 200,000 people became landlords. Because the reality is that many people have more than one of these 200,000 mortgages.

Of these mortgages, the Indo reported that 50,000 or so are now more than 90 days in arrears. The figure of 90 days is significant because that is when it is generally felt that it becomes difficult for someone to claw their way back into the black. Once you've missed three months, you're on to a slippery slope. So 50,000 people in this country are not coping with their rental properties.

And the ones who are keeping up repayments?

Many of them will tell you that they are having to stick in an extra 500 quid or whatever a month on top of the rent to keep up the payments. So they are coping on paper. They are not showing up as distressed yet. But they are deeply strained.

Now, those of us who can pay our debts and who didn't get involved in multiple property madness could easily turn around and say, well, those people made foolish decisions, I didn't, why should I bail them out? They need to live by the consequences of their actions. And again, that is a perfectly normal reaction considering that everyone is strapped these days.

But the reality is that this economy will only begin to function again when the debt trap that most people are in is sorted. Only then will people accept the painful internal devaluation that is necessary in the absence of us being able to devalue our currency. That new economic reality -- of a lower wage economy -- cannot happen while we hold people to legacy debt from another era. Only when the debt trap is eased will people begin to participate in the economy again -- to get out and spend rather than squirrelling everything away.

Because at the moment, personal debt is not only a personalised black hole for individuals and families, it is a black hole for the economy in general. Money gets paid back, goes into banks, and banks sit on it or pay back bondholders or otherwise square up their balance sheets. And don't forget the simple point -- these are banks that we all paid billions into to bail out. Equally, it is becoming clearer all the time that none of the banks' big debtors are being required to pay back everything they owe.

So not only is it economic suicide for there not to be a rigorous programme of debt restructuring for personal debt in this country, it would be wrong not to do it. And neither can the banks be given a veto on individual cases, as in the proposed insolvency legislation.

The banks, to misquote Homer Simpson, are the cause of all our problems, they cannot be the solution too.

Sunday Independent