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James Fitzsimons: Like it or not, some sort of debt forgiveness is inevitable

THE Government claims it has stabilised the economy and it will now focus on recovery.

But in spite of the resources that have been sunk into the banks and our growing debt burden that sustains wasteful public spending, the economy is not stable. If things are getting better for some, they are getting worse for others.

People queued overnight looking for jobs abroad because there is nothing here for them. In Dublin they queued down the street against the backdrop of the Fianna Fail Ard Fheis, where 4,000 members gave ousted Taoiseach Brian Cowen a standing ovation as he arrived.

It's only been a year and we are slowly resigning ourselves to the grim reality that this Government has no magic bullet. In spite of all the pre-election rhetoric, and all the laurel wreaths it bestowed on itself, it hasn't done what it says on the tin. We all recognise the daunting task ahead of us, the benefits of staying in the EU and the need to honour our debts. But we deserve more than we are getting.

When the Government took office, it hit the ground running. But it quickly hit a brick wall. On debt restructuring, it soon became apparent that the only way was Frankfurt's way. Upholding a flawed European banking model has become our Government's goal too.

They would never accept their losses, at least not publicly. Whatever we get out of the ongoing renegotiation of our debts will be decided in Frankfurt or Brussels. The EU continues to call the shots.

The downturn was created by faulty economic and financial policies. It doesn't matter whether we live on €10,000 a year or €100,000 when it all goes on basic essentials. If less than 1 per cent cannot pay their bills, it's down to poor financial planning. When half the country have problems, the system is at fault.

It would be easier to accept the fiscal compact if our co-conspirators in Europe would recognise their losses and write down our debts accordingly. We wrote cheques that we couldn't honour when the bank guarantee was given. We are paying for our mistakes but there is no end in sight. Someone should have plugged the holes before we put any more in. The last government acted recklessly when it gave the bank guarantees. It was misguided and it comprom-ised our EU partners. But the damage was already done.

Our €20bn annual budget deficit will get worse, not better, for as long as the Government does not stand up to the EU in relation to the banking crisis. It's an accepted political maxim that sovereign default cannot happen. At least, it cannot be seen to happen. That is why the EU is pumping money in, so that Ireland does not default. But we cannot afford to pay either. Let them prop it up, but it is too soon for us to pay anything back. We are only going through the motions and nobody is being fooled.

The problem with consumer credit is different. But the Government is treating it as the same. It washed its hands of the problem when it recapitalised the banks. Last year AIB bank announced it was amenable to debt forgiveness, but BoI made it clear it was not. Both are right -- but the only viable solution is somewhere in between.

Ordinary people borrowed money based on prevailing economic conditions to provide homes and lifestyles that were an expectation, if not a given. The banks brokered the deals and while it is not bank policy to accept their losses, in many cases, it is the right thing to do, both commercially and morally. More would be done if the Government hadn't made a blunder when it chose to bail out the developers. Now there is nothing left to help the rest. "Moral hazard" is put up like a shield any time the subject of debt forgiveness is mentioned.

We can't continue as we are and we won't recover if things don't change. Like it or not, debt forgiveness in some form is inevitable. Those who can pay should pay and they should be given whatever flexibility is needed to allow them pay back what they owe. If it's acceptable for wealthy developers to park their debts and in many cases walk away from them, why should it be any different for the rest. If the law favours one side over the other, then the law is wrong. The problem for government is that it lost control of its finances and the EU will not countenance debt forgiveness.

Eamon Gilmore and Enda Kenny have suggested their position has softened on debt forgiveness for hard-pressed homeowners. They had to say something since the number of cases with mortgage arrears is growing. The Government still pins its hopes on the Keane report which led Finance Minister Michael Noonan to leave debt forgiveness to the banks.

It is the responsibility of Government to protect its citizens from external forces beyond their control, financial or otherwise. The Government failed to do this. Even if it understands its obligations, foreign powers are preventing it from taking the corrective measures that are paramount to our recovery. So-called financial experts have clouded its judgement by blowing the concept of moral hazard out of all proportion. We don't need a blanket write-off of debt and we don't want any more victims of financial mismanagement. But we need a solution that works and not excuses for doing nothing.

If you bought your home for €50,000, it's probably worth a lot more now and you are one of the lucky ones. If you paid €500,000 and it's only worth €200,000 today, you are a victim of the global downturn that was facilitated by lack of financial control. The Government has a case to answer. But it cannot see this. If you are in negative equity, then the bank has a case to answer too. For more than three years, one has blamed the other. We won't have a viable solution until each accepts its part in all this.

It doesn't matter whether the roof over our head costs €100,000 or €500,000 provided we can afford to pay. Markets got out of control, fuelled by bad government policies and reckless lending. Nama and the Government continue to interfere in the property market with reckless guarantees and tax relief that favour the few at the expense of the rest.

Even if the Government gets everyone back to work, the market is different now and pre-crisis debts are no longer sustainable. The reason most people saw no benefit from the Celtic Tiger is that any gains they made were taken away, eroded by market forces they could not control.

If the Government did its job, property prices would have been managed, and lifestyles would have changed for the better. There might be fewer paper millionaires, and wealthy developers, but most would have been cushioned from the blow that wiped us out. The European banking model helped put us where we are. The holes are still there to be plugged before we can succeed with any attempt at recovery. The tail must wag the dog before we can look to the future.

James Fitzsimons is an independent financial adviser specialising in tax and financial planning

Sunday Independent