June 24, 2013
If the chink of financial light that shone from Brussels late last week can be used to address the growing mortgage crisis, then the news that the Europeans might cough up for the next round of mortgage defaults may be worth celebrating.
Make no mistake about it: the way the domestic economy is going and the way mortgage arrears are rising, there will be a need for further recapitalisation of the Irish banking system.
Obviously the eurozone chief bottlewashers didn’t say they would pony up for Irish mortgage defaults, but that’s what the decision last Friday could mean.
As losses mount on one side of the Irish banks’ balance sheet, someone will have to write a cheque on the other side of the balance sheet – the thing has to balance.
The way mortgage arrears are headed in Ireland, it looks like only a matter of time before the banks need new capital. There will only be two places from which that can come. The money is either from the Irish taxpayers or the taxpayers in other European countries. The ESM is other European taxpayers’ loot.
Last Friday there was lots of talk about being able to claw money back from the Europeans, money that we had already put in. This doesn’t look likely – not least because Irish taxpayers have injected around €32 billion into AIB, PermanentTSB and Bank of Ireland and the total European fund for bust banks is only €60 billion. It doesn’t seem reasonable to think that 50 per cent of a fund which is supposed to be sufficient to cover all bank debts in the eurozone would go to a country with 2 per cent of the eurozone population.
In addition, as the European fund would only take a position in the Irish banks after buying shares, it might be worth remembering that Bank of Ireland’s total market capitalisation is just over €4 billion and AIB much less. In fact, AIB is probably worth nothing. If it had value, don’t you think the government would have flogged it by now?
So, even if the ESM bought both entire banks, we, the taxpayers, would be massively out of pocket to the tune of possibly €28-odd billion.
More likely, and a better bet now, is that the cost of further recapitalisations could be met by the ESM with real money.
This is what the state may play for now. But why, you might ask, would the Irish banks need yet more money?
After all, weren’t we told that Irish banks were the best-capitalised banks in Europe?
Yes, they were, as long as they didn’t open for business. As long as they were safe deposit boxes for deposits, they were grand. But as soon as the banks’ balance sheets came into contact with the real world of excessive debt, arrears and mortgage defaults, the notion that they had loads of capital became farcical.
The latest news from the Central Bank shows that arrears are mounting relentlessly. Anyone who works in the real economy knows why. People simply can’t pay their mortgages, because incomes are falling. Taxes erode the incomes of those in work, and unemployment destroys the ability to pay of those on the dole.
This is simple stuff, really. As income falls, it doesn’t really matter what the rate of interest is. The ability to pay is reduced.
But why is your income falling? It is because someone else is not spending. After all, my income is your spending; and your spending is my income. So your income falls because my spending has fallen and my savings have risen.
Normally, when someone chooses to save, someone else chooses to spend those savings and the system rights itself. But this balancing mechanism is not happening, because the banks are petrified to lend.
But the very fall in income makes the banks more neurotic. This neurosis is because, even though your income has fallen, your debts have not fallen in tandem. In fact, because the interest rate is positive, your debts are actually rising.
When the banks see income falling, the debt-to-income ratio of their existing portfolio rises. This prompts more hushed conversations between the bank manager and head office. They get even more worried and lend out less, not more.
This process means that the banks simply sit on deposits and don’t recycle cash through the economy. This pattern is how the economy gets stuck.
Without fresh credit into the economy, income falls further and arrears rise, which is why the latest Central Bank figures show that ordinary people are slipping further and further into the mire.
According to the bank: “There were 95,554 (12.3 per cent) private residential mortgage accounts for principal dwelling houses (PDH) in arrears of over 90 days at end-March 2013, up from 92,349 accounts (11.9 per cent) at end-December 2012.”
If it was not clear that Ireland needs a large deal on personal debt up to now, it should be very clear from the latest figures. Such a deal could be executed by a large debt-for-equity swap whereby the banks take equity in the house and reduce the mortgage accordingly.
The ESM could pay for this, allowing those in debt to recover and begin to see a little bit of hope for the first time in years.
A debt deal of this type would put money back in people’s pockets, and would have the advantage of doing so immediately.
Many opponents of debt forgiveness or debt deals like this cite something called moral hazard. But shouldn’t we be more worried about real hazard – the real hazard of tens of thousands in mortgage arrears, the marriages breaking up, the mums and dads with no jobs?
This is a real hazard, and it is the real risk of a lost generation, living in a country with no hope. Should not this be what we worry about?
The idea of debt forgiveness is rooted in common sense as much as economics. It is as old as the Bible. Readers of the good book will turn to Leviticus or Deuteronomy to see chapters devoted to how you need to forgive your neighbours’ their debts.
The expression “the jubilee year” originates from the Old Testament. The wisdom of the Bible was that, if you don’t forgive your neighbours and you continue to subjugate them in a debtor’s prison, they eventually lose hope and turn against you.
As Tony Soprano might say, debt forgiveness is only “good business”. Bad business is grinding your neighbours down and not expecting them to stand up against you.
If last Friday’s European bank deal allows for recapitalisation funds to be used to reduce the debt burden on our neighbours who need a break, well then it should be seized immediately.
Because the clock is ticking. On Thursday, the Federal Reserve signalled a dramatic change in policy. Having kept interest rates low for five years, the Fed has now moved to a policy of pushing up rates. When US rates go up, global interest rates tend to follow, and you don’t need to be a genius to figure out the negative implications of this for Irish mortgages in the near future.