Private Debt Relief

This post was written by John McHale

The debate over the private debt relief has developed a lot of momentum, with the both the Central Bank and the Department of Finance now seemingly increasing the pressure on banks to provide debt relief.   While there certainly is a case for targeted debt relief, it seems to me that there are a number of confusions in the debate.   I think the following points are worthy of some discussion. 

1.       The distinction between accounting loss recognition and debt relief

This is a point that has previously been emphasised by Greg Connor (see quote here).   The processes of loss recognition for accounting purposes and debt forgiveness are very different.    In part motivated by the Japanese experience, it was recognised early in the crisis that it is critical for banks to recognise losses and then to be properly recapitalised.   Failure to do so can lead to the “zombie banks” phenomenon, whereby effectively undercapitalised banks are unwilling to lend.    This can further be associated with “zombie borrowers”, whereby banks engage in “evergreening of accounts – essentially lending more money to prevent default – so as to avoid having to recognise the losses.  

Through the PCAR process, Irish banks have been forced to recognise losses and to be propertly recapitalised, although concerns about mortgage losses have left lingering doubts about whether the process has gone far enough.   But this process is consistent with banks doing everything possible to maximum the recovery of loans – even loans that they have written down on their books.   Minimising the need for yet further capital injections requires that banks only forgive debts if it actually increases the expected recovery.

2.       The “debt Laffer curve”

I have mentioned the “debt Laffer curve” before, but I think my exposition just caused confusion.   But I still think it is a very useful device for thinking about the case for debt forgiveness.   The basic diagram is here.    The horizontal axis measures the present value of payments to the bank assuming full repayment on a given debt obligation.   The vertical axis measures the expected present value of the repayment.   The “debt Laffer curve” shows the relationship between the present value of the debt obligation and the expected repayment.   The basic case for (mutually advantageous) debt relief comes from the possibility of the curve beginning to slope down beyond a certain point.   This means that debt forgiveness could actually raise the expected value of repayment.   This could happen, for example, if lowering the debt burden means the borrower has stronger incentives to raise their income or to avoid default (where repossession would b e costly for the bank).    Such cases are certainly conceivable, but it is a fairly demanding hurdle.  (I would be very interested in commenters’ views on this.)  

There is, of course, the extra complication of the much discussed moral hazard/strategic default.   If the bank provides relief for people in certain conditions, then there is the potential for a bad “pooling equilibrium” where people have the incentive to be in those conditions.   Colm McCarthy has famously put this in a pithy way:

Since you cannot get blood from a stone, it is desirable to streamline the personal insolvency arrangements so as to recognise this reality.  But no incentives should be created which encourage those who can pay to disguise themselves as stones.

Now it may well be that the government wants the bank to provide debt relief even where the curve is upward sloping but relatively flat.   The relief would have the added advantage that it could help stimulate household spending.   But if this is the policy, then it is better to admit up front that the policy means bigger losses for the bank and, where the bank is State owned, ultimately for the State.   There is a danger that State-owned banks will be forced to follow a range of political objectives, storing up longer term fiscal problems and making harder to gauge the ultimate performance of the banks.   If the government wants broader debt relief, then it is better to provide appropriate subsidies and then let the bank get on with – and be accountable for – maximising value. 

3.        Insolvency rules

One way to make it more likely that the bank has an incentive to forgive debt to prevent outright default is to strengthen the “threat point” of the borrower through more debtor-friendly bankruptcy laws.   Making bankruptcy or other insolvency rules more borrower friendly is likely to reduce the value of the banks.   But I think the focus here should be on the overall design of the regime.   The current regime is archaic and brutal and needs to be reformed.   If moving to a modern regime results in losses, then additional losses for the banks is a bullet to be bitten.

However, much of the discussion in pitched in terms of a trade off between debt and creditor rights – and creditors understandably get little sympathy at the moment.   But it is important not to forget the “instrumental role” of creditor rights in ensuring there is an incentive to provide credit in the first place.   Everyone’s creditworthiness is tied to there being reasonable protection of creditor rights. 

107 Responses to “Private Debt Relief”

  1. grumpy Says:

    there is another aspect that you haven’t mentioned. During or shortly after 2013 Ireland will likely be attempting to sell stakes in it’s banks predominantly to the solvent constituents of the Eurozone.

    Delaying any policy that would require additional provisioning by the banks until after they are sold is something the Irish government have a logical incentive to try to do.

    Once the stakes are sold the government will likely be strangely more amenable to arguments about the general economic gains that might result from debt forgiveness.

  2. Frank Galton Says:

    Banking theory is not unambiguous on the behaviour of undercapitalized banks. Going back to the US S&L crisis, the idea was that they engage in “shoot for the moon” lending, since the riskiest loans are the ones with some capacity to get them out of the red, whereas plain vanilla lending does nothing to the balance sheet of an already barely solvent/insolvent bank. The dominant idea now is that they become risk averse or engage in extend and pretend on existing loans. Irish banks seem to be in the latter case. But there should be a diagnosis before there is a solution.

    I’d also recommend avoid the term “Debt Laffer Curve.” A term that comes from Charlatanomics is probably doing more harm than good to a solid argument.

  3. Fiatluxjnr Says:

    @Grumpy
    Given the current share price of the three quoted Irish banks are mere option prices (2 cent, 6 cent and 9 cent) is it likely that anyone will invest in 2013 or anytime soon. As John McHale says lingering doubts about capitalization seems to suggest that the “markets” are highly skeptical about any meaningful return to profitability for the next few years. If your theory is correct then it seems unlikely we will see any proper debt resolution process anytime soon. Stephen Collins raises interesting questions today..
    http://www.irishtimes.com/newspaper/opinion/2012/1027/1224325792973.html

  4. DOCM Says:

    @ FLJ

    Indeed he does! As always in Ireland, there is the public debate and the one going on behind the scenes. How many of the nomenklatura, and of their supporters, are insolvent to the tune of €3 million?

  5. grumpy Says:

    I think that Stephen Collins article:

    http://www.irishtimes.com/newspaper/opinion/2012/1027/1224325792973.html

    … should be read by everyone, even people who don’t like Stephen C!

    What you have here is classic moral hazard - remember in economic terms it is about stopping the market from rewarding beneficial behavior toward society’s general interest or preventing losses from arising to those responsible for behaviour detrimental to society’s general interests.

    Ireland has been an economic experiment and a group of people self-selected themselves in demonstrating their possession of poor business judgement. You might think this group should perhaps be discouraged from being in a position to “lead” the allocation of capital in the future. ‘Moral hazard’ is something that acts to undermine that.

    There are many more competent at assessing economics, risk and business prospects who will not, as a result, be looking to have the State write off €3 million.

    But I suppose a lot of them would be members of a politically influential group and the politicians they influence are persuaded they were “THE entrepreneurs”, “THE risk takers” etc, etc…..and there aren’t any smarter ones the pitch should be cleared for.

  6. Gregory Connor Says:

    The three million euro threshold as discussed in the Stephen Collins article seems extremely high — what is the political or economic or bureaucratic explanation for this very high threshold? I am surprised it has not caused more of an uproar from the Labour backbenches, union leaders, opposition parties, lobbying groups. Is the Buy-to-Let lobby that powerful?

  7. zhou_enlai Says:

    Increasing the “threat point” through more reasonable personal insolvency is the ONLY solution imho. People who advocate that the state should mandate debt relief are heading off down a blind alley.
    The best the state can do is to provide an option for a voluntary agreement by the bank to 110% of value of the property to remain as a secured debt.
    State ordered debt forgiveness has the following problems:
    Politically poisonous
    Legally unsound in terms of the creditors property rights
    Too complex and too big to administer properly or to protect against gaming

    If people are serious about getting fairctreatment for borrowers they will focus on the insolvency legislation and forget about proposing pie in the sky debt forgiveness schemes.

  8. DOCM Says:

    @ grumpy

    It is a good deal less complicated than that! The situation may be summed up in terms of the Buckley Report, a companion reader to the Croke Park Agreement; appropriate to Lake Woebegon “the little town that time forgot, and the decades cannot improve,” and as the town “where all the women are strong, all the men are good looking, and all the children are above average.”

    Especially the consultants! Who now risk being ejected from the “protections of the CPA”.

    cf.

    http://www.finance.gov.ie/viewdoc.asp?fn=/documents/PressReleases/2001/report38.pdf

    Our parliamentarians - charged with the fundamental task of raising taxes and ensuring that they are properly disbursed - come in under Chapter 7, lumped in with everyone else.

    No wonder the Troika are incredulous!

  9. DOCM Says:

    @ Gregory Connor

    They are! You can see the stigmata of their operations in every town, and almost every village, from one end of the country to the other.

    Alternatively, one could consult page 22 of the Form 11 self-assessment tax return.

    O - PROPERTY BASED INCENTIVES ON WHICH RELIEF IS CLAIMED IN 2011 [901 - 930]

    http://www.revenue.ie/en/tax/it/forms/form11.pdf

  10. grumpy Says:

    @Gregory c

    Its buy to lets, but also people of what David Begg might call “standing” who borrowed to “invest” in everything from pubs and hotels to hedge funds and proptery developments in Bulgaria.

    Very often the easiest access to funds was to those with personal connections in banks.

    Banks may have a decision making role in debt write offs.

  11. Gregory Connor Says:

    Bank management is very opposed to the high threshold so it is not the bank industry lobby.

  12. grumpy Says:

    @Gregory

    Wasn’t suggesting the lobbying has come from the banks.

  13. Joseph Ryan Says:

    “This means that debt forgiveness could actually raise the expected value of repayment. This could happen, for example, if lowering the debt burden means the borrower has stronger incentives to raise their income or to avoid default (where repossession would b e costly for the bank). Such cases are certainly conceivable, but it is a fairly demanding hurdle. (I would be very interested in commenters’ views on this.) ”

    Take an example of an SME company with 20 employed, net assets of €4million, of which a building constructed in recent years is €3million, and banks loans of €3million. The loan is repayable over 15 years at approx payment of 300K pa.
    The company could in current times,at a stretch, possibly pay €50,000pa.
    Should the bank;
    a) Write down the capital amount of the debt to match the repayment capacity, leaving the company continue with a fighting chance of survival.
    b) Fold the company, leaving the State to pay redundancy costs of say 250,000. Liquidators fees €50,000 to come out of the bank residual. The building would remain empty.
    c) Write off the loan, repossess the building, lease it a reasonable cost to the company, insist on an equity stake in the company of say 50%, and leave the company with a fighting chance of survival.
    d) Do nothing, hope and hassle the SME owner

    Up to now banks have opted either (b) or (d).
    I have a few places in mind where (b) was the result, sometimes as a result of putting too much pressure on the SME owner (d)

    @Gregory Connor
    “Is the Buy-to-Let lobby that powerful?”
    Yes, seems to be answer.
    There should be no reluctance to repossessing BTLs. There is neither family home or employment involved.

    @ALL
    The Stephen Collins article should require an explanation on the extremely high €3million figure.
    Of course one or two Dublin boom time properties would easily account for €3million. Anecdotally, the legal profession are up to their necks and FG, being the barristers party would not like to ‘let down’ its own.

  14. Tullmcadoo Says:

    Grumpy, Gregory,
    Re the 3m limit, who wrote the legislation? I do not mean the pols either. Who are the Amateur BTL landlords. It is the professional classes in the private sector and the officer class in the public sector. The former probably lobbied but did not draft.

  15. Frank Galton Says:

    The Stephen Collins article makes for a nice example of distraction politics. When the insolvency legislation was being debated, the Opposition devoted their energies to the vital issue of whether people would get to keep their Celtic Bling in bankruptcy. The meeja duly obliged. With the legislation far advanced. everyone suddenly notices the 3m limit and the implications thereof.

    By the way, credit to Sarah Carey who asked the question about the 3m limit at the ministerial post-Troika news conference, the answers to which Collins draws upon for his column. While we keep debating the semantics of Ireland’s post-program arrangements, the vested interests will be at the trough.

  16. insult after injury Says:

    http://www.irishtimes.com/newspaper/opinion/2012/1027/1224325792973.html

    civil servants have to move house with young families now and then, why can’t these folks not move to 4 bed semi detached houses, they gambled - they lost, others were more careful, three million is too high, one million is too high,

    http://en.wikipedia.org/wiki/Libro_d%27Oro

  17. John Corcoran Says:

    First at the trough are the politicians,then the politicians bagmen and then the vested interests. The public interest is irrelevent.

  18. David O'Donnell Says:

    fyi

    Resolving bank balance sheets is the way to move on
    By Fiona Muldoon

    Wednesday, October 17, 2012

    The Central Bank’s head of banking supervision, Fiona Muldoon, believes a culture of leadership is missing in Irish banks. Here is an edited version of her speech yesterday

    LADIES and gentlemen, thank you for asking me to speak to you. I am conscious that I am your invited guest and so I will start by saying, that today I do not intend to speak of comfortable matters. I hope to provoke you a little, maybe even vex you.

    http://www.irishexaminer.com/analysis/resolving-bank-balance-sheets-is-the-way-to-move-on-211046.html

  19. Paul Ferguson Says:

    @ John McHale

    We recently submitted ‘A Solid Foundation to the Housing Market’ to the central bank as part of their consultation on fixing the distressed property market. It can be read at;

    http://sensiblemoney.ie/literature/#publications

    To summarise the document it describes how bank create the vast majority of the money supply in line with debt. We explain how what’s in circulation is the prinicipal of each loan plus the small amount of cash in the economy. From this, the economy is expected to repay the principal plus interest of each loan which is impossible in practise.

    Given that defaults are so inevitable we question the morality of the bank gaining assets under this system, considering that the banks created the money for the loan in the first place.

    Finally we argue the case for implementing full reserve banking in the Eurozone as a means of allowing all loans to go according to plan.

    You may find it interesting.

  20. JDL Says:

    The most damaging fallacy in the mortgage arrears debate is this: “mortgage debt relief involves a one-for-one transfer payment from taxpayers to borrowers, since taxpayers own the banks.”

    In fact, taxpayers own only part of the banks. Fully-State owned Irish banks (AIB, EBS, PTSB, IBRC) have a market share in residential mortgages of about 49%; in addition, the 15% State-owned Bank of Ireland has a market share of about 17%. The other third of the market is held by foreign-owned banks: Ulster, KBC, Lloyds (BOSI), Dankse (NIB), Rabobank (incl. ACC), and others.

    Crucially, a disproportionate share of mortgage arrears is concentrated in the foreign-owned banks. Banks like Bank of Scotland Ireland and First Active (owned by Ulster) lent mostly at the top of the market and had notoriously bad underwriting.

    So the fully State-owned banks’ “market share” of mortgage arrears is maybe 40-45% (plus 10-15% in Bank of Ireland). The other 40-50% is in foreign banks.

    For every 100 of mortgage debt default, here’s my estimate of who will suffer the losses:
    UK taxpayers (through RBS and Lloyds holdings): 20
    Other shareholders in foreign banks: 22
    Private shareholders in Bank of Ireland: 12
    Irish taxpayers: 46

    So here’s a less catchy but more accurate restatement of the consequences for Irish taxpayers of mortgage debt relief: “mortgage debt relief involves a 0.46-for-one transfer payment from taxpayers to borrowers, since taxpayers own part of some of the banks.”

  21. Ernie Ball Says:

    Here’s a fun game to play: read the top posting on Irish Economy (but not the comments) and then try to figure out how the commenters will manage to blame the public sector. You can always be secure in the knowledge that they will blame the public sector, no matter how far afield the original post seems to be. The question is by what tenuous thread they will manage to do so.

    So, hats off to grumpy and tullmcadoo. Well done, lads.

  22. PR Guy Says:

    Every lawyer I know is up to their necks in negative equity btl ‘portofolios’

  23. grumpy Says:

    @Ernie ball

    You have lost me. I have re-read my posts on this thread and I fail to see how you have managed to come to your familiar conclusion.

    Do you see everything as an attack on the public service?

  24. David O'Donnell Says:

    speaking of public sector …. and the health service ….

    I find this scapegoating, simplistic, of hospital consultants [the health experts without whose input no health service will progress and improve …… and evidence is emerging of a brain drain and a loss of very scarce human capital. strange and probably very counter-productive …. some good insights here ….

    Saving lives, losing respect: how ‘consultant’ became a dirty word

    The Government’s decision to lop €50,000 off starting salaries for new consultants will most affect midcareer doctors in their 30s.

    Many of them are making plans for their last stage of their overseas training before, they had hoped, returning to take up consultant posts back in Ireland.

    Not any more. People like “Beth”, a final-year specialist registrar about to take up a training post in Australia, are seriously considering one-way tickets.

    “My time abroad was always planned with a view to returning home, but now I’m thinking I might stay over there. The salary cut was the final straw on top of a health system that is going from bad to worse.”

    In Australia she will work a 43-hour week with no overtime and earn as much as she does in Ireland for working more than 60 hours a week.

    “Beth” isn’t alone in her outlook; friends from her old class have already moved to Boston and Toronto, and others, even those with families, are looking.

    http://www.irishtimes.com/newspaper/weekend/2012/1027/1224325773964.html?via=mr

  25. David O'Donnell Says:

    Of course we can take is as 99% given that a certain group in The Bundestag will be perusing the 16 billion in recap for certain purposes and the 35 billion in somewhat of a questionable state …. before any ESM dosh might be forthcoming …..

  26. Robert Browne Says:

    The banks have played the government for fools. I agree with Steve Keen that any money pumped into banks should have been given to debtors first with the proviso that any loans outstanding be paid off. That way the government would not be standing around wringing their hands as the banks try to extend and pretend just as they have done from the moment they walked into Lenihans office.

    This caper of case by case is ultimately going to send a wave of defaults cascading through Irish banks and it will not matter whether they are BTL or residential the net effect will be the same, insolvency yet again and requiring another substantial bailout. More austerity and conditionality and national asset sales on the way. I never bought into Honohan, Elderfiels and Blackrock’s spin that the Irish banks were “fixed” they were temporarily fixed but because they thought they were wide boys they figured they could keep the money and afford themselves the luxury of trying to screw a premium out of the bad loans which had been provisioned for. The wide boys failed to see that they did not have the luxury of time on their side. As for the PIR it beggared belief that they could persuade the government to put them in charge and give them a veto.

    They just refused to change their attitude they have brought what is coming down the line on their own heads unfortunately they cannot even see it coming.

  27. Michael Hennigan - Finfacts Says:

    If the excuse for the €3m limit is to help startups/entrepreneurs, most would likely be doomed before building up personal debts of that amount. Anyway, it would be easy to craft an exception for business ventures.

    @ David O’Donnell

    Two big features in the IT this week making the case for medical consultants.

    Maybe I missed the comparable coverage on the thousands who put in long hours during this brutal recession, without PRSI, while struggling week by week to get even a basic income?

    What are the comparable pay levels in the UK never mind the rest of Europe?

    I have recently spoken to a person in a public hospital and there is stress when there are two earning sources — that applies to anyone with 2 jobs.

    So, having two many public patients scheduled creates problems when an individual has to be elsewhere.

    Remember Mary Harney’s solution of co-location?

    As for emigrating to Australia, that sounds a little like bankers’ excuse for high pay.

    I’m against dual labour markets and we know why we have one in this case.

  28. Barry Says:

    David o’Donnell,

    When you talk about Beth emigrating to Australia I get the impression you believe something should be done about that problem.

    But people like Beth taking a one way ticket to Australia isnt a problem. The prevailing orthodoxy is that while emigration is a bad thing immigration is a good thing.

    Beth leaving is a bad thing for Ireland but a great thing for Ireland and one they will certainly celebrate.

    However while its a bad thing for Ireland little will be done to stop it because for every Beth who leaves we can attract similarly skilled workers in from countries where the conditions in the health sector are worse. Beth can be replaced and while we will mourn her loss we will at the same time celebrate the arrival of a new citizen.

    Putting in place measures to ensure citizens like Beth are retained in the country, or are in the future are enticed back, will be hard to implement in the face of the neo-liberal agenda which would rather have access to the world’s labour markets to ensure a large reserve of labour, and all that implies, and equally you would face the lobby which argues that Beth leaving and someone arriving here are indistinguishable so why try entice Beth back.

    Its good bye Beth and hopefully one day you might return home. But sadly you’ll receive little enticement to do so.

  29. Sarah Carey Says:

    I think Stephen might have been a little harsh with this explanation

    “Cynics could be forgiven for concluding that a sizeable number of our politicians must have run up debts of millions of euro during the boom and are putting in a high threshold to cover their own speculative losses. It is striking that far from objecting to the €3 million threshold the pressure from backbench TDs was to raise and not lower the limit.”

    Isn’t bankruptcy the only disqualification for a sitting TD? Any backbencher who wants to hold onto his seat would not be contemplating insolvency, unless they are also convinced they are going to lose their seat anyway.

    However, I did wonder if that’s why they also granted the banks power of veto over PI so that anyone considering strategic defaults on the btl’s would be nailed.

    Or- maybe they thought - well, why not, raise the threshold. A lot of this was reckless lending, we’ve recapitalised them and they aren’t lending. Let this cohort of the heavily indebted resolve their problems and start again. That will help the real economy. Cos all that capital sitting on the bank’s balance sheets is doing nothing for the rest of us.

  30. PR Guy Says:

    @Robert Browne

    “The banks have played the government for fools”

    Over the past five years or so, I have found myself in the same room as bankers and politicians on a few occassions. Sad to say, it’s not hard to tell who the smart guys in the room are. One group runs rings around the other.

  31. brian lucey (@brianmlucey) Says:

    nobody has blamed the Croke Park agreement yet….:)

  32. John Corcoran Says:

    @Sarah Carey
    Irish
    To succeed in Irish politics there are three things you need ,the first is money,the second is money and the third is money. The politicians look after their own interests first, then their bagmen who supply the money and then the vested interests who do them favours. Its not complicated–the public interest is irrelevent, hence the country is the most bankrupt country in the world–all because of political corruption.

  33. Joseph Ryan Says:

    @Brian Lucey

    Now that you mention it, perhaps we should have a special debt relief scheme for Croke Parkers. You know the arguments…….

    As somebody who works in private industry, where 50% of the people were made redundant, statutory payments- no top ups, no pensions, I found the comment somewhat distasteful. Once upon a time those people used to be citizens too.

  34. rf Says:

    “nobody has blamed the Croke Park agreement yet”

    Maybe not explicitly, but the dog whistles are always there:

    DOCM

    ‘The situation may be summed up in terms of the Buckley Report, a companion reader to the Croke Park Agreement; appropriate to Lake Woebegon “the little town that time forgot, and the decades cannot improve,”’

    Tull

    ‘I do not mean the pols either. Who are the Amateur BTL landlords. It is the professional classes in the private sector and the officer class in the public sector.’

    Insult after injury

    ‘civil servants have to move house with young families now and then, why can’t these folks not move to 4 bed semi detached houses’

    Grumpy

    ‘Its buy to lets, but also people of what David Begg might call “standing” who borrowed to “invest” in everything from pubs and hotels to hedge funds and proptery developments in Bulgaria.’

    “I found the comment somewhat distasteful”

    I might be misunderstanding you, but you found ‘nobody has blamed the Croke Park agreement yet’ distateful? Why? What does it have to with the situation you describe?
    As someone who actually had to leave the county to find work and still has trouble finding anything consistent, I didn’t find it in anyway distasteful - and to be honest, special pleading from the ‘SME secto’r, the coping class or whatever fantasy community is being pushed here and in the Sindo is about as useful and relevant as Barrys low signal, anti immigrant nativism

  35. Michael Hennigan - Finfacts Says:

    @ brian lucey (@brianmlucey)

    nobody has blamed the Croke Park agreement yet….:)?

    No conflict of interest here — an alien concept in Ireland?

    Remember when the conventional wisdom was that the free lunch had been invented, the reaction to people like myself was to seek to drown out dissent?

    Why would such defenders of the status quo, have changed and some of the anonymous trolls that appear here from time to time, were undoubtedly once disciples of the new Moses, Bertie Ahern.

    The Promised Land was the fool’s gold and now what better to blame others rather than ourselves?

    If you believe that it’s OK for an insider in his fifties who had never made a consequential decision in his life, can walk away with a retirement bonanza of over €700k and an annual pension of €140,000 in a bankrupt country, while the lives of tens of thousands of fellow citizens have been destroyed, then the best hope for the have-nots is that external control will end the scrounging.

  36. DOCM Says:

    @ rf

    Whether certain bloggers do or do not criticise the CPA (or whether they like or dislike Stepen Collins!) seems to me to be beside the point. The question is whether the criticism is justified or not. Events - as evidenced by recent media coverage - seem to be deciding the matter in favour of the first conclusion.

    I like the reference to Lake Woebegon because of the bit of the quotation that you left out viz. “where all of the children are above average”. I have no problem with the best consultants earning the salaries that they deserve but are all equally talented?

    The distinction between consultants and the rest is, in itself, archaic. Why do we need a “consultant-led health service”? Why not just doctors with various levels of specialities and the salaries that that the market dictates for their services? The same holds true for the vast bulk of those involved in the other services provided by government. They should also have the same basic conditions of service and pension rights as workers anywhere in the economy.

    The majority of the working population that have to fund their own pensions have woken up to the evident disparity in treatment. It’s that simple! How to fix it is the problem.

    @ Sarah Carey

    In case you missed the link provided by Frank Galton above.

    http://www.irishelection.com/2012/09/personal-insolvency-the-ecb-and-the-shallowness-of-much-political-debate/

  37. rf Says:

    ‘Why would such defenders of the status quo….were undoubtedly once disciples of the new Moses, Bertie Ahern.’

    That’s quite an assumption to make!

    ‘The Promised Land was the fool’s gold and now what better to blame others rather than ourselves?’

    Not at all, the point is that continually blaming one specific group of people (the PS) and imagining that ending Croke Park is the answer to our problems won’t actually resolve the crisis. The anti Croke Park extremists are every bit as bad as those who blame *everything* on outside actors.

    You’re stuck in this rut and refuse to move on from the positions you took in the naughties and deal with the country as it is now

    ‘ some of the anonymous trolls that appear here from time to time’

    Signed, Ronan Fitzgerald, Stephney Green, London .. if that matters (which of course it doesn’t, it’s just another straw-man)

    DOCM

    My problem is with the endless exaggerating of how important Croke Park is

    http://www.irisheconomy.ie/index.php/2011/09/11/public-pay-and-the-sindo/

    Not with the specifics of your argument vis a vis consultants - which seem reasonable enough
    It’s also with the divisive, anti-union and parochial nature of the attacks, (perpetuated by a newspaper owned by a tax dodging billionaire), that has very little to do with actually reforming the institutions and challenging the ideology that created the crisis.
    On a personal level I don’t buy the premise that if I’ve been impoverished by the recession, then so should my neighbour- and I don’t think (although I might be wrong) that’s what’s driving the hostility here. Its more ideological, irrational and reactionary - just a new enemy for those sections of Irish society that are perpetually angry about something, imho

  38. Michael Hennigan - Finfacts Says:

    @ rf

    I have never suggested that Ireland’s economic problems and challenges can be distilled into a soundbite.

    There are a multiplicity of issues such as a failed enterprise policy that matter. However, let each vested interest determine what is taboo and wonder where the sustainable solutions can be found.

  39. DOCM Says:

    @ rf

    Thank you for a reasoned reply. I would certainly agree with your view in relation to the rubbish spouted by one media outlet in particular. But the point I am making is not to be construed as an attack on public servants or laying all the blame with the CPA. Quite the opposite, in fact. It is a question of agreeing an equitable solution to an obvious problem viz the Exchequer is spending billions more than it is taking in. One simply cannot have immovable elements in this scenario. Among the others are (i) no increases in income tax (ii) no cuts in social welfare spending and (iii) continued practices aiding rent-seeking, from the Oireachtas itself to a myriad of other areas in need of reform.

  40. brian lucey (@brianmlucey) Says:

    Michael H
    yes, thats exactly what i believe. As you know….(imagine an emoticon of rolling eyes..)

    Joseph Ryan
    Looking at the CSO data for employment with the singular exception of construction NACE non state sectoral employment has fallen from the peak by about 17-20%. Not sure what sector, construction apart, has fallen by 50%.
    State (education, public admin and defence) has fallen by 6%. Of course, if we dont WANT to have a state that acts in some way as an automatic stabilizer….

  41. DOCM Says:

    @ brian lucey

    Or,maybe, we could give everyone a job in the public sector!

  42. Robert Browne Says:

    @ PR Guy

    The banks fooled the government or the government were willingly fooled or simply failed deliberately, to do due dilligence. This despite being told by Morgan Kelly “do you see the ghost estates and empty building sites that is the capital of the Irish banking system, right there!” There was no excuse whatsoever for Lenihan and Cowen they deliberately put every tax payer in this country and future generatiosn on the hook for the insolvency of the banks because they were afraid that insolvency would impact the whole of the Public Service.

    The banks were subsequently given huge slices of the NPRF and other bailout money to recapitalise them. Recapitalise meaning they were given free money without strings attached from tax payers and politicians. In theory they are nationalised, but in reality, the government are saying that, eventhough we own 97% of AIB they cannot get involved in day to day decision making. Great being involved in day to day recapitalisation but told to get lost when it comes to day to day decision making? What kind of hocus pocus is this? We have “brave” Central bankers making speeches to other suits, complaining about the useless bankers who are not doing what they were given the nod and wink to do. That’s the way government are operating and it is pathetic and by the time they figure out what is really happening the whole thing will come crashing down on the rest of us. As politicians they are reactive in the sense of doing things that look after their own class i.e. barristers, auctioneers, midde class property speculators, accountants and tax specialists. As regards ordinary people it is a case of, sure the banks will evaluate your case along with all the other cases on a case by case basis. What is that about going bankrupt very slowly at first then all of a sudden? And I am not talking about the individual the banks are going to be back looking for at least another 40bn from state coffers. Why do I distinguish between the banks and the tax payers when we are told we are all the one now? Well only when the money is being shoveled in after that, it is a matter for the banks and nobody else to decide what happens. It is great business model you cannot loose because you are too big to fail but the tax payer cannot win because he is represented by a financially illiterate government class advised by economists who cannot be held to account.

  43. Robert Browne Says:

    @ Brian Lucey

    I seem to recall reading an article written by one Cormac Lucey where he described the Croke Park agreement as “economic apartheid” to you not talk to him?

  44. Brian Woods Snr Says:

    @ RB: A lucid commentary along the style and substance of Dr Michael Hudson and the surgical savagery of Prof William Black.

    Lots of hubris. Must be a ‘fall’ due.

  45. seafoid Says:

    @docm
    Those who lost money on private sector pensions are often invoked as st bernadette types who suck it all up in stark contrast to the scheming PS cliques. What amazes me is that the pros who ran the schemes never get hit in the crossfire. How many schemes were wiped out on bank shares ? Was anyone advising or fund managing disciplined professionally or was it enough to nominate sean quinn and that clown who ran anglo as lightning rods for public anger? The money is gone anyway but the big picture is very.opaque still.

  46. Sarah Carey Says:

    @DOCM

    PO’Neill speculates the PI threshold might be “a backdoor way to implement massive household debt relief in Ireland”

    and John McHale says

    “Now it may well be that the government wants the bank to provide debt relief even where the curve is upward sloping but relatively flat. The relief would have the added advantage that it could help stimulate household spending. ”

    Do we think is that what’s going on?

  47. paul quigley Says:

    Some solid issues tabled above. We ‘own’ the banks but for some odd reason we can’t even contemplate directing them. Our vested interests and internal hierarchies gaze placidly upon unemployment and emigration. Our respected professions bury thier heads in the sand. The new normal. Methinks we are headed for a crisis of the state, and a bigger crisis of global development to boot.

    Here’s someone with a robust analysis.

    http://www.golemxiv.co.uk/2012/10/why-are-we-bailing-out-the-banks-part-three-lies-and-opposition/

  48. zhou_enlai Says:

    I do not understand the rationale for the €3m limit. Why are such people not entitled to equal treatment under insolvency law? A lot of them had higher debts because they were older and had more savings to risk and leverage. Why should they be told their economic life is over and be condemned to the economic scrapheap?

  49. Ahura Mazda Says:

    @ John McHale,

    1. “The relief would have the added advantage that it could help stimulate household spending.”

    I note that you use the word ‘could’, but this is a commonly suggested benefit of debt forgiveness. I don’t readily accept this. Is there any proof that this would increase consumer spending? If you consider criticism that Irish consumers are saving too much, why would indebted people spend rather than save(/accelerate debt repayment)?

    2. I’m uncomfortable with the idea of middle class welfare. I don’t think it’s a good idea to assist with the acquisition of privately owned assets. It’s not reasonable to tell poor people that we need to subsidise some mortgage holders (large amounts), so they get to spend money in the economy.

    3. Copy-cat behaviour is a big risk. The way I see it 20k of a mortgage reduction probably wouldn’t turn a bad loan good. But if we start looking at 100k or 150k of mortgage reductions, there’ll be a rush to default. This needs to be quantified.

    4. Would we need to cut mortgage amounts to cover future increases in taxes. For example property tax. How would other taxpayers feel about this?

    5. What does asset back lending mean?

    I think the most realistic solution is a reasonable insolvency/bankruptcy option. i.e. the borrower loses all wealth/assets but gets debts written off after a reasonable period (2/3yrs). Though in certain circumstances allowances should be made to attach to future income.

  50. Eureka Says:

    Here’s how it is: we are running a country we cannot afford on a credit card based at a German bank - and they have every intention of collecting their money. Our politicians have been reduced to boot licking ghetto meisters and our talented children are being let drift abroad wherever the four winds might take them.

    So here’s the issue about debt:
    1: There is debt I incur on my own behalf where I know the risks and potential benefits. That debt should be honoured. If it is not honoured it should limit my ability to access debt in the future.
    2: There is debt that has been incurred by reckless idiots in a bank that I and my children are expected to pay. This is not my debt and should not be repaid at all.

    2 different kinds of debts. Defaulting on a debt is not a fault of the system - it is a fundamental righting mechanism that teaches prudence to the lender and the borrower.

  51. Eureka Says:

    @ Michael H
    A good friend of mine’s husband has recently left the HSE for the NHS in the north. Take home pay is actually better - this is because the tax system is more benign and there are generous increments and awards the whole way through. But the big difference is that relative to the HSE the NHS actually works. Staff there enjoy good conditions.

    I find your take no life peculiar. It’s as if we should all aspire to some fanciful middle earth private sector dystopia. It makes no sense. Henry Ford set up the Ford motor company with the aim of paying his workers decently - why? - because these workers would be the guys who would buy the fridges from the guys who bought the cars. It’s the same the world over. Austerity is a misnomer. As someobdy else on this blog points out - this is not austerity - this is financialism - the banks are doing very very very well

  52. Robert Browne Says:

    @ paul quigley

    A good analysis on the link above. It brings to mind the fairy tale

    “The Emperor’s New Clothes” (Danish: Kejserens nye Klæder) is a short tale by Hans Christian Andersen about two weavers who promise an Emperor a new suit of clothes that is invisible to those unfit for their positions, stupid, or incompetent. When the Emperor parades before his subjects in his new clothes, a child cries out, “But he isn’t wearing anything at all!”

    The tale has been translated into over a hundred languages but obviously not into one our government and their advisors understand. In this case the “clothes” are the equivalent of the banks telling us they have changed their ways. The reality is they are now on the public payroll, doing what they have always been doing, the Pavlovian response, which is looking after their own interests regardless. I want to shout “no you have not changed, no you are not lending, no you are not being honest, you have taken the bailout money for which the country is paying dearly and you think that like a dog who can only bark, that it is in ‘your’ best interests to screw everyone else on loans for which you have been recapitalised, you are a sorry lot.”

    We are now told by those we elected, that to question the way the banks are acting is tantamount to an act of treason. I believe the treason was committed when the banks were given the blanket guarantee and subsequently recapitalised, willy nilly, by our government know all’s and their economic advisors. I will say it again the money should have been channeled through the debtors to the bank but that is anathema to bankers and their central bank buddies who are now crying wolf.

    However, there are further recapitalizations coming down the line, the softening up for this is that we will be out of our bailout program end of 2013 (or policies are working) and that the German Chancellor thinks we are “a special case” (our policies are working) eventhough she is facing into a general election next Oct/Nov she is willing to cut a deal with Enda. A further lie is that the Croke Park has delivered real and substantive change (our policies are working) which is the “envy of our EU partners”. Nothing is further from all these truths. At the end of the day all the lies and can kicking is going to wreak even more havoc on this economy. The government are going to get a lesson in real politik. Draghi is now on record saying that some countries do not seem to realise that they have lost their national sovereignty when they took on these huge debts. |What he is really saying is that the game is up for these countries. I believe those in power will willingly sell the rest of us out because it is the surest way of making sure that they get their pensions in the future.

    Living beyond our means has cost us our sovereignty and the fact is that we have been living beyond our means for practically all of the 13 years that Bertie was in power. We were living way beyond our means paying ourselves inflated salaries, using social partnership, benchmarking and latterly Croke Park to try and justify the indefensible and all of this is separate from the banks growing their loan books at stupifying rates from 2002 onwards. For those who say we only increased our debt to GDP in the last few years? You are ignoring the fact that the money swishing around from property taxes was all that kept the inflated salaries paid once that collapsed then the government had a choice borrow, pretend and extend or face reality. They are the emperor so we know what they did.

  53. David O'Donnell Says:

    A MUST READ [H/T NAKEDCAPIATLISM … figure out the parallels …

    The Quiet Coup
    The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

    By Simon Johnson

    http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/

    @The Medical Consultants

    Your patients appreciate you. Now, sort it out, and lead the restructuring of the Irish Health Service.

  54. Mickey Hickey Says:

    The 3 million ceiling does not make political or economic sense. The state has to confine itself to what is necessary to keep society from unravelling, not more and not less. The per residence value eligible for a reset should not exceed something in the order of 400K to 600k. Anything over that is entirely up to the owner/occupier and the bank. Since it is abundantly clear that the Gov’t itself is skating toward bankruptcy it is equeally clear that the expectation that the Gov’t can continue to be all things to all people has no tangible support. Protecting BTL owners is a laudable impulse and some support should be provided if the Gov’t was solvent and running annual budget surpluses.

    Leading up to the collapse the mantra was the markets, markets, markets. We had markets up the ying yang. Now when we need to get back to market reality, cruel as that is, we have developed a markets phobia. The Gov’t has to be seen to be protecting families, children and the aged so as they can continue to live reasonably decent lives. The key here is reasonably decent, not extravagant or poverty stricken lives.

    The Gov’t has manoeuvred itself into accepting 100% liability for the banks and their creditors. Losses incurred in bailing out owner/occupiers who are underwater, even if it is confined to properties not worth more than 400-600K, is far more than the Gov’t and taxpayers can afford. To help the medicine go down it will be necessary to impose a capital gains tax on all residences over 200K or so.

    We should be dealing in the art of the probable and not the impossible. Let us not forget that we are the country that mired itself in poverty for over fifty years. Keeping that uppermost in mind should lead to sober and responsible decision making.

  55. Gtfaway Says:

    Imagine if back in he day the losses had been forced through the banks capital, and the bond holders had been told take a hike. The state would be able to work out the personal private debt issues without much hitch. It would be instructive to go back to those debates and seed what those now whining “something must be done” we’re saying then.

  56. Joseph Ryan Says:

    @Brian Lucey

    “Looking at the CSO data for employment with the singular exception of construction NACE non state sectoral employment has fallen from the peak by about 17-20%. Not sure what sector, construction apart, has fallen by 50%.”

    Manufacturing Section C. Code 2312. I work in the flat glass processing ‘industry’. That particular subsection would have seen falls of about 66%, for those still standing. In fact a lot of subsection 23, part of manufacturing which I suspect supplies mostly the domestic construction sector (there is some export of higher value added product) would have seen falls of that order of magnitude. [In fact whether the activities of one of the best known national companies in construction, Munster Joinery, Ballydesmond, fall under construction (4334) or manufacturing (2312), is hard to tell].

    Your comment was probably meant in jest, so my use of the word offensive was not appropriate. Flippant would perhaps have been a better word in the circumstances.
    But the Croke Park agreement is no matter of fun to many in private sector or unemployed sector, who believe that they have been consigned to second class citizenship. They are not likely to remain silent about their second class status, nor should they be expected to be. A historical analogy might be the way the dwellers of the Irish towns felt about the dwellers of English towns in times past, where their labour was welcome, but their presence was tolerated.

    On the issue of a Keynesian stimulus argument, I could not agree more with you. However the protection provisions of Croke Park, that extend up the pyramid to people who save large percentages if not all of their the surplus income, can hardly be labelled Keynesian.

    PS. I also agree with you protests at paying bondholders. It was a dreadful capitulation, the details of which should be put in the public domain. However, I think you underestimate the kind of ‘war’ that Ireland would have had to enter into in order to embark on such a course. Ireland then or now simply does not have the stomach for such a fight. Ireland’s underbelly is far too soft and pampered. In fact that is why we capitulated and that is why we are still capitulating.

  57. Joseph Ryan Says:

    @Mickey Hickey
    “The 3 million ceiling does not make political or economic sense. The state has to confine itself to what is necessary to keep society from unravelling, not more and not less. The per residence value eligible for a reset should not exceed something in the order of 400K to 600k. Anything over that is entirely up to the owner/occupier and the bank.”
    +1

    “To help the medicine go down it will be necessary to impose a capital gains tax on all residences over 200K or so.”
    Now there’s a idea worth pursuing.

  58. paul quigley Says:

    @ Mickey Hickey

    Your comments +1

    ‘The Gov’t has manoeuvred itself into accepting 100% liability for the banks and their creditors.’

    Lets face it. The leadership of our banks were no different from Wall St and the City of London. They ddipped into the punch bowl as deep as they were let. Successive Irish governments found it electorally attractive to hand over the management of the economy to them and their developer cronies. The party backers benefitted massively from the property game and the professions lapped up the associated business. The unions jumped aboard and off we went..

    Now its all washed up locally and regionally. The so-called developed world is in a bind. Uncontrolled expansion of private credit has been exposed as a toxic disorder and a development cul de sac. The fiscal medicines are making the patient worse, but the depth of denial and compromise is such that it will be a while yet before the ‘recovery’ talk is recognised for the mirage that it is.

    @ john mchale

    Protection of creditors is of course important but its one principle among many. The principle of appropiate debt forgiveness has an equal right to respect, and is often employed when it is deemed expedient to do so. I suppose the issue is who is entitled to determine what is expedient, and what sort of questions usually entails considerations of power and cost. Debts will be collected until the cost (in whatever terms) of doing so becomes ‘excessive’.

    It will suit the well-connected to have individual case debt resolution behind the scenes. That way they can quietly fudge the boundaries between family home protection and recovery of speculative losses. It’s up to the concerned citizens, responsible professionals and cleaner politicians to see that a bit of sunlight gets ino the smoke filled roooms.

  59. brian lucey (@brianmlucey) Says:

    Robert Browne
    No more than any other collective agreement. Plus i think right wing populists (sorry cormac…) using the descriptive noun apartheid in the irish context is bonkers.

  60. brian lucey (@brianmlucey) Says:

    Joseph Ryan/ Mickey H
    Re capital gains : this has been looked at. http://brianmlucey.wordpress.com/2012/09/01/can-we-have-a-win-win-property-tax/
    See the discussion there and the link to Michael Collins paper. Estimates (from 06 data) of 2.4b pa to be raised by removing the exemption of the PPR from CGT. Even in these times a billion should be gettable! Wonder why this is not on the agenda?

  61. DOCM Says:

    @ Sarah Carey

    As to what is going on, does anyone really know? Other than that there is a constant element of all involved seeking an easy way out. There is none.

    @ All

    Interesting profile of Schaeuble by Derek Scally but which is primarily a resumé of the “story so far” in our relations with Germany on the issue of the banking bailout.

    http://www.irishtimes.com/newspaper/finance/2012/1029/1224325865609.html

  62. Joseph Ryan Says:

    @BL / MH
    re; CGT on Private residences:

    It is good idea. It needs some air.
    The State banks providing debt relief to Mr MacPatrick, while allowing Mrs MacPatrick and the younger MacPadraigíns, to sell a few houses free of CGT hardly makes economic or equitable sense.

  63. rf Says:

    DOCM @ 3.55

    Thats fair enough. Perhaps I unfairly lumped you in with the anti PS renegades! Apologies if so

  64. Michael Hennigan - Finfacts Says:

    @ Eureka

    I find your take no life peculiar. It’s as if we should all aspire to some fanciful middle earth private sector dystopia.

    You’ve got the wrong end of the stick on both Henry Ford and myself.

    I know one or two things about Henry Ford. I grew up a few miles from where his father had lived.

    He revolutionised car production through the adoption of the moving assembly line, increasing productivity which enabled him to double average pay in 1914 and cut the work day to 8 hours.

    So the improved conditions were made possible by the new production processes.

    I have often said that well run companies are not mean companies. It’s not theory as I have worked in several companies — all directly dependent on markets for products or services.

    Pre-2008 isn’t coming back — so it’s cake, fridges and cars for some and stale bread for others.

    There is no credible policy to deal with high long-term unemployment

    The total full-time permanent employment in the internationally tradeable goods and services sectors in December 2011 was 281,000 compared with 320,000 in 2000 and 292,000 in 1999. There were 144,000 employed in the foreign-owned export sector in 2011 - - down from 166,000 in 2000.

    @ rf

    DOCM @ 3.55

    Thats fair enough. Perhaps I unfairly lumped you in with the anti PS renegades!

    The truth is often bitter.

    The US Republican Party would have lots of like-minded folk who want their own facts!

  65. David O'Donnell Says:

    fyi IMF Press

    Country Report No. 12/292: Portugal: Fifth Review Under the Extended Arrangement and Request for Waivers of Applicability and Nonobservance of End-September Performance Criteria

    http://www.imf.org/external/pubs/cat/longres.aspx?sk=40064.0

  66. David O'Donnell Says:

    Rajoy Faces Bailout Split With Monti at Madrid Meeting

    Silvio throws his toys out of the pram!

    http://www.bloomberg.com/news/2012-10-29/rajoy-faces-bailout-split-with-monti-at-madrid-meeting.html

  67. Tim O'Halloran Says:

    @ zhou_enlai

    ” I do not understand the rationale for the €3m limit. Why are such people not entitled to equal treatment under insolvency law? A lot of them had higher debts because they were older and had more savings to risk and leverage. Why should they be told their economic life is over and be condemned to the economic scrapheap?”

    The actual order of martyrdom is surely
    1. the unemployed
    2. Negative equity home owners
    3. Buy-to-let get rich quick morons.

    The unemployed over 40 are the ones on the economic scrapheap, their economic lefe really is over. Of the 3 categories, the ‘buy-to-letters’ are the only ones who actively contributed to the disaster. Indeed the disaster was created to feed their mad fantasies.

    Why should European tax payers subsidise these people, which is what we are asking for in the debt relief negotiations? What will German opposition politicians do with this nugget, if ever a German government agrees to any debt relief for us?

    Why are Labour prioritising economic sovereignity, when the troika are the only ones opposing this kind of mad inverted welfarism?

  68. David O'Donnell Says:

    Schäuble pledges German support

    http://www.irishtimes.com/newspaper/breaking/2012/1029/breaking14.html

    Danke Wolfgang.

  69. David O'Donnell Says:

    fyi

    10/29/2012
    Interview with ECB President Mario Draghi
    ‘We Couldn’t Just Sit Back and Do Nothing’

    In an interview with SPIEGEL, President of the European Central Bank Mario Draghi defends his euro crisis policies and promises to keep prices stable. He also says he’s on Germany’s side when it comes to encouraging reforms in the euro zone.

    http://www.spiegel.de/international/europe/spiegel-interview-with-ecb-president-mario-draghi-a-863971.html

  70. Fiatluxjnr Says:

    @DOD
    That meeting with Schauble was a bit of a damp squib. 40 minutes is all it took to tell the two ministers there would be no retrospective bank debt forgiveness.
    As for the PNs…he kicked that to Mario. But Mario doesn’t believe in debt forgiveness either. Here is what his compatriot said today…
    “For the ECB, forgiving debt isn’t possible because it would be equivalent to indirect state financing,” Nowotny told journalists in Vienna on Monday. “Therefore, the ECB certainly can’t participate in a such actions of the public sector.”
    So we are back where we started.

  71. Mark Says:

    re- Tim O’Halloran: ‘the ‘buy-to-letters’ are the only ones who actively contributed to the disaster.’

    And some are paying dearly for their mistakes. Though notwithstanding which(and mindful of whatever political/banking strata it was engineered), without their participation in the scheme it couldn’t have happened to the extent that it did - pushing up house-prices beyond the laws of physics, which was thereby a principal factor in the existing negative equity situation & excluding others from affordable homes (though this has turned out a blessing in disguise for them).

    In general;

    How many of the buy-to-lets are currently serviced by rent-allowance ?
    What proportion of these are mortgages held by the re-capitalised banks ?
    Do these banks have an interest in sustaining the value-illusion of these properties, or have a fear of having to repossess tenanted, overvalued homes with all attendant complications ?
    Is the rent-allowance propping up the value illusion of these homes ? Is rent of circa €1000 p/m justified for these properties ?
    Was the availability of homes, prospective landlords, prospective tenants, or mortgage-funds the prime factor at play (ie; demand creating availability or availability creating the demand )?
    Similarly, was the doubling of homes in the country over the relevant ten-year period a cause or an effect of the immigration rate over the same period ?
    Is the need to keep houses filled a factor in current policies re-immigration (ie; is e.u. citizenship enough to justfiy access to welfare after unemployment for an indefinite period)?
    Is it possible to dissolve/replace the banks if they cannot survive any suitable combination of mortgage-writedowns to current market levels / the voluntary handover by landlords of their properties to the State (which could then pay reduced ‘rent-allowance’ to the banks on the reduced mortgages), re-paying due-money to the former landlord which would not include portion of mortgage paid via-rent-allowance.
    And would it cost more or less to the country as a whole to do this than to continue as at present ?
    In the event of a large-scale reduction in the presence of commercial banks, would new institutions be likely to establish themselves in their place, or could the state establish for a period a national bank, at least for deposits ?

  72. seafóid Says:

    Münchau has a great question in this risk-on environment

    http://www.ft.com/intl/cms/s/0/4da327a0-1ed1-11e2-be82-00144feabdc0.html

    What I cannot get into my head is why anybody would be optimistic now when they were pessimistic a few months earlier. Could someone explain this to me?

  73. grumpy Says:

    @rf

    With the greastest respect, what on earth are you on about with this rubbish from earlier?

    “Grumpy

    ‘Its buy to lets, but also people of what David Begg might call “standing” who borrowed to “invest” in everything from pubs and hotels to hedge funds and proptery developments in Bulgaria.’

    “I found the comment somewhat distasteful”

    I might be misunderstanding you, but you found ‘nobody has blamed the Croke Park agreement yet’ distateful? Why? What does it have to with the situation you describe?”

    FFS!

    Try actually reading the thread, and noting who has said what, before sounding off, maybe.

  74. Robert Browne Says:

    @ brian lucey (@brianmlucey)

    It seems the term “Economic Apartheid” has nothing to do with being right wing, centre or left wing. The underlying concept or idea is for those who gain power, whether they be left, right or centre, deciding that they have the political and trade union power to shift the burden of economic adjustment on to the “outsiders” in what basically amounts to a collectivist, insider, elitist approach, to divvying out the national pie. Hence the term, “economic apartheid,” nothing to do with race, but everything to do with being corrupted by power. If the pie no longer exists to be draw down, in the proportions that the insiders decided were “equitable” then, it will be supplemented by unconscionable borrowings and divvied out on the same basis. The fact that these borrowings must be paid by higher emigration, unemployment or the children now in buggies merits only passing gossip.

    http://www.news24.com/SouthAfrica/Politics/Zille-ANC-extending-economic-apartheid-20120728

    The funny thing, is, that you would want to label someone who objects to ‘economic apartheid’ as being “right wing” or simply bonkers. Just goes to show the easiest way to try and defeat someone else’s argument is simply to find an appropriate bar code for them.

  75. grumpy Says:

    @sarah c

    “Or- maybe they thought - well, why not, raise the threshold. A lot of this was reckless lending, we’ve recapitalised them and they aren’t lending. Let this cohort of the heavily indebted resolve their problems and start again. That will help the real economy. Cos all that capital sitting on the bank’s balance sheets is doing nothing for the rest of us.”

    There are always exceptions of course but the problem in economic terms is that “this cohort” in particular have by and large identified themselves as cohort that has particularly bad risk assessment skills and poor business/economic judgement.

    Why should they not be regarded as a cohort to, if anything, discourage from being leaders in capital allocation in the future so they don’t crowd out potential entrepreneurs with better judgement? Is is to some extent because they are ‘our type of person’? Do many of ‘us’ play golf with them?

  76. Sarah Carey Says:

    @grumpy

    - On the sentiment I’m inclined to agree…..

    - I’ve done the jaw-on-floor- thing as I’ve listened to the “investments” apparently sound people made and thought WERE YOU OUT OF YOUR MIND? And while it’s easy to judge them (or very very hard Not to judge them) the judging doesn’t actually help. Consigning them to debt repayments interminably just isn’t a cure. Sooner or later they have to be cut free and let start over. Some will make mistakes again. But America is the cultural leader in this. Failing and trying again makes the wheels go around. Leaving them stuck with their failures means the whole economy is stuck. Even though there’s a part of me that says I DIDN”T BORROW _ ONE HOUSE WAS ENOUGH FOR ME AND NOW I’LL PAY FOR YOUR MISTAKE?. But gotta let that go. It doesn’t help us all in the long run.

    - I think you’re wrong on the golf thing. Part of what shocks me is that “ordinary” working class people, that I thought would have been thrilled to own one house, were the guys going out to Budapest buying apartments. David McWlliams covered all this. The sign that things went crazy was how far down the demographic chain the insanity travelled.

    Maybe there is a lot of lobbying going on. Maybe there are a lot of civil servants who bought two houses. But maybe there is a reason beyond that. Perhaps if the others stop arguing about Croke Park on a debt relief thread, we get some more ideas.

  77. paul quigley Says:

    @ SC

    Perhaps the reason Paddy the Plasterer was off to Budapest was the better off professionals had really torn the a*** out of it in terms of speculation. Self regulation my eye.

  78. David O'Donnell Says:

    Press Review Berlin on Greece …

    Bild continues to play dodgy populist card - others ahead of Politicos

    Greece’s international creditors have proposed that the country receive another debt writedown, this time from EU governments. That, say German media commentators, is hardly a surprise. Fresh aid for Athens, they argue, has been inevitable for months, but leaders have shied away from telling the truth.

    http://www.spiegel.de/international/europe/german-press-comments-on-report-that-greece-will-need-more-aid-a-864010.html

    @all
    Waiting for the Irish to take action as in this thread
    Waiting for Greece again
    Waiting for Spain and the danger of an Irish Precedent
    That Election in September 2013 and the shades of Dastardly Deauville

    Waiting for IRELAND TO BECOME A PROBLEM. The EZ view of Ireland: NO PROBLEM

    The centrality of time again. Let’s push ahead with what is in our control.

  79. rf Says:

    sorry grumpy, should have put Joseph Ryans name in there between your comment and his.

  80. grumpy Says:

    @sarah C, Paul q

    The difference between Ireland’s traditional ‘economic leaders’ and ‘Paddy the Plasterer’ was that by the time the latter were buying units off-plan in some East European, as yet unbuilt, seaside resort, the former were often borrowing to take stakes in ambitious and significant East European capital city property speculation.

    The point about the potential gains to the wider economy following debt write-offs is well known, but the problem with extending it to this traditionally privileged group is that in a small society like Dublin’s, many will continue to comprise the list of ‘people like us’ that forms the outer layer of ‘insiders’ and ‘movers and shakers’.

    Avoiding moral hazard has economic benefits that you might be confusing with a desire for retribution. There is an economic case for people who demonstrably have sub-par economic judgement to be discouraged rather than encouraged to re-commence the making of significant entrepreneurial decisions.

  81. Sarah Carey Says:

    But grumpy - who’d be left?

    Also, I presume they’d be a tad more cautious now. We don’t even need them to make “entrepreneurial” decisions. We just need them to spend like normal people, cos as long as they’re paying off debt, they’re not buying normal products and services.

  82. grumpy Says:

    @Sarah

    Are we talking about the same group of people here? You ask “who would be left?” but I’m thinking about the crowd with in the region of €3m to be written off - there are a comparatively small number here.

    If you are looking to free up masses of people to spend rather than just pay off debt then you need to focus on those who would need 100k written off - there are loads of them.

    Once you go over 300k written off (never minf 3m) you are starting to get into bailing out a much smaller and much more, erm, ’select’ group.

  83. Sarah Carey Says:

    oh, good point.

  84. Michael Hennigan - Finfacts Says:

    I said before that the Central Bank did not bother gathering data on 5 and 10 year interest-only mortgages, even though they were the fuel for the buy-to-let market.

    Davy said in a report last Aug that a substantial amount of BTL lending that originated in H2 2007 and in 2008 had not yet hit the trigger to increase payments to both interest and principal.

    “We estimate that 29% of Bank of Ireland’s BTL balances and 35% of Allied Irish Banks’ outstanding BTL mortgages have yet to switch to principal and interest repayments.

    We expect that by value the proportion of BTL loans in arrears will rise to 38.4%. Based on a 60% fall in property prices, peak-to-trough, delinquent loans will have a current market value of €6-7bn or close to 40,000 BTL properties will be in arrears.”

    http://www.finfacts.ie/irishfinancenews/article_1024775.shtml

  85. Sarah Carey Says:

    @Michael

    eeep.

    What’s your theory then? on the 3m threshold?

  86. Obsessivemathsfreak Says:

    Every lawyer I know is up to their necks in negative equity btl ‘portofolios’

    And low and behold, the PIA legislation allows a portfolio sized debt-write off of €3 million. And who exactly writes, drafts, advises on, and ultimately judges these laws?

  87. brog Says:

    John

    By private debt relief I assume you are talking about principal forgiveness?

    In the US the Federal Housing Finance Agency (FHFA) has ignored political pressure and refused to direct Fannie Mae and Freddie Mac to implement principal reduction strategies. The FHFA do acknowledge the economic benefit from Principal Forgiveness but argue that those benefits would be offset by the cost of strategic defaults and could also have damaging long-term consequences for mortgage credit availability.

    http://www.fhfa.gov/webfiles/24113/PFStatement73112.pdf

  88. John Gallaher Says:

    Some color on above comment.
    http://www.treasury.gov/connect/blog/Documents/letter.to.demarco.pdf

  89. zhou_enlai Says:

    @Tim O’Halloran

    I am not calling for debt relief. I am calling for insolvency laws which are no more generaous than applies in the UK.

    People calling for debt relief are doing more than anyone else to stymie a solution to the problem of unsustainable private debt.

    I am suggesting that the arbitrary €3m limit of fair procedures is a purely populist measure which is not grounded in economics.

  90. john gallaher Says:

    that dastardly ‘moral hazard’ linked a decent paper,the full FHFA report and options for debt relief,a little heavy going, but they may contribute to your discussion from a US perspective.

    https://www.law.northwestern.edu/faculty/programs/colloquium/law_economics/documents/Mayer-Morrison-Piskorski-Gupta_mortgage-modification-Northwestern.pdf

    http://www.fhfa.gov/webfiles/24108/PF_FHFApaper73112.pdf

  91. brog Says:

    Link to a related article that explores the effectiveness of various modification strategies in a US context

    http://www.pewstates.org/uploadedFiles/PCS_Assets/2012/Goodman_et_al_%20Modification_Effectiveness.pdf

  92. john gallaher Says:

    @brog an intended oxymoron?

  93. Ahura Mazda Says:

    @ Sarah Carey,

    “Also, I presume they’d be a tad more cautious now. We don’t even need them to make “entrepreneurial” decisions. We just need them to spend like normal people, cos as long as they’re paying off debt, they’re not buying normal products and services.”

    wow, looks like you’ve stumbled across a cure for poverty. We get a subset of people, let’s call them the Happy, who borrow and spend. Their spending creates a trickle down effect to the rest of the population. And, now for the magic bit, the Happy don’t have to repay their debts.

    I think the ‘yin’ in your response is missing the yang; or in this case the Happy missing the Grumpy.

  94. zhou_enlai Says:

    I do not campaign for debt relief for the highly indebted. Campaigning for debt relief is self-defeating. I only suggest there should be a fair legal framework within which people can try to deal with their creditors or default if necessary.

    Going down the insolvency/voluntary arrangement route will still be a last resort for any person who aspire to business success in the future. The banking market in Ireland is shrinking and lending is going to be conservative.

    Many people who were successful at their chosen line of work (publicans, dentists, pharmacists etc.) incurred big debts by investing for the future. They thought they were being prudent. Whilst many bought property, most did not engage in development. Many only bought for the purposes of their own businesses. They bought at prices inflated by reckless lending practices and their income which was to service such loans has now collapsed because of the ongoing recession.

    These people should not have their debts forgiven by the state but they should have access to a fair insolvency regime just like everybody else. The fact that they were wealthier than others did not make them smarter than others or more aware of the risk of national economic collapse.

    The idea that these people should be punished as part of some kind of false morality play is revolting. It comes from our cultural heritage of despising the successful and the rich. That cultural heritage is the result of the wrongs we suffered during colonial oppression and exploitation. It will compound the historical tragedy if we perversely punish our fellow Irish citizens as proxies for the Crown, absentee landlords and tithe gatherers of the past.

  95. John Corcoran Says:

    Bank of Ireland is pursuing six-figure settlements from three further surveying firms as it seeks to recoup losses accrued from unpaid property loans.

    The bank is claiming a total of £11.7m from Cluttons, DTZ and Bond Davidson for alleged breaches of contract relating to their valuations
    of residential properties.

    Since the downturn, the bank has distinguished itself as a lender that has frequently turned to litigation to recover losses in valuation disputes against some of the UK’s best-known property firms. The new cases are among at least five that are being defended at the High Court in London.

    DTZ and Bond Davidson face claims of £4.1m and £6.6m respectively after the bank agreed to loan a special-purpose vehicle connected to Penpol Developments £9.3m in 2008 to develop 16 flats and two houses in Newquay.

    Following a dispute between the owners of Penpol, the vehicle that owned the project was placed into receivership and sold for £1.4m. The bank claims DTZ and Bond Davidson overvalued the site and the gross development value. Both companies are defending the claims.

    Cluttons is facing a similar claim brought by the bank for more than £1m over its valuation of a flat in Belgravia.

    Aside from the claims that emerged this week, the bank pursued: Lambert Smith Hampton in August after suffering a loss of £4.5m on a Leeds residential scheme; Edward Symmons in February to recoup £4.9m in losses on a business park in Cheshire; and DTZ in February to recover £2m it lost lending against a plot of development land in Swindon.

    Bank of Ireland, which suffered a 26% increase in its underlying first-half loss in 2012, declined to comment.

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  96. Sarah Carey Says:

    @Zhou

    + 1

    @Ahura

    Do I smell patronisation there? Think I should stick to the knitting? (Or in my case, darning. It’s tricky you know….)

  97. Yields or Bust Says:

    @John Corcoran

    Have you any idea on past success rates for banks in pursuing this strategy?

    I cannot for one moment believe any sane judge would side with a bank in the cases noted above - banks have ample evidence gathered over generations as to what works in property lending transactions and what doesn’t - what strikes me about this route is the sheer desperation on the banks behalf to save face on their past stupidity.

    I’ve said it here many many times before - a bank always has the opportunity to say no to any property deal presented to them. If the rental yield dynamics didn’t make sense why did banks engage in the process in the first instance? The same can be said of lending money in 2004/2005/2006/2007 and before, in virtually all property transactions in the RoI - the rental yields made zero sense and the banks had all the evidence at their disposal to know this but obviously refused to believe the evidence that was stacking up against them, most likely because renumeration metrics were sales driven as opposed to long term profitability driven. The rest as they say is history.

  98. David O'Donnell Says:

    Tuesday, October 30, 2012
    Defusing ‘The Mortgage Timebomb’

    Seamus Coffey

    In this weekend’s Sunday Business Post, commentator David McWilliams has an article under the title “It’s time to defuse the mortgage timebomb”. The piece concludes with:

    “In addition, the longer this goes on, the more the banks become zombie banks incapable of breathing credit into the market. A deal must be done right now.

    Read on:

    http://economic-incentives.blogspot.ie/2012/10/the-mortgage-timebomb.html

  99. Yields or Bust Says:

    @DOD

    The problem with the analysis that Seamus does all the time in relation to this issue is that he presents the numbers as if there has been no wrongdoing on the part of the banks - its as if they were simply doing their job during the 2001 to 2008 period and shit happens. This is Alice in Wonderland economic analysis and convientiently forgets that all the banks operating in Ireland (including the foreign owned Irish branches) are completely insolvent beccause the business models they utilised utterly failed.

    The failure arose not because of some highly complicated products goings badly wrong - the failure arose because of a basic mispricing of the property asset class by the lending banks. Any bank which lends money at rental yields less than the equivalent risk free 10 year bund rate forfeits their right in my view to full recourse on their loans. Why? Because with the greatest respect to Seamus - its their job to know better. In most walks of life if you balls it up so royally that the business goes tits up, you lose.

    The problem here is that we’re still stuck in apportioning blame mode. We need to find a fix to a mis pricing problem created by the banks. Moral hazard issues will not even enter the equation if a model pricing mechanism can be agreed and a re callibration of ALL mortgages from an agreed date and an agreed pricing model can be calculated. This is very achievable, its transparent and importantly avoids a mass bankruptcy and repossession event which is nobodys interest.

    It must be stressed however that the overwhelming error in this saga rests with the banks. All manner of ’solutions’ as far as I can see tries to avoid this inconvienient fact for the elites and this needs to change.

  100. seafóid Says:

    El Erian has a cracking piece on Greece

    http://blogs.ft.com/the-a-list/2012/10/31/time-to-decide-whether-greece-is-in-or-out-of-euro

    “In order to secure additional financing, Greece’s governing coalition is very close to finalising a new fiscal package involving further cuts in the public wage bill, pension reductions and a broadening of the tax base. Coalition negotiations on labour reform – entailing lower firing hurdles, changes to the minimum wage legislation, and weaker collective bargaining – are proving more difficult.”

    I wonder if Ireland might be asked to give up firing hurdles and collective bargaining in return for Anglo.

  101. David O'Donnell Says:

    @Yields or Bust

    ‘It must be stressed however that the overwhelming error in this saga rests with the banks. ‘

    Agree. And until they ‘act’ and clean up the local economy remains comatose …. and getting ‘comatoser’ - gov also needs to ‘push more’ ….

  102. David O'Donnell Says:

    @seafóid

    Greece
    Why I published the Lagarde List
    31 October 2012 The Guardian London

    In 2010, the so-called “Lagarde List”, which names more 2,000 Greek tax evaders, was handed over to the Greek government. But nothing was done. Kostas Vaxevanis, editor in chief of Hot Doc, was recently arrested for publishing it. For him, it’s a symptom of Greece’s corruption.

    http://www.presseurop.eu/en/content/article/2975961-why-i-published-lagarde-list

  103. seafóid Says:

    Re Greece

    3 insights from the FT

    http://blogs.ft.com/the-a-list/2012/06/06/spain-must-avoid-becoming-a-roach-motel/

    So far, emergency European funding has been impossible to exit, like a “roach motel”. Rather than act as a catalyst for crowding in private capital needed to restore growth, and financial viability, public money has provided the private sector with the possibility to exit programme countries at a much lower cost; and exit it did. As a result, governments have become highly dependent on official aid to cover their budget needs, meet interest obligations and roll over maturing debt; and domestic companies have been starved of the oxygen that is so critical for investment and job creation.

    http://www.ft.com/intl/cms/s/0/74f3017e-ac15-11e1-a8a0-00144feabdc0.html

    Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events

    http://www.ft.com/intl/cms/s/0/14054388-1f77-11e2-b273-00144feabdc0.html

    Cutting fiscal deficits is not the urgent task many assume it is, for two reasons. First, as argued above, it cannot be done without risking a collapse in demand and then, possibly, a fiscal deficit almost as big as that before, but at lower levels of activity. That is what it means to be in a liquidity trap. Second, there is next to no risk of a significant rise in interest rates on US treasuries, unless there is a strong economic recovery. But that would eliminate much of the fiscal deficit, as revenue recovers and spending falls

  104. john gallaher Says:

    @DOD link to BH speech…Berlin, 27 October 2011!!!!
    http://www.finance.gov.ie/viewdoc.asp?DocID=7034

  105. David O'Donnell Says:

    @John Gallagher

    Thanks. When Brian and Lucinda are left out on their own I get worried …. Brian Hayes’ eulogy on the Irish Financial System on EuroNews is a classic ….

  106. David O'Donnell Says:

    … dated Berlin, 27 October 2011 ….

    have we entered a worm_hole? Where is Seven_of_9 when I need her?

  107. brog Says:

    Some further colour on the US market from John Campbell of Harvard. He notes that “most European countries have recourse mortgages, as do most US states with some important exceptions including California”

    http://www.economics.illinois.edu/seminars/dkl/pastlectures/documents/MortgageMarketDesign013112.pdf

    Article points to research from Massachusetts of an average forced sale discount of 27% (difference between the prices of houses sold by mortgage lenders after foreclosure with the prices of comparable properties sold by owner occupants). The volume of repossessions in Ireland is low but is there any research as what an equivalent forced sale discount would be?

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