The state seems content to consign people to a lifetime of indebtedness, says Bill Hobbs
There's to be no relief for people suffering unaffordable indebtedness from this Government. Requiring banks to forebear on home repossessions and juggle loan repayments to make them more affordable, whilst buying time, increases overall costs to beleaguered homeowners, consigning them to a constant state of indebtedness. A new class of indentured servant is emerging, one which this state, or at least its executive arm of Government, is prepared to do allow.
Owing far more than this state can ever hope to repay, facing a decade of austerity, with a near bust economic model, a threatened loss of tax haven status and potential for sovereignty dilution, Justice Minister Ahern appears happy to consign a generation of workers to debt servitude.
Commenting at the launch of the Law Reform Commissions interim report on personal debt and debt management, Mr. Ahern appeared to rule out any prospect of a just, fair and equitable response to what has become a social disaster. RTE reported the Minister saying “that as debt was money owed to somebody, and it was not for the Government to pass laws saying the debt was not there anymore.” He added the Government would try to ensure that people having problems paying debts would be looked at “favorably”.
His reported comments illustrate scant concern for a just and fair society. Did anyone explain to the minister, that tens of thousands of households have no chance of ever paying back what they owe? Did anyone explain the economic and social costs to society? If they did then the Minister appears to believe that Government has no role in allowing for a financial safety net or at least the prospect of earning a discharge from unaffordable debt.
Humane societies and their legislatures ensure that over indebted citizens are not consigned to a live a life-time with unaffordable debt. They realise that sometimes honest, hard working, good people cannot afford to repay what they owe. They realise that people have to be given the opportunity to once again become productive members of society. And they realise that the economic and social costs of not providing a safety net are horrendous.
Not so this Government, whose response has been to continue to criminalise non-payment of debt. Under Irish law a person can still be jailed for non-payment of debt. There is no non-judicial debt settlement and resolution system as found in other countries. Elsewhere, humane laws provide for systems of earned forgiveness through which a person pays what they can and the balance is written off over time. The only option here is personal bankruptcy.
Irish private sector debt, one of the highest in the western world, is captured in a telling headline. Irish banks leveraged their balance sheets from 60% to 200% of national income between 2000 and 2008. Most of this money, borrowed from abroad, financed a consumption spending boom principally in housing and construction. The legacy is quite a scary mammoth mountain of personal debt.
The big figures are reflected in the €140bn in mortgages and about €30bn in other personal debt most of which is owed by working classes. By year end, with no sight yet of stabilising property values, upwards of 350,000 households will suffer varying degrees of negative equity. Many are first timers who borrowed to buy grossly overpriced houses that no one wants to buy. A third of SME loans are in arrears which will now be personalised as banks call in business owners personal guarantees. Amateur landlords who gorged on cheap credit, buying multiple investment properties are discovering the real cost of a free lunch. Banks and credit unions are indicating hardening personal loan arrears – code speak for rising unaffordable debt. It’s debt that will have to be written off, sometime.
Over 30,000 homeowners are living on borrowed time. Switching to interest only payments creates a mirage of affordability and just delays inevitable defaults. Thousands more are in terminal arrears which will trigger foreclosures or walk away “jingle mail” options. Many will figure it’s cheaper to rent than own their home and will act accordingly. Bankers may have to concede to short selling – selling the house for what its worth and writing off the balance.
Not one jot of reliable, consolidated consumer debt data has been officially published on the extent of unaffordable indebtedness. The only way out of unaffordable debt is to declare personal bankruptcy, which in this country is too expensive, lasts 12 years. No other resolution system exists.
Late last year the Law Reform Commission in a lengthy consultation document proposed a humane debt resolution regime which would allow people earn the right to a partial discharge of what they owe over a period of time. Simply put such a system would require people to pay what they could and require banks to write off the balance over a five year period. The Commission’s interim report last week listed a 14 point action plan including clarifying the legal status of existing Regulatory codes of practice to allow courts to take non-compliance into consideration. There is no sign yet of a comprehensive debt resolution system emerging. And mortgage indebtedness remains the elephant in the room.
It’s inevitable that billions in personal loans will have to be written off by the banks, credit unions and other lenders. Some estimate write downs of between 5%-10%. If so, the bill may be well over €10bn. Who pays?
It's a massive social problem that this Government continues to brush under the carpet.
A version of this article appeared in the Irish Examiner, Business Section, Monday 24th May 2010
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