The risk of a borrowers' run is growing

If this Government does not get to grips with an unprecedented consumer debt crisis, there could be a borrowers’ run on the banks. They happen when ordinary people, realising how weak banks are and becoming suspicious of political interference in arranging cosy insider deals, stop repaying their loans. Mass defection from “willing to pay” to “won’t pay” has the same disastrous effect as a depositor run.

In pouring cold water on any suggestion of an organised personal debt settlement/forgiveness regime, Government heightened public disquiet.

Furthermore, when ruling out a mortgage forgiveness programme, Minister Michael Noonan said his cabinet colleague Richard Bruton was looking into doing something to help viable “family firms” whose owners lost money on “property plays”.

While ring-fencing viable businesses from their owner’s property losses may be a worthy job protection measure, it could also be construed as a political party acting in the interests of its traditional farmer, business owner and professional classes support base.

Unless there’s a national debt settlement regime that people can trust in, such worthy initiatives could amplify the risk of a borrowers’ run. It’s inevitable that there will have to be some form of debt resolution agency to oversee the forgiveness of anything up to €16bn in direct and indirect un-repayable consumer debt. And, as it will have to be a regime that people can trust, it must be free from political, institutional and sectional interests and influence.   

Leaving debt settlement to be dealt with through current institutional arrangements risks undue political interference, cosy insider deals and serious social unrest. Maintaining that vulnerable people should be left to deal with their banks on a case by case basis is a political cop-out.

Such a national debt resolution/settlement agency should be independent from the Government and Oireachtas, similar to say the central bank and judiciary. Its mandate would be to establish the ground rules for and oversee the execution of a national debt management system and its quasi-judicial processes through which where ordinary people settle debts through multi-lender debt settlement agreements. While this may seem a prescription for another monolith such as NAMA, the alternative scenario is less palatable.

Firstly, the judicial debt collection system with its antiquated legal framework, including inhumane bankruptcy laws, is wholly unsuited and incapable of dealing the scope of solutions and magnitude of agreements required to work out billions in unaffordable debt.

Secondly, creditors not only include state funded banks but other credit institutions and utility firms owed money by indebted consumers. As each firm will have its own debt collection policy, some may act to favour some customers over others, cutting them better deals. Already there’s an emerging disparity with some banks said to be agreeing to debt forgiveness while others continue to pile on legal debt collection pressure.

Thirdly, Government officials have had three years to get to grip with the problem. Not only has the consumer debt can been kicked down the road through extend and delay forbearance tactics – everyone is trying to kick the can onto someone else’s patch.

Last week Government’s compassionless commentary starkly contrasted with the horrendous personal stories told on the Joe Duffy show by honest people. Mr. Noonan talked of yet another interdepartmental “expert group” which, while taking into account bankers’ institutional interests, once again does not include for robust consumerist representation.

Similarly constituted, the previous “expert” group failed to meaningfully address the unprecedented scale of a consumer debt crisis for which there are no international precedents to draw on. While established to consider mortgage and personal debt it focussed exclusively on mortgage “arrears” and not the wider systemic crisis. Still it may be the case the new “expert group” will finally come up with a meaningful response. Many suspect all it will do is to cobble together another set of sticky plasters. If so, it may be only a matter of time before ordinary people decide enough is enough and trigger a borrowers run.  

 A version of this article appeared in the Irish Examiner, Business Section, on Monday the 5^th September 2011.