“It’s the economy stupid” was the maxim that propelled Bill Clinton to office in 1992. Clinton is a big believer in Ireland’s recovery story, but when he visited last year his chief caveat was on personal debt.
With what must have sounded like music to the ears of the many Irish people drowning in debt, he said that writing down personal debt more aggressively would speed recovery. Many activists and economists are in agreement on this, and the IMF recently weighed in with its support.
Perhaps the biggest brake on domestic demand, growth and employment is not austerity, but debt. People are earning less, and spending a smaller proportion of these reduced earnings than previously. Recent analysis by our Central Bank shows that Irish households are, perhaps unsurprisingly, among the most indebted in Europe and have been busy paying down debts for the past three years.
Would we better off as a nation if we wrote down debts to spur growth? Is it fair for prudent taxpayers who did not over-borrow to pay for the debts of those who did?
If you could wave a magic wand and write down debt without cost, there is no doubt that a reduced debt burden would free up disposable income and boost growth.
Iceland, which has been to the forefront of unorthodox policy responses to the financial crisis, has written down mortgage debt in excess of 110% of the property value. Although leading parliamentarians were among its chief beneficiaries, and the total cost came to a whopping 13% of GDP, Iceland is now growing. For the IMF, Iceland is ‘exhibit A’.
Ireland’s main problem is that we don’t have a magic wand, and we can’t print our own currency. Given that our banking system is largely state owned, it follows that any write-down of debts involves the effective transfer of wealth from taxpayers to debtors. A blanket debt reduction is not an option because of resource constraints, and may not even be desirable.
It stands to reason that the biggest beneficiaries from debt relief are those who hold the most debt. Usually, it is those with the highest incomes and most assets that run up the most debt.
Since 2007, incomes in Ireland are down, asset values have been decimated, and many are no longer in a position to service their debts. Of the three quarters of a million mortgages outstanding, nearly 1 in 7 are either in arrears of more than 3 months or have been restructured. The situation is getting worse, not better.
Arrears are even greater for investment properties, and recent reports that as many as 1 in 4 of these cases could be investors choosing not to pay in the expectation that their debts will be written down is quite disturbing.
For those who won’t pay, there should be zero tolerance, and they should not be able to benefit from the proposed Personal Insolvency legislation. Taxpayers have already paid enough to bail out undeserving investors.
For those who can’t pay, there is no option but to write down their debts. The quicker, the better. It was for precisely this reason that the banks were stuffed with enough taxpayers’ money last year to withstand losses even in a worst-case scenario. So far, this worst-case scenario is, according to some measures, coming to pass. If the decline in house prices continues to accelerate, and they do not level out next year, the banks may require further taxpayer bailouts to meet new, stricter capital requirements. Any generalized mortgage write-down could run up the taxpayers’ tab even further.
Given the shock to our economy, debt write-downs are inevitable. Where they must happen, they should happen quickly. Mass repossessions and fire-sales are in the interests of nobody. New bankruptcy laws and an extra-judicial debt settlement mechanism are long overdue. Increasing flexibility on the side of the banks, such as allowing people in negative equity to move house in certain circumstances, is to be welcomed. Mortgage interest relief and other supports should be re-directed to those who are in most difficulty.
We need policies that are progressive, not populist.