Prize-winning economist Joseph Stiglitz told The Irish Times last week that a percentage of the debt of mortgaged-to-the-hilt people in negative equity should be lopped off. This, he said, would assist economic activity, by alleviating the sense of entrapment that people feel. It’s an easy stimulus that would also create more realistic bank balance sheets. (Read Colm Keena’s interview with Stiglitz here.) It also sounds attractively like getting a voucher for money off after you’ve paid for the (overpriced) goods. Please quote the promotional code “NAMA”.
One day later and the renewed Programme for Government proposed by Fianna Fail and the Green Party were touting the arrival of IVAs, or individual voluntary arrangements, a kind of court-free bankruptcy-lite process currently available to UK residents. Under an IVA, debt-riddled consumers can get a certain percentage of their debts written off if they come clean and – via the mediation of an insolvency adviser (a private company!) – successfully persuade three-quarters of their creditors to agree to a new schedule of reduced repayments. If they do, this is then binding on all the creditors.
Hmmm. This is just not the same thing at all. Sure, it might mean that some people who would be evicted from their homes under the current system would live to pay another loan repayment. Superficially, it seems like a good deal for bedraggled borrowers if they can get 62 per cent of their debts written off (the average last year in the UK). But IVAs can be insidious voluntary arrangements, too. For a start, it stands to reason that lenders would not agree to an IVA if they didn’t think they would work in their favour.
In the middle, a swathe of licensed insolvency advisers take their cut (in the UK, this is usually a couple of grand). That might generate a spot of employment for some out-of-work mortgage brokers: IVAs become next season’s debt consolidation deals. But are commercial insolvency practitioners really the kind of jobs that we want to create? Needless to say while others are enriching themselves on the back of the difficulties you’ve suffered as a result of the mismanaged economy, your credit rating will be flushed down the toilet (not that banks will be lending to anyone anyway).
The scheduled repayments, which typically last three to five years, are rigid, formal agreements: if you can’t keep to it, you are plunged into the very bankruptcy you were hoping to avoid. I know, that sounds a lot like a mortgage or any other loan. But borrowers were motivated by the desire for security (not greed) when they signed up to a mortgage. Sign your name to an IVA and you are effectively admitting culpability: your debt, your problem. That may be fine, but it does absolve the Government from having to force Ireland’s zombie banks to reduce borrowers’ debts in a manner that admits their culpability.
The Government is “overpaying” for the Nama assets by some €7 billion over the current market value. Asked why, Minister for Finance Brian Lenihan said this: “We’re talking about distressed loans, we’re talking about a distressed market, and you are entitled to make some allowance for long-term value… After all, if you look at it from the point of view of the bank – which is not a popular way to look at it, I accept that – why wouldn’t they just hold onto the loans and work them out themselves, if there was absolutely no premium involved?”
If you’re feeling a little shivery reading that, then it’s probably because you know you’re not going to get your “premium”, even though you’re a part of that distressed market too. Instead, you’ll be getting an economy marred by cuts to wages and welfare that will only increase the real value of your debts. Without a corresponding reduction in your loans, this painful slump will last a lot longer for everyone.
Of course, existing court debt enforcement procedures are Dickensian and individual voluntary arrangements – key word “individual” – as they exist in the UK will help reform this particular problem and spare some misery. But they are not the right mechanism to prevent Ireland’s zombie banks from breeding zombie consumers.
So UBS “Delta One” trader Kweku Adoboli (left) joins the rogues gallery of traders who have lost their employers millions or billions with dodgy trades which their superiors claim to have had no knowledge of. At $2 billion, he has some ground to make up on Jerome Kerviel, who lost $7.2 billion at Societe Generale in 2008. But he easily beats Nick Leeson, the Galway-resident who brought down Barings Bank with losses of $1.4 billion in 1995, and John Rusnak, the US foreign exchange trader, who lost $691 million at AIB’s US subsidiary in 2002.
