Troika warns over insolvency law delays

Wed, Jun 13, 2012, 01:00

GOVERNMENT DELAYS in reforming personal insolvency laws are a “specific source of concern” for the EU-ECB-IMF troika and could, it warned, trigger a deterioration of payment discipline.

In their sixth report, seen by The Irish Times, the troika said Nama faces “challenges . . . to meet its debt redemption charges” next year, with bond targets likely to be revised downward.

In addition, it warns that, despite cutbacks, “fiscal consolidation is far from complete”.

In the 52-page report, circulated to members of the Bundestag budgetary committee in Berlin, the authors flag the risk posed by insolvency legislation delays, a source of tension during the April troika visit to Dublin.

Minister for Public Expenditure and Reform Brendan Howlin said after the visit the troika was concerned about getting the legislation “absolutely right”. In their latest report, the troika acknowledges the delicacy required to balance creditor rights with the restructuring unsustainable debts – but indicates the delay is on the government side.

“Despite the government consistently ruling out blanket debt forgiveness and reiterating its preference for case-by-case individual arrangements between banks and mortgage borrowers, there is a risk that, unless the legislation is carefully and promptly finalised, the ensuing uncertainty might lead to a deterioration of payment discipline and thus the quality of banks’ loan portfolios.”

The Bill would cut the bankruptcy period from 12 to three years and introduces three voluntary debt-settlement systems outside of formal court insolvency.

Also of concern for the EU-IMF inspectors is the continued complexity of bank restructuring, despite new capital buffers.

“New recapitalisation needs cannot be ruled out altogether, especially if the economy fails to pick up pace as currently envisaged,” it notes. Risks include the continued weakness of the domestic housing market, a growth in non-performing loans and uncertainty over medium-term funding.

Ireland’s budgetary situation is still far from where it needs to be, the troika warns, with one-off fiscal boosts now completed.

“For Ireland to achieve a budgetary position that ensures the sustainability of public finances . . . a substantial additional adjustment will be required,” it said.

Looking at Ireland’s banks, a continuing difficult financing situation overall continues to improve. Central Bank funding of the domestic sector is “declining but remains sizeable” as banks exceeded targets to dispose of non-core assets.

Banks’ use of ECB credit facilities has also dropped in March to €65 billion, down 30 per cent on a year earlier.

Quality of bank loan portfolios continues to deteriorate, inspectors note, while bank deleveraging is “on track but entering a more challenging phase”.

“The pace is set to decelerate as market appetite and pricing for the remaining non-core assets earmarked for disposal become less conducive,” the report said.

Inspectors are more upbeat about Ireland’s investment chances, saying new-won competitiveness could help the country boost its market share of global trade.

Credit constraints nothwitstanding, strong inflows in foreign direct investment are also likely. Meanwhile, consumers, while not back shopping in large numbers, may take advantage of low interest rates to at least curb the decline in private consumption.

In all, the report sees a balance of risks to the Irish economy in the coming months. On the demand side, the troika identifies continued squeeze on disposal income as well as lending to SMEs. It remains cautious about external situation, adding: “Any renewed bout of euro area turbulence, which could result in a fall-off in demand for Irish exports.”

The expiration of patents on several drugs this year may squeeze industrial output and nominal growth.