Cantillon: Dealing with debt will benefit banks too

Whatever your view about the banks, insolvency schemes, and debt write- downs, you would have to be hard-hearted not to feel sympathy for people featured in recent media reports on those struggling to pay bubble-era mortgages on reduced incomes. One unidentified woman on RTÉ radio last week spoke of how she and her accountant husband were trying to deal with loans they could no longer service.

“I hate Ireland,” she said bitterly, succinctly illustrating the strain she and her partner have been under. While it is commendable an insolvency scheme has been put in place, the weirdness of what is going on is noteworthy.

No one was forced during the bubble years to take out a mortgage but people had to get on with their lives in a context where property prices appeared to be increasing relentlessly. As is now clear, a major, if not dominant, reason prices were rising was the fact that banks were borrowing heavily abroad and pumping money into the property market.

Having contributed in this way to so many people’s difficulties, the banks, which would have failed but for a bailout paid for by the public purse (and increased taxes), have in part been seeking to repair their businesses by charging variable interest rates well above the ECB rate to these same mortgage customers.

While demanding people pay their debts, the banks are upping the amount people must pay. It is just another indicator of the extraordinary business that is Irish banking. Between now and Christmas, more than 13,000 former Irish Nationwide mortgages may be sold. Will the new owner of the loans wonder how much more money can be squeezed out of the loans? Quite possibly.

At a conference in Dublin some months ago, US banking experts spoke of how, in some states, mortgage-holders who are in difficulty can give the keys back to their banks and walk free of their debts. The view was expressed that people need to be allowed get on with their lives, and that banks can benefit from dealing quickly with bad loans. Dealing quickly with people who have unsustainable debts is not just humane, it may also benefit banking, and the economy generally.