BUSINESS OPINION:Protection for borrowers may be needed to stimulate growth in economy, writes JOHN McMANUS
THE GROUND appears to be being prepared for the next instalment of what is starting to look like the most bank-friendly bailout in the relatively short but eventful history of contemporary bank bailouts.
Last Friday, during the course of a briefing on its latest forecasts, the Central Bank belled the cat on the thorny issue of some sort of bailout for mortgage borrowers.
The timing of the comments was interesting, coming as they did on the day Bank of Ireland moved to follow AIB and put up their variable mortgage rates to improve their margins, ratcheting up the pressure on hard-pressed borrowers in the process.
The Central Bank makes a simple point, which is that if the Government forces the banks to take measures to bail out mortgage borrowers – debt forgiveness, repayment caps etc – the measures may well come back to bite it and the taxpayer.
Any bailout for borrowers will result in further losses for the banks, which, as we all well know at this stage, means further drains on their capital and in all likelihood, the injection of even more public money. This can only come from one source: taxation.
The logic of the argument would appear to be that it is better for us all in the long run to let mortgage borrowers swing rather than add to the already massive bill for recapitalising the banks.
In saying this, the Central Bank was only reiterating the views of the Minister for Finance as expressed in his statement on the banks to the Dáil last month.
Lenihan told the Dáil that “we must be careful that our efforts to help owners do not store up more problems in the banking sector that will require further calls on the hard-pressed taxpayer”.
There is a very real prospect that this analysis will soon become perceived wisdom and ultimately an immutable plank of policy along the lines of the Government’s grim determination to keep Anglo Irish Bank alive, seemingly regardless of the cost. And like the related position of letting Anglo’s bond holders avoid the consequences of their risk taking, it will become harder and harder to defend.
Of course, there probably is a significant portion of the population who are not completely averse to letting distressed mortgage holders take their medicine. If you sat out the Celtic tiger or better still used your new-found wealth to pay off your mortgage then you might baulk at the prospect of paying even higher taxes to help bail out your fellow citizens who got caught up in the frenzy.
It would be a defendable enough position if you, along with them, had not just agreed to do something similar for the banks and their developer clients via the establishment of the National Asset Management Agency.
Having socialised the losses of this most undeserving collection of individuals and institutions, it is pretty hard to argue that we should not do likewise for what could be characterised as their hapless victims.
If nothing is done, then a situation would arise in which the only people who will have to face up to the full consequences of their actions – accept the moral hazard – are the banks’ customers and their mortgage borrowers in particular. To some extent, this has already started to happen, with the banks putting up interest rates ahead of the ECB.
This is in effect an admission by the banks that they lent money on unsustainable margins. They can and are doing something to correct this, but the cost of their mistake is being borne by the people who borrowed from them under their flawed business model.
There is also an argument extending beyond simple equity for doing something for mortgage borrowers. As things stand, we have no real handle on the size of the twin problems – negative equity and mortgage arrears – and that is something the Mortgage and Debt Group set up by the Minister under Hugh Cooney has been charged with finding out.
But even if it turns out the numbers involved are smaller than anticipated, they will still have a disproportionately corrosive effect on the economy and on sentiment in particular. It is becoming increasingly obvious that, if the economy is to return to growth, people are going to have to start spending again. As long as problem issues related to the property bubble such as repossessions, negative equity and mortgage arrears are at the front of people’s minds, then it’s hard to see a sustained revival in consumer spending.
The Central Bank and the Minister may be right when they say a balance needs to be struck, but it probably does not lie as far in the bank’s favour as it is shaping up to do.
