Debts of the nation
Personal debt levels are what set Ireland apart in this financial crisis. CONOR POPE wonders whether the Government’s insolvency Bill can help throw off their shackles
IN THE Dublin city centre boardroom where Alan Shatter and Michael Noonan last month unveiled the Government’s plan to deal with the personal debt crisis which has made economic recovery so difficult there was standing room only.
“Debt is the Irish crisis – sovereign debt, banking debt and personal debt. We are dealing with the sovereign debt and the banking debt effectively. Now we are putting in place a legal basis to deal with the personal debt,” Noonan told the 30 or so journalists who gathered for the launch of what Shatter claimed was “most radical reform of insolvency law since the foundation of the State”.
Days later, Taoiseach Enda Kenny was talking debt again – in Davos. Addressing an audience of mostly international delegates, he said easy access to credit had spawned “greed to a point where it just went out of control completely with a spectacular crash”. There was an immediate outcry at home – much of it contrived – but he was probably right, at least to a degree.
There is no escaping personal debt in this country. It is a massive problem. Just how massive was revealed in a recent report by consultants McKinsey, which put Ireland’s household debt as a percentage of gross domestic product at the end of the second quarter of last year at 124 per cent. The average for a mature economy is 77 per cent. And while in some respects Ireland is performing much better than other financially troubled countries, when it comes to our personal debt mountain we are out on our own. Greece has a personal debt to GDP ratio of 66 per cent, in Portugal it stands at 99 per cent and in Spain it is 82 per cent, while Italy’s personal debt to GDP ratio is an admirable 45 per cent.
But ratios don’t paint a proper picture of a reality which has seen at least 30,000 people landed with unsustainable mortgages and five times that number struggling to make ends meet each month.
The Shatter/Noonan Personal Insolvency Bill proposes a number of steps which should help some of these people. It cuts the bankruptcy period from 12 to three years and introduces three voluntary debt-settlement systems, which will offer people ways to sort out their finances outside of formal court insolvency.
The banks are livid and the rating agencies are not best pleased either. The banks don’t want to see mortgage debt included in any solution to the problem – despite the fact that mortgages account for at least 70 per cent of the personal debt problem here. According to Moody’s, a quarter of all Irish mortgage debt is susceptible to a writedown and “many borrowers will become discouraged from maintaining their mortgage-loan repayments”. It made this seem like a bad thing.
There are obviously a lot of unanswered questions about the Bill and how it is going to work. Key to the success of the voluntary measures will be the personal insolvency trustees – but who will they be?
“They can come from a broad range of people with different skills – for example, accountants, lawyers. They are performing the role of financial intermediary,” Shatter has said. But the question of who they will answer to has not really been addressed. When contacted by Pricewatchlast week, the Central Bank had no answers and was unprepared to comment about what role it might play in regulating the sector.
The Bill gives some clues. It says that the trustees will have to be authorised by the Insolvency Service or “competent authorities” which are likely to include the Central Bank, the Law Society and the Irish Auditing and Accounting Supervisory Authority.
There are a lot of interested parties and all of them think they should be the trustees.
Aidan Lambe is the director of technical policy at Chartered Accountants Ireland and he says that, while it is “early days”, it is “logical and makes sense that our members are in a position” to take on the role. He points out that accountants have been handling corporate insolvencies for generation, which makes them best-placed to step into the personal insolvency breach.
Others are not so sure.
“Traditional insolvency practitioners are accountants but, in this instance, with so much of the debt involving mortgages, I think there is value in experienced mortgage brokers being considered for the role, once they meet certain qualification criteria set out by the Central Bank,” says managing director of Mortgage Negotiators Trevor Grant.
He says trustees “will need to have some experience in dealing with the banks over forbearance” and suggests that many of those who worked in the financial institutions may be best-placed to act as intermediaries now.
Trustees will need to have financial underwriting skills so, ironically, the people best-placed to rescue home owners from bad loans are the people who signed off on those bad loans in the first place. They will know the relative position of each bank and how they respond to certain situations. How foolish would be a personal insolvency trustee to approach an overseas bank that wants shot of this country, for example, with a loan haircut offer of 10 per cent when it would readily accept 50 per cent.
Karl Deeter of Irish Mortgage Brokers says whoever becomes a trustee will need to be able to work in an operational rather than notional sense. He says that while solicitors may have the legal nous, they may lack the financial skills; and while accountants may tick that box, they may fail to grasp the intricacies of the law. Then there are brokers who might be best-placed to understand the property market but they lack the legal basis and possible the numeric skills.
“I think trustees are ultimately going to have to be ordained and they will come from different backgrounds,” Deeter says.
It is likely regulation will come from a range of professional bodies. The Government is unlikely to want to police the trustees too closely because it will not want to oversee loan haircuts that would make a US marine look like a hippy.
Deeter is upbeat about some elements of the proposed Bill. “If we can impose costs on creditors and make them pay at least a portion of the trustees’ fees, then this will incentivise them to resolve problems before they reach crisis stage and settle financial difficulties through negotiations outside of the personal insolvency system,” he says.
Deeter believes the early stages of the new insolvency process will be a “slaughterhouse” and there will be an obvious advantage to having talented trustees with a high level of experience who may be able to strike a better deal, “but as the system matures the bad trustees will be weeded out. It will be like a demolition derby at the outset but there will be no winners because if you are going into this process then you are already a loser.”
The system is to be based around the standard financial statement which banks already make borrowers seeking to restructure mortgages fill out, but Deeter anticipates that the process will involve a more complete revelatory process “which is probably the only way to do it”.
Lambe says some kind of “regulated mechanism that will look at what everyone is doing” is needed, but adds that, like every other profession, there will be discrepancies. “Negotiation skills and the ability to cut a deal are very much personal aptitudes that will come into play. You would like to see consistency across the board but that might not happen in just the same way that you don’t see consistency when you visit GPs,” he points out. Grant agrees. “The fact is that the bank’s veto means that you are likely to see people get different results not only from different lenders but from the same ones, depending on who the trustee is.”
The bottom line is that even the most experienced property investor does not want to sit in front of their bank and talk about restructuring loans. “While the Government is always saying people need to discuss options with their banks, it can be a very dangerous thing to do,” Grant says. He points out that individual banks only care about their portion of a person’s indebtedness while frequently loans need to be looked at holistically.
“Ultimately,” Grant says, “many of those who underwrote the loans which are now considered unsustainable were doing the bidding of their superiors. Either everyone is to blame or no one is to blame and I take the view that we were all to blame but we have to get on with our lives and start living without fear.”
The Government has been inviting interested parties – with the exception of consumers, who are most affected by the law – to consultations in recent weeks to see if they can thrash out some of the intricacies. The full picture will only emerge towards the end of next month. But one thing is clear, the story is going to run and run.