THE PATH of destruction left in the wake of the property crash is long and wide. Mass unemployment has returned, businesses built up over lifetimes have been destroyed and almost every citizen of the State suffers the effects of austerity, in one way or another. Those unfortunate or unwise enough to have bought or invested in property close to the peak of the boom are enduring their own torment.
Their assets have plummeted in value but their liabilities have not. Being mired in negative equity is never pleasant. Being unable to service one’s debts in that position is worse still. Some such people are hopelessly insolvent. Should a portion of their debts be forgiven to allow them return to solvency?
Schemes to allow the writing off of mortgage debt, or “household debt restructuring” in the jargon of economists, have been proposed with growing frequency recently. Such schemes can have merit. If they result in the household sector being better placed to contribute to recovery, then the cost to taxpayers could be worth paying. Calculating the costs and benefits is no easy task but such an exercise should be a minimum requirement before commiting the multiple billions of euro any scheme would need to make an impact.
Even if a cost/benefit analysis found in favour of State-funded debt relief, international evidence shows that such schemes are not only expensive but are difficult to administer and not always effective in achieving their core objective – accelerating economic recovery. There is no better example than our north Atlantic island neighbour, Iceland. There, household balance sheets and incomes have suffered significantly more damage than in Ireland over the past three years, and so serious is the household debt problem that the country’s IMF bailout explicitly includes provision for writing down these debts (it is worth noting that neither the IMF nor the EU institutions involved in Ireland’s bailout have advocated this approach in Ireland’s case). The difficulties Iceland has encountered in designing a mechanism for household debt restructuring are also noteworthy. A scheme introduced last year was not taken up by households because of an expectation of more generous terms in the future.
Designing and implementing household debt restructuring programmes are tasks plagued by risks. On the one hand, those able to service their debts may seek to use the scheme to avoid doing so. On the other hand, if terms of participation are too restrictive the scheme will be ineffective. Striking a balance is not easy. The case has not been made conclusively that the Government should even attempt to do so. There is abundant evidence that debtors and creditors are themselves working problems out on a case by case basis. That the number of home repossessions remains small in absolute terms or in comparison to Britain, where economic conditions are far more benign than here, does not suggest a problem that would justify the transfer of still more wealth from one section of society to another.