independent

Tuesday 20 August 2019

Government stepped in for banks, but what about regular borrowers?

with IVAN Yates

DIFFERENCE between this recession and those of the 1950s and 1980s? Accumulation of bad debt. Individuals face inability to repay loans emanating from boom times. Mortgage or other lending default is a reality for 10,000 individual customers within both AIB and Bank of Ireland. These are not covered by Nama and are for sums of under €10m.

When even Financial Regulator Matthew Elderfield (official watchdog) is bemoaning our antiquated personal insolvency laws, there must be an indisputable case for reform. Irish laws can be traced back to the English Sheriffs Act of 1912, treating defaulters as criminals. Those declared bankrupt cannot obtain credit above €630 and suffer this purgatory for 12 years. There is in fact no maximum time length for bankruptcy in Ireland. Distressed borrowers are residing in Northern Ireland or Britain to obtain a 12-month release and settlement of their liabilities.

The bailout deal included a commitment to modernise this legislation by early 2012. Such new laws are not included in the Programme for Government. Justice Minister Alan Shatter needs to get his finger out urgently to allow a modern debt resolution process. The blueprint for this was set out by the Law Reform Commission last December. The Free Legal Advice Centre (FLAC) has advocated a nonjudicial debt-settlement process. Families face enormous distress in the absence of effective procedures.

The way it works is to allow a personal insolvency trustee to be appointed to manage the debtors' affairs. They would surrender all assets and earnings and agree a personal survival budget over five years. Residual proceeds and income are shared out among creditors. This would allow unsecured debtors recovery rights along with financial institutions. It's inevitable the negative equity housing scenario will require such procedures.

House prices are set to drop from peak value by 60 per cent. Rising interest rates and lowering incomes mean mortgage debt traps will impoverish at least 10 per cent of mortgagees. Around 80,000 families will require recourse to insolvency. This social disaster will afflict the most progressive and entrepreneurial people. Governments have bailed out banks to the tune of €70bn, yet there is no proposal to save banking customers – a lose-lose scenario for taxpayers and borrowers. JOAN BURTON'S HOT POTATO

When the cabinet was appointed, an internal labour hiatus developed over which job deputy party leader Joan Burton was to get. She ended up in the lesser role as Minister for Social Protection, involving oversight of one million payments each week and an annual budget of €20.9bn. The government pledge no welfare cuts. Alas, FG and Labour are sleepwalking their way into a crisis.

Fianna Fáil included in their election manifesto provision for further adjustments to benefits, rates and entitlements. They knew the small print of the EU-IMF bailout terms and conditions. This programme provides for each year over the next three years a specific welfare reduction of €900m – cumulatively €2.7bn. Overall, cost of social welfare is determined on a demandled basis. Governments have no control over the total number of eligible claimants, who become unemployed or sick. If high rates of unemployment remain, it's unavoidable that the Government will have to break pre-and post-election promises. This dilemma was swept under the carpet in the recent bailout review. Overoptimism about declines in the Live Register will surface in preparation for the 2012 budget later this year. Burton faces a stark choice – either cut rates of benefits and allowances or alter eligibility criteria. The previous administration reduced by €8 a week jobseekers benefit, disability allowances, widow's pensions, carer's allowances and one-parent family payments. Child benefit was cut by €10 per child per month. If similar cuts are to be avoided, she will have to axe entitlements.

Options to be considered include taxation of child benefit, rather than means testing. A crack down on welfare fraud for each claimant is now underway, hoping to save €500 million by the introduction of an individual smart card with photo identity. This aims to banish welfare tourists and multiple claims. Accommodation rent subsidies face radical moves, shifting to a much stricter housing benefit regime to be operated by local housing authorities. Those who refuse places on training schemes will face their dole being terminated. Rationalisation towards a single unified social assistance payment will be contemplated.

Instead of moving to an administrative backwater, Joan Burton may have to oversee one of the most politically controversial departments. International state creditors believe our welfare structure is excessive and unaffordable. Rates of pay in Northern Ireland for the unemployed are £80 per week, compared to €188 here. The old age pension amounts to £119 there, while we pay €230 here. Ajai Chopra and the boys will be back to monitor developments on a quarterly basis. Their compromise over the minimum wage re-adjustment may not be as accommodating when it comes to social protection.

BONUS BONANZA

As Victor Meldrew would say, 'I don't believe it'. Payment of severance packages to failed bosses beggars belief. Read it and weep. Denis Casey of Irish Life and Permanent walked away with €4.6m. This outfit now requires a state cash injection of €4bn. Liabilities on tracker mortgages are costing Permanent TSB losses of €400m annually.

David Drumm pocketed €2.4m from Anglo Irish Bank, while claiming €2.6m in additional deferred bonuses. He is defaulting on mega loans. Anglo's previous head of lending, Tom Browne, walked away with €4m. Michael Fingleton obtained €2.4m when leaving Nationwide, failing to repay a separate €1m bonus from 2008. This organisation has to be closed, with €8bn of toxic loans being transferred into the Nama skip. Bank of Ireland's Brian Goggin received €3m in 2009.

Patrick Neary resigned with a lump sum of €630k and an annual pension of €143k. Fás's Roddy Molloy was rewarded with a pension boost of €1.4m upon resignation. AIB's Colm Doherty trousered €3m, even after €20bn losses were known. This culture of rewarding failure is unacceptable. Brian Lenihan promised to tax bankers' bonuses with a surcharge of 90 per cent. This Dáil still has to enact this finance bill measure.

The basis of these payments is predicated on the view that contractual obligations to top executives leave boards and government powerless to avoid liability. However, the principle of 'force mejure' must be considered where the balance sheet has imploded. Culpability for failure needs to be contested in court. Consequences of management mistakes and misjudgements should be tested in the high court. Enda Kenny should instruct the attorney general to take a much more combative approach to protect the taxpayer. The proposed bank clearout of remaining elites will otherwise be stymied.

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