1/8/2013: Anatomy of the Personal Crises: QNHS Q3 2012

CSO has published Q3 2012 survey concerning the Effect on Households of the Economic Downturn: here.

Some core findings:

• 82% of households cut spending on at least one of the main categories of expenditure as a result of the economic downturn in the 12 months before July-September 2012. 
• Nearly a quarter of all households indicated that they had cut back on five or more categories of spending out of 9 categories listed.
• Over 1/3 of households who used a car had cut back on their expenditure on this means of transport.
• "Some 14% of owner occupied households with a mortgage were unable to make mortgage repayments on time at least once in the previous twelve months due to financial difficulties." This number is strangely well below the current rate of mortgages arrears by accounts. Does this suggest that households tend to overstate their financial health?
• "On the rental side 19% of all renting households failed to pay rent on time at least once."
• 43% of households "indicated that they had experienced difficulties in keeping up with their bills and debts."
• "Two fifths of individuals were concerned about their level of personal debt. Over half of these said that they were currently more concerned than they had been twelve months previously. Only 5% indicated that their level of concern had decreased."
• "households consisting of one adult aged 65 or over said they had the least difficulty" paying bills and funding debt (27%).
• "Of households where the reference person was at work 41% experienced difficulty [paying bills and funding debt] compared with 73% where the reference person was unemployed." Note that 41% is a frightening number, still.
• "Looking specifically at those households which had experienced difficulty in managing bills and debts, 47% of them said that it was due to loss of income, 73% said it was due to higher than expected or additional costs and 5% said the difficulty was due to other reasons."
• "Looking more deeply into the type of higher or additional costs mentioned by those households for whom it caused difficulty, 90% of those households mentioned higher or additional utility bills , 32% mentioned higher or additional school, college or university costs, 17% mentioned higher or additional medical or dental costs and 15% mentioned higher or additional loan or mortgage repayments" Now, run through these again. All of them are state-controlled and state-regulated services, ex mortgages and loans. That's the cost of Irish State policy of extracting rents out of already stretched households.

And a handy chart summarising demographics of debt crisis:

That's right: core crisis impact on debt side - 25-54 year olds, majority with kids and homes, just the crowd that the Government is targeting for cash extraction via higher prices and charges for services like health, health insurance, transport, energy, utilities, education... you name it.

And as you read data in Table 1.1.1. showing details of the households experiencing financial difficulty due to loss of income, classified by main reasons over 12 months prior to July-September 2012, keep in mind - almost all 'employment creation' in the labour market that the Government and 'green jerseys' keep talking about is taking place in the part-time jobs, which cannot cover the true cost of living in this country.

Finally, take a look at Table 1.2. This shows the extent of debt restructuring delivered by the 'reformed' banks. At 7% total - it is laughably low.

5/6/2013: The economics of Lost Generations: Sunday Times 16/5/2013

This is an unedited version of my Sunday Times column from May 16, 2013


Not known for its 'ahead of the pack' thinking and bruised by recent controversies, nowadays, the ESRI focuses on a more retrospective in-depth analysis of the trends shaping Irish economy and society. Aptly, this week's most talked-about Irish research note was ESRI paper on the impact of the crisis on households. Covering data through 2009/2010, it offers both a fascinating look into economics of our lost generations, and a reminder that it takes official Ireland at least 3 years before everyday reality gets translated into policy-shaping analysis.

The topic is close to my heart: back in 2010 and then in 2012, in these very pages, I wrote about the fact that Ireland is facing not one, not two, but a number of lost generations covering those under the age of 50. Things only got worse since.

The crises we face continue to destroy lives and wealth of the 35-50 year-olds, who mortgaged their future back in 2003-2007. Pensions and savings are gone, psychological and social wellbeing is under unrelenting pressure from the threat of unemployment, losses in after-tax disposable income, negative equity, the banks' push to extract revenues from borrowers, and the internecine policies adopted by the Government.

Housing wealth and negative equity exact the greatest toll. Housing wealth accounted for over 3/4 of the total real disposable wealth that formed the bedrock of pensions provisions in the years before the crisis hit. This has now tumbled by over half, once taxes and property prices declines can be factored in.

Income losses are not far behind. Not withstanding the effects of tax increases, an average working age family in this country lost close to EUR100,000 in income between the beginning of 2008 and the end of 2012.

Much of these losses were accumulated by the prime working age group of 35-50 year-olds. Adjusting for changes in population and unemployment in these groups, relative to the rest of the country population, the opportunity cost of foregone savings, and adding the impact of tax increases, the real disposable income declines during the crisis run somewhere closer to EUR120,000 per family with two working adults in the 30-50 years of age group. When you consider the losses in housing wealth over the life time, and interest costs on negative equity components of mortgages, the total real life-time losses due to the crisis easily reach over EUR200,000 per family. This number assumes expected house prices appreciation in line with 2% annual inflation from 2013 on, but excludes effects of future tax hikes.

And more tax hikes are coming still. The Government might boast that ‘most of the adjustment is behind us’. Alas, IMF’s latest forecasts for the Irish economy clearly show that by 2018, compared to 2012, Irish Government tax take needs to increase by EUR12.5 billion per annum. Of these, EUR8.7 billion in revenue will come from personal income taxes and VAT. For comparison, between 2009 and 2012 receipts from these two tax heads rose only EUR2.9 billion. Social Insurance contributions are required to rise by EUR2.2 billion in 2013-2018, against the decline of EUR2.6 billion recorded in 2009-2012.

The ESRI research, published this week, does not go as far as attaching real numbers to the losses sustained by Irish households, but it does conclude that "income and consumption increase roughly steadily for the average household over the age of 45 from 1994/95 to 2009/10. ...In sharp contrast to the increase in earning and expenditure of older households over the last two decades, there has been a large drop in income and consumption for the younger average household in the crisis. Between the 2004/05 survey and that of 2009/10, real disposable income decreased by 14 per cent, real consumption including housing by 25 per cent and excluding housing by 32 per cent."

In other words, at the end of 2012, gross investment in the Irish economy stood at the levels below those in 1997, domestic demand at mid-2003 levels and private domestic demand (excluding Government spending) at the levels last recorded in 1998.

The future looks bleak for today's 30-50 year-olds even beyond income declines and the negative equity considerations. Per ESRI, "Mortgages are most prevalent in the 35-44 year bracket, with more than half of households in this group having a mortgage. About 43 per cent of the households aged 25 to 34, and 45 per cent of those aged 45 to 54 are mortgage holders as well." In other words, those in 30-50 years of age cohorts are in the worse shape when we consider housing wealth.

The ESRI fails to note that these households are also facing a very uncertain future when it comes to the cost of funding their mortgages.

Currently, ECB benchmark rate stands at 0.50%, which is miles below the pre-crisis period average of 3.10%.. At some point in time, Germany and other core European economies will be back delivering the rates of growth comparable to those seen over 2002-2007 period and the ECB rates will inevitably rise. At the same time, Irish banks will be carrying an ever-worsening book of household loans. With every year, average mortgage vintage on banks books moves closer and closer to 2006-2007 peak market valuations, as better quality older mortgages are being paid down. As real estate prices continue to signal zero hope of a rapid recovery, Irish banks will have to keep margins well above pre-crisis averages. Failing SMEs loans and Basel III capital hikes add to this pressure.

This week IMF released a set of research papers focusing on expected paths for unwinding extraordinary monetary policy measures deployed by the central banks around the world. Their benchmark scenario references interest rates increases of 2.25% for longer maturities and the adverse scenario a 3.75% rates hikes. Were the benchmark scenario to play out, mortgages rates can jump by over 2 percentage points on today's rates, before the increases that would be required for capital supports.

For mortgages of 2003-2007 vintage a return to historical levels of ECB rates combined with higher lending margins will spell a disaster.

Put simply, anyone who thinks the worst is now behind us should heed the warning: wealth destruction wrecked by the property bubble collapse is yet to run its full course.

The ESRI report doesn't tell us much about the expected effects of the crisis on our youngest working-age cohorts of 18-25 year olds. Truth is they too count as Ireland's Lost Generation.

Lower incomes and higher debt burdens of the 30-50 year-olds will translate into longer working careers and less secure retirement. For the younger generations, this means fewer promotional opportunities and reduced life-time earnings in the future, as well as higher tax burden to care for the under-pensioned older generation. The disruption and delays in access to career-building early jobs will also cost dearly. Many of today’s graduates of the universities with professional degrees and skills face rapid depreciation of their earnings when they delay entry into the professions.

Our economy’s re-orientation toward ICT services is an additional risk factor. Recent research points to an alarmingly high rate of skills depreciation in ICT services sectors, with declining employability of those in late 30s and early 40s compared to their younger counterparts. Likewise, worldwide and in Ireland, the earnings premium, even adjusting for the risk of unemployment, associated with education is now much smaller than in the late 1990s - early 2000s.

In short, today's young face lower life-time real earnings, higher life-time burden of taxation and dramatically reduced value of intergenerational wealth transfers (or put simply -inheritance).

The ESRI attributes younger households' aggressive cuts in consumption during the crisis to the bottlenecks in credit supply, parrot-like mimicking the Government assertion that if only the banks were lending again, things will miraculously return to normal. The reality on the ground is different. Irish society has been hit by a series of inter-related crises that not only reduced credit supply to younger households, but made household balance sheets insolvent by a combination of high debt, reduced life-time disposable incomes and wiping out middle and upper-middle classes wealth.

The only solution to these crises is to help repair households' balance sheets by helping them to deleverage their debts faster and a lower cost. This can be achieved solely by lowering tax burden on the households and aggressively writing down unsustainable levels of debt. Like it or not, were the banks to start lending tomorrow, even ignoring the fact that the cost of credit is only going to climb up in the future, the impact this will have on the economy and Irish households will be negligible.

Two successive Irish Governments have spent over 5 years throwing scarce resources on repairing the banks. It is time to realize that doing more of the same and expecting a different outcome is not bright policy to pursue. It is time to focus on what matters most in any economy – people.

Box-out:

This week, the IMF published its Article IV assessment of Malta’s economic conditions. The study expresses one major concern about the risks faced by the Maltese economy in the near future that is salient to the case of Ireland, yet remains unvoiced in the case of our assessments by the Fund. Quoting from the release: "In the longer term, regulatory and tax reform at the European or global level could erode Malta’s competitiveness. The Maltese economy, including the financial sector and other niche services, has greatly benefitted from a business-friendly tax regime. Greater fiscal integration of EU member states and potential harmonization of tax rates could erode some of these benefits, with consequences on employment, output, and fiscal revenues."

Ireland is a much more aggressively reliant on tax arbitrage than Malta to sustain its economic model and has been doing so for far longer than Malta. Both, our modern manufacturing and traded services sectors are virtually captive to the foreign multinationals reliant on tax arbitrage opportunities to domicile here. Yet, neither the IMF, nor any other member of the Troika seem to be concerned about the prospect of tax reforms in Europe and elsewhere in the context of Irish economy. May this be because the elephant in the room (our reliance on tax arbitrage) is simply too large to voice in the open?

19/5/2013: Namawinelake closure

I do not know the reasons behind the Namawinelake decision to stop operations, but the announcement that the blog will cease publishing new material starting from tomorrow was a shocker for me.

I can attest from my own & others' experiences that those of us who run anything independent of the officialdom mouthpieces (regardless of political / ideological orientation or even the lack of one) have near-zero support (moral or citations- and links-wise) from our internal (not to be confused with international) media and all businesses.

Those in our society, including the traditional media, who only benefit from the free analysis and the climate of openness and debate the independent analysts help to create prefer to endlessly endorse and support, including via advertising revenues, cross-links, citations and readership, those who offer no alternative but consensus.

In contrast, independent analysts in Ireland operate in the environment of constant, usually indirect, 'soft', pressure from the part of the Irish society which is fully aligned with the official elite. This 'aligned' sub-section of Ireland often has direct and indirect support (including financial) from major business, political and ideological organisations in this country, and even from European organisations. Because of this, Irish new independent media remains relatively small, under-resourced and often marginalised.

The rarity of honest, no-spin analysis in this country is exemplified by the rarity of excellence regularly provided by a handful of independent blogs, like Namawinelake. To say that Namawinelake will be missed is a massive understatement for me, personally.

Any healthy society requires healthy dissent both in the traditional and new media, funded and resourced by the society that values debate, honesty, independence and discourse. Any healthy economy requires a healthy society. It is a benefit to businesses, their customers, their investors, as well as in the interest of the entire nation to nurture and support such dissent. I can only hope that Namawinelake closure had nothing to do with our collective and repeated, long running failures to recognise the immense personal, social and economic values of the independent new media.

17/5/2013: Ireland v Iceland 2013

Ireland vs Iceland macroeconomic comparatives in 15 simple charts that DofF wouldn't want you to see...

All data is either IMF direct-sourced or based on IMF data. Click on the charts to see more detailed comments imbedded in them.

Three charts on GDP comparatives:

Investment:

External trade and balance:

Unemployment and Employment:

Government Finances:

30/4/2013: Irish chart that worries me most

The chart that bothers me most in Irish context is:

This shows the structural nature of the growth slowdown in Ireland in post-2007 period (based on IMF forecasts through 2018). The period of this slowdown is consistent with the growth rates recorded in the 1980s. And here's the summary of decade-average real GDP growth rates:

Now, keep in mind, in the 1980s and 1990s, Irish growth was driven by a combination of domestic drivers, plus external demand, primarily and predominantly in the goods exports areas. Which means that more of our GDP actually had real impact on the ground in Ireland. Since the onset of the crisis, most of our growth has been driven by the growth in exports of services, which have far less tangible impact on the ground.

Another point to make: current rates of growth for the 2010s are below those in the 1980s and, recall back, the rates of growth achieved in the 1980s were not enough to deflate the debt/GDP overhang we had. Of course, in addition to the Government debt overhang (similar to that in the 1980s) we also now have a household and corporate debt overhang.

If the IMF projections above turn out out be close to reality, we are in a structural decline economically and are unlikely to generate sufficient escape velocity to exit the debt crisis any time before 2025 at the earliest.

27/4/2013: Village Magazine, April 2013

The third of three posts covering my recent articles.

This is an unedited version of my regular column in The Village magazine, April 2014.




As the events of the last few weeks clearly show, Irish trade union movement is suffering from a number of acute crises, ranging from systemically existential to psychological.

First up, the crisis of identity, best symptomised by the conclusion of the Croke Park 2.0 deal in which the Unions once again traded the interests of their future members – the younger public sector workers – to preserve the privileges of their current and past members. This is hardly surprising. During the last decade-and-a-half, the Unions and their leadership have became firmly embedded in the corporatist structure of the Irish State. Self-serving, focused on the immediate membership concentrated in the least productive sectors of the economy, the unions have opted to be paid over being relevant to the changing economy and society.

Second, the crisis of the short-term memory amnesia. In recent weeks, the Irish Trade Unions have managed to produce much bluster on the topic of the centenary anniversary of the 1913 Lockout. Throughout the crisis, the very same unions have been vocal on the topics of social fairness, austerity, protection of the frontline services etc. Yet, all along, the Liberty Hall has attempted to sweep under the rug its principal role in helping the Irish State to polarize and pillage both the society and the economy during the Celtic Tiger era, in part aiding the very processes that led to our national insolvency. Promoting the narrow interests of the state and associated domestic private sectors’ elites, the Social Partnership (including the two Croke Park agreements) assured boards representations, funds and other pathways to decision-making for unions. This power was deployed consistently to reduce accountability in the public sector for decisions and actions of its foot soldiers and bosses alike. By corollary of the cooperative approach to policy formation, the Partnership also protected domestic sectors, especially those dominated by the semi-state companies.  As the money rolled into the unionized sectors of the economy, the Unions had no problem with rampant costs inflation in health insurance and services, energy, transport, and education. The interests of the own members were always well ahead of the interests of the society at large.  Thus, today, in the environment of reduced incomes and high unemployment, with hundreds of thousands households in sever financial distress, Liberty Hall sees no problem with state-generated inflation in state-controlled Unionized sectors.

All in, the irony has it, Irish Trade Unions movement has been traveling along the same road previously mapped out by the Anglo Irish Bank: reducing their scope of competencies, their reach across various social. demographic and economic groups, and focusing on a singular, medium-term unsustainable objective. Where Anglo, post-2001, became a monoline bank for funding speculative property plays, Irish Trade Unions today are a monoline agency for preserving the status quo of the incumbent public vs private sector divisions in the economy.

The failure of the Trade Unions movement model in Ireland is best exemplified by the years of the current crisis.

Since the onset of the present economic recession Irish Government policy, directly and indirectly supported by the majority of the Unions’ leaders was to consistently shift the burden of the economic adjustment to younger workers in both private and public sectors, indebted Irish households, and consumers. Liberty Hall’s clear objective underpinning their position toward these groups of people was to retain, at all possible costs, the pay and working conditions protection granted to the incumbent full-time employees in the public and semi-state sector. Grumbling about the ‘low-paid public sector workers’ aside, the Unions have consented to the creation of a two-tier public sector employment with incumbent workers collecting the benefits of jobs security and higher pay, and the new incoming workers paying the price of these benefits with lower pay and virtually no promotion opportunities. The very same unions are now acting to preserve, at huge costs to the economy, unsustainably high levels of employment in our zombified banking sector.

Even on the surface, based on the headline figures, the Unions act to protect the pay and working conditions of the incumbent public sector employees. Average weekly earnings in Ireland have fallen 2.7% between 2008 and 2012 in the private sectors, while in the broader public sector these were down only 1.1%. Over the same period of time, the pay gap between public and private sector has risen from 46.1% in favour of public sector employees to 48.5%.

But the reality is much worse than that.  Between 2008 and 2012, numbers in employment in private sectors have fallen 14.7% while in the public sector the decline was less than 8.9%.  Within the public sector, largest losses in employment took place in Defence (-20% on 2008), Regional bodies (-15.4% on 2008), Semi-State bodies (-10.1%). No layoffs or compulsory redundancies took place, with natural attrition and cuts to contract and temporary staff taking on all of the adjustments.

In simple terms, the Machiavelian Croke Park deals have meant that the Irish public sector ‘reforms’ were neither structural, nor progressive in their nature. These ‘reforms’ do not support long-term process of realigning Irish economy to more sustainable growth path away from the bubbles-prone path of the last fifteen years.

Lack of layoffs and across-the-board shedding of temporary and contract staff have meant that the public sector in Ireland has lost any ability to link pay and promotions to real productivity differentials that exist between individual employees, work groups and organizations. This effect was further compounded by the Croke Park 2.0 agreement. The shinier the pants, the higher the pay principle of rewards has now been legally enshrined, relabeled as a ‘reform’ and fully protected at the expense of younger, better educated and potentially more innovative employees.


Such a system of pay and promotions engenders severe and irreversible selection bias, whereby the quality of applicants for jobs in the public sector is likely to decline over time, with more ambitious and more employable candidates opting out of pursuing careers in the state sector. Deterred by limited promotions opportunities and lower pay for the same, and in some cases heavier workloads, younger applicants are likely to seek work in private sector and outside the country. This selection bias will only gain in strength as economy starts to add private jobs in the future recovery.

The status quo of non-meritocratic employment in the public sector will also mean continued emigration of the younger workers with internationally marketable skills.

Meanwhile, per EU-wide KLEMS database, back at the peak of the public sector activities in 2007, labour productivity in Ireland’s public sectors was already running at below 1995 levels. In Public Administration and Defence, Compulsory Social Security sector, labour productivity stood at below 86% of 1995 levels, in Education at 80% and in Health and Social Work at 95%. In contrast, in Industry, labour productivity in 2007 was running at 153% of 1995 levels.  The same holds for the technological innovation intensities of the specific sectors. Three core public sectors of public administration, education and health all posted declines in productivity associated with new technologies compared to 1995 of 17-30% against an increase of 8% in Industry and a 20% rise in Manufacturing.

If Irish public services productivity was falling in the times of massive spending uplifts and big-ticket capital investment programmes, what can we expect in the present environment of drastically reduced investment? Unfortunately, we do not have data beyond 2007 to provide such an insight.  But the most probable answer is that stripping away superficial productivity gains recorded due to higher current spend on social welfare supports being managed by fewer overall state employees, plus the productivity growth arising from reductions in employment levels, there is little or no real same-employee productivity gains in the public sector.

One has to simply consider the ‘cost reduction’ measures enacted through the Budgets 2010-2012 to realize that during the crisis, Irish public sector was shedding, not adding responsibilities. Much of these reductions in services was picked up by the private sector payees and providers. This too implies that the actual productivity in the public sector in Ireland has probably declined during the years of the crisis.

Marking the centenary anniversary of the 1913 Lockout, Irish Trade Unions movement needs serious and deep rethink of both its raison d’etre and its modus operandi. Otherwise the movement is risking being locked out of the society itself as the irrelevant and atavistic remnant of the Celtic Tiger and Social Partnership.

The Liberty Hall must shake off the ethos of corrupting proximity to the State power and re-discover its grass roots. It will also need to purge completely the legacy of the Social Partnership and embrace new base within the workforce and the society at large in order to assure its ability to last beyond the rapidly advancing retirement age of its members. Lastly, the Unions should think hard about their overall role in the society to better balance the interests of their members against the needs of the country and the reality of the new economy.

Irish society needs a strong and ethically underpinned Unions as the guarantors of the rights of association and supporters of the policy dialogues and debates. What Ireland does not need is another layer of quasi-state bureaucracy insulating protected elites and sectors from pressures of demographically young, technologically modernizing and global competitiveness-focused small open economy.

27/4/2013: Sunday Times : April 7, 2013

Second post of three catching up with some of my recent articles.

This is an unedited version of Sunday Times article from April 7, 2013.


Just when the EU leaders were ready to relax after the tough couple of weeks spent dismantling the economy of Cyprus, the news flow has turned once again and, predictably, not in their favour.

Over the last week, euro area Purchasing Managers Indices for manufacturing have showed that the economic activity in the sector has fallen for 19th consecutive month. The downturn in the eurozone manufacturing has accelerated, slipping to 46.8 in March, down from 47.9 in February. In Ireland, manufacturing PMI reading fell to a 14-months low at 48.6.

Meanwhile, Eurostat data showed that seasonally adjusted unemployment in the common currency area reached 19.1 million in February, up on 17.3 million a year ago. In Ireland, seasonally adjusted unemployment rate is stuck at 14.2% since December 2012, while youth unemployment rate rose to 30.8% in February.

Adding insult to an injury, CEPR and Bank of Italy leading growth indicator for the euro area, eurocoin, posted another negative reading in March. This means that the euro area economy has been contracting now for 18 months in a row. The previous crisis of 2008-2009 counted only 13 months of continued sub-zero readings.

In short, over the last 10 days we had a plethora of reminders that the current growth crisis sweeping across the euro area is both deep and structural in nature. Which puts into the context last week’s warning from the IMF to Ireland that the headwinds to our economic growth prospects in the medium term are posing some serious risks to the prospects of our recovery and debt sustainability.


The underlying causes of the crisis we are experiencing since 2008 relate to the structural weakness in our economic system when it comes to identifying, pursuing and delivering organic growth opportunities.

Since around 1997-1998, Irish economy has been growing by one asset bubble displacing another. We started with a sizeable bubble in the ICT sector that inflated out of any proportion with the real economy from 1997 and finally met its end with the dot.com crash of 2000-2001. Alongside this bubble, around 1998, we began to inflate a public spending and investment bubble. Between 1999 and 2005 Irish Government voted spending rose from EUR22.8bn to EUR45.1bn, with 2001-2002 period increases accounting for 43% of the total  rise over 1999-2005. Rampant over-spending in the public sector was coincident with (and co-dependent on) a massive bubble in the property market.

In short, Irish economy has been running on steroids of spending or credit bubbles for some eleven years prior to the crisis of 2008. An entire generation of Irish policymakers, analysts, bankers, investors and businessmen has matured with not a slightest idea as to where the real sustainable economic value added comes from other than the over-inflated egos, valuations and leverage.

As the result, today, we need serious reforms to reduce our reliance for growth on the structurally sick euro area, and to shift our own economy's development engine away from unsustainable reliance on bubbles-inflating activities and re-focus it on growth reliant on high value added activities, entrepreneurship and human capital.

On human capital, OECD's annual Going for Growth report from 2013 shows that Irish economy suffers from structural deficiencies in labour force participation by women. On average, women outside the workforce have higher skills and better work experience than men in similar demographics and work status. However, women participation rates in Ireland are below those in many other advanced economies due to a combination of factors, including high cost of early age education, childcare.

Improving affordability and access to childcare is an imperative for Ireland, given our demographics, but we also require a wholesale re-balancing of our tax system to reduce Exchequer reliance on income tax-related revenues. Current tax system in Ireland penalises skills and higher investment in human capital through excessive taxation at the upper marginal tax rate and exceptionally low threshold for the upper tax band applicability.

Other labour market measures needed include: increasing resources for job-search assistance and workplace training within the existent education systems, and better aligning training programmes with skills needs of the economy. Both of these objectives formed cornerstone of the Fas reforms. However, these reforms were only partial, especially considering that the very same people who were responsible for the past training and up-skilling systems failures are now manning in the reformed entities.

Irish economy must become more knowledge and skills-intensive - a process that requires simultaneous development and rapid expansion of our R&D capacity and output, as well as our human capital base.

On R&D front, the Government pursued policy of retaining and even enhancing R&D tax credits. Alas, recent research shows that lower tax rate on patent income is more effective in improving R&D climate in the economy than R&D tax credits and allowance.

Supporting human capital investment in the economy means strengthening value-for-money delivery in public services, providing higher quality services to skilled workers (an area where Irish system fails completely), reducing tax disincentives relating to human capital and enhancing our education, training and immigration systems to improve inflow of human capital.

Education acts as major driver of human capital formation and innovation in the economy, as well as a viable exporting sector. In a small economy like Ireland we have to think outside the box to deliver greater efficiencies in the higher education sector.

We need to decentralise pricing and decision-making in universities and IT sector by introducing variable, flexible fees reflective of differences in degrees and awarding institutions. To continue increasing access to education a system of merit and need-based grants should be used to offset the cost of tuition. Ireland has three or four internationally competitive universities with potential to compete globally for quality students and staff, including TCD, UCD and UCC. These universities should move toward a model of accepting 2nd and 3rd year undergraduates to deliver full and internationally-competitive 4 year degrees. This can free more resources to focus on post-graduate education. Other Universities can continue with the current model of 3 year degrees and focus on undergraduate education with post-graduate training geared toward more applied fields. IT schools should become feeder-schools for universities, supplying early-stage undergraduate training equivalent to years 1 and 2 of the 4-year degrees, and on professional and applied training.


Both OECD and the IMF focus a lot of attention on increasing competition and efficiencies in our non-manufacturing domestic sectors, including energy, utilities, health insurance, legal and professional services. The recent strengthening of the Competition Authority is helpful, but hardly sufficient, especially in the environment where regulators of the domestic services are captives of the semi-state companies operating in these sectors. The way to break this industry stronghold on the state is to break up and privatise commercial semi-state entities. The Government has committed to such actions, but no privatizations took place to-date and the break ups under the planned privatizations remain inadequate in scope.

The same principles of increasing completion and choice of service providers should apply to the all client-facing public services. Alas, the Government is incapable of even starting a debate about such a change in the status quo.


Another major reform of domestic economy we need to undertake that is not covered by the Government strategies is the change in the way we fund our business creation and growth. Globally, as the fall-out from the financial crisis settles, advanced economies are shifting more and more corporate and SMEs funding away from debt, toward business equity. In Ireland, such a change is being held back by a number of small policy bottlenecks.

One is the unequal treatment of debt and equity in taxation. Last month, IMF published a research paper looking at the effects of preferential treatment that debt financing receives over equity in the majority of the advanced economies. The paper concluded that such asymmetry in taxation increases likelihood and severity of the financial crises. IMF study shows that providing for a tax on business equity returns, in line with the treatment of bonds returns, is the most effective measure to improve systemic stability of the economy.

The second, and somewhat related bottleneck is the punitive treatment of employee share ownership in Ireland. Issuance of business equity to key and long-term employees is both an efficient means for raising capital for the firms and for incentivising key employees. However, in Ireland, such a move triggers income tax liability on equity granted for the employees, which is completely divorced from any actual returns accruing to the employee. The solution to this problem is simple enough: the state should apply capital gains tax to employees shares, with an added incentive for shares issued to long-term key employees.

Another major problem with out tax regime is the application of taxes to proceeds from the sale of business. Many new ventures are launched by entrepreneurs on the basis of funding obtained from the sale of pervious business. Allowing a 2-3 year tax-deferral for any reinvestment of such proceeds can stimulate flow of funding into the Irish economy, reduce incentives for entrepreneurs to domicile outside Ireland prior to the sale of business and net exchequer more tax revenues over the medium term than the current regime allows.

Reaching well beyond the confines of the existent Troika and Government-own programmes for reforms, the above measures can help shift Ireland’s growth model away from unsustainable reliance on tax arbitrage activities of the MNCs and bubbles-prone domestic investment.

Box-out:

Recent data from CSO’s Residential Property Price Index and the GeoView/DKM survey of commercial property vacancy rates shows that contrary to the Government claims of turnaround in the Irish property markets, our real estate sector continues to suffer from the ongoing crisis. Per GeoView/DKM survey, 23,432 commercial premises remained vacant in Ireland in January 2013, up 6.7 percent on previous survey results from August 2012. In Dublin, some 13% of all commercial premises are empty, up on 12% in August 2012. Meanwhile, prices of residential properties have fallen 1.53% in February 2012, compared to January, marking the steepest decline in 12 months and the decline is accelerating over the last 3 months period compared to previous 3 months through November 2012. In other words, the green shoots in our domestic investment, claimed by the Government and property sector analysts over 2012 so far appear to be an illusion. Irish property market remains stagnant, with occasional volatility pushing prices up a few percentage points only to see subsequent reversion to the zero growth trend established since January 2012.

27/4/2013: Sunday Times : March 31, 2014

The first of three consecutive posts to update on my recent articles in press.

This is an unedited version of my Sunday Times article from March 31, 2013.

What a difference a week, let alone nine months, make. 

Nine months ago, on June 29th, 2012, the eurozone leaders pledged "to break the links between the banks and the sovereign" prompting the Irish Government to call the results of the euro summit 'seismic' and ‘game-changing’. 

Fast-forward nine months. The number of mortgages in arrears in Irish banks rose at an annualised rate of 25%, the amounts of arrears have been growing at 65%. The number of all mortgages either in arrears, or temporarily restructured and not in arrears, or in repossessions is up 23% per annum. 

Deposits held in Irish ‘covered’ banks have fallen 13.9% between June 2012 and January 2013. In three months through January 2013 average levels of Irish residents' private sector deposits was down 2.34% on three months through June 2012, clocking annualised rate of decline of 4%. Over the same period of time, loans to Irish private sector fell 1.54% (annualised drop of 2.7%).

Smoothing out some of the monthly volatility, average ratio of private sector loans to deposits in the repaired Irish banking system rose from 145.8% in April-June 2012 to 147.0% in three months through January 2013.

Put simply, in the nine months since June 29th last year, the urgency of implementing the eurozone leaders' 'seismic' decisions on direct recapitalization of the banks and on examining Irish financial sector programme performance has been rising. 

Yet, this week, in the wake of yet another crisis this time decimating the economy of Cyprus, a number of EU officials have clearly stated that the euro area main mechanism for funding any future bailouts - the European Stability Mechanism fund - will not be used for direct and/or retrospective recapitalization of the banks. The willingness to act is still wanting in Europe.

First, chief of the euro area finance ministers group, Jeroen Djisselbloem, opined  that the ESM should never be used for direct capital supports to failing banks. Mr Djisselbloem went on to add that Cypriot deal, imposing forced bail-in of depositors and bondholders, is the template for future banks restructuring programmes. This pretty much rules out use of ESM to retroactively recapitalize Iriosh banks and take the burden of our past banks’ supports measures off the shoulders of the Irish taxpayers.

On foot of Mr Djisselbloem's comments, the EU Commission stated that it too hopes that direct recapitalisation of the banks via ESM will be avoided. In addition, the EU Internal Markets Commissioner Michel Barnier, while denying Mr Djisselbloem's claim that Cypriot 'deal' will serve as a future template for dealing with the banking crises, said that "Under the current legislation for bank resolution . . . it is not excluded that deposits over €100,000 could be instruments eligible for bail-in". Finnish Prime Minister Jyrki Katainen weighed in with his own assertion that the ESM should not be used to deal with the banking crises, especially in the case of legacy banks debts assumed. Klaus Regling, the head of the ESM, made a realistic assessment of the viability of the June 29, 2012 promises by stating that using ESM to directly recapitlise troubled banks will be politically impossible to achieve.  German officials defined their position in forthcoming talks on ESM future as being consistent with excluding legacy banks debts from ESM scope.

All of this must have been a shocker to the Irish Government that presided over the Cypriot bailout deal structuring which has shut the door on our hopes for Europe to come through on June 2012 commitments. After last weekend, uniqueness of Ireland is surpassed by the uniqueness of Greece where sovereign bonds were thrown into the fire and Cyprus where depositors and bondholders were savaged and not a single cent of Troika money was allocated to support the banks recapitalisations. 

The slavish conformity to the EU diktat that prompted the Irish Government to support disastrous application of the Troika programmes in Greece and Cyprus is now bearing its bitter fruit.

Which means that three years into what is termed by the Troika to be a 'successful adjustment programme', Ireland is now facing an old question: absent legacy banks debts restructuring, can we sustain the current fiscal path to debt stabilisation and avoid sovereign insolvency down the road?

Let’s look at the banking sector side of the problem.

Latest reports from the Irish banks show lower losses for 2012 compared to 2011, prompting many analysts and the Government to issue upbeat statements about the allegedly abating banking crisis. Such claims betray short foresight of our bankers and policymakers. Even according to the Central Bank stress tests from 2011, Irish banks are not expected to face the bulk of mortgages-related losses until 2015-2018. Latest data from CSO clearly shows that residential property prices across the nation were down for three months in a row through February. Prices have now fallen almost 23% since the original PCAR assessments were made. Even at the current levels, prices are still supported to the upside by the banks' inability to foreclose on defaulting mortgagees. Meanwhile, there are EUR45.3 billion worth of mortgages that are either in repossessions, in arrears or restructured and performing for now. Taken together, these facts mean that at current rates of decline in property values from PCAR valuations, we are already at the top of the envelope when it comes to banks ability to cover  potential mortgages losses. Add to this the effect of increasing supply of distressed properties into the market and it is hard to see how current prices can remain flat or rise through 2014-2015. 

All of the above suggests that before the first half of 2014 runs its course we are likely to see renewed concerns about banks capital levels starting to trickle into the media. Thereafter, the natural question will be who can shoulder any additional losses, given the entire Euro area banking system is moving toward higher capital ratios and quality overall. The answer to that is, of course, either the ESM or the Irish State.  The former is being ruled out by the euro area core member states. The latter is already nearly insolvent as is.

The headwinds to Irish debt sustainability argument do not end with the mortgages saga. 

Take a look at the economic growth dynamics. Back at the end of 2010, when Troika structured Irish ‘bailout’, our debt sustainability depended on the 2011-2015 forecast average annual growth at 2.68% for GDP.  By Budget 2013 time, these expectations were scaled back to 1.76%, yet the Troika continued to claim that our Government debt is sustainable. To attain medium-term sustainability, defined as declining debt/GDP ratios, between 2013 and 2017, IMF estimates that to stay the course Ireland will require average nominal GDP growth of 3.9% annually. To satisfy IMF sustainability assumptions, Irish economy will have to grow at 4.5% on average in 2016-2017 to compensate for slower rates of growth forecast in 2013-2015. So far, in 2011-2012 recovery we managed to achieve average growth rate in nominal GDP of just under 2.25%  - not even close to the average rates assumed by the IMF.

And the real challenge will come in 2015-2017 when we are likely to face sharp increases in mortgages-related losses. In other words, growth is expected to skyrocket just as banks and households will engage in massive mortgages defaults management exercise. 

There are additional headwinds in the workings, relating to the shifting composition of our GDP in recent years. Between 2007 and 2012, ratio of services in our total exports rose from 44.8% to 51.2%, while trade balance in services went from EUR2.75bn deficit to EUR3.1bn surplus. Trade in services is both more imports-intensive (with each EUR1 in services imports associated with EUR1.03 of services exports, as opposed to EUR1 in goods imports associated with EUR1.73 in exports) and has lower impact on our real economy. Irish tax system permits more aggressive, near-zero taxation of services trade against higher effective taxation for goods trade. This implies that while services-exporting MNCs book vastly more revenue into Ireland, most of the money flows through our economy without having any tangible relationship to either employment here or value added or any other real economic activity. In recent years, a significant share of our already anemic growth came from activities that are basically-speaking pure accounting trick with no bearing on our economy’s capacity to sustain public debt levels we have. If this trend were to continue into 2017, we can see some 5-7 percent of our GDP shifting to services-related tax arbitrage activities. 

Which, of course, would mean that the ‘sustainability’ levels of nominal growth mentioned above must be much higher in years to come to deliver real effect on our government debt mountain.

Take these headwinds together and there is a reasonable chance that Ireland will find itself at the point of yet another fiscal crisis with reigniting underlying banking and economic crises. Far from certainty, this high-impact possibility warrants some serious consideration in the halls of power. Maybe, continuing to sit on our hands and wait until the euro area acts upon its past promises is not good enough? Is it time we start building a coalition of the states willing to tackle the Northern Core States’ diktat over the ESM and banks rescue policies?

Box-out: 

Following the High Court judgment in the case involving rent review for Bewley’s Café on Dublin’s once swanky now increasingly dilapidated Grafton Street, one of the premier commercial real estate brokerages issued a note to its clients touching upon the expected or potential fallout from the case. The note mentions the stress the case might be causing many landlords sitting on ‘upward only rent review’ contracts and goes on to decry the possibility that with the Court’s decision in some cases rents might now revert to open market valuations. One does not need a better proof than this that Irish domestic sectors are nowhere near regaining any serious competitiveness. Instead of embracing self-correcting supply-demand reflecting market pricing, Irish domestic enterprises still seek protection and circumvention of the market forces to extract rents out of their customers. That’s one hell of a ‘the best small country to do business in’ culture, folks.

26/4/2013: ECB's policy mismatch in 6 graphs

For those interested in the monetary drivers of the current euro area crisis, here's an interesting new paper from CESifo (WP 4178, March 31, 2013): "The Monetary Policy of the ECB: A Robin Hood Approach?" by Marcus Drometer, Thomas I. Siemsen and Sebastian Watzka.

In the paper, authors "derive four sets of counterfactual national interest rate paths for the 17 Euro Area countries for the time period 1999 to 2012. They approximate desirable national interest rates countries would have liked to implement if they could still conduct independent monetary policy. We find that prior to the financial crisis the counterfactual interest rates for Germany trace the realized EONIA rate very closely, while monetary policy has been too loose especially for the southern European countries. This situation was inverted with the onset of the financial crisis. To shed light on the underlying decision rule of the ECB, we rank different rules according to their ability to aggregate the national counterfactual paths to the EONIA rate. In addition to previous literature we find that those mechanisms which care for countries who fare economically worse than the Euro Area average perform best."

Paper is available at SSRN: http://ssrn.com/abstract=2244821

Here are few charts, illustrating the results. In these TR references Taylor Rule, quarterly estimated backward-looking Bundesbank rule denoted BuBa, monthly estimated Bundesbank rules with interest rates smoothing denoted BuBaS and BuBaGMM respectively for backward- and forward-looking, and realised EONIA rate.

Legend:

CHARTS

Per authors: "Two results are worth noting.

First, the counterfactual interest rate path derived from the original Taylor rule and our baseline counterfactual path (quarterly estimated backward-looking Bundesbank rule) trace each other very closely. In fact, they are hardly distinguishable. The monthly estimated Bundesbank rules with interest rate smoothing (backward- and forward-looking) deviate sometimes considerably from the quarterly paths. …all four paths yield qualitatively similar results...

Second, …all four counterfactual paths for Germany lie strikingly close to the actual realization of the EONIA rate. Especially
for the southern European countries the ECB’s monetary policy has been too loose according to all four counterfactuals."

And more: "For all four sets of counterfactual national interest rate paths the Robin Hood rules outperform the standard decision rules. Especially our "economic-needs"-rule performs exceptionally good across all four specifications. Moreover, the forward looking model performs worse than the three backward looking specifications."

In other words, ECB policy rules were completely mis-matching the reality in all countries, save Germany, with (per charts above) mismatch most dramatic in… right… Ireland.

21/4/2014: Exports-led recovery? Not that promising so far...

Regular readers of this blog know that since the beginning of the crisis, I have been sceptical about the Government-pushed proposition that exports led recovery can be sufficient to lift Ireland out of the current crises-induced stagnation.

Over the recent years I have put forward a number of arguments as to why this proposition is faulty, including:

1. A weakening link between our GDP, GNP and national income,
2. A worrisome demographic trend that is structurally leading to lower labour markets participation, alongside the renewed emigration,
3. Structural weaknesses in the economy left ravaged by some 15 years if not more of bubbles-driven growth,
4. Taxation and state policy structures that favor old modes of economic development and which are incompatible with high value-added entrepreneurship, employment creation and growth, 
5. Substitution away from more real economy-linked goods exports in favor of the superficially inflated exports of services in the ICT and international financial services sectors, etc

But the dynamics of our exports are also not encouraging. 

Here's a summary of some trends in Irish exports since 1930s, all expressed in relation to nominal value of merchandise trade (omitting effects of inflation). Based on 5-year cumulative trade volumes (summing up annual trade volumes over 5 year periods):

• Irish exports grew 147.8% in 1980-1984 and 86.7% in 1985-1989 - during the 1980s recession. This did not lift Irish economy out of the crisis, then.
• Irish exports grew 56.3% in 1990-1994 period and 56.4% in 1995-1999 period. Thus, slower  rate of growth in exports during the 1990s than in the 1980s accompanied growth in the 1990s. This hardly presents a strong case for an 'exports-led recovery'.
• Irish exports expanded cumulatively 148.0% in 2000-2004, before shrinking by 0.4% in 2005-2009 period and is expected to grow at 4.6% cumulatively in 2010-2014 (using 2010-2012 data available to project trend to 2014). 

The last point above presents a problem for the Government thesis on exports-led recovery: the rates of growth in merchandise exports currently expected to prevail over 2010-2014 period are nowhere near either the 1980s crisis-period rates of growth or 1990s Celtic Tiger period rates of growth.

Ok, but what about trade surplus? Recall, trade surplus feeds directly into current account which, some believe almost religious, is the only thing that matters in determining the economy's ability to recover from debt-linked crises. Again, here are the facts:

• During the 1980-1984 Ireland run trade deficit that on a cumulative basis amounted to EUR5,969mln. This gave way to a cumulated surplus of EUR8,938mln in 1985-1989 period. So attaining a relatively strong trade surplus did not lift Irish economy from the crisis of the 1980s.
• In Celtic Tiger era, during 1990-1994 period, cumulated surpluses rose at a robust rate of 155.7% on previous 5 year period, and this increase was followed by a further improvement of 113.9% in 1995-1999 period. 
• During Celtic Garfield stage, in 2000-2004 period Irish trade surplus increased by a cumulative 245.4%. However, in 2005-2009 period trade surplus shrunk 10.9% cumulatively on previous 5 years. Based on data through 2012, projected cumulated growth in trade surplus (recall, this is merchandise trade only) grew by 43.6%.

Again, trade surplus growth is strong, currently, but it is nowhere near being as strong as in the 1990s. Worse, current rate of growth in trade surplus is well below the rate of growth attained in the 1980s.

Charts to illustrate:

Oh, and do note in the above chart the inverse relationship between the ratio of merchandise exports to imports (that kept rising during the Celtic Tiger and Garfield periods as per trend) and the downward trend in exports growth. 

19/4/2013: Mountains to climb, canyons to wade across

Nice visual from Pictet gang, sizing up two banking systems:

That was pre-'rescue' of Cypriot economy from itself by the 'benevolent' Troika Partners...

Recall, the package deal includes scaling back Cypriot banks to ca x3 GDP, or cutting the sector back to just about where it was in mid-2012 for Iceland, given the magnitude of GDP contraction from 2012 levels that this would require. It will be the case of roughly 'Look to your left, look to your right - either both of the bank clerks next to you are gone, or you are gone with one of them in tow'.

Updated:

And another visual from Pictet folks:

10/4/2013: IMHO Submission on the Review of Code of Conduct on Mortgages Arrears

The Irish Mortgage Holders Organisation Ltd.,
www.mortgageholders.ie
Not for profit organisation.

Submission on the review of code of conduct on mortgage arrears consultation paper CP 63

Irish Mortgage Holders Organisation, April 9th 2013.

Attention: Mr. Bernard Sherridan, Central Bank of Ireland.



Dear Mr Sheridan,

We would like to thank you and your team for meeting us recently about issues and concerns we have at the treatment by banks of Mortgage Holders.


We are very concerned by the statements made by Mr. Elderfield at the launch of the “targets” (set by government and the Central Bank) for banks, with respect to dealing with those in arrears as well as comments surrounding the changing of the Code Of Conduct on mortgage arrears to allow banks to take swifter action against mortgage holders.

It is our view that the process of mortgages arrears resolution is being facilitated in an unsupervised and unstructured way, without due regard to the need for transparency and openness which would be consistent with the best practices for arrears resolution and consumer protection. The process – as outlined to-date – leaves the mortgagees fully exposed to banks putting their own objectives and strategies ahead of the needs of the Irish economy, society and borrowers, and provides a large deficit in consumer protection.

We would like to make the following specific points regarding the review of the code of conduct on mortgage arrears notwithstanding the fact that it may already be predetermined as demonstrated by Mr. Elderfield’s comments as referenced above.


Legal standing:

In the first instance and reluctantly we have to raise the issue of the legality of the Code Of Conduct. This issue has been discussed behind closed doors for some time now and it is an issue of the utmost importance as the legal status of the code of conduct on mortgage arrears is by no means certain. We wish to reaffirm our concerns about the legality of the code which we expressed originally in our email to Governor Honohan last month.

A number of recent high court cases refer to this issue including Irish Life and Permanent v Duff where Justice Hogan raised “the somewhat troublesome issue of the precise legal status of the code of conduct”. Justice Hogan followed recent high court precedent in the Fitzell case and warned The question, for example, of what constitutes a “reasonable effort” on the part of the lender does not easily lend itself to judicial analysis by readily recognisable legal criteria. How, for example, are “reasonable efforts” to be measured and ascertained? If, moreover, non-compliance with the Code resulted in the courts declining to make orders for possession to which (as here) the lenders were otherwise apparently justified in seeking and obtaining, there would be a risk that by promulgating the Code and giving it a status that it did not otherwise legally merit, the courts would, in effect, be permitting the Central Bank unconstitutionally to change the law in this fashion’.

The Code itself has no specific legislative status. It is neither a piece of primary legislation in the form of an act of the Oireachtas nor a secondary piece of legislation in the form of a ministerial regulation issued by the Minister for Finance. The Code is not even stated to be admissible in legal proceedings. It is a Code issued under the terms of Section 117 of the Central Bank Act 1989 and therefore lenders who infringe its terms may be subject to the Central Bank’s Administrative Sanctions Procedure. This is an internal process that allows the Bank to control the conduct of and helps to define its regulatory relationship with financial service providers, but it is not one that a consumer as a borrower has any involvement in. This we believe is a matter of extreme urgency that needs addressing.


Right of Appeal:

Section 49 & 52 as proposed allows for a lender to have 3 senior staff act as an appeals board. This is completely unacceptable and allows for no independent oversight. The appeal process must be fully detached from the banks or banking sector representative institutions and vested with an independent authority acting to protect the interests of all parties involved in a dispute. The process must be made explicitly transparent and any asymmetries in representation during the dispute that may arise due to (a) nature of the processes that lead to the appeal, and (b) resources available to the parties prior to and during the appeal should be removed. In practical terms, this requires provisioning for the independent and fully funded counsel for borrowers who cannot afford such professional help, and an appeals board that is fully operationally and membership-wise independent from both borrowers and lenders.


Moratorium:

The proposed and current code is flawed in not being prescriptive in defining the periods of time over which the moratorium clock is ticking. No time is given for gathering of financial information or indeed an exchange of offers between the lender and the borrower. This will become a significant issue when the legislation is introduced to reverse the Dunne Judgement, which will lead to a significant rise in repossession applications. Lenders can initiate delays in corresponding with borrowers, as they have done on many occasions to-date, and such periods of delays will account for time eaten into a moratorium period. Borrowers, however, are not accorded similar powers. Again in the absence of prescriptive process and recording of times borrowers can be seriously and unfairly disadvantaged by losing time that is taken off them ahead of potential repossession proceedings.

Provision 37 proposes ‘Prior to completing the full assessment of the borrower’s standard financial statement, a lender may put a temporary arrangement in place where a delay in putting an arrangement in place will exacerbate a borrower’s arrears or pre-arrears situation. Such a temporary arrangement should not last for more than three months. Any subsequent arrangement should be based on a full assessment of the standard financial statement’.

This provision should state that the duration of this temporary arrangement does not count for the purposes of the 12 month moratorium on repossession proceedings. Similarly, Provision 57 should state in relation to the twelve month moratorium that ‘the twelve month period does not include any time period where a proposal for an alternative repayment arrangement is being negotiated’.


Unsolicited Contact by Lenders with Borrowers:

The Central Bank “themed inspections” as to the banks adherence to the previous rule of no more that 3 unsolicited contacts in one month was typical of light touch supervision. The lenders seem to have
had significant influence in this proposal and the Central Bank seem to have accepted the industry’s lobby position on this. In addition the Central Bank gave advance notice to banks before their “inspection”.

‘Feedback from industry would indicate that the current requirements, particularly the limit of three successful contacts, are preventing lenders from making contact and engaging with borrowers and are therefore impeding the consideration and resolution of borrower’s cases. The Central Bank does not believe that this is in the best interests of borrowers’.

There are no provisions for the engagement with mortgage holders in this feedback system. Similarly, there are no explicit, transparent and enforceable provisions to ensure that lenders engagements with the borrowers will be “proportionate and not excessive”. There are no data disclosure provisions relating to inspections and any remediation measures applied to institutions violating code of conduct.

The new unlimited contacts must not be “aggressive or intimidating”. Once again, how is it proposed to ensure this will be the case? How will it be proven that all attempts to contact the borrower have been made and that these attempts have been made within the confines of the Code-permitted procedures? The removal of this limited protection of mortgage holders is a significant regressive step in consumer protection and has left the borrowers unprotected against potential abuses by the banks.

Debt collectors acting on behalf of lenders are still unregulated within the existent structure and under the proposed code. How does this code cover their activities or can they adopt any means they deem appropriate to recover monies?

The Central Bank will have failed to provide symmetric protection of the interests of the borrowers and the lenders unless it allows for explicit, enforceable and transparent safeguards to protect many vulnerable people who are in arrears and will be set upon by lenders who have been given a free rein.


Unsustainability: 

Many actions taken by the bank to repossess property are predicated on a decision by a lender that a loan underlying the property is unsustainable. The Code should include prescriptive rules defining what is sustainable and what is not sustainable. This may involve some sort of expenditure guidelines. These rules and guidelines should be transparent, public, enforceable and compulsory for all banks, and applicable to all borrowers.


Trackers:

It is vital that provision 12 (d) is not changed unless there is a clear system for borrowers to seek advice to ensure that any removal off a tracker is of benefit to the borrower. Such advice should be delivered on a professional basis and borrowers in need of funding for procuring such advice should have access to such funding. Page 4 of the consultation paper suggests that the removal off a tracker might have merit if in the interest of the borrower. This determination cannot be solely in the remit of the lender nor can it be left subject to the appeal system that incorporates explicit conflict of interest between the appeals process and the bank interests per note above.


Engagement:

Our experience, confirmed by the experience of other organisations working on behalf of the borrowers in distress, is that lenders do not respond in a timely manner to borrowers proposals or engagements, which is unacceptable. What happens to a lender who does not engage, who does the borrower appeal or complain to, other than the bank, which is alleged to engage in the abuse of the system?

Engagement by lenders with borrowers can be painfully slow, tedious and difficult leaving the borrower exhausted, their financial resources significantly reduced and without a resolution. There needs to be a clear code of conduct enforcement by the central bank on lenders for their behaviour and engagement and such enforcement should be transparent, effective, verifiable and not based on an ad hoc system of inspections, criteria and judgements.


Borrower representation and advice:

Even in normally functioning bankruptcy regimes around the world, those in debt are at a significant disadvantage compared to the might of creditors. They face corporate strength and power that can crush any debtor financially, emotionally, socially and psychologically. Observed by passive regulators, as in Ireland, compounded by the insolvency regime that is both under the current statutes and in its ‘reformed’ reincarnation nothing short of draconian, leaves the debtor in great peril.

When this financial crisis happened it was the citizen who suffered where the regulated entities and regulators enjoyed protected pay, conditions and functionality. Now, the very same citizen is facing the immense power of the state backing the already significant powers of the banks when it comes to the personal debts.

Bankers have a Banking Federation that represents them. Bankers are also availing of the weaknesses in the Irish competition laws to sustain and even consolidate their market powers at the expense of the taxpayers. They discuss issues and present their views publicly and to the government rather effectively and are assisted by a receptive media. They tend to be in sync with government announcements and findings and have direct access to the Social Partnership process and all other avenues of policy formation.

Debtors lack any statutory or institutional power. They need assistance and protection, care and support. This is best achieved by a coming together of advocates and organisations that provide services and assistance to debtors. Organisations and bodies such as MABS, The Irish Mortgage Holders Organisation, Flac, Phoenix Project and others are providing exceptionally effective and professional services to debtors usually on the basis of voluntary engagement of experts and ordinary citizens, and in the majority of cases, with no cost to the state. These and other organisations have a combined knowledge, experience and passion of their volunteers to help those is debt.

Mabs has been effectively assisting debtors for the last few decades and they have experience and a national foot print from where services and supports could be head quartered.

Yet, even with these organisations behind them, Irish debtors do not have the resources needed to deal with aggressive and disruptive creditors. With many commentators and practitioners expressing concerns and uncertainty as to how the new personal insolvency act will work there is a need to address the imbalance that exists today between debtors and lenders, as well as prevent the exacerbation of this imbalance threatened by the new legislation.

The new Insolvency regime will add additional hurdles for debtors, allowing vultures prey on the hundreds of thousands of households saddled with excessive debts, while providing little certainty to the debtor or any chances for a renewal to the economy.

Successive governments have chosen to ignore the one constant support debtors have had which is Mabs, in favour of diluting their effectiveness and giving banks and creditors a strengthened hand. Successive governments have also opted to ignore all other organisations currently working on the frontlines of the debt crisis. Despite the governments’ best efforts these organisations continued to offer a better balance and chance for debtors to be represented and protected effectively. These organisations deserve to be recognised as the de facto debtors’ representatives and be allowed to fund professional provision of services to debtors by linking arrears and insolvency resolution savings delivered to the economy at large via their efforts to the resources available to them to achieve such savings.

The insolvency bill raises a serious question of how those deeply in debt will be able to afford professional representation to assist them deal with their debt in favour of those with cash flow who can avail of professional services. This will promote a two tiered system leaving the most vulnerable to fend for themselves in unchartered waters full of predatory creditors and commercial service providers.

What would be helpful to debtors in the years ahead would be a number of organisations that compete to provide a full suite of services to debtors including legal, financial, negotiation, mental health, conveyancing and creditor payment services. These organisations should be modelled around Mabs, with Mabs established on a stand alone basis with an independent Board filled with experienced directors. A Board with a strategic plan that addresses the needs of debtors in the years to come.

Mabs is currently funded from the department of social protection to the tune of EUR18,5 million per annum. This funding could be directed towards the new organisation and additional funding could be raised by charging creditors as is done in many other jurisdictions. Many consumer credit counselling services agree voluntary payment arrangements with creditors on behalf of debtors and facilitate the cash transactions for a fee. A truly independent and well-resourced Mabs can act as a coordinator and supervisor over other organisations that compete with each other for representation of debtors in the
process of developing systemic resolution to the debtor arrears or insolvency.

Given the disproportionate powers granted to the banks by the new legislation, existent debtors’- representing organisations will undoubtedly try their best to help but they are not adequately funded to achieve significant scale and scope of their operations to fully function as representatives of families and people in difficulty. Indeed, majority of them are not funded at all. There is an urgent need to consolidate these organisations’ efforts, provide them with proper supervision and supports, and allow them to raise resources to deliver meaningful and effective change.


Yours sincerely,
David Hall
Dr. Constantin Gurdgiev
Directors
Irish Mortgage Holders Organisation.
Dublin, Ireland
April 9, 2013

THE IRISH MORTGAGE HOLDERS ORGANISATION LIMITED is Registered in Ireland No: 517549 Directors: Arthur Mullan, David Hall, Lucy Cronin, Tracy Mullan, Constantin Gurdgiev