In the previous post, I covered in 4 charts (via IMF research paper) the extent of the European debt crisis (link: http://trueeconomics.blogspot.com/2013/04/442013-real-debt-european-crisis-in-4.html?spref=tw ). Here, based on the same source, proposed solutions for dealing with the household debt crisis.
Per IMF:
"A number of European countries have introduced or refined personal insolvency regimes to achieve orderly resolution of the debt overhang over time." Note that here, "personal insolvency law may also cover natural persons who are engaged in business activities (traders or merchants)", which is of course something unaddressed explicitly in Irish reforms despite the fact that current system of insolvency effectively spells an end to the careers of many professionals and businessmen and businesswomen.
"For example, Estonia, Iceland, Italy, Latvia, Lithuania, and Poland adopted or amended the personal insolvency law. The Irish Parliament recently adopted an entirely new personal insolvency law to, inter alia; shorten the discharge period from 12 years to 3 years subject to certain conditions. [The bill also allows the court to require repayments for up to five years in the bankruptcy process.]
Here's a very interesting bit: "The German government is also considering a reform of the personal insolvency regime that includes a shortening of the
discharge period. [The proposal envisages to reduce the discharge period from six years to three years provided that at least 25 percent of all debt must be repaid by an individual debtor]." Now, again, interestingly, Irish reforms provide for no set bounds for repayment, thus implying that there is no set limit resolution to the post-bankruptcy liability.
"In designing such regimes, these countries have faced a number of challenges. First, unlike corporate insolvency, there is no established international best practice at all in this area, especially with regard to the treatment of residential mortgages in insolvency proceedings. Second, as individuals are involved, the design of the law is inevitably driven by social policy considerations; these include the goal to reinvigorate individual productive potential in the mainstream economy and to reduce the social costs of leaving debtors in a state of perpetual debt distress. [Note: this is obviously not a core objective for the Irish reform, as it provides virtually no protection to the borrower during the voluntary arrangements period prior to bankruptcy.] Third, the law needs to keep an appropriate balance between maintaining credit discipline and affording financially responsible debtors a fresh start. Finally, the design of the law needs to take into account institutional infrastructure that is critical to the predictable and transparent implementation of the law, including the availability and quality of judges and trustees, administrative capacity, accounting, and valuation systems. [Note: in the Irish reforms case, none of these objectives are met and in fact some are directly violated by the reforms.]"
"A number of basic design features for an economically efficient personal insolvency law have emerged from the early cross-country experience:
What's happening beyond the above menu?
"The unprecedented challenge of excessive mortgage debt has prompted some European countries to introduce special legislation. [Norway, when facing its own banking crisis and recession in the early 1990s, adopted the Debt Reorganization Act in 1993 to provide debt relief to debtors who are unable to meet their obligations for a period of time. The law provides for voluntary debt settlement and compulsory debt settlement (e.g., reduction of principal of a residential mortgage to 110 percent of the market value of the residence). Now, wait, we were told that such measures (also deployed in Iceland) have never been tried and would lead to a wholesale collapse of the economy...] "
"Faced with wide-scale household mortgage distress in the aftermath of the recent crisis and the bursting of the real estate bubble, Greece, Spain and Portugal have introduced special legislation to address unsustainable residential mortgage debt burdens on households while limiting adverse effects on banks’ balance sheets and minimizing moral hazard."
All of these regimes differ in several respects:
"A number of countries have adopted measures to facilitate out of court settlement for distressed mortgages. For example, Iceland, Ireland, and Latvia adopted voluntary guidelines or codes of conduct that provide guidance on mortgage restructurings for borrowers in financial distress. In 2012, Portugal introduced voluntary out of court guidelines for banks to restructure household debt including residential mortgages more generally with the assistance of debt mediation facilities. Estonia adopted a law effective in April 2011 aimed at supporting the out of court restructuring of debt obligation, including mortgages, of natural persons facing financial difficulties — although the procedure relies heavily on court input. To reduce the burden on the court system, the personal insolvency law recently adopted by the Irish Parliament introduces three non-judicial debt settlement procedures for household debt including a personal insolvency arrangement for settlement of secured debt up to €3 million and unsecured debt (no limit) over six to seven years. The effectiveness of these approaches in tackling mortgage distress remains to be seen."
Per IMF:
"A number of European countries have introduced or refined personal insolvency regimes to achieve orderly resolution of the debt overhang over time." Note that here, "personal insolvency law may also cover natural persons who are engaged in business activities (traders or merchants)", which is of course something unaddressed explicitly in Irish reforms despite the fact that current system of insolvency effectively spells an end to the careers of many professionals and businessmen and businesswomen.
"For example, Estonia, Iceland, Italy, Latvia, Lithuania, and Poland adopted or amended the personal insolvency law. The Irish Parliament recently adopted an entirely new personal insolvency law to, inter alia; shorten the discharge period from 12 years to 3 years subject to certain conditions. [The bill also allows the court to require repayments for up to five years in the bankruptcy process.]
Here's a very interesting bit: "The German government is also considering a reform of the personal insolvency regime that includes a shortening of the
discharge period. [The proposal envisages to reduce the discharge period from six years to three years provided that at least 25 percent of all debt must be repaid by an individual debtor]." Now, again, interestingly, Irish reforms provide for no set bounds for repayment, thus implying that there is no set limit resolution to the post-bankruptcy liability.
"In designing such regimes, these countries have faced a number of challenges. First, unlike corporate insolvency, there is no established international best practice at all in this area, especially with regard to the treatment of residential mortgages in insolvency proceedings. Second, as individuals are involved, the design of the law is inevitably driven by social policy considerations; these include the goal to reinvigorate individual productive potential in the mainstream economy and to reduce the social costs of leaving debtors in a state of perpetual debt distress. [Note: this is obviously not a core objective for the Irish reform, as it provides virtually no protection to the borrower during the voluntary arrangements period prior to bankruptcy.] Third, the law needs to keep an appropriate balance between maintaining credit discipline and affording financially responsible debtors a fresh start. Finally, the design of the law needs to take into account institutional infrastructure that is critical to the predictable and transparent implementation of the law, including the availability and quality of judges and trustees, administrative capacity, accounting, and valuation systems. [Note: in the Irish reforms case, none of these objectives are met and in fact some are directly violated by the reforms.]"
"A number of basic design features for an economically efficient personal insolvency law have emerged from the early cross-country experience:
- Allocate risks among parties in a fair and equitable manner; [Not delivered in the Irish case at all]
- Provide a fresh start through discharge of financially responsible individuals from the liabilities at the end of insolvency proceedings (typically after 3-5 years); [Provided in the Irish reforms]
- Establish appropriate filing criteria to make insolvency procedures accessible to individual debtors while minimizing abuse; [Irish reforms maximise potential for abuse in pre-insolvency processes of so-called voluntary arrangements by ensuring the banks have asymmetric veto power over arrangements, the banks have sole power of determination of terms and conditions for voluntary arrangements workout period, the banks control and own arbitration process, the banks are not compelled to transparently disclose their solutions and conditions for accessing these solutions, etc].
- Impose automatic and temporary stay on enforcement actions with adequate safeguards of creditor interests; [This is contradicted by the stated Government intention to speed up forced foreclosures as a part of restructuring of the banks mortgages books]
- Set repayment terms that accurately reflect the debtor’s capacity to repay to ensure an effective fresh start; and [Note: it is hard to imagine how this can be achieved in the environment of Irish reforms as outlined in the bullet point 3 above]
- Recognize foreign proceedings and enable cross-border cooperation to avoid bankruptcy tourism. [It is unclear how Irish reforms can reduce incentives to avail of the UK system given the conditions for insolvency in Ireland involve up to 6 years of voluntary work-out plus insolvency process, against 12 months in the UK].
What's happening beyond the above menu?
"The unprecedented challenge of excessive mortgage debt has prompted some European countries to introduce special legislation. [Norway, when facing its own banking crisis and recession in the early 1990s, adopted the Debt Reorganization Act in 1993 to provide debt relief to debtors who are unable to meet their obligations for a period of time. The law provides for voluntary debt settlement and compulsory debt settlement (e.g., reduction of principal of a residential mortgage to 110 percent of the market value of the residence). Now, wait, we were told that such measures (also deployed in Iceland) have never been tried and would lead to a wholesale collapse of the economy...] "
"Faced with wide-scale household mortgage distress in the aftermath of the recent crisis and the bursting of the real estate bubble, Greece, Spain and Portugal have introduced special legislation to address unsustainable residential mortgage debt burdens on households while limiting adverse effects on banks’ balance sheets and minimizing moral hazard."
All of these regimes differ in several respects:
- "...While the Spanish regime allows financing institutions to opt into the scheme [Once a financial institution opts in, it must implement for at least two years a Code of Good Practices which provides for measures aimed at achieving a viable mortgage restructuring for debtors covered by the regime., banks’ participation is mandatory for Greece and Portugal].
- ... Spain and Portugal allow mortgage debtors, subject to certain conditions and as a last resort, to transfer the mortgaged property title to the bank (or a government agency in Portugal) and obtain cancellation of the mortgage debt (up to the assessed value of the residence in Portugal). [Under the Spanish regime, the transfer of the property title and the cancellation of the debt can only happen after it has been proven that neither restructuring of the debt nor application of a partial release is viable.] Greece, on the other hand, allows the court to grant a full discharge of the mortgage debt if the debtor repays up to 85 percent of the commercial value of the principal residence determined by the court over up to 20 years. It is yet too early to assess the effectiveness of the Spain and Portugal regimes, but the Greek authorities are revisiting their framework due to its low rate of successful restructuring to date."
"A number of countries have adopted measures to facilitate out of court settlement for distressed mortgages. For example, Iceland, Ireland, and Latvia adopted voluntary guidelines or codes of conduct that provide guidance on mortgage restructurings for borrowers in financial distress. In 2012, Portugal introduced voluntary out of court guidelines for banks to restructure household debt including residential mortgages more generally with the assistance of debt mediation facilities. Estonia adopted a law effective in April 2011 aimed at supporting the out of court restructuring of debt obligation, including mortgages, of natural persons facing financial difficulties — although the procedure relies heavily on court input. To reduce the burden on the court system, the personal insolvency law recently adopted by the Irish Parliament introduces three non-judicial debt settlement procedures for household debt including a personal insolvency arrangement for settlement of secured debt up to €3 million and unsecured debt (no limit) over six to seven years. The effectiveness of these approaches in tackling mortgage distress remains to be seen."
