18/4/2013: Legalising Modern Version of Slavery

Insolvency guidelines published today were wholly and fully written by the banks and for the banks.

The core points are that under the new regime, Irish mortgagees will be:

1. Treated as de facto strategic defaulters until they are proven not guilty of such behaviour in a biased process that will see them face fully resourced lenders while having no practical and meaningful means for defending themselves. 'Innocent until proven guilty' principle no longer applies in the Irish State.
2. Permanently branded as defaulters for the rest of their lives as there record of applying for the resolution process will be kept indefinitely, independent of success or failure of the process.
3. Will lose basically any means to sustain real savings, investment, pensions provisions for the duration of up to 6 years or even longer without any guarantee that their engagement with the system will end in resolving the debt overhang at the end of the process.

This means that the Irish economy will continue to struggle with the debt overhang and, materially, the current change in the regime will only serve the purpose of further shifting financial resources from the households to the banks.

There was no real functional process for consultation with the current providers of services to those facing the insolvency. There was no transparency in developing these Guidelines. Give you one example, there is no reference to the protection of consumers, mortgagees or borrowers in the entire text of the document.

Take it from the top: "A debtor should be able to participate in the life of the community, as other citizens do. It should be possible for  the debtor ‘to eat nutritious food …, to have clothes for different weather and situations, to  keep the home clean and tidy, to have furniture and equipment at home for rest and  recreation, to be able to devote some time to leisure activities, and to read books,  newspapers and watch television" according to the Guidelines.

In other words, from get-go, a debtor is not to be allowed to plan or provide for the retirement, to arrange for health cover, to build functional (as opposed to token) precautionary savings, or to have incentives to better their lives. 

Presumably, Irish social inclusion does not provide an allowance for dental care either. At EUR5 per week in allowed savings, a debtor would have to wait around 140 weeks in agonising pain before they can get a tooth cap. Children braces will take as much if not longer. And you better not dare go to a doctor more than once every two months during your dental affordability waiting period.

Now, let's give it a thought - we are releasing households with children into the wilderness of living without providing a single cent for uncovered (beyond those stipulated by the guidelines) eventualities - e.g. dental emergency or a breakdown of the sole family vehicle. And we give them no capacity to acquire such means by working harder or undertaking different jobs which pay more.

When it comes to access to car, the guidelines do not distinguish between the need to commute to work and to commute to deliver children to schools or childcare facilities. The guidelines also appear to ignore the fact that shopping for a family is not the same as shopping for a single individual when it comes to transportation options allowed. There are no provisions for households that may require two cars. There are no realistic provision for caring for the old-banger vehicle that Guidelines allow for and which cost more in repairs than newer vehicles which the households will be forced to sell.

The real flaw in this approach is that we start from the point of allowed disposable income and work our way back to earned income. This means that a household has absolutely no incentive to earn more, no allowance is provided for them to take up risk and become entrepreneurs, no capacity to fund change in employment. 

This is precisely what wage slavery is all about. And we are now putting people into it.

The Guidelines talk vaguely about the need to incetivise households to engage in economic activity, yet provide a cap on savings of EUR5 per week per adult. None allowed per child. 

In other words, suppose you satisfy the conditions of the Guidelines and you get a new job paying an extra EUR50 per week. You cannot save anything out of this, which means all of the additional income immediately accrues to the banks.

Now, imagine that a new job offer comes with the prospect of better pension down the line, greater promotional opportunities, better life satisfaction and other benefits you might want to have and that can significantly improve your and your family wellbeing, not to mention the economy. Alas, also assume that the new job requires you to commute to work by car while prior to that - with your old job - the Guidelines allowed only for public transportation option. You have no savings to buy the car and no access to new credit. Which means that you will either have to turn down the new job (at a loss to you, employer, the bank and the economy) or to borrower on terms and conditions from the bank with which you have arrangements in place (at a loss to you, as you can't keep the upside of the new job pay). 

This is like taking slave labour and forcing it to consume bank-provided services at prices set by the bank. In the 19th century this was the practice with monopsonist employers and it led to industrial unrest on a massive scale and even revolutions. Welcome to the New Ireland, folks.

Thus, even in theory, the Guidelines are not consistent with one of their intended purposes - that of supporting economic activity and participation in this activity by the households.

In a summary: From the beginning of this crisis I have argued that we need to import UK insolvency regime into Ireland, so as  to allow effective and efficient bankruptcy resolution. 

What we have done instead is put forward a modern-day, democratically legislated slavery in the name of protecting our banks and created an incentive for tens of thousands to convert current bankruptcy tourism into a permanent bankruptcy emigration. 

Welcome to the 21st century model of a Dickensian nightmare grafted onto, as Namawinelake puts it perfectly world's most exemplary Nanny State.


Updated:
Two excellent posts on the Guidelines that are a must read:

Brian Lucey's: http://brianmlucey.wordpress.com/2013/04/18/pettifogging-nanny-state-gone-mad/

and

Namawinelake's: http://namawinelake.wordpress.com/2013/04/18/hey-world-if-you-want-to-see-what-a-true-nanny-state-looks-like-look-at-what-ireland-has-just-done/

17/4/2013: Global Banking Sector Roadkill Alley (aka euro area)

Lets play the game of 'Spot the odd one out...' 

Fact 1: Globally, growth is concentrating in Latin America, Asia Pacific and Africa (see earlier post here) and the lowest growth centre is the Euro area.

Fact 2 (via IMF GFSR Chapter 1):

Question: Which banking system has spent almost three years now 'deleveraging' itself out of global growth centres so it can focus its immensely healthy balancesheets on pursuing growth where there is no growth in sight?

Answer on a post-card addressed to:

Mr Mario Draghi 

Kaiserstrasse 29
60311 Frankfurt am Main, Germany

Bonus round: in the Sick Banks Club (aka euro area) which are the sickest and second sickest national banking systems?

For hint, see this post.

17/4/2013: IMF's succinct summary of Irish banking mess

IMF's GFSR Chapter 1 offers a nice visual highlighting the fact that Irish banking system is still the sickest of all banking systems in Europe, bar that of Greece (which doesn't count, for anyone with a will to argue the point, as it has been comprehensively destroyed in rounds of sovereign debt restructuring and by all Troika MOUs is yet to undergo the 'repairs' similar to those allegedly 'completed' in Ireland in 2011):

And a footnote explaining the chart:

17/4/2013: Talking of Being Stuck in a Wrong Hood...

In recent presentations on the global economy, euro area and Ireland I have stressed the fact that we (EA and Ireland) are stuck in the 'wrong hood' - low growth, ageing and socially sclerotic environments with no structural drivers for creation of new value added.

Here's a good visual courtesy of the IMF WEO April 2013 (full publication here):

First, the World of new regionalisation, with:

• Stagnant North-East or Fortress Europe
• Drowsy North-West or Fortress North America
• Dynamic Asia-Pacific or Bad Boys Gang
• Dynamic Latin America or Government Spending Junkies
• Emerging Africa or Catch-up Hare:

 And zooming onto our (Ireland's) hood:

Per IMF (italics are mine): "The near-term outlook for the euro area has been revised downward, with activity now expected to  contract by ¼ percent in 2013, instead of expanding by ¼ percent as projected in the October 2012  WEO (Table 2.1). This reflects declines in growth projections across all euro area countries, with notable revisions in some core members (France, Germany, Netherlands). Growth will strengthen gradually through the year, reaching 1 percent by the fourth quarter, as the pace of fiscal consolidation (at ¾ percent of GDP) is eased by almost half during 2013.

But growth will generally remain subdued as improvements in private sector borrowing conditions are hampered by financial market fragmentation and ongoing balance sheet repair. Further headwinds to growth could result from a sustained appreciation of the euro that lowers competitiveness and dampens export growth."

Table referenced above:

Do note that per above, with exception of France, all euro area economies are expected to pursue 'exports-led' or 'exports-supported recovery' in 2013-2014. And also do note that unemployment in this 'exporting haven' is not expected to improve in 2013-2014.

16/4/2013: One question, Mr Market, please...

A uncomfortable question:

Faith seems to have no bounds once sentiment shifts. The Market seemed to have maintained confidence in EU's crisis-fighting 'measures' despite the fact that Cyprus case revealed an obvious lack of any real crisis-fighting 'measures' to-date.

The entire periphery-fixing policy tool kit in Europe - now into the sixth year running - still boils down to

1. Rolling out unfulfilled promises (ESM banks-sovereigns break, OMT, a banking union, fiscal policies coordination, fiscal supports for growth - do recall that EU keeps talking about the need to 'support' growth and yet does nothing about providing such supports), 
2. Dogmatic ECB stuck in a rates and money supply policies that neither ease currency and interest rates pressures, nor provide a break from the failed transmission mechanism, and 
3. Internal devaluations of the worst kind (ad hoc loading of debt on economies already carrying too much debt & lack of reforms in the real economy - keep in mind, setting deficit targets ≠ reform). 

So would The Market please run this by me: What HAS changed between Ireland 2008 (the beginning of the euro crisis) and Cyprus 2013 (it's latest iteration) other than the channels by which more debt is being piled onto over-indebted economies hit by crisis?

Well, not much. Yesterday, IMF has issued a statement on Greece (that's right - the second country that was 'repaired' by the EU approach to crisis, ...and then repaired again... and again) claiming that with the fourth round of 'reforms' promised, Greece is now (still?) on a sustainable debt path. Never mind that the 'sustainable debt paths' so far for Greece have meant debt/GDP ratios bounds for sustainability rising from 'under 120%' within Programme 1 to 'under 200%' within Programme 4.

15/4/2013: Advanced economies exports: converging in growth trends?

Quite an interesting new trend that emerged since the late 2000s and is reaching well into 2012-2013 so far is the trend of convergence in the rates of growth in exports of goods and services between euro area, the US and Japan.

Here are few charts:

 Note, the above correlations convergence is also confirmed on a 20 year rolling basis.

One thing is pretty clear from the above: while prior to 2004-2005 the US exports dynamics remained relatively weak compared to those of the euro area, since 2005, the picture has changed dramatically, with the US exports dynamics falling pretty much in line with those of the euro area.

Here are some interesting facts:

• On a cumulated basis, from 1981-2012, volume of exports has expanded from index reading of 100 in 1981 to 406 in 2012 for Japan, 352 for the UK, 505 for the US, 812 for the Advanced Economies and 715 in the euro area, highlighting the fact that the euro area overall cumulatively outperformed all other economies in the comparison group.
• Similarly, on cumulated basis, from 2000 (index=100) through 2012, volume of exports index rose to 156 in the case of Japan, 137 in the case of the UK, 156 in the case of the US, 227 in the case of the Advanced Economies and 237 in the case of the euro area, once again confirming euro area outperformance over the period.
• In contrast, on cumulated basis, from 2004 (index=100) through 2012, volume of exports index rose to 124.5 in the case of Japan, 122.1 in the case of the UK, 151.6 in the case of the US, 166.4 in the case of the Advanced Economies and 154.8 in the case of the euro area, showing closing gap in euro area outperformance compared to the US over the period.

The drivers for these changes are most likely a combination of factors including:

• Technological and supply chains convergence in traditional sectors;
• Increased openness in the euro area to trade;
• Changes in currency valuations with the introduction of the euro and the effects of the current crisis on currency valuations;
• Improving energy component of the total cost basis in the US, and
• Shift in exports growth toward services sectors (composition effects).

15/4/2013: Bonus Culture: A model of social efficiencies in the presence of bonuses

The global financial crisis has exposed the absurd effects of short-termism when it comes to bonuses on long-term sustainability and efficiency of enterprises. However, the idea that bonuses can be effective in creating a compensation wedge over relatively standardised salary scales to reward performance and/or human capital (on the supply side of labour) and to provide competitive advantage to firms in attracting human capital (on the demand side of labour) is not necessarily out of touch with reality in many other sectors and occupations. Still, some worrying lessons that we should learn about the distortions introduced by bonuses from the crisis do apply to other sectors as well.

An interesting paper, albeit purely theoretical, titled "Bonus Culture: Competitive Pay, Screening, and Multitasking" by Roland Bénabou and Jean Tirole (NBER Working Paper No. 18936, April 2013) looked at "the impact of labor market competition and skill-biased technical change on the structure of compensation."

The authors found that "Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic under-incentivization of low-skill agents first decreases, then gives way to a growing over-incentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions."

Furthermore, "The extent to which [such a correction via bonus caps and income taxes] is achievable depends on how well the government or regulator is able to distinguish the incentive versus fixed parts of compensation packages, as well as on the distortions that may arise as firms try to blur that line or resort to even less efficient screening devices."

One issue with the study is that the model does not allow for heterogeneity between agents and between various sectors of economy. The authors acknowledge this much by stating that "…task unobservability may be less of a concern for some (e.g., private-equity partnerships) and more for others (large banks), but if they compete for talent the high-powered incentives efficiently offered in the former may spread to the latter, and do damage there. Heterogeneity also raises the question of the self-selection of agents into professions and their matching with firms or sectors, e.g., between finance and science or engineering."

Other shortcoming, also mentioned by the authors in their 'what can be done next' discussion is that in some  "settings in which high-skill workers become more valuable as firms compete harder for customers, for instance because the latter become more sensitive to quality."

15/4/2013: Irish Labour Costs: IDA spin and reality

IDA presentation claims loudly & boldly that Ireland is one of 3 countries where nominal wages have dropped (slide 5).

This raises two questions.

1. An existential one: are dropping nominal wages a good thing? Well, not really. For a number of reasons. Firstly, declining wages = declining domestic demand and investment. Now, IDA - focused on MNCs and FDI - might not give a damn about these two aspects of the economy, but sadly they are more important to Ireland than IDA-sponsored multinationals, as the last 6 years of the Great Recession clearly show. Secondly, declining nominal wages = lower incentives to locate talent into Ireland and develop human capital here. Now, that is something IDA should care about, since this cuts the ability of its MNCs to continue creating the illusion of productivity here. Thirdly, declining nominal wages may mask loss of efficiency and productivity in some sectors and superficial gains in efficiency in other sectors. How so? Ok, suppose wages in a less productive sector, like construction or retail fall, while wages in more productive sector, like ICT rise. Average or median wages across economy might fall, but competitiveness might also decline where it matters - in higher growth sectors. Sadly, IDA seem to have no clue that this is what appears to have been happening in the economy, presumably because it would put a bit of a brake on the IDA spin. But see table below to verify that the above factor 3 does indeed apply to Irish data.
2. A factual one: is this claim true. Now, here's Paul Krugman's article saying it is not true: http://krugman.blogs.nytimes.com/2013/04/13/dnwr-in-the-ea/ . But what about raw, direct data from Ireland? CSO provides: http://cso.ie/en/media/csoie/releasespublications/documents/earnings/2012/earnlabcosts_q42012.pdf and the end game is: average hourly earnings in Ireland in Q4 2012 were +0.6% y/y and +0.7% q/q in the private sector, and down -0.4% y/y and +0.6% q/q in public sector. So unless IDA cares about labour costs in the public sector (presumably because IDA have discovered a treasure cave full of MNCs in Irish public sector), Irish nominal earnings are up, not down.

There are other problems with claims IDA makes. Wages might fall, but cost of labour might still go up due to increased cost of Government related to payroll and income taxes. Conveniently, CSO provides raw data on this too. Total labour costs in Ireland as of Q4 2012:

• Increased in the private sector +2.6% q/q and +1.3% y/y
• Compared to 2008, these were down from EUR23.51/hour to EUR23.31/hour - a massive decline of 0.86% in 4 years, cumulative.

Judge for yourselves as to what the dynamics in Irish wages (earnings and total labour costs, to be more precise) are (for all sectors reported by CSO):

No comment needed.

15/4/2013: About that orchestra on Titanic's deck...

In a telling sign of total disconnect with reality, last week we heard two bizarre comments from the European 'leaders' all made in the context of Dublin Ministerial dealing with Cyprus.

First, "Klaus Regling, managing director of the ESM, told reporters that the fund had had its "most successful week". The statement can on foot of ESM selling EUR10bn worth of new debt in heavily oversubscribed markets. Alas, the said claim was made in the week when ESM became the sole vehicle for handling EU side of the Cyprus 'bailout'. In other words, Regling, like rest of EU 'leaders' measures success by how high he can pile on debt (EUR8bn worth of bonds here, EUR2bn worth of notes there), not by real economic outcomes (which can see Cypriot economy shrinking 15% in one year - some 'success').

However, the weekly prize for detachement from reality goes, as it often does, to Olli 'The Delusional' Rehn - the EU Commissioner for Something-to-do with Economy - who was forced to concede that Cypriot bailout can lead to the island economy shrinking up to 15% in 2013. Never, mind, says Rehn, as "I don't deny that there is uncertainty about the precise figure whether it will 10 percent, 12.5 percent or 15 percent."

Indeed, 'never mind'. You'd think he would make it his job knowing. But, of course, why bother, since 10-12.5-15 percent range clearly might reach into 20-22.5-25 percent range as easily and Mr Rehn wouldn't bat an eyelid. Especially since the host nation's Government - aka Ireland's 'best pupils in the EUssroom' - were there to cheer Mr Rehn in exchange for getting a handful of platitudes from important foreigners. Behold Jeroen Dijsselbloem's claim that Ireland is "a living example that adjustment programmes do work". Cyprus, presumably, will be the EU's roadkill of history... joining Greece and Spain, with Italy and Portugal in the waiting wings.

In short, we are now going verifiably gaga this side of the Atlantic, begging for a comparison with the orchestra that played through Titanic's sinking. Alas, the orchestra, as historian tell, was rather competent one - unlike Messrs Rehn, Regling, et al.

13/4/2013: Human Capital & Economic Development - a fascinating study

A fascinating paper, published in The Quarterly Journal of Economics (2013), 105–164, titled "Human Capital and Regional Development" by Nicola Gennaioli, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer (see also NBER Working Paper No. 17158, September 2011 or in final version at http://scholar.harvard.edu/files/shleifer/files/human_capital_qje_final.pdf) looked at "the determinants of regional development" across "1569 sub-national regions from 110 countries covering 74 percent of the world’s surface and 96 percent of its GDP."

The authors "combine the cross-regional analysis of geographic, institutional, cultural, and human capital determinants of regional development with an examination of productivity in several thousand establishments located in these regions." In addition, the study also extends a standard model of regional development to include a "model of the allocation of talent between entrepreneurship and work", and a "model of human capital externalities".

Top line conclusion: "The evidence points to the paramount importance of human capital in accounting for regional differences in development, but also suggests from model estimation and calibration that entrepreneurial inputs and human capital externalities are essential for understanding the data."

More specifically:

• In the paper, human capital as measured by education attainment "emerges as the most consistently important determinant of both regional income and productivity of regional establishments.
• "…Some of the key channels through which human capital operates, includ[e] education of workers, education of entrepreneurs/managers, and externalities." 
• The authors omit other forms of human capital (e.g. creative capacity, innovation capacity, various measures of aptitude, etc), which implies that the results of the study error on cautious side when it comes to determining the full extent of the effects of human capital on economic development.
• The authors also omit from consideration "the role of human capital in shaping the adoption of new technologies. Starting with Nelson and Phelps (1966), economists have argued that human capital accelerates the adoption of new technologies." This once more implies that the numerical estimates provided by the authors error on the side of underestimating the true effects of human capital on economic development.
• The authors "do not find that culture, as measured by ethnic heterogeneity or trust, explains regional differences."
• The paper shows no effect of "institutions as measured by survey assessments of the business environment in the Enterprise Surveys" on helping to "account for cross-regional differences within a country."  
• The two points above are important for us in Ireland - and indeed in all Small Open Economies within the EU27 - because, given the extent of labour mobility and markets integration within the EU27, we are closer, on a comparative basis, to being a regional economy, rather than a separate country-level economy.
• "In contrast, differences in educational attainment account for a large share of the regional income differences within a country. The within country R2 in the univariate regression of the log of per capita income on the log of education is about 25 percent; this R2 is not higher than 8 percent for any other variable."
• Acemoglu, D, & M. Dell (2010) paper “Productivity Differences Between & Within Countries” (published in American Economic Journal, 2(1):169-188) examined "sub-national data from North and South America to disentangle the roles of education and institutions in accounting for development. The authors find that about half of the within-country variation in levels of income is accounted for by education." 
• The study also shows that "focusing [in the analysis of the role human capital plays in economic development] on worker education alone [absent separate consideration of entrepreneurial human capital] substantially underestimates both private and social returns to education. Private returns are very high but to a substantial extent are earned by entrepreneurs, and hence might appear as profits rather than wages…  …the evidence points to a large influence of entrepreneurial human capital, and perhaps of human capital externalities, on productivity."
• Key numerical finding is that "education explains 58% of between country variation of per capita income, and 38% of within country variation of per capita income."
• "Turning to institutions, some of the variables, such as access to finance or the number of days it takes to file a tax return, explain a considerable share of cross-country variation, …but none explains more than 2 percent of within country variation of per capita incomes. Indicators of infrastructure or other public good provision do slightly better: on their own many explain a large share of between country variation, while density of power lines and travel time account for up to 7% of within country variation. These variables are obviously highly endogenous, and still do much worse than education."
• The last two points summarised in the table below:

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

10/4/2013: EU Commission on debt-overhang in Europe

A new paper on the effects of debt and deleveraging in Europe was published by the EU Commission. The paper can be accessed here.

Some nice charts summarising the debt overhang in the real economy (households and non-financial corporates):

Gross level relative to GDP, Irish households are 3rd most indebted in the euro area by 2011 measure. However, adjusting for GDP/GNP gap puts us at the top position, well ahead of Cyprus and even ahead of the EU27 'leader' - Denmark.

Now, much is usually being said about Irish net debts being lower due to immense wealth accumulated by the households. Table above shows that, actually, that is not true. We rank second from the top. Interest burden has declined, but it remains the third highest in the euro area.

Now to non-financial corporations:

 Irish corporates are second most indebted (after Luxembourg) in the EU and adjusting for GDP/GNP gap, the difference to the third most-indebted country is even more dramatic than the chart above indicates. Irish corporates debt rose in 2008-2011, rather dramatically - marking the highest increase in the euro area.

Detailed decomposition:

Again, adjusting for GDP/GNP gap, Irish economy is the most indebted in the euro area and the EU when measured relative to overall economy size (note: Luxembourg comparatives are wholly meaningless due to massive presence of brass-plates operations in the economy).

More fun charts:

Again, Ireland is in top first (corporates ex-Luxembourg) or second (households) positions.

Deleveraging household debt overhang will be extremely painful for Ireland:

And although asset valuations suggest the pain will be milder, in reality, one has to consider the fact that Irish household assets valuations are not exactly (a) fully reflective of real extent of price contractions in the housing sector, and (b) liquid.

 Here's EU Commission view:
"as regards households capacity to repay (figure 12), Ireland, Spain, Estonia, the Netherlands, Latvia, Denmark, the United Kingdom and, to some extent, Cyprus are amongst those that experienced a rapid increase in household indebtedness before the crisis. Despite the varying starting position in terms of household debt, the information content of the level dimension also points to the same set of countries as potentially prone to suffer from deleveraging pressures, on top of Portugal and Sweden. Ireland, Latvia and Estonia also appear as subject to high  pressures when considering actual leverage as well as its build-up (figure 13)".

And on non-financial corporates deleveraging:
"on the firms' side, there is also a clear positive relationship between the  accumulation and the level factors when considering the capacity to repay (figure 14). Countries like Belgium, Ireland, Spain, Cyprus, Portugal and Bulgaria stand out as presenting vulnerabilities related to their firm's indebtedness. This snapshot is highly nuanced when looking at firm's asset side (see figure 15). Belgium and Cyprus present a healthier picture while firms in countries like Greece, Italy, Slovenia and Latvia appear as subject to higher pressures. As a robustness check, this exercise was also run with consolidated data and the results are consistent but for the case of Belgium, where the relevance of intra-company loans calls for further qualifications when assessing non-financial corporates debt sustainability"

Using more sophisticated analysis, the Commission paper concludes that:
"The following countries can be identified as more prone to face deleveraging pressures in the household and non-financial corporation sectors: Cyprus, Denmark, Spain, Ireland, the Netherlands, Portugal, Estonia, Latvia, Slovakia, Sweden and the United Kingdom on the household side and Belgium, Bulgaria, Cyprus, Greece, Spain, Hungary, Ireland,  Italy, Portugal, Estonia, Latvia, Slovenia, Sweden and the United Kingdom on the corporate side."

Of all countries listed above only Ireland, Cyprus, Spain, Portugal, Estonia, Latvia, Sweden and the UK fall into both groups, but only Ireland falls into extreme scenarios of debt sustainability in both categories:

In EU Commission calculations (see link above), Ireland has the greatest gap to sustainability (35.2%) when it comes to debt overhang in the entire euro area, and second highest in the EU.