Next Monday sees the new insolvency service open for business. The body has already had 4,500 inquiries and its boss, Lorcan O’Connor, expects thousands of people to avail of its services.
Overborrowed and insolvent individuals will now have a couple of ways out of their problems other than fully fledged bankruptcy. None of them are pleasant but, for people who have borrowed too much, there is the prospect of some debt-forgiveness and keeping their home.
It is an important step towards tackling what is one of the biggest remaining impediments to economic recovery, the huge personal-debt overhang; the knock-on effects of which can be seen in limp retail sales and wafer-thin consumer confidence, not to mention a spluttering recovery in property prices.
The insolvency service is only part of the Government/troika strategy for dealing with overindebtedness. The most important bit was meant to be a determined effort by the banks to work through their loan books and come to sustainable solutions with overstretched borrowers, particularity mortgage holders.
Those in authority are coy about it – for good reason – but debt write-offs were supposed to be part and parcel of this and the Government-supported banks were capitalised to allow it happen.
But it hasn't. One of the more remarkable things about the Irish bailout is that it was supposed to allow the banks take their losses. The banks faced terrible losses following the property collapse and could not sustain them without a level of Government support which the taxpayer could not afford. Hence we took a multibillion bailout which now drawing to its close. The banks are talking about profitability being in sight once again but tens of thousands of unsustainable mortgages remain unresolved, according to the Central Bank. Clearly something is not going according to plan.
The new insolvency regime was meant to act – in part – as some sort of benchmark cum stick to incentivise the banks to do more deals with borrowers. The thinking being that the banks would prefer to do deals directly with customers rather than take their chances with the insolvency regime.
Lack of transparency
There seems to be little evidence that this is happening but the picture is murky because the banks are not very keen to give details about the number and type of deals done and anyone who gets a deal is sworn to secrecy. The rhetoric coming from the banks' chief executives over the summer interim results season was nuanced but did not amount to the words people want to hear: yes we are doing deals and yes we are giving write-offs.
It remains to be seen if the actual opening for business of the insolvency service will trigger an increase in bilateral deals. Unfortunately, there is more than one reason to be pessimistic. The first is a lack of transparency in the new regime. Borrowers will not be able to compare a deal on offer from the banks with the likely outcome of going down the Personal Insolvency Arrangement (PIA) route which may be counterproductive.
The other reason to be a bit gloomy is that the banks have the ability to stall or block most PIAs as they are by far and away the biggest creditor in most situations because the core problem in so many cases is property-related.
Given the banks’ apparent heel-dragging to date, it would be prudent to assume the opening of the insolvency service will not result in some sort of sea change, although it may well represent a lifeline for hopeless cases.
It might be best to assume that what will ultimately force the banks to start doing deals is the threat by the financial regulator to force them to make special provisions next year for unsustainable mortgage debt, regardless of whether they have come to an agreement with the borrowers.
The Central Bank's threat and associated targets are an attempt to cut the Gordian knot. What is holding back the banks is that it goes against pretty much every tenet of banking to take a loss if you can avoid it. This is because the golden rule is the preservation of capital, as Irish bankers have rediscovered.
What the Central Bank hopes is that once the banks realise they are going to take a hit one way or the other they might approach the whole personal-debt problem with a bit more gusto. Meanwhile, the recovery splutters.
