Playing beggar-my-neighbour could prove a dangerous game

From kathleen barrington: 07 February 2010

By Kathleen Barrington

When Eircom shareholders and taxi drivers lost their shirts on over-priced shares and taxi-plates, voters turned their backs on Fine Gael’s proposals to bail them out ahead of the 2002 general election.
Fine Gael argued that small investors in Eircom should be compensated, at an estimated cost to the taxpayer of €80 million.
The party defended the plan on the basis that it would make up for the way people were duped into buying Eircom shares by the government’s hype.
The proposal was widely ridiculed as an attempt to buy the votes of the 500,000 small Eircom investors who had suffered financial losses. It effectively backfired on the party, which was widely seen as having damaged its economic credibility by calling for financial rectitude in the Dáil, while simultaneously trying to buy votes by promising Eircom shareholders and taxi drivers compensation for punts that they had freely taken.
The failure of that particular Fine Gael proposal said quite a lot about Irish voters. First, politicians should not assume the public will necessarily vote for parties that want to bribe them with their own money. Second, there is a free-market streak in the Irish electorate which should not be underestimated.
Against that background, it will be interesting to see the reaction of voters if the government agrees to implement the ideas floated by communications minister Eamon Ryan of the Green Party. He suggested that a system should be set up to protect mortgage borrowers who have fallen behind in their repayments.
Ryan floated the idea after the Financial Regulator published figures last month which stated that about 3.3 per cent of Irish mortgage-borrowers were at least 90 days behind on their repayments.
The regulator said that €4.8 billion was owed in relation to all accounts that were more than 90 days in arrears.
That could translate into bad mortgage debts of at least €4.8 billion on the banks’ balance sheets, though the picture could be far worse if more people fall into arrears due to rises in mortgage interest rates and unemployment.
It is not exactly clear what Ryan has in mind, though there have been suggestions that banks might extend the term of the mortgages, reduce the interest rate or allow the borrower to sell the home back to the bank and lease it.
While these options may be favoured by the 26,000 hard pressed mortgage account holders in arrears, it is unclear how they will go down with the remaining 765,000 mortgage account holders meeting their mortgage repayments – or with the rest of the population, who don’t have any mortgage at all.
Any measures that the government took to ease the burden on mortgage holders would almost certainly reduce the banks’ cashflow and increase bad debts, resulting in the need for more capital from the taxpayer.
The taxpayer has already stumped up €11 billion to recapitalise AIB, Bank of Ireland and Anglo Irish Bank. Estimates vary, but brokers suggest that the banks would need a further €14 billion in new capital to replenish their balance sheets after the banks’ developments loans are transferred to the National Asset Management Agency (Nama).
The taxpayer is also expected to overpay for the Nama loans by €7 billion, based on the government’s original Nama proposals.
The taxpayer is also carrying the cost of the interest rates on the borrowings that the state is raising to fund the various capital injections.
In short, bailing out the banks on the development loans alone is already set to cost at least €31 billion.
This is before taking account of any new capital that may be required if Ryan insists on the banks going softly on mortgage holders who are in arrears.
It is true that losing your home is a far more emotive issue than losing on an investment in shares or taxi-plates; it is true, too, that there have been voices calling for a bailout for the little guy after the government proposed Nama to bail out the banks. But it is unclear whether this is a widely-held view, or whether a second bailout will make the first bailout right.
Certainly, vox-pops carried out by RTE and a number of letters to newspapers, following Ryan’s mortgage bailout proposal, indicate that many taxpayers are in no mood to fund the mortgages of their neighbours, as well as meeting their own obligations from pay packets already shrinking under the twin pressures of falling wages and rising taxes.
Ryan’s proposal has the potential to be enormously divisive if it has the effect of forcing the mortgage holder who lived within his means during the boom years to fund the one who was clearly living beyond his means. How will the homeowner who settled for a modest home on a repayment mortgage feel about his taxes being used to fund the bailout of his neighbour, who bought a far fancier house on an interest-only mortgage on which he has never paid a penny of the principal?
How will the mortgage-holder who sacrificed holidays so he could meet his payments feel about bailing out the individual whose jumbo house-loan may have been swelled by consolidating holiday loans and car loans onto the mortgage?
The proposal will also have the effect of artificially propping up the prices of homes which otherwise would have been repossessed and sold at cheap prices, thereby delaying the fall in house prices to more realistic levels. Cheaper houses would greatly ease the burden of people in employment and, most likely, dampen demand for higher wages, thereby boosting competitiveness.
US banker JP Morgan once said that nothing so undermined one’s financial judgment as the sight of one’s neighbour getting rich. But it is also possible that nothing will so concentrate the voters’ political judgment as the prospect of having to pay for their neighbours’ houses, on top of paying for their own.
Ryan’s proposal could yet prove to be the straw that breaks the patience of the Irish taxpayer, who will want to know why they should pick up the tab for the borrower who borrowed too much, the bank that lent the borrower too much and the bondholder who persisted in supplying the funds to the reckless bankers.