herald

Friday 25 May 2018

Dan White: Morgan's €6bn loan plan won't work - here's what we must do

In his recent Hubert Kelly Lecture in Kilkenny, UCD economics professor Morgan Kelly called for debt forgiveness for residential mortgages.

He estimated that the cost of writing down the debts of homeowners at about €6bn, chicken-feed by comparison with the €70bn we have already pumped into the banks.

Over the weekend, the notion of mortgage write-downs gained further traction, forcing junior Finance Minister Brian Hayes and then his boss Michael Noonan to rubbish the idea.

The fact that two such political heavyweights had to be wheeled out in an effort to squelch the notion shows just how worried the Government is that it will gain widespread popular support.



Crash

At the heart of the Government's objections are the cost, about €6bn, and the complexity of deciding who would have their mortgages written down and who wouldn't.

As against that, with at least 10pc of all mortgages now either in arrears or having been restructured and close to 50pc of all mortgages underwater, something has got to give.

Morgan Kelly has, rightly in my opinion, been widely praised for predicting the property price crash and the impact that it would have on the banking system. However, his latest proposal exposes once again a huge blind-spot on the part of the UCD economist.

Despite having been unerringly right on both property prices and the banks, Professor Kelly seems to regard Irish membership of the euro as being somehow immutably fixed. In none of his various newspaper articles or public lectures has he questioned our membership of the single currency and its possible contribution to our current difficulties.

It is this blind-spot which has led him to come out with what is, on even cursory examination, an utterly impractical proposal.

Much and all as I hate having to say it, Messrs Noonan and Hayes are surely correct when they object to the notion of mortgage write-downs on the grounds of both cost and complexity.

Even if we could reach out and lay our hands on a spare €6bn, who would decide which homeowners had their mortgages written down and those who did not?

How would such a scheme be constructed so as to ensure only "deserving" homeowners had their mortgages written down?

What steps, if any, could be taken to ensure that such a scheme wasn't corrupted by party politics -- in fairness to Kelly, he acknowledged this risk in his Kilkenny lecture.

Unfortunately, while Noonan and Hayes are correct in pointing out the difficulties of writing down mortgage debt, doing nothing is not an option. While Kelly puts the cost of writing down mortgages at €6bn, I suspect the problem is much, much worse than that.

At the moment, when loans they have sold on to investors are included, the Irish banks manage about €140bn of mortgages. Even if the €50bn of mortgages taken out by property investors are excluded, that's still €90bn. With house prices now down more than 40pc from their peak, €6bn won't be enough to rescue over-indebted homeowners, it won't even come close.

So what do we do? If Ireland were to leave or, far more likely, be ejected from the euro, the new Irish currency would immediately fall by 30-40pc in value on the foreign exchanges, something that would push up Irish inflation as imports became more expensive.

This post-euro inflation would also have the effect of writing down the value of all Irish debts, not just mortgages, in real or inflation-adjusted terms.

Not alone would this help rescue over-indebted homeowners, it would also dispense with the need of setting up an elaborate system for writing down mortgages.

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