TWO issues have been dominating the Irish economic landscape this week. The first is: what does our being described as a “special case” by Angela Merkel and Francois Hollande actually mean? If it means we will be treated specially, what will other countries, like Spain, think? The second, and equally important, issue is this: does being “a special case” mean we will get a legacy bank deal, which would be a big step forward? If so, what would such a deal do for the biggest problem facing our society — the coming tidal wave of mortgage defaults initially in the “buy-to-let” market, and then in the residential mortgage market?
The last five days have not been easy for the faint-hearted. On Friday, Ms Merkel poured freezing Baltic water on Ireland’s chances of getting a legacy deal. Then, following a flurry of diplomacy, a joint communiquÃ© issued by Berlin and Dublin suggested we were in fact a special case. Our specialness has not yet been defined, but on Monday, the Taoiseach took a swing at it, saying Ireland was special because we had “taken one for the team”, in not applying the rules of capital to the bankruptcy of the banks; leaving the creditors to take a major hit.
As soon as it became apparent that the Irish State, bullied by the ECB, was following a “no bondholder left behind” policy with respect to the banks even as their losses mounted, this column always argued that the bondholders should be burned. The basic logic of not paying up front — instead of paying and then looking for your money back — is obvious.
Yesterday, it looked like the door had been left tantalisingly open for us to get our money back in some form through this “special case” reference. Given how things have gone over the past few years, it’s hard not to be sceptical, but equally, if the facts truly have changed, it would be misguided not to adjust to the new reality of our being special.
For a moment, imagine that the hoped for outcome materialises. Ireland is treated as a special case because we “took one for the team” — we stuck to the austerity programme and are small in European terms. Our fate will then be governed by the American expression “you don’t get what you deserve; you get what you negotiate”.
This is when we should focus on a deal that provides not just enough money for the legacy debts, but also the future debts of the banking system, which will come via the mass default on buy-to-lets and later, on residential mortgages.
Last year the Minister of Finance in the Dail put the figure for personal household indebtedness at 143pc of GDP. This is bigger than the national debt and much bigger than the banking debt. The problem with much of this debt is that it was used to finance house buying. Now those houses — the assets — have fallen in value, but the debt remains fixed and rising because interest rates, although low, are positive.
More worrying still is the fact that interest rates are now at historic lows. The implication is they can only go up. A total 45,165 of all mortgages are in arrears of over 90 days; 17,553 are in arrears of over 45 days and 65,698 are in arrears of over 180 days. These figures come from the Central Bank’s latest bulletin. Already, â‚¬15bn worth of mortgages have been restructured.
Fitch, the rating agency, believes 20pc of Irish mortgages will eventually default as incomes fall.
The reason people default is not so much because houses are in negative equity but mainly because people’s incomes fall and they can’t keep all the balls in the air. This week’s survey from the credit unions reinforces the contention that we are very close to this tipping point. It suggests that 1.8 million adults had less than â‚¬100 at the end of the month after all the bills were paid.
So rather than wait for the debt bubble — the corollary of the housing bubble — to burst, wouldn’t it be more sensible for the State to try and put a figure on the worst case scenario. Then it could go to Europe with that figure added to the existing legacy debt and demand that much money. The logic of this is simple: you only get one chance to strike a deal. If the Government has indeed secured special treatment (which we deserve) then it’s better to go big.
This makes sense because, for starters, the average person needs a break. Secondly, the default tsunami is coming. If we only deal with past debts, the future ones will sink the banks after we get the deal that was supposed to solve their bankruptcy.
In these situations you only get one chance.