A NATIONAL debt crisis, such as the one Ireland is now suffering, tends to follow a four-stage pattern. We see these stages playing out in every episode of national bankruptcy — whether in Latin America, Asia or Western Europe. In Ireland, we are moving towards the third phase.
There is no escaping this pattern because the mathematical corollary of a housing boom is a debt bust. It is only a matter of time.
Now those suggesting that the endgame will be debt repudiation are taking the flak. But it will happen.
Let’s briefly examine the four stages of national bankruptcy.
The first phase is rapid: highly leveraged banks go bust alarmingly quickly. This leads to massive state intervention to prevent a bank run, political upheaval and inklings of just how deep the mess might become.
The second stage is a period of unusual calm. The remedial action taken by the State calms things down, banks don’t collapse, there is no run on the banks and the economy settles in to the grinding reality that falling incomes and too much debt don’t mix.
During this period, vested interests, powerful “insiders” in society, move to protect themselves. Supposedly binding agreements are signed. Likewise, the banks do deals with debtors in the hope that they can postpone the day of reckoning.
The second stage leads relentlessly to the third stage, also slow, where gradually the “outsiders” — people with too much debt, traditionally working in the private sector or with small businesses — go bankrupt slowly. In the UK these people have been called the “squeezed middle”. Here they should be called the “squeezed outsiders”, caught in a vicious embrace of falling incomes, rising taxes and negative equity.
In any estate in the suburbs there can be two families which on the surface look identical — same houses, same cars with 2005 registrations, whose children go to the same school — but once the hall door closes a very different reality faces each family.
The “insiders” rest easier, not without worries but without valium. If they are “outsiders” the parents are likely to be awake in the dark. Ultimately, for the outsiders, the more taxes rise, the less they can spend and the more the economy stalls.
Despite the lowest interest rates in living memory, the number of mortgages in difficulty is now running at 11pc and likely to grow. Yesterday the EU published evidence that Irish households suffered a 9pc fall in income from 2009 to 2011.
The incomes and wealth of “squeezed outsiders” are now being looted to keep the “insiders” — who may live across the road — from paying their share.
Insiders are those with a stake in society, access to state power and the ability to protect themselves, as a sub-group, from the recession.
There are insiders on both the left and the right. On the right, the classic rich insiders are bank bondholders and members of the well-paid professional services class, who are still in positions of power. Insiders on the left are those who seek to protect themselves, whether they be trade unionists who cling to restrictive practices or senior public servants who seek to pay themselves far above counterparts in bigger countries.
In our third phase of national bankruptcy we are seeing a struggle between the unprotected “outsiders” and the protected “insiders” for the last slice of the national pie. This is playing out on the streets of our suburbs.
The evidence of the squeezed outsiders is everywhere. We have seen a 200,000 fall in the number of people with private health insurance. Similarly, the number of people able to afford private pension provisions has collapsed.
The number holidaying abroad fell from 53pc in 2010 to 39pc in June 2012, according to a survey carried out by MyHome.ie.
A KBC/Irish Independent survey on childcare costs shows that the average cost of childcare for one child stands at â‚¬1,100 per month, whereas the average mortgage repayment is â‚¬913 for those aged 25-44. If you have two or more children, it can go as high as â‚¬2,000.
When you drill a bit deeper you see that the reason the mortgage repayments are lower is that tracker mortgages — 400,000 of them — understate the real cost of borrowing because they are subsidised heavily. Even still, 10.9pc (83,251) of mortgages are now more than 90 days in arrears. What happens if that subsidy changes?
A Friends First survey in August showed that one in five of those with pensions have reduced or stopped contributing to it.
MORE than a third (34pc) of people without a pension have not thought about how they are going to fund their retirement. This is obviously because they have more pressing financial problems. And of those trying to pay into a pension, 21pc are currently unable to meet their financial commitments. Over half of participants surveyed felt less optimistic about their personal finances for 2013, compared to 2012.
Ultimately, when the squeezed outsiders have nothing left to give, we will reach the fourth phase, when those “insiders”, who used the period of calm to protect themselves, realise that they can’t escape.
They realise that their lifestyle will also be hammered and this is when, politically, it all kicks off, and the consensus fractures.