Tuesday, 24 February 2015

Ireland facing second mortgage-related banking crisis?

A showdown is brewing up in Ireland between bank lenders and mortgage debt defaulters which if not properly handled could lead to far more than ugly scenes between the public and law enforcement agencies. It could threaten the fragile Irish banking system and even undermine Ireland's return to economic health, so the stakes are disturbingly high. The defaulters' movement draws its oxygen from historical precedent in the late 19th century when Ireland's Land League was formed to resist British landlords seeking to evict cottagers behind with their rents.

The land League movement won a major victory in restricting the rights of landlords in Ireland but a change to the law in 2013, at the behest of the EU, means that the Government has closed a loophole that had made foreclosures on certain mortgages almost impossible. The legal change now makes it much easier for lenders to recover their loans and is designed to cut the troubled banks' debt loads.

Home repossession is a highly charged, emotive subject and perhaps nowhere more so than in Ireland, given its long-standing culture vehemently opposed to evictions and repossessions. "Irish culture is opposed to evictions and repossessions for good historical reasons and that will not change," opined Brian Lucey, a finance professor at Trinity College Dublin. "Culture will always trump strategy," he added but the professor should remember that like God economics will not be mocked indefinitely and when abused too much can destroy empires. So what are the chances of delinquent home owners besting the bankers and ushering in a second banking crisis?

The sums involved are disturbingly high. According to Ireland's Central Bank the mortgages in arrears totalled 117,889, or 15.5% of all outstanding loans at the end of September 2014. While this was a 6.4% decline on the second quarter the number of accounts over 90 days in arrears was 84,995, while those over two years behind, valued at Eur 8 billion, continued to rise and was 7.6% of total outstanding balances on primary dwelling home properties. In addition, at the same time the buy-to-let delinquent mortgages over two years in arrears were 15,435, with an outstanding balance of Eur 4.8 billion, equivalent to 16.6% of total outstanding balances on all buy-to-let accounts. Moreover, the Central Bank's figures do not include the sale of mortgage loans to non-regulated entities, who like sharks smelling blood are now circling to profit from the misery of mortgage defaulters.

The modern Land League of resisters is, as part of its strategy, aligning with politicians to target those industries that have grown up around the mortgage crisis, including hedge funds, private equity, auctioneers and carpet baggers. One such example was when 60 Land League activists were prevented by police from reaching the home of a Dublin accountant said to be working for banks so that they could present him with a wreath commemorating the suicides of people weighed down by debt. The activists are well organized, harnessing cyberspace to interpose their bodies when beleagured home owners text them for help to prevent bailiffs entering their homes. "Our slogan is that we'll be there faster than an ambulance," said Jerry Beades, a former real estate developer who helped found the National Irish Land League last year. The activists' negative publicity is clearly adversely impacting those agencies helping in debt recovery, including disruption of real estate auctions. "From what we hear , they have a problem. They can't get sheriffs to repossess properties and they can't get get auctioneers to sell them," says Beades.

Just how effective the legal loophole was before closure in 2013 can be seen by the fact that despite the six figure number of serious mortgage arrears in the last three months of 2012 there were only 38 foreclosures. Now, however, banks have lodged 10,000 applications to foreclose on homes in the year through to September, four times as many as in the preceding year.

It is natural for aggrieved mortgage defaulters to blame others for their predicament and while there is some merit in taking this stance against lenders who acted imprudently in their exhuberance to lend the borrowers themselves cannot escape some blame for their naivety in financial matters and so should share some of the pain with the banks. That naivety would have been less if economics had been made mandatory in all schools from secondary level and should certainly be made so to prevent history repeating itself. It is an immutable law of economics that every boom precedes a bust.

There may be trouble ahead

It could be argued that already some of the banks involved in the Irish domestic real estate debacle, especially some British banks, have already taken their fair share of haircuts. The Royal Bank of Scotland, for example, while deciding to keep its Ulster Bank going has lost £15 billion since the financial crisis, while Lloyds' latest deal to sell its Irish mortgage portfolio to Goldman Sachs and the private equity group, CarVal, for £1.6 billion has reportedly led to a purchase price of less than half the face value of the underlying assets. Lloyds still has £1 billion of net exposure to Irish non performing loans but just six of Ireland's leading banks represent 90% of the total mortgage market.

Clearly, borrowers should share the pain, especially as, according to one leading Irish bank, up to 20% of the arrears are so-called "strategic defaults" because the borrowers are unwilling rather than unable to make repayments. In a land famed for its chancers such a percentage is not implausible. Both sides are talking tough. AIB, Ireland's second biggest bank by assets, said that their market was preparing to step up enforcement action. "For someone just not paying their mortgage we will take a robust line," said the bank's chief executive. "There is no rent-free option any more." Karl Deeter, of Irish Mortgage Brokers, said the banks need to reconsider repossession of homes in long-term difficulties. "Once people get into long-term arrears it tends to be a one-way journey," he said. Economists have warned that any escalation in the mortgage crisis could force Ireland's fragile banks to raise more capital and delay the country's recovery. Ellen McQuaid, economist at Merrion Stockbrokers, warned: "As things currently stand banks are probably OK but if things continue to worsen on the arrears front then the banks could be in trouble."

It is impossible to calculate how much money is at risk but given the size and longevity of loan arrears the sums could easily run to many billions of Euros if a solution attempt is bungled. It is clearly not an option to allow reckless, naive borrowers to continue their debt welching unscathed. To do so would simply add to the burden of taxpayers and those at risk of more social security cuts.

Wednesday, 4 February 2015

Does Greece deserve more debt relief?

The growing consensus in parts of the British Press and global business media is that Greece should be released from much of its US$272 billion sovereign debt in the interests of ending the country's obvious social pains and restoring its economy to health, and by extension preserve the economic equanimity of Europe but is it a wise course of action, given the risks of contagion down the line and the likelihood that Greece will not take on board the absolute necessity for good political and economic governance?

The country's record of financial governance does not inspire optimism. Over the last 200 years Greece has defaulted on its sovereign debt obligations at least five times and the first recorded debt default goes back to the 4th century BC when 13 Greek city states borrowed money from the Temple of Delos, which ended with the temple nursing an 80% loss of principal. Clearly, Greece is a recidivist debt welcher of the first magnitude. Much of this malfeasance derives from the Greek psyche that drives the population to think it is their God-given right to evade taxes at all cost, thus forcing the Government to borrow ever-more huge amounts, which is not then spent honestly and wisely.

In terms of Government spending, for example, pensions are a good case in point. Although the official Greek retirement age is 65 early retirement is widespread and the average age of labour market exit is 62.4 years for men and 60.9 years for women. An OECD 2009 report discusses the early retirement problem in Greece by asserting: "The comparatively lax conditions to qualify for a minimum pension tend to increase incentives for early retirement. Despite their low level minimum pensions they are relatively generous in relation to the contributions paid by their beneficiaries which creates perverse incentives for certain workers to retire early without any reduction in benefits." These perverse incentives for workers to access early retirement schemes even included bizarre cases. For instance, pensions were given by the Greek State to daughters of military officers and various civil servants if they were not married!

The ubiquitous tax dodging problem is even more disturbing. Greece has suffered serious weakness in tax collection because of its large shadow economy and the real loss from tax evasion can hardly be calculated. One analysis, however, based on prestigious American institutions, suggests Euro28 billion in lost tax revenue in 2009 just from the self employed.  The highest tax evaders are doctors, lawyers, accountants, engineers, private tutors, artists and journalists.

There is no denying the enormity of the unprecedented shrinkage of the Greek economy, which has shrunk 25%, perhaps the worst in modern times, but neither is there any gainsaying of Greece's colossal economic mismanagement, corruption, cronyism, damaging labour restrictions and ineffectiveness at righting these parlous proclivities, which has brought it to its current parlous state. It is true that Greece has cut bloated pensions and raised taxes but their attempts to institute the bailout conditions from foreign creditors are evidently failing, though it seems that the Greek economy has started to grow again, albeit very feebly.

The public sector suffers substantial integrity gaps in both law and practice. A 2010 report, for instance, showed that only 2% of misbehaved civil servants were subjected to disciplinary procedures. A poor system of tax collection, helped by an opaque tax code, allows individuals and companies to bribe tax inspectors and evade taxes. According to a 2011 survey the cost of bribing tax inspectors to "arrange" tax audit activities is reported to range from Euro 100 to Euro 20,000. In such a climate as this it is hardly surprising that Greece is the lowest scored country in Europe for corruption in 2013. A global corruption index of 176 countries placed Greece at 94th position, with one being the cleanest and the 176th the foulest.

In support for the case to forgive a significant slice of Greek sovereign debt, perhaps one third to a half, the point is made that there are plenty of historical precedents for relief on such a scale. Most notably, Germany is cited after World War 2, when in 1953 Germany's creditors recognized that full payment of the country's debts would make revival harder and could destabilize all Europe. Consequently the creditors wrote off half of Germany's debts and made the rest contingent on economic performance. Such debt relief was in all parties' best interests but the comparison of Greece today with Germany after World War 2 is a crass one. The fact is, Germany's industries were shattered, its cities laid waste by war, and given its pre-war position in Europe as an economic power house it was absolutely essential to help Germany back to health. Germany's post war recovery proved an economic miracle, not least because of its business drive from a people imbued with an industrious spirit and respect for clean government and economic good governance. Those key attributes are still lacking in Greece, and without them any more debt relief on top of the billions of Euros already written off by private creditors and banks, would almost certainly be throwing more good money after bad.

Ireland and Finland have already voiced their concerns that Greece should not receive any more debt write-offs and it is plain to see why. Ireland received a bail out and endured much austerity for years as a pre-condition for loans. By following those conditions Ireland is now well on the road to economic recovery. Spain, too, has taken its medicine and is showing good signs of recovery. If Greece were let off scores of billions it would set a dangerous precedent. Other countries in the Mediterranean sphere, like Spain, Italy Portugal and even France whose economic integrity has left much to be desired, could clamour for similar relief, and that could herald the irremediable collapse of the Eurozone currency, and much worse.

This is not to argue that Greece should no longer he helped. There is a good case for extending the loan repayment periods and even, perhaps, suspend interest payments for a few years. But Greece should also help itself, but how? Greece has many islands in a balmy, desirable location. It could, for example, let these islands on 99-year leases, with favourable tax incentives, which alone would bring in billions of Euros in the short term. Longer term, Greece could make better use of its inexhaustible free sunshine by harnessing solar energy to supply the energy-hungry countries to the north. The infrastructure could be paid for by the energy importing countries like Germany provided the energy charges were low enough long term to justify the investment. It would also provide a much-needed boost to employment.

All efforts to help Greece back to prosperity and growth will, however, fail unless Greece is prepared to burn the canker of lousy governance from its soul forever. Perhaps the country would do well to learn a lesson from British history concerning the need to pay their taxes in full. From the late 17th century Britain had two key assets in its empire-building clashes with much larger empires: its system of Government credit, rested on confidence, and a fair tax burden, leading to a remarkably high level of compliance -- a situation that did not exist among England's enemies and so led to their downfall.

Sunday, 1 February 2015

Changing how history is taught could change its course benignly

History, quipped Henry Ford, is more or less bunk, meaning not that it is garbage but rather that one should make history today by living in the present and ignoring tradition. "The only history that is worth a tinker's damn is the history that we make today," he said. Yet if humanity is to progress righteously by making history today it is manifestly clear that history's lessons must be learned if its mistakes are not to be repeated. As the Spanish philosopher, Santyana, remarked: "Those who cannot remember the past are condemned to repeat it." Tragically, such ignorance of the past leads to continuation of modern and ancient ills like extremism, intolerance, pogroms, oppression, discrimination and xenophobia -- proving that history's valuable lessons are routinely ignored. Yet could a difference be made if history were taught differently in schools from secondary level and made mandatory?

The perceived problem with history teaching, it seems, is that it tends to confine students to study only their own country's history and only then for a very short history period. Moreover, there is always a risk that in closed, undemocratic societies the subject will be distorted and perverted for political and religious ends. The subject could also be viewed by many students as boring and dry. If, however, much more emphasis was placed on how history was fundamentally changed over the long term, ultimately for the better, embracing many nationalities and groups that mixed to cause and enrich such changes it would surely give students a less prejudiced view of other nationalities, religions and cultures -- cutting the risks from xenophobia, religious bigotry and racism. It would also make history more interesting.

Even today, invasions and wars begin which show why, if history's lessons had been given due cognizance, they could have been avoided and arguably no better current example of that, in logistics terms particularly, is the Afghan war. This harsh, arid, unforgiving, landlocked country, perfectly designed to confound invaders, made the logistics of supply not only breathtakingly costly but a nightmare. Twice before over the last 200 years the Afghans have humbled two world powers, Britain and Russia, whose arrogance seemingly ignored appalling logistical problems, and again, today, a coalition of world powers has been humbled as they leave with little to show for the blood and gold shed and an uncertain future for the Afghans.  

The teaching of world history spanning millennia does, of course, present its own kind of logistical problems for students, like finding the time and teachers, who themselves may lack understanding of the vast scope of historicity. The problem could be eased, however, if national history was downplayed in favour of global, human and natural events that fundamentally changed the course of history far more than emperors, monarchs and other panjandrums.

Henry Ford himself could have done with such history lessons that might have tempered his well-known anti-Semitic views and their odious connexion involving use of slave labour in Nazi Germany's Ford factories, even before America entered the war. Great men also make great mistakes and the greatest of these often stem from ignorance of history and its disturbing infant of arrogance.