Personal insolvency, the ECB, and the shallowness of much political debate
If you had tried to follow the debate on the bill reforming personal bankruptcy in Ireland, what would you have learned over the last few weeks? From the opposition you’d have learned that awful Alan Shatter wants to take away people’s wedding rings, and from Alan Shatter you’d have learned that we had a massive problem of bling weddings in the boom and by God they’re not keeping those rings. The whole thing was ready made for Liveline, and no doubt whoever got the last chance to Talk to Joe would have a major influence on the eventual public attitude to the bill. That may be par for the course in Ireland, but in this case the departure of the popular understanding of the bill from its substantive effect is striking. For while the bill is well on its way to being viewed as an essentially Dickensian framework in the popular media, according to the just released opinion of the ECB on the bill, it risks being a disaster for the financial sector and the mother of all loopholes for medium-sized property speculators.
Friday’s Irish Times had an article on the ECB’s legal opinion on the bill, but it really doesn’t bring out the starkness of what the ECB actually said in what was technically a letter from Super Mario (Draghi) to Michael Noonan:
The ECB notes that the PIA (personal insolvency arrangement) will apply to an arrangement which, inter alia, has satisfied the criterion that the aggregate of a debtor’s debts which are secured debts is less than EUR 3 000 000. In the ECB’s view, the potential inclusion of such large amounts of secured debt in the PIA, including debt relating to a debtor’s quasi-commercial transactions, i.e. ‘buy-to-let’ mortgage loans, is unprecedented and may have significant financial implications for creditor banks if it results in deteriorating payment morale of debtors. The ECB notes that the threshold of EUR 3 million represents by many times the average amount of secured borrowings by customers of Irish banks. If made use of by large numbers of debtors, the PIAs could significantly increase default rates and thus impact on both the capital adequacy and liquidity position of credit institutions at a time when they are still undergoing restructuring. Furthermore, in order to qualify to make a proposal for the PIA, insolvent debtors must, inter alia, declare that they have cooperated for at least six months with their secured creditors as respects their principal private residence. It is not clear to the ECB why the evidence of good cooperation by debtors with their creditors should only be relevant when it concerns secured debt relating to a debtor’s principal private residence and not to other debts which are owed to creditors and which could be more significant. The ECB considers there is a case for debtors to be obliged to show that they have engaged in bona fide debt negotiations for a reasonable period of time with a majority of their creditors.
In other words, despite all the focus on bailiffs literally after the family jewels, the real action in the bill is the way it shields secured debt i.e. the ability of a borrower who got a loan against specific assets to then retreat behind insolvency proceedings when the bank comes looking for the asset in lieu of payment. And what’s attracting attention is not the principle, but the size of the limit: you could shield a lot with that 3m euro limit. Add to that the provision that a borrower only has to show cooperation on the debt on a principal residence to get the whole lot put under bankruptcy protection, and you have a regimen that makes your ordinary decent property speculator far better off than his large speculator cousin forced into battle with NAMA.
Now it’s possible that from the government side, all this counts as a feature, not a bug: a backdoor way to implement massive household debt relief in Ireland. That doesn’t explain why the limits in the bill are so generous but as a result of the way the debate has gone, we’re all chasing shiny objects, those Celtic Tiger bazookas, and not focusing on who might be getting a windfall now, or whether the incentives in the bill might be enough to wipe out the mortgage assets of our expensively rescued banks!