Jill Kerby

The expression ‘zombie bank’ has been doing the rounds in recent months as lending nearly dries up altogether, except for the most credit worthy, income secure, borrowers.  

 

And even for those people, they could be very unlucky in their choice of lender, as one Dublin couple who wrote to me last week discovered recently. 

 

This couple, both in secure jobs and able to meet all their mortgage repayments, are now in the clutches of their zombie bank – Permanent TSB – because the value of their mortgage now exceeds the estimated market value of their home.  They have no need or intention to move, they say, but they do need to choose a new mortgage rate option now that the two year fixed rate that they took out two years has matured.  

 

“At the time [two years ago] money was very tight for us and we were very cautious in relation to our financial commitments.  We looked at every aspect of every loan offer available to us and having done this we decided that we would use Permanent tsb because what they offered – 4.99% for two years - suited us and was within our means. Needless to say we have honoured all of our financial obligations.”

 

 

Now, however, the bank has presented them with a list of six new rate options that vary from a tracker rate that is 2.5% above the ECB rate and higher than even variable rate loans being offered by other banks, to a seven or 10 year fixed rate of a whopping 6.1%.  Even if they simply replaced their existing two year fixed rate with a new one, they would have to pay 5.25% instead of 4.99%, and this at a time when the underlying ECB rate has never been lower. 

 

 

Because their house is caught in the negative equity trap - along with 339,000 other home owners, according to Daft.ie economist Ronan Lyons (see http://ronanlyons.wordpress.com/) - no other lenders (lenders like AIB and Halifax, who are offering the most competitive two or five year fixed rate of 3.10%) will touch them. 

 

 

“This [negative equity] is not of our making. Not only can we not sell the house … Permanent TSB can call the shots. We are very hard working, responsible people but we are not happy that our freedom to negotiate the interest rate has been unilaterally removed from us.”

 

They included the angry letter of complaint they sent to the Financial Regulator in which they demanded that PTSB be forced to offer them a better rate commensurate with those of other banks. Sadly for them, this will not happen.  The PTSB is no position to offer attractive, competitive lending rates; even those banks that are advertising lower rates are doing so partly because of the government bail-out they’ve received and they are still being hugely selective in who gets the money. 

 

Perhaps the best outcome for this couple would be if PTSB ended up merged with another bank or building society – most likely the EBS – and their toxic loans were quickly taken over by the debt management agency, Nama.  Then, perhaps, more affordable rates and products could emerge.  

 

With Nama having it’s own problems, they shouldn’t count on moving house…or lender anytime soon. 

 

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The Hospital Savings Fund, the charitable trust that was set up in the 1870s in the UK to help the working poor secure hospital access by making small weekly payments into the fund, celebrated its 60th anniversary here in Ireland with a lunch at Dublin’s Mansion House, hosted by the Lord Mayor. 

 

It was as modest an affair as the organization itself, which these days, despite having 100,000 members, is practically unknown among the wider population, despite the fact that one in two Irish people are the holders of comparatively expensive private health insurance. 

 

The HSF (www.hsf.eu.com/ireland/) pays tax-free cash benefits to members for a wide range of hospital and outpatient treatments and services and only charge a single premium that covers the entire family. 

 

But as executives who flew in from the UK to attend the Dublin celebration didn’t seem to me to be aware of how serious the unemployment and economic situation here really is, and even admitted that they’ve tended to rely on their strong links to trade unions and word of mouth for a large part of their business. 

 

They claim that membership is still growing (even after taking into account their takeover of the other health plan operator HSA Ireland last year) but they don’t seem to be factoring in the sharp fall in income and jobs here, or the fact that three health insurers are now fighting for every piece of business and are spending huge amounts of money to keep their brand in the public eye. 

 

This is a good, affordable product for anyone who is finding it hard to keep up with the ever-rising cost of their private health insurance, but unless more people know about them, HSF will remain a niche player in what is still a disproportionately large health insurance market for such a tiny population. 

 

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The country’s defined benefit (DB) pensions crisis hasn’t gone away you know – it just seems that way. 

 

The shocking revelations that many Waterford Glass workers and those at SR Technics would end up without their full pension entitlements after a lifetime’s work, brought home the grim truth that workers in companies with defined benefit pensions – 90% or more of which are currently underfunded - could lose not just their jobs if their firms went bust…but their retirement income as well. 

 

Under considerable pressure from the employers, trade unions and pension fund managers the Pensions Insolvency Payment Scheme (PIPS) was quickly passed as part of the amended Social Welfare and Pensions Bill 2009 at the end of April.  (The funding standard had already been eased.) 

 

The Irish Association of Pension Funds in particular have been calling for a fairer distribution of pension fund assets when a company is wound up for some time.  Before this existing pensioners and their benefits were ring-fenced and any money left over once they were paid was only then distributed to active and former workers.  Now, existing pensioners may have to forego indexed increases, for example, in order for workers behind them to receive a greater share of the pension pot in the event of a winding up due to insolvency.

 

Meanwhile, the pension trustees can now also tap into the resources of the National Treasury Management Agency to purchase lower cost pension annuities for retiring workers.  

 

These issues and many others to do with low pension coverage here and even whether it would make sense to just beef up the old age pension, were to be addressed in the long overdue Pensions White Paper. 

Now the Department of Social and Family Affairs says there is no date set for its publication– the consultative green paper process has taken nearly three years already – and industry sources say the delay is to accommodate the report of the Commission on Taxation which is not expected before July. 

 

Too much attention, says pension specialists has already been focused on the €3 billion worth of tax relief given for private pension contributions, which they say is more widely distributed than it’s detractors claim and if reduced would simply result in fewer pension sales. 

 

However that row is settled – and in this climate of antipathy to anyone earning over the average industrial wage, it doesn’t look good for higher earners – the government might still want to reconsider putting one of its known time-bombs on a back burner while it tries to put the pin back into all the new ones that have been thrown into its lap.  

 

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Over the past year financial advisors have been scrambling to try and come up with a better solution for their anxious clients than just switching them into cash deposits or funds and out of volatile – and collapsing – equities. Falling interest rates and rising DIRT tax shows just how unsatisfactory such a strategy could be over the longer term. 

 

It’s no wonder that the better informed advisors are taking a much closer look at various bonds funds – government and corporate – for their clients and not just those approaching retirement. 

 

Bonds are not a widely held asset by ordinary investors here, who aren’t particularly well-informed about the merits of different assets anyway, though they’ve always made up a small part of the ubiquitous managed fund that people buy to fund their children’s education or for other longer term savings. 

 

In recent years some better informed trustees and pension fund managers have shifted huge occupational pension schemes exclusively into bond holdings (as they do on the Continent) because of the combination of longevity risk, the sponsor company’s funding obligations and flat or poor stock market performance over the past decade. 

 

The danger of large cash holdings, say an increasing number of financial advisors, is the price inflation risk that is building as the world’s central banks force up the money supply with near zero interest rates and massive debt financing of the insolvent banking sector. 

 

As this money spills into the wider market place, our cash holdings will devalue with the falling value of currencies.  Inflation-linked bonds – which offer protection from inflation that might impact negative on both the coupon (your annual interest) and the bond’s capital value could be a better line of defence than ordinary government or corporate bonds, I’ve been told. 

 

 

Anyone interested in a defensive investment position (that is if you don’t think the latest stock market rally is going to last) should speak to a good independent financial advisor about the merits of bond holdings.  You can check out a low cost inflation-linked bond fund for Irish investors from iShares here to get an idea of what protection it offers: http://uk.ishares.com/content/stream.jsp?url=/publish/repository/documents/en/downloads/factsheet_global_inflation_linked_bond.pdf

 

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I’m looking forward to seeing the new theatrical version of The Shawshank Redemption at the Gaiety Theatre – I’m a big fan of the movie.  

 

Clearly, so are the chancers behind ‘Dufresne & Andy International’, the American boiler room operation that was added to the Financial Regulator’s list of unregulated companies last week after they were found to be cold-calling Irish investors: ‘Andy Dufresne’ is the name of the leading character in the prison drama Shawshank Redemption. 

 

And if anyone from Ellis Boyd & Redding should subsequently give you a ring, ask them to put Morgan Freeman on for a chat.  The great American actor played Ellis Boyd ‘Red’ Redding, Andy’s closest friend and mentor in the film. 

 

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In a week in which the doctors and nurses unions got together to warn us to expect even worse health care delivery over the next year due to budget cutbacks, it was encouraging to see that that Hibernian Aviva Health has decided to not just finally simplify and improve its product range, but to also lower its prices, however slightly. 

 

With this move last week, private health insurance brokers and consultants say that Hibernian has laid down the gauntlet to the state owned insurer Vhi. It’s certainly pulling out all the stops with a more transparent range of products, lower prices, and a big advertising and a cross selling campaign that harnesses its huge sales distribution channel. 

 

Anecdotally, brokers say they are selling more health insurance contracts these days than pensions and savings policies, even with record unemployment numbers.  It should be even easier now that Hibernian acknowledge, like their other rival, Quinn Healthcare, that what the great middle ground of consumers want is a good basic hospital plan or a good composite hospital and outpatient plan in a single wrapper with two competitive price points. (Despite the dozens of combination plans of plans available, over two thirds of the two million private health insurance members own Vhi Plan B or Plan B Options and the two Quinn Essential and Essential Plus plans.

 

One independent health insurance consultant claimed last week that Vhi, as the largest and most expensive provider, “is coming under so much pressure from Hibernian in particular on the vital corporate side of the market that it has been forced to adjust the cost of its corporate plans.”  Earlier this year it cut the price of child member premiums, a response to cheaper offers from its rivals. 

 

Nevertheless, the price differential between the Vhi, and Quinn and Hibernian, is growing so large that the Vhi is said to “hemorrhaging members” said the consultant, something that will only be confirmed when the Health Insurance Authority produces it’s next report. 

 

In the meantime, says fee-based health insurance broker Dermot Goode of www.healthinsurancesavings.ie, families in particular should take note of the latest cost comparisons: two adults and three children will save €455 in the space of a year by switching from Vhi’s Plan B at €2,520 to Hibernian’s new Level 2 Hospital plan at €2,065 and €186 by moving from Quinn’s €2,251 Essential Plus plan. 

 

It wasn’t long ago that a savings of €455 may not have been enough to shake off a member’s inertia, says Goode, but thanks to the April budget, “that’s the kind of money some families are losing every month to the new income tax and health levies.” 

 

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Anyone with a property down payment that’s burning a hole in their pocket should take a careful look at the latest Daft.ie National Rent Index survey.   

 

The 5% fall in rental yields nationally in the first three months of this year and 15.5% in the year to date isn’t just a phenomena of the rental market; it also reflects the general state of the market which in some areas is reckoned to be down 40% since it’s peak in late 2006. 

 

If this negative price pace continues over the next three quarters, rents, which are now averaging €840 a month, could drop by a further 20% in 2009.  With twice as many rental properties available than there were in 2008 and so many thousands of empty properties not even on the rental market, the buy to let market looks dead in the water.  Negative equity is the risk that the investor or owner-occupier takes if they try to wade in without at least a 20% deposit.

 

The banks – which were falling over each other to approve all those 100%, interest-only landlord loans – also share that view.  Despite the fact that rents are crashing, they have declined to pass on the substantial ECB rate cuts to buy-to-let clients with variable rate mortgages on the grounds that – wait for it - this would be irresponsible lending at a time when prices are declining. 

 

The only winners in this collapsed market are residential tenants of course, who, unlike their commercial equivalents are not hamstrung by long, inflexible leases and upward only rent reviews. But they still shouldn’t be tempted to jump into the market just yet.  The Daft report is one of the best indicators of the fundamental weakness of the wider property market and rising unemployment by itself will keep forcing rent and purchase prices lower.  

 

The time to buy – either for yourself or as an investor – will be when the historic ‘mean’ is reached again; that is, when a mortgage can be arranged that accounts for no more than three or four times the buyer’s annual salary or when the price of the investment property accounts for between 12 and 14 times the annual rental yield.  In other words when someone on €40,000 a year can buy a home for €160,000 and a property that generates the Daft average rent of €840 a month sells for between €120,960 and €141,120.

 

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An ATM card isn’t much use when it’s in your wallet at the bottom of the Canal du Midi in France or it’s been gobbled up by an ATM machine in Italy on the Friday evening of a bank holiday weekend.  Up to now all you could do was use your mobile phone – if you had one – to cancel the cards and ask for replacements. 

However, if you are one of the 52,000 Permanent TSB customers who loses their card every year (but not their mobile) you can now use your mobile to text yourself access to up to €100 a day of emergency cash for five days from any PTSB machine.  

And even if you lose your phone you can get someone else to text your account for you.   I expect this one will be rolled out by the other banks – and the sooner it includes international ATMs the better. 

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It would be nice to think that everyone has come to grips with the increased income and health levies that were announced on April 7th, but if anecdotal evidence I’ve accumulated just by talking to friends and acquaintances is anything to go by, many people still seem to have only a vague idea of exactly how much more tax they’ll be paying from this month. 

 

 

Am I surprised?  Not really.  The vast majority of PAYE workers can’t say exactly how much the earn in a year –say, to the closest €100 – and certainly not how much income tax and PRSI they were paying even before the emergency budget. 

 

 

I expect this might change by next June 1st when everyone has had a chance to see a full month’s impact on their pay packet. 

 

 

Even those who can recall the budget night soundbite - that the emergency taxes will cut a month’s pay from their annual salary - don’t necessarily believe it. One friend of mine who with his wife earns over €150K a year, was convinced they would only (sic) end up paying an extra €6,000 or €7,000 in tax this year.  Not when the PRSI ceiling change, the higher health levies, and the loss of mortgage interest relief is taken into account as well, I suggested.

 

 

I feel like a financial version of Mexican Flu these days:  every time someone stops and asks me what I think of the budget, or the latest ESRI unemployment predictions or the state of our insolvent banks, they end up feeling worse.  (I hope Des, the owner of my local bathroom supplier, has recovered from our recent encounter on the South Circular Road.) 

 

 

I don’t enjoy alarming people, I just don’t see the point in telling anyone who has a beating pulse and a vote that the current tax and debt strategy adopted by the same people who willfully got us into the worst fiscal position of any country in the western world, is going to facilitate “a recovery” here. 

 

 

It isn’t going to happen.  So long as the insolvent banks and bloated government infrastructure is kept on artificial life support care of the taxpayer and international lenders, we’ll just have to get used to the idea of the opposite of recovery – perpetual collapse.

 

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Those of us still working are doing what any sensible person would do during an economic super downturn:  cut down on discretionary spending in favour of more saving. 

 

A survey by the Danish-owned mutual bank, NIB (it’s important to make the distinction these days), claims that the national savings rate is back up to a respectable 10%, from a 2007 low of just 3%.

 

It also reports that the average Irish household has lost €150,000 worth of wealth, mainly due to the collapse of housing and pension fund values.  But more savings is exactly what needs to happen everywhere if a functioning and sustainable global banking system is to ever re-emerge. 

 

 

Much as President Obama would like to see us all returning to those heady days of super-sized borrowing and spending, American (and Irish) consumers know that it’s all behind us. 

 

 

It seems the banks know it too.  Ulster Bank is the latest to set up a debt help centre and website to assist customers that are having trouble coping with their debts, or might be if they lose their jobs. 

 

 

To give them their due, Ulster Bank asked MABS, the Money and Budgeting Service to help them with their staff training and the new “Money Sense for Adults” is the grown up version of a programme the bank introduced for secondary students before the crash.  Like the ones that NIB and even AIB have set up, the service extols the virtues of careful budgeting, lending and debt management, and more savings, of course. 

 

 

 

The cynical reaction would be to wonder why Ulster Bank didn’t have a mandatory ‘Money Sense for Bankers’ course in place these past few years, but people who are trying to find a way to maneuver themselves out of a debt hazard might find a site like this quite useful. 

 

 

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Finally, some good news for property speculators. It’s official: the cheapest real estate in the western world is in Detroit, once the greatest industrial centre in America.  

 

 

I first mentioned blighted Motown properties in this column over a year ago when a 20 storey, 1920s, art-deco skyscraper there went on sale for about $2.5 million dollars.  

 

 

Now, some foreclosed properties in decent Detroit neighbourhoods like Wayne County, as opposed to inner Detroit’s truly scary slums, are selling for less than $10,000-$20,000 according to the US Department of Housing and Urban Development(HUD). (See www.homesales.gov/homesales/mainAction.do and follow the links to Michigan and Detroit) 

 

 

I came across foreclosed houses on this site, on streets adjacent to where my own American family live that are over 2,000 square feet in size, have three and four bedrooms, and are selling for less $15,000.  Many are in a very poor state of repair and have back taxes that need to be cleared, but the land and fittings alone – the lead on the roof, copper pipes, are worth more than the asking prices. 

 

 

Specialist estate agents like www.helpbuilddetroit.com are now taking orders from national and international buyers for the foreclosed properties that they source from banks and HUD.  

 

 

Dublin and Dubai bubble “investors” may want to take special note: this is what ‘rock bottom’ really looks like. 

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Last week, Bank of Ireland Life launched two new capital guaranteed tracker bonds, those tired, opaque, derivative investments that promise to return your money after, typically, four to six years terms but put a ceiling on any growth the tracked indices of stocks may earn (if you’re very lucky)and pay no dividends.  

 

 

I’ve never thought there was an optimum time to buy a tracker bond: they are no more than glorified deposits, with a tiny portion of your stake exposed to specific stock price movements.  Whether the market was in the ascent or in decline, it was always more cost effective to put the bulk of your funds in the highest yielding savings account you could find and punt the rest on your favourite shares or low cost ETF; over six years, the yield on the savings was nearly always going to secure the capital that was tracking the shares.

 

 

With the markets so volatile, charges are still a big part of the risk you take investing in pooled funds of any kind. Some but not all life assurance companies and specialist fund managers spread their initial charges  and commissions over a number of years but too many still pocket up to 5% of every contribution as well as on-going management fees. 

 

 

The problem with trackers is that the charges are bundled into the derivative pricing and it’s impossible to compare them with the more conventional plans or to the much more transparent (and non-commission) direct, on-line providers like Quinn Life and RaboDirect. 

 

 

Quinn Life have no upfront charges and their annual fund costs are mainly in the 1% to 1.5% range; RaboDirect have just waived their usual 0.75% entry fee for the rest of this year, which is very welcome, and their fund prices range from 1% for some bond funds up to 1.75% for more specialist funds.  But the conventional life assurance providers and other fund managers are still not only charging high initial fees, but annual management fees as high as 1.75%-2% no matter whether your investment value goes up or down.

 

Bank of Ireland Life gently scolds what they call the ‘biscuit tin mentality’ that is prevailing among those ordinary retail customers who once saved their SSIA money with them, or invested to cover their children’s third level education.  

 

The biscuit tin seems a perfectly sensible option to me when not only do the fund managers – a year into the downturn – keep losing client’s money but seem to think it’s perfectly acceptable to pocket 5% of every monthly contribution and annually, another 1.5% or 2% or the entire loss-making fund. 

 

Here’s a novel marketing idea: why not announce that from May 1st all management fees will track the fund performance?

 

 

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We may all be mourning the collapse in the value of our property – it is after all, the way we measure our wealth in Ireland.   But there’s no profit in hanging onto a redundant house value if it means you’re going to overpay for your buildings insurance. 

 

 

The Society of Chartered Surveyors latest guide to house rebuilding costs shows that rebuilding costs are down 4%-5% nationally and that insurance companies should be adjusting ourpremiums on a pro-rata basis.  

 

 

The rebuilding cost of a typical three bedroom semi-detached house in the Dublin area is down about €9 a square foot to €292,500.  Rebuilding a 2000 square foot four bedroom property has fallen from €386,000 to €368,000 says the Society and it is in everyone’s interests to contact their insurer and adjust their policies, especially since the cost of home insurance has risen sharply in the past year – by 25% in some cases, according to the latest CSO figures. 

 

The substantially lower rebuilding costs relative to property market prices was always a sign of irrational house prices – and labour costs.  The boom also fuelled a great deal of inertia about how much we paid, a luxury that many can’t afford anymore. 

 

Non-life insurance premiums are on their way up – not just because of higher claims, but because the insurers are taking a hit on their investment income and from falling sales. You can check out the different rebuilding examples in the latest surveyors guide here: www.scs.ie .

 

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The higher income and health levies announced in the emergency budget will be tipping many people already saddled with substantial mortgage, car loan and credit card debt over that line between just about coping with their monthly bills and defaulting on them. 

 

Such people may want to check out The Financial Regulator’s new Recession Survival Guide (see www.itsyourmoney.ie) that deals with money management, redundancy and debt and suggests some practical ways to make savings of up to €3,000, including the old standby’s of cutting out the cappacino’s and bringing a packed lunch to work. 

 

 

But if you’ve hit a debt wall, and need more than helpful budget tips to stop your house from being foreclosed, you should get a copy of Eddie Hobb’s latest book, Debt Busters – Managing Your Money Through the Recession. 

 

 

Hobbs comes up with 192 pages of debt recovery and consolidation plans for a wide spectrum of debt experiences. He also reassures the desperate householder that they’re more likely to keep their housekeys if they voluntary present the bank’s debt resolution officer (once known as their ‘loan officer’) with a workable repayment solution than the person who does nothing but wait for the date of their mortgage foreclosure hearing before a judge.

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Last December when the Health Insurance Levy Bill was introduced, the Department of Health, which owns the Vhi and for whose benefit this bill was created, expected that it would be passed and enacted by the deadline the Dail set for it: Easter weekend.  

 

Sadly for the Vhi, but thankfully for private health insurance members, the bill, which had to be sent to the EU for a ruling to ensure that it wasn’t just a state price subsidy or loss compensation scheme, didn’t get the rubber stamp the VHI and Department of Health wanted.  

 

Instead, it seems that the people in Brussels who monitor European competition laws don’t think that this levy – which the Vhi says was to prevent them from having to jack up the premiums they charge to older members despite the presence of community rated premiums for everyone – is at all straightforward.  

 

In it’s present form, €160 per adult member and €53 for child members to be paid by the insurers and virtually all the money going straight to the Vhi, the levy certainly looks like a subsidy to the government owned insurer.  Some health insurance analysts believe the delay in approving the bill at EU level is about the unfairness of this transfer.  The Vhi, they say, is not only the dominant player in the three player Irish market, but it still isn’t under the financial supervision of the Financial Regulator, (as Quinn Healthcare and Hibernian Vivas Health are) and it is still not setting aside the full 40% of its premiums into a reserve fund as it is required to do so after an earlier EU ruling.

 

The impact of the back-dating of this levy to January 1, 2009 – without the EU go-ahead – is bad enough in that it will result in the transfer of about €35-€40 million from Quinn and Hibernian to Vhi in a full year.  But the cash transfer didn’t stop the Vhi from also increasing its premium charge by a whopping 23% from January, but not for corporate clients who appear to be receiving subsidies from ordinary members now.  This premium hike is more than twice the estimated medical inflation; the consumer price index meanwhile is -2.6%. 

 

The consequences of this levy proceeding are already well known to the cabinet, the Health Insurance Authority and the Competition Authority:  membership is already falling due to unemployment, but the higher premiums could eventually cause up to a 20% further fall in membership. 

 

All the people forced to give up their private health insurance - perhaps as many as 400,000 – this levy could end up being a very expensive way to preserve the Vhi’s status quo, but at the expense of the public health service. 

 

 

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Last week’s enthusiastic reporting in the Irish media of President Obama’s declaration that the first signs of recovery were appearing in the United States just shows you how desperate we are for some good news here. 

 

I don’t buy it for a second.  US unemployment is still soaring at about 660,000 people a month; yes, house sales rose in January and February but the delinquency growth rate among prime and Alt-A (slightly less than prime) mortgages has more than doubled; commercial property debt is exploding and personal bankruptcies were up 38% in March compared with the same time last year.  

And on the same day that President Obama was at his most hopeful, the Department of Commerce announced that US wholesale prices fell 1.2% in March, bringing the producer price index (PPI) down 3.5% year over year -  its steepest 12-month decline since 1950. US retail sales figures also fell by 1.1% last month and are down 1.2% for the entire first quarter, prompting the New York Times to comment about the “fragility” of the President’s glimmers of hope. “If consumers had turned the corner in January and February, they apparently did not like what they saw and quickly reversed course in March,” the Times quoted Richard F. Moody, chief economist at Forward Capital.

I was, however, very glad to see that RTE’s business reporter Christopher McKevitt didn’t let the Wall Street cheerleader (and securities analyst) who was brought onto the News at One to put even more spin on the President’s uplifting remarks, to entirely lose the run of himself. 

“So, in other words, all the money the US government has printed to stimulate the economy has had an effect?” asked McKevitt after all the cheering.    

“Uh, yeah,” the analyst replied. 

 

There’s a big difference between cash printed out of thin air having a short term effect on expectations, and money earned by hard work, prudent saving and investing and careful allocation to real businesses and industries (created by real entrepreneurs and not political hacks) producing a genuine recovery. 

 

President Obama insisted last week that if the US consumer will not or cannot keep spending money they don’t have or don’t wish to risk, then the US government must do so on their behalf, with money it doesn’t have either but will borrow, print or confiscate.  (If our government could have done the same, rest assured, they would have.)

 

If anyone can really spell out for me how the world’s salvation lies with such a plan, or in our own case, the taking on of €80 billion worth of overpriced property and land, which looks like it might cripple my grandchildren with debt, do let me know.   

 

I’m as keen as the next person to see a light at the end of the tunnel, a glimmer of hope, a green shoot.  

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It’s easy for the Minister for Finance to say that the tax increases introduced on Wednesday will only bring people back to the tax levels that they were living with two or five or eight years ago, depending on their level of income.

 

The problem is that these same people went and committed much of the tax reductions they were awarded – and encouraged to spend, remember – on mortgages and car loans and crèche fees that still have to be paid every month. 

 

Some mortgage holders on variable or tracker rates have been extended a lifeline by the ECB in the form of seven interest rate dropsand these will help to   buffer the impact of the doubled income and health levies levies, though God help the homeowner who locked in their huge mortgage at a 5% fixed rate last year and now can’t get out of it. 

 

But even that extra €400-€450 interest savings for the typical €250,000 mortgage holder couple won’t offset the budget increases if their incomes exceed €75,000, the tipping point for the 4% levy (and higher PRSI liability) or if they are public servants and are already stunned by the c€4,000 net pension levies introduced last February. 

 

Include two young children into this scenario, with €1,000 in early childhood payments gone for 2009 and €2,000 next year and the proverbial garda/nurse couple with combined income of about €80,000 will have to scramble around to find about €9,000 over a full year to meet all their tax, pension bills and current child-care bills. (I’ll believe that single year state crèche announcement when it’s up and running.) 

 

Even these figures don’t take into account the upcoming property tax, the further loss of the child benefit payments (of €3,940 for two children) and the possible loss of all mortgage interest relief. 

 

More money had to be found to meet the deficit, but it’s come from the wrong source and these are staggering sums in a single year. 

 

Since housing is the biggest expenditure homeowners have, and interest rates will not remain this low forever as the US and other governments scramble to inflate the money supply with trillions of dollars worth of bail-outs and loans, Irish homeowners might want to lock in their interest rate gains by securing fixed rate of 3% or less. 

 

If you’ve already seen a drop in income, or a partner has lost their job and you can’t repay your mortgage – but genuinely believe you have a good chance of finding a new one - prepare a budget and refinancing proposal for your lender and tell them you will pay what you can.  If this isn’t a realistic prospect, you should realistically consider a voluntary default arrangement with your bank that involves a rental, buyback option so that you don’t become homeless. 

 

The second family car may have to go and the overseas holiday.  Middle-income parents that were already struggling to pay private school fees may want to reconsider this hefty expenditure (especially if they have more than one child enrolled) and start planning on how to pay college fees from next year. 

 

The airwaves have been full of shocked tax-payers in the vulnerable 25 to 50 age group this last week who admitted they were already living paycheque to paycheque. They must now do what the government did not do on Tuesday: cut their expenditure to the bone and face their creditors head on.

 

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Two recent surveys, from the Financial Regulator and Postbank, were lost in the run-up to the emergency budget but need to be revisited in light of the amount of extra money that is now going to be sucked out of the consumer economy. 

 

The Regulator’s survey on our financial capability revealed that fewer than half of us (46%) are able to keep track of our finances and nearly six out of ten have made no provision for a drop in income. 

 

Meanwhile, the latest savings index from Postbank, showed that 60% of savers don’t know what interest rate they are earning on their deposit funds and are probably just as much in the dark about the fact that the Dirt tax of any interest earnings went up from 20% to 23% last October and will now be subject to 25% tax.  That said, a bigger number of people surveyed by Postbank say they are increasingly worried about the safety of their money in those bank accounts, despite the 100% guarantee on all Irish banks and An Post savings, including Postbankaccounts.   

 

Is this money safe?  Well yes, so long as the government’s original €400 billion guarantee for Irish bank deposits and liabilities up to the end of next year stands up and from this week, the five year guarantee of the specific €80-€90 billion toxic property and construction debt that’s been crushing the Irish banks. 

 

Personally, I’ve made sure that my savings are mainly outside the Irish banks and in those that are not carrying the same legacy of catastrophic sub-prime or property-related debt as the Irish ones or some of the international banks operating here.  I’m also attracted to the fact that these other non-Irish institutions (and Postbank, where my son is about the open his first solo bank and savings account) never had boards stuffed with overpaid and clearly incompetent directors and executives.  

 

(For the record, I write a column for the web-magazine of one of these banks, RaboDirect and have another column in the regional press that is now sponsored by Postbank, but I’d also like to say that the interest I’m earning is less than that offered by Anglo Irish, AIB or Bank of Ireland, the three most indebted banks.)  

 

If this budget doesn’t focus people’s minds on the need to pay attention to their personal finance and their return on their money, I don’t know what will.  

 

Get your heads out of the sand.  Face up to your debt and your falling standard of living.  There is more bad news to come in six months time.

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There will be no middle ground to flee to after next Tuesday’s mini-budget: either the government will get it right and the economy will be put on the road to recovery, or, to paraphrase the Czech prime minister, we will be on “the road to hell”.

He was referring to the multi-trillion borrow and spend stimulus strategy of the Americans, but it’s just as apt in the Irish context.  Our government has given us plenty of notice that it will borrow, tax, and cut its way to put us on the correct road to recover and on Tuesday we will finally know to what degree. 

This is expected to be the first year of a five year process, but how long are we to wait before we can see that we are on the right road…or that the tarmac is burning up beneath our feet?

I’m worried about the way the government action plan has prioritised borrowing and taxing ahead of the cutting part. As anyone who has been reduced to a three day week or has been handed their P45 knows, when your income has been catastrophically reduced, you cut out all the spending that you could once afford, but now cannot. 

Within government itself, that means that the excessive number of legislators and their overly generous salaries, expenses and pensions has to go; the additional public servants and departmental quangos that were hired during the property boom years and fuelled by the huge tax take also needs to be reduced. 

Before income taxes are hiked and more money sucked out of the economy, the government should consider selling off the ESB, Bord Gais, Bord na Mona, Coillte and the VHI. Perhaps it can be done this time without the mess created during the Telecom Eireann and Aer Lingus privatisations.

 And does a country of 4.4 million people, with no known enemies but a mostly friendly nuclea neighbour really need a highly trained, national police force with 30 years of anti-terrorism experience AND a billion euro a year standing army?  I don’t think so.  (But we should keep the coast guard and helicopter service and if needs be, beef up the Gardai with ex-army recruits.)

Meanwhile, only those parents who cannot afford to feed, clothe or house and properly educate their children out of their own financial resources should receive child benefit payments from next week.   All the hundreds of millions of euro paid out in property tax relief should be abolished too, if only to hasten the fall in our still artificially high property prices. Only when the cost of houses reverts to the mean in this country – no more than three or four times the buyers’ income – will the crucial housing market start to recover. 

Private health insurance subsidies should also go, but only in conjunction with the introduction of universal health insurance for all and a commitment by the government to get out of the health delivery business and to accept the role of supervisor and regulator only (as they do, thank goodness in the delivery of food services.)  This would save the country billions, but it would also force us to accept more personal responsibility for the state of our health and to be honest about the level of personal financial sacrifices we are prepared to make in exchange for a first world health service. 

Should the mini-budget cut the €3 billion tax incentives private sector pension fund holders currently get?  No. Not because the €3 billion is fair – it isn’t, but because this should happen on in the context of a complete overhaul of the pension system – the one that applies to public sector workers, the private sector and to old age pensioners. 

Ironically this is currently underway, but it’s moving at a snails-pace; that process needs to be speeded up, not undermined by the mini-budget. 

The easy route for this panic-stricken government on Tuesday will be to increase and extend income levies and other taxes, rather than drastically cut spending and begin the even more necessary action of widespread tax and government reform.  

Since there is no example anywhere of an economy in the midst of a deflationary prices and earnings downturn getting out of it by imposing higher taxation on an increasingly shallow pool of workers, I’m going to make one more suggestion:  aside from cutting our fiscal spending to the bone, the Minister for Finance should actually cut income and employment taxes and see where that leads us.  

I’m convinced, like the Austrian School economists who recommended these measures at the height of the last Great Depression, that it won’t take us down the road to hell. 

It’s just a pity the Minister for Finance and the cabinet haven’t a clue who they are. 

 

 

 

 

 

 

 

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Late last Monday evening, because of the taxi strike, I ended up driving myself to the TV3 studio and the Vincent Browne Show where I was appearing.  

 

Since I always have a radio playing, the first thing I heard after I turned on the ignition was a cheerful, and highly ironic ad for a Dublin taxi company that is currently offering a 20% discount on all their metered fares between now and December. (You can call them at 820 2020).

 

‘Why pay over the odds?’ was the gist of the message.  Why indeed, with such a multitude of taxis on the streets of the capital (when they are aren’t striking, that is).

 

I have a lot of sympathy for those full time, professional taxi drivers whose incomes are shrinking due to the recession and the continuing numbers of plates the regulator is giving out to part-time drivers. 

 

But their protest is misdirected:  it is the regulator, not the public who deserves their abuse. It is she – and not the public  – that has artificially skewed their industry by not just determining how many drivers there will be, but by how much they must charge as well. 

 

Take away the artificially imposed meter rate, and the market – the drivers and their passengers freely deciding how much to charge and pay – will eventually solve the problem of too many drivers chasing a diminishing amount of business and those excess drivers and plates will disappear

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If Eugene McErlean’s charges against his former employer, AIB, hold up, then it will certainly add more weight to the growing evidence of incompetence, at the very least, on the part of the Financial Regulator. 

 

Mr McErlean, who was group internal auditor in AIB from 1997 until 2002, claimed last week before the Oireachtas Joint Committee on Economic and Regulatory Affairs that the Regulator failed to properly investigate or report the overcharging and share dealing irregularities that he brought to their notice in 2001. 

 

Not that anyone in the Joint Committee seems particularly interested in what Sean Citizen thinks about the shortfalls of the nation’s banks or its regulator, but perhaps they should ask one or two such people to their meetings, people who over the years have had money stolen from their accounts in the form of grossly inflated fees or higher than expected foreign exchange commissions. 

 

Our legislators could even invite the regulator’s own Ombudsman to join in; a person with an impeccable public reputation – and I genuinely mean that – who  could supply them with plenty of cases of ordinary folk who have been devastated by the terrible investment advice they were given by the bank’s life assurers.  Tens of thousands have lost c40% of the value of their managed pension funds over the past year, but to this day are still being charged exorbitant administration and fund management fees that copper-fasten these losses. 

 

It isn’t just on the banking side that the regulator is losing the plot: last week, the regulator’s consumer office published the finding of a ‘mystery shopping’ exercise it did last November, in order to see how well or badly the banks handle the banks’ own personal bank account switching procedure. 

 

Of the 51 different branches of the seven banks visited, just 59% of them – less than six out of ten – were doing it right.  The others didn’t have the switching packs at hand; staff were unable to provide any information; they discouraged the switching based on the information provided or actively discouraged the switch. 

 

Not only does the Regulator not name the offending banks, but it doesn’t even comment on why their mystery shoppers may have received such poor service.  There’s also no suggestion of a scolding, let alone a genuine penalty, like requiring the banks to withdraw the staff concerned and retrain them, or even pay compensation to the inconvenienced customers.  

 

In case the acting Regulator, Ms O’Dea, is still scratching her head in wonder at this survey result, let me enlighten her: the banks sign up for all sorts of voluntary codes, but that doesn’t mean they like them. Maybe four of the 10 branch officials who failed the test were - quelle surprise! - simply following orders to not facilitate customers moving their business to a competitor. 

 

Mr McErlean’s allegations of a cover-up have yet to be proved, but consumers know by now that even when Regulators appears to be doing their job, it doesn’t necessarily mean that anything is going to change for the better. 

 

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It’s ISA season again in the UK – when anyone with some spare cash puts it into their tax-efficient individual saving account that comes in a simple, deposit version or a range of individual shares, bonds and investment funds.  

 

The amount you can save or invest tax-free is reasonable – the ISA is no millionaire’s tax shelter – but over a period of years if you can afford to divert up to £3,600 in cash or £7,200 a year into a riskier investment fund or shares, you can end up with a substantial nest egg, with which to buy a home, fund higher education for your children or put away for retirement. 

 

Sounds familiar doesn’t it?  Remember the SSIA scheme when over 1.2 million of us were happy to save up to €3,000 a year (with the 25% top up by the exchequer) for five years?  Thank goodness for that scheme now – it’s paying off debts and paying groceries for people whose incomes have been cut or lost altogether in the last year. 

 

The only way we – and the rest of the indebted world is going to genuinely recover from the extraordinary spending binge of the past decade is if we own up to our mistakes, pay off or write off our debts and start building and restoring our savings accounts. 

 

What better way to do this than to set up our own version of the ISA, however modest:  it’s enough that the money going into such a fund will be as heavily taxed as it will be after the mini-budget is finished with our finances next month. A little tax-free savings scheme will at least give some promise that ‘this too will pass’, and that there will be a future worth saving for. 

 

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This latest trillion dollars worth of quantitative easing – printing money from thin air, to you and me – as part of President Obama’s campaign to bail out toxic mortgage debt held by insolvent banks and insurers in the United States, is expected to have the eventual effect of causing all sorts of corporate and individual debt to be inflated away. 

 

But, say the plan’s critics, once this money spills over into the wider investment market, it will force consumer prices up too, especially the price of oil as investors and traders pile into this essential commodity which, like gold, is a reservoir of real, intrinsic value (unlike paper money). 

 

Anyway, if that isn’t enough to convince you that oil prices are sure to rise again, how about the news that the Tata Motor Company of India now expects to attract 500,000 orders of their new Nano, the no-frills, but cheap and cheerful little four seater car that was launched last week for just $2,500.

 

Highly fuel efficient already, that number of family-friendly Nano’s are still going to need a lot of petrol until a viable alternative fuel can be found.  This is all good news for anyone who is adding Exxon, BP and Royal Dutch Shell to their share and pension portfolios or buying oil ETFs – one is even listed on the Irish Stock Exchange. 

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Is this the start of a genuine stock market rally or just another false dawn?  Is it a chance to buy world leading shares that are now at bargain basement prices or a signal that you might be able to recover some of the losses of the past year? 

 

 

Pension fund holders in particular, who may be about to lose some of the tax incentives associated with their pension when the mini-budget is announced next month, are especially keen for some answers: their retirement is at stake. 

 

 

Yet trying to time the stock market correctly is such a mugs game and even the world’s most successful investor, Warren Buffett, admits that he was ‘premature’ in thinking that stock prices had bottomed out last November when he went on a multi-billion dollar buying spree. 

 

 

His bearish critics still respectfully suggest that Buffett has underestimated how bad corporate earnings are going to be over the next few quarters and that this rally could end up crushing the investors it lures in, just like those who piled into the markets during the great rally of early1932 were crushed. Only when shares dropped to 90% of their original 1929 peaks in July 1932 was it worth buying again – if you had any money left. 

 

 

I’m told every pension advisor in the country is losing sleep over John Maynard Keynes’ famous saying – “The market can remain irrational longer than you can remain solvent”.

 

 

What do you tell Mr X, who turns 55 this year – and had every intention of prudently following a plan to start shifting his pension into safer assets -  but missed the boat by a year?  Do you advise him to cash out of what is left of his equity funds now, crystallizing all his losses or do you try and help him time this rally?  Is now the time to tell him to start buying those select number of genuinely blue chip shares that have never been priced so low? Is time on his side?

 

 

These are tough calls that the April budget changes could make even harder.

 

 

But my sympathy really goes to the tens of thousands of private pension fund holders who bought their contracts directly from the pension provider (or their employer did) and aside from an annual performance statement, have never heard from them again. 

 

 

In an ideal world, life and pensions companies would be earning their on-going fees and commissions by contacting fund-holders in the 50s and offering to help them work out a new investment strategy. 

 

 

Since there is absolutely no sign of this, and no sign that the Financial Regulator is doing anything about it  -  I think orphaned pension fund holders should be demanding, en-masse, that the ongoing, but unearned fees that they are still being charged be scrapped, or the very least, be refunded. 

 

 

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Still don’t have an emergency fund stuffed with three to six months worth of net income?

 

I’ve already recommended that you extend the term of your mortgage and make interest-only repayments in order to bank the extra cash – an idea that the Financial Regulator subsequently endorsed. 

 

In America, where savings are a fraction of what they are here and where foreclosures or arrears now affect one in every nine mortgage holders, people are turning to a different source to build their emergency fund: their Visa or Mastercards. Thousands of working Americans who are living from paycheque to paycheque are now drawing down the maximum approved credit line off existing and new credit cards and banking this money.  

 

 

The spread between the card interest rate – typically 11% or 12% compared to the 1%- 2% deposit rate – is huge, but the card-holder doesn’t care, reports the Wall Street Journal website, Marketwatch.  So long as they can juggle the minimum monthly re-payment, a la Peter-paying-Paul, the fund can keep building.  Even if the worst happens – bankruptcy – the unsecured credit card debt is usually discharged. 

 

 

This is surely a credit line of last resort (especially if legal action can’t be taken for at least 12 months if you fall into mortgage arrears with AIB and Bank of Ireland. 

 

 

But desperate times provoke desperate measures, especially when a long-standing family home is at stake.

 

 

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I’m all in favour of house prices falling back to their natural pre-bubble levels – and as soon as possible.  I have a young friend, newly married who has a downpayment burning a hole in his pocket and is positively salivating over showhouses that he and his wife keep visiting on weekends.  His parents (and me) keep telling them to wait – prices will keep falling – but they’re pretty fed up with this message. 

 

The crux of the matter is that the housing market isn’t going to bottom out until house prices revert to about three times earnings – maybe four times in the most desirable locations. But that isn’t going to happen until sellers have thrown in the towel and reduced what are still unrealistic price tags, in spite of the 30%-40% falls that have been recorded since the property bubble burst in late 2006.  And not until the foolish low cost mortgage offers imposed on the likes of AIB and Bank of Ireland by the government in exchange for the €7 billion bail-out are withdrawn by the banks:  artificially cheap mortgage credit is what blew the bubble all out of proportion and it’s still going to keep house prices artificially high. 

 

In the UK, their Financial Services Agency (FCA) is about to bring in a rule that prevents the banks from lending more than three times income to new borrowers, which might be exactly what we need here too…though I am loathe to endorse any more meddling with the property market by our own government that has done so much harm to it over the past decade.

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