Jill Kerby

Negative Equity Mortgage?  No thank you.

 

The property market is doing as Professor Morgan Kelly predicted it would: it is taking back between 75%-80% of the spectacular prices it achieved at the peak of the bubble.

Just on cue, the government and banking industry that did everything it could to inflate that bubble, is still trying to manipulate the correction, in an effort – they say - to ‘break the logjam’ of sales.  This time it will permit heavily indebted owners in negative equity to carry their debt with them to yet another property, which will also continue to fall in price until the correction is over.

The problem is well documented: tens of thousands of mostly younger buyers purchased overvalued houses with artificially low credit. Their affordability levels - their income – was grossly overestimated if property prices fell, interest rates went up or their incomes dropped.

All three happened. The economic collapse revealed how uncompetitive the country had become and how necessary it was to freeze or reduce income (but paradoxically increase taxation to protect ‘key’ spending levels by the state - its own paybill and politically sensitive social welfare payments.)

The mother and father of all negative equity conditions now exist in this country – and will get much, much worse if and when interest rates go up.  Yet the government think letting heavily indebted owners trade up (or ideally, down) while the conditions that created the negative equity and the rising arrears risk still exist – is some kind of solution.

It is not.

The tens of thousands of first time buyers (in particular) caught by the boom need an immediate and fulsome recovery of the economy and a surge in their incomes…or they need substantial debt forgiveness.

Instead, they’re being offered another debt cul-de-sac that will give the perception that the property market can be stimulated back to life.

It can’t.

The property market will recover – naturally - when normal lending is resumed; when interest rates are not being so grossly manipulated by central banks; when the overhang of empty properties is cleared (which is happening in Dublin but not the rest of the country) and unemployment starts reversing.

Those neg-equity mortgage holders who are facilitated to abandon their distant suburbs for the homes they had wanted to buy that were closer to their jobs and parents in the city, will now end up even more indebted as the new property they buy also falls in value.

Good luck to them.

Meanwhile, the suburbs they leave will be even less attractive to live in than they are right now.

God help the poor sods they leave behind and strike up another victory for witless politicians and their creatures in central banks who endlessly subscribe to the Law of Unintended Consequences.

 

Misery loves company: Financial companies to be ‘named and shamed’

The decision to introduce legislation that will allow the Office of the Financial Services Ombudsman to name and shame financial institutions that it finds against has taken 20 years longer than it should have.

Better late than never.

When the first ombudsman’s offices were set up back in the early 1990s by the banking and life assurance industries, there was never any question that their members would be named and shamed.

Everyone maintained that the ombudsmen would be wholly independent of their paymasters, but there were just too many categories of complaints that were excluded or beyond their remit. The penalties were not onerous or high enough.

That isn’t to say that a good job wasn’t done within those limitations. 

Many complainants, in the years before the statutory IFSRA (Irish Financial Services Regulatory Authority) ombudsmen were set up in the early 2000s told me they were very satisfied with the investigation and settlement of their complaints and the published judgments appeared to be measured and fair.

But everyone also knew (the way everyone ‘knew’ that Charlie Haughey was on the take) that there were certain institutions – usually banks and their life assurance subsidiaries – that were chronic abusers of their own industry’s voluntary codes of conduct. But self-regulation has a funny habit of stacking the deck in favour of those who are being regulated, no matter how honourable and hard-working the ombudsmen and their staff doing the investigating.

When you pay that piper, he plays your tune.

All the same mealy-mouthed excuses were used by the State authorities when the two financial ombudsmen’s offices were taken over by the new Financial Regulator (now the Central Bank) a decade ago: that the complainants would also have to be named (to what purpose?); the firms would resist cooperating with the inspectors if there was a chance they’d see their names in lights or, worse still, as a case-study in the Ombudsman’s quarterly report (all the more reason!).

It hasn’t been determined how far the new legislation will go in the naming and shaming process, but no one gives a toss about the sensibilities of financial services companies anymore.  

The previous regulatory regime was incompetent and clearly in awe of the industry and allowed them too much influence in setting the rules and limitations of the ombudsman’s offices, especially regarding the historic mis-selling of investment products, which still needs to be addressed.

Banks, life assurance companies, insurers AND their agents always knew that ordinary folk and especially the vulnerable (like the elderly who are sold long term stock market investments) needed more protection than they ever got.

The Central Bank has been slowly but surely working its way through the banking mire that was left behind by the previous bunch, but now it is coming under scrutiny for its handling – mishandling? – of Custom House Capital. The mostly pension investors, who have lost €90 million, continued to be at risk even after the regulator discovered evidence of malpractice in 2009.

They say that misery likes company. 

The banks and insurance industry better get used to owning up to their own malfeasance, accept that the old days when they could keep repeating the same infractions year after year is finally be coming to an end, and accept that what’s left of their reputations will be lost forever, if they keep screwing their customers.

Having their ‘good’ names dragged through the mud might be just what they need to clean up their collective acts.

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Has the Anti-Household Charge Revealed the Power of the People?

 

Yesterday, a small, but good natured group of local people – with a smartly turned out Jack Russell terrier at their head - marched down the part of Dublin’s South Circular Road where I live to join the protest rally at the National Stadium.

It was a glorious day for a demo (and for gardening) and the boxing stadium attracted over 3,000 similarly inclined people from all across the country who had decided to take a stand over the €100 household charge.

But the real test of this national protest will be next Saturday, March 31stdeadline.

Will the bulk of the households of Ireland capitulate as the Minister for the Environment expect them to, cowed by his threats of unleashing other agencies of the state on them, including the courts if they fail to pay, or will the ‘We are the 80%’ hold firm and defy the minister?

First let me say that Phil Hogan seems to be is a nasty sort. Just another jumped up power monger who was elected by a miniscule number of local supporters but is utterly disdainful of the wider citizenry who continue to pay his inflated salary, pension and expenses.

He reminds me of Dick Cheney.  Enough said.

But his recent, brutish, threatening behaviour and that of the Fine Gael minions who were shoved in front of microphones after he was yanked off the national airwaves, seems to have put a little more steel in the backbones of the protest groups and many other folk (who may have been about to pay up) who dislike such blatant intimidation.

So will the majority register and pay the household charge by next Saturday?

Maybe.

It has been my experience that most people in this country are far more afraid of the State and its agents, like tax collectors and the courts, than the State is afraid of them. (Hasn’t it always been thus, even in so-called democracies?)

But this little protest has at least provided a tiny glimpse of what happens when folk are emboldened, if only for a brief moment, to threaten to cut off the state’s source of power – taxes.The politicians, whose very own livelihoods and source of power are personally threatened by this act of resistance, end up panicking.  They say the most extraordinary things (“you WILL pay, or else”) in the most menacing of tones. 

The ‘servant of the people’ mask slips and they reveal their true nature.

Since this economic depression began, the Phil Hogan’s in all the ruling parties have of course, been lucky. The USC (Universal Social Charge), a far more blunt and non-progressive tax instrument than the household charge has had a devastating impact on personal spending power and the domestic economy.  The higher VAT is further destabilising the retail trade.

Yet the USC (and 23% VAT rate) was passed, implemented and is being collected with barely a whimper because every employer also felt compelled, under fear of retribution, to hand over this money.

Self-assessment tax collections, by contrast, only work when the taxpayer themselves decide it is in their self-interest to do so. We’ll see next Saturday how many people collectively decide it is no longer in their interest or that of their families to pay this charge and instead to defy the will of the state.

I’m guessing that a large number of people who paid directly from the government payroll or whose income is mainly derived from the exchequer and therefore ripe for a little ‘withholding’ action, will pay the household charge by March 31st.

They and many others, despite their deep unhappiness with austerity and the repayment of private bank debts will also pay because they also reckon €100 isn’t worth fighting over and they always pay their bills at the last minute anyway.

That will leave the diehards. 

 

The property tax

But the entire chambolic event doesn’t auger well for the introduction of the property/site water usage taxed from next year, when real money is at stake.

If the state can’t convince the bulk of the private property owning citizenry to cheerfully and promptly pay a small charge that is clearly needed in 2012, at a time of desperate economic need by local authorities, how can it possibly imagine that the same people will agree to pay a multiple of €100 next year? 

Many people are not convinced any new money raised will improve services in their community; some believe the income tax and all the other levies allocated for local authorities is already being wasted.  

Saturday’s protest was organised by parties who are not just against bailing out the banks, but who also oppose any tax that is not progressive enough to exempt their followers as well as the unwaged/poor (who are already exempt.)

The bulk of all taxes, say the anti-household charge leaders, should always be paid for by “the rich” though they are divided on whether a property tax is ever justified, except for “the rich”. (Property tax is a tax on wealth, not labour.)

If a site tax is introduced there is certainly a risk that many anti-household tax supporters, living in modest dwellings but on valuable sites, will be required to pay more than than someone who owns a fine house on a low value site. Cue demands for average industrial wage income exemptions if that happens.

Ironically, the dwellers of the high moral ground share also share the same attributes with the Phil Hogan’s.

If they were in power they too would use threats and force to make whoever they deemed rich enough to pay for the services and entitlements they believe should be free to their followers.

If Ireland is ever going to get out of this deepening economic quagmire, the part of the anti-household charge campaign that has revealed that the people do have the ability to curb the rampant power of the government - needs to grow.

But the other side of the picture, the redrawing of the function and power of the state and its servants, in accordance of the real desire of the people, how much funding it requires (as opposed to how much it wants) and whether those funds are collected voluntarily or by force, hasn’t even begun.

Until then, we’re just a bunch of debt serfs who will be led by trumped up little dictators from either the left or right.

 

Ends

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Sunday MoneyComment – March 18, 2012

 

Universal Health Insurance? Only if there’s a true – government-free - market

 

I was stopped by a man in my local supermarket yesterday who told me that he couldn’t afford private health insurance anymore for his family. It’s just got too expensive, he said, and he insisted he knew why.

“Let me tell you a story. I met a friend recently who told me how he’d had to go to Germany for specialist treatment for prostate cancer. The cost of the surgery and treatment was all picked up by VHI – though not the flight – and for the four nights and five days it cost €10,000.

“Two years ago,” he continued, “my young son had to have a relatively minor heart condition treated in Crumlin – it was done by keyhole surgery but he was also in hospital for four nights and five days and Aviva covered the bill, which cost nearly €30,000.

“That’s why I can’t afford private health insurance anymore for my family and why 60,000 people have dropped their cover.  My friend said his surgeon said that his bill in Ireland would have been two or three times more than was charged at the German hospital. Irish doctors and Irish hospitals are killing the golden goose.”  

He’s right at least about the health service now being caught in a nasty inflationary/deflationary spiral: the more people drop private health care, the more the insurers raise their premiums and the higher the cost to the state which increases its charges to the insurers… ad nauseum.

This man’s son and his friend, like the vast majority of the other two million people with private insurance here are mainly only treated by private consultants in public hospitals and their insurance plan covers the billing of both the operation/consultant and their semi-private or private room bed (or just an ordinary bed in the children’s ward) in the public hospitals. The cost has been going up sharply in recent years since it was decided that the true price of the use of the public hospital services hadn’t been passed on.

Meanwhile, only a minority pay for expensive plans that cover them entirely in the private hospitals.

It isn’t private health care that is to blame for the huge disparity between the cost of health treatments in Ireland and Germany. So what is doing so?

How about the fact that nearly 80% of the Irish health budget is spent on salaries and pensions, and these are set by the government and the public sector unions. The other 20% of the running costs – drugs, equipment, fittings, utilities, food,– are also the responsibility of government paid administrators, and with no personal ‘skin the game’ they’ve few qualms about spending taxpayer’s money either.

Is it any wonder then that the price, both public and private, to over two million health insurance members has been soaring for years?

James O’Reilly, the Health Minister seems to think that once universal health insurance is rolled out (starting with “free” GP care by 2016) we’ll have one, wonderful health care system that is fair, and accessible and world class.

There is only one way this will happen, regardless of how many golden eggs can be squeezed out of the poor, shrinking Irish goose:  the Department of Health and the Government must be reduced to a supervisory and regulatory role only and the health care market – patients, practitioners, hospitals, insurers – must be allowed to work out a genuine service that is affordable and deliverable, based on our available resources.

Let me put it another way:  if the Department of Agriculture had also been allowed to run the provision and delivery of food in this country, we’d have all starved long before anyone would have needed medical assistance.

 

This lack of empathy gets you nowhere

 

The Central Bank Governor Patrick Honohan must think it is helpful whenever he lobs another little hand grenade into the public debate about the dire state of our banking system.

He’s wrong. It just annoys ‘the little people’.   

You know, people not like him, not on a big fat Irish government salary of c€300,000, pension and perks, who didn’t get sucked into buying a huge mortgage on an overpriced property (for their own use or as an investment) during the biggest property boom in the western world that happened partly because the central bankers of the day were incompetent and asleep on the job.

Last week, Mr Honohan said it was high time the banks start putting the boot into owners of investment properties who cannot meet their repayments and are in arrears.

Why?

Because these defaulting loans are a threat to the survival of the banks – as are the c100,000 or so homeloans in arrears – but the investment ones are not subject to the same consumer protection codes and forbearance measures. He knows that if the entire problem is left to fester, it could bring down the Irish banks once and for all. By tackling the smaller c30,000 buy-to-let problem first, he must think it will give the banks a little breathing space before they’re forced to cope with the more lenient treatment that is expected to be afforded to distressed home owners when the new insolvency and bankruptcy law comes into force next year.

What the head of the Central Bank isn’t taking into account is that a lot of those 30,000 investment loans are backed by the equity in the borrower’s principal private residence. If one goes, they both go.

Or maybe the Governor does know this, but figures it’s going to be ugly whatever the outcome and the banks have to start somewhere.

It’s their survival, let us never forget, and not yours, that isn’t making this well-remunerated government servant lose any sleep.

 

 

 

 

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HIGHER STUDENT FEES COULD LEAD TO YET MORE FINANCIAL DISASTER …FOR STUDENTS

 

Last week’s revelation that there has been a surge in CSO applications for science and technology places in our universities is great news. The country needs more young people training for such sectors.  Consequently, and I speak from personal experience here as the mother of an 18 year old with his heart set on a science place at TCD, more young Leaving Cert heads are now engrossed in their schoolbooks this weekend as they scramble to achieve the higher points they’ll need from their June exams.

The less good news for these aspiring scholars is that there’s also been an increase in the number of students from Northern Ireland and the British mainland applying for college places here.  

They’re not doing so to fill our skills gap but because from next September their annual college fees go up to £4,000 and £9,000 respectively.  Unless they have rich parents, Irish registration fees of c€2,500 look a lot more affordable over four yeas than the prospect of years of slogging to pay off UK bank loans of £36,000  or more.

This isn’t just a simple tale of the consequences of changing government policy regarding the funding of third level education.  Fees are higher because all western governments are running huge deficits and they can’t get away with blatant universal freebies (like free university).

But unless they plan to reserve access to third level education only to the very wealthy – which is political suicide - they will have to find another way and state backed, student bank loans will be given a go until that money burns out.

The British have the Student Loans Company, which originally offered mortgage style finance to qualifying students and since 1999, future income-based loans – or graduate tax - for repayment purposes. The amounts the SLC award no longer cover the huge new fees and there are questions about how far the UK government can go to keep funding and guaranteeing these loans.

The Americans have similar schemes, but the money originates in private banks and is backed by the US government so that full cost of fees can always be covered and not just amounts set by the student loan company as happens in the UK.

The UK system is losing money, but the American one is an an unmitigated financial disaster. Could it also happen here?

Young buyer beware, especially in light of this anecdote.

A couple of weeks ago, the Federal Reserve Chairman, Ben Bernanke, made an extraordinary revelation to the House Finance Committee during his monthly report about the state of the US economy.

He said that his son, who is a medical student, now owes over $400,000 in (state-backed) student loan debt.

Tuition at an Ivy League medical school (where presumably Mr Bernanke’s son attends) costs at least $50,000 a year. Multiply that by seven or eight years (the young Bernanke also has living expenses) and that figure is credible. 

Or Incredible.

American doctors earn huge money but to be carrying $400,000 in debt before getting your first job or seeing your first patient seems a little excessive even by the US personal debt standards.

Bernanke junior’s story is an extreme example of what happens when government policy to support higher education with a state backed loan scheme goes out of control.

Government supported loan schemes really took off in the US in the 1970s, partly as a response to meet the education promises made to returning Vietnam War GI’s and to encourage higher third level education generally.

The size of the loans grew greater and greater in response to the inevitable raising of fees by the education sector which was acting in exactly the same way as all commercial recipients of cheap, easy-to-get finance react:  they raised their prices. 

(When an infinite amount of money meets a finite supply of goods, the goods ALWAYS get more expensive.)

The US student loan industry is now a racket. 

There is over $1 trillion in loans outstanding now and 27% of those loans are now in 30 days arrears.  Default is commonplace; so much so that bankruptcy laws were changed to exclude student loans. Unlike non-recourse mortgages, that debt now follows the ex-student indefinitely.

It isn’t just Ivy League and State universities that are the expected beneficiaries of taxpayer largesse. Every post secondary institution qualifies and there is now a new industry of for profit educational institutions in the US that was set up specifically to milk the government student loan schemes, aimed a sub-prime scholars.

No one with a beating pulse is turned away from so called third level education; if the student drops out or doesn’t get their qualification or degree, (and can’t repay their loan because they have no job), so what? The government picks up the tab, the fee part of which just keeps getting more expensive every year.

The US Economic Policy Institute recently produced a study that showed that the wages of young men aged 23-29 have fallen by 11%, adjusted for inflation over the past decade and by 7.6% for young women. 

The easy availability of higher education has not improved the employment or earnings prospects of all graduates in the United States and while the Ivy Leaguers with professional qualifications will undoubtedly early substantial incomes over their lifetimes, if their fees are not waived, even they will be burdened by inflated state-backed loans.

No one wants third level education restricted to only those who can pay the true and full cost. This is why colleges constantly seek (or should) donations, bequests and benefactors, and hire fund raisers and fund managers:  to offset the costs for gifted but poor scholars.

The politicians meanwhile have a political agenda, specifically to please middle class voters and to keep youth unemployment and dissent as low as possible.

For 15 years the cost of ‘free’ third level education was paid for through government borrowings and especially during the boom years, from abundant property taxes. (Where did you think that money was going when you paid €40k stamp duty on your new house?)

Now all this money is gone and university fees have to be reintroduced.

I don’t think we’re at risk – yet – of introducing calamitous state loan schemes on the American or even British models. That’s because we’re already bust.

But emigration isn’t going to keep the youth unemployment pressure cooker under control forever and it doesn’t buy very many votes from their parents either.

Give us enough time and financial assistance from the Troika or ECB and student loans will be part of the debt landscape here too with the same outcome: higher college fees and charges, even more ‘graduates’ than we already have with useless arts and social science degrees, a growing default rate as they can’t find adequate employment to repay their debt and, in the end, another great big bill for the Irish taxpayer.

 

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THOSE AIB WORKERS LOST THEIR JOBS FOUR YEARS AGO

Losing your job is always a difficult personal setback.

The 2,500 AIB workers who will lose theirs are no different from all the other hundreds of thousands of private sector employees who have been made unemployed in the last four years except, of course, that they’ve known for nearly all that time that their jobs were hanging by a thread.

The 2008 global financial crisis and the massive fall in Irish bank share prices the previous year signalled the perilous state of the Irish banks. Within months it was established that the Irish banks were bust and would have folded if the Irish state hadn’t unilaterally guaranteed all their debts and deposits.

Four years later and nationalisation, no profitable new business has been done in AIB.

The 13,000 workers have mostly spent their time servicing the on-going ordinary needs of customers like personal banking (which is not very profitable) or in coping with their arrears and debt problems - which is a huge loss-maker. 

There have been no severe or widespread cuts to their numbers, pay, perks or pensions.

No one knows exactly who will make up the 2,500 redundancies at AIB, but every single one of the 13,000 employees have had a three or four year stay of execution that no one else in the private sector has enjoyed. Non-Irish banking firms that experienced a 20%, 30%, 50% drop in business have long since slashed their labour costs and numbers, usually the single highest cost component of any service business.

AIB workers instead have shared the protected status of civil and public servants who have also been immune from the reality of the collapse of their business – the running of the Irish state.

Tens of thousands of state workers have also kept their jobs despite having less to do, or certainly less money with which to do it as the tax base of the state collapsed and a €25 billion a year shortfall appeared (now ‘just’ €18 billion).

Like the public and civil service, AIB (which only has more losses coming down the road) is now offering an incentive of three and a half weeks of pay per year of service to incentivise those 2,500 to take voluntary redundancy.  The state, of course, incentivised the early retirement of 9,000 of its staff to leave its employ but attracted mostly the wrong people by not identifying the 9,000 people whose jobs were actually redundant, and had little or not work, due to the Great Recession.

On a personal level I’m sorry that anyone employed by AIB with bills to pay and children to raise and hopes and dreams they wanted to fulfil, is losing their job.  I wish every one of the 2,500, which might include a beloved nephew, good luck in finding new work.

Yes, we’re all ‘victims’ of the dastardly bank bosses. But workers in the Irish owned banks have seen the writing grow larger on their walls since 2008 and they’ve enjoyed four years worth of wage/pension subsidies from the taxpayer to prepare them for the inevitable.

 

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IS IT HIGH NOON FOR MORTGAGE LENDERS AND DEBTORS? 

 

Let us all wish Matthew Elderfield, the Deputy Governor of the Central Bank well in his efforts to get the banks to properly identify and own up to the great wall of bad mortgage debts that is about to crash down upon them.

The slow pace at which the insolvency and bankruptcy legislation is being finalised suggests it will probably be at least a year before the first debtors are processed through the new system.

The legislation is under construction right now, but after passing through the Houses of the Oireachtas, it will take considerable time before the proposed Insolvency Agency is set up and the recruitment, training and accreditation of the Insolvency Trustees.  

And time is running out.

At least that seems to be the view of the Deputy Governor last week in a speech to the Harvard Business School Alumni Club of Ireland. He doesn’t seem in the least bit happy about how long it’s taking the banks to identify the loans that are septic and need to be lanced and those that are downright untreatable, even with available forbearance measures such as interest only payments, extended terms, lower rates and mortgage holidays.

“The very limited or transitory relief provided by standard forbearance techniques could just be putting that person deeper in debt,” said Mr Elderfield. “The homeowner may be building up a bigger and bigger shortfall, for example through interest capitalization, which will eventually be owed when ownership of the home if ultimately lost. In other words, kicking the can down the road in the most difficult cases where families are borderline insolvent is unfair by adding to debt if there is in fact no realistic prospect that the standard forbearance is ultimately going to work.”

Sheriff Elderfield, who has cleared the worst of the desperadoes out of the town’s banks and stuffed their empty vaults with new capital borrowed from the ECB Sheriff’s Fund, knows that everyone from the schoolmarm, vicar, and town drunk borrowed too much when the place was booming. They know and he knows that the banks are never going to see billions of this money ever again.

It now looks as if the terrible mortgage arrears problem will start to be cleared long before our 21stcentury bankruptcy laws will be up and running and write downs and writeoffs will be happen - whether the banks’ like it or not.

 ‘High Noon’ has arrived and maybe genuine, widespread debt relief too, but it will interesting to see who’ll be left standing when the gunsmoke clears.

 

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UNIVERSAL OAP BENEFITS NEXT FOR THE TROIKA CHOP?

 

Will old age pensioners take to the streets again if the Troika forces the government to withdraw or reduce their free travel passes, over-70s medical cards, electricity allowances and contributory old age pensions?

Maybe.

Judging by the crowds at the Over50s Show this weekend in Cork, (where I was giving “Build an Ark” seminars), most of the retirees I saw seemed more preoccupied by their planning their next holiday and spa weekends than in paying much interest in taking on the government.

They may be worried about the increasing cost of living, but don’t seem very convinced that they will be the next target for special austerity measures.

“They wouldn’t dare, not after the medical card demo” one woman told me after I suggested that means testing of all sort of pensioner benefits could be on the cards.

No one is suggesting that people who diligently paid their PRSI contributions, raised their families when personal income tax rates were at nosebleed levels and were prudent borrowers are not deserving of a decent state pension, currently c€12,000 a year and the other benefits.

But it just isn’t true that every pensioners is only getting back from the system what they paid in.

The value of the minimum required 260 PRSI contributions over 10 years that are required, up to this year, for a 65 year old to qualify for a contributory state pension (assuming they earn an average wage over that period of say, €30k) would never equate the value of the state pension should that person live another 10, 20 or 30 years.

Having paid in just €12,000 into the social insurance fund, and their employer another c10% or €30,000, is still a fraction of the €240,000 they would be paid over 20 years if they lived to be 85, assuming today’s payment remained the same.

Explaining this reality and reminding everyone that old age pensions continue to operate on a pay-as-you-go system (our taxes fund our pensions, not investment assets) doesn’t really cut much ice with retirees, but the sad truth is that the country is broke and the state pension system is unsustainable.

All the anger in the world won’t magic up the billions needed to keep this pyramid scheme from collapsing, but calls for a wealth tax are unlikely to go down very well with the prosperous ‘Over50s’ crowd either.

 

 

‘FATCA’  IS NOT JUST FOR FAT CATS

 

What an odd business page poll The Irish Times ran last week.

It asked readers if they believed the US Foreign Accounts Tax Compliance Act will have a detrimental effect on Irish financial institutions. The majority of respondents said it would, but judging from the accompanying comments, nobody seemed to really understand what FATCA is – most seemed to think it has something to do with our low corporation tax that so attracts American companies here.

In fact FATCA requires any foreign bank or deposit taker, insurance company, brokerage house, even estate agency identify and report to the US Internal Revenue any clients who are US citizens and who have holdings with their institution of $50,000 or more or €37,830.

FATCA, which is being rolled out over the next couple of years is part of a crackdown on personal tax evasion by US citizens who have foreign bank, brokerage, insurance accounts.  Banks and institutions that don’t comply will be liable to an annual 30% withholding tax on all their earnings from US assets (such as bank deposit and share dividends).

Irish institutions may still only be coming to grips with the implications of FATCA, but what is a real eye opener is the number of Americans living in Ireland, many of them for decades, who are even unaware of their obligation (if they have earnings in excess of the equivalent of c$90k) to file and pay US income tax every year and then claim credits here on their Irish tax liability.

If they haven’t been filing, and have savings in excess of $50k in a deposit account, shares or investment funds, these American residents may want to speak to a good tax advisor with an understanding of both the US and Irish tax code.

 

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Borrowers batten down the hatches for a long voyage

I don’t know anyone who is borrowing money these days…if they can help it.

It isn’t that they don’t want to add a new bathroom or replace their car, purchases that usually require an injection of credit. It isn’t even that their bank would reject their application out-of-hand.

It is simply because they are waiting.

Waiting for that sign that things really are getting better, and not just here in Ireland. Signs like unemployment rolls finally reversing, the bottoming out of home prices, forced immigration no longer being a talking point amongst their family and friends and perhaps most of all, no more threats of cutbacks at the office or plant.

Nevertheless, some commentators are pointing to the Central Bank’s latest monthly summary of private sector credit and deposits for December 2011 as a sign that consumer fears are diminishing.

Lending to households was only down €90 million in December instead of €360 million the previous month, they note, but the fall is still a negative 3.8% year on year compared to -4.1% year on year to November 2011.

These minor celebrations of fraction of a percentage movements is a lot of wishful thinking.

Even the fact that household deposits rose significantly in December by €540million to a total of €91.3 billion, after a €865 million withdrawal the previous month, reflects a complex pattern of debt repayment and intensive savings that has been at play for nearly four years.

This was a ‘good’ December for savings for two reasons:  people who were desperately worried about the huge tensions that had built up about Greece and the euro by November saw some frantic deal making by the technocrats and the easing of crisis. The impulse to pay off even more debt or to even shift savings out of the euro or out of Ireland (the latter representing a very small percentage of household savings) would have also eased.

The heightened savings, debt paying, and protective measures for any wealth we still have are just instinctive but sensible reactions to the crushing debt and huge uncertainty that continues.

They may not know it, but it is just part of the financial Ark building that began four years ago all over the country, as personal budgets were dusted down or created, debts tackled and unaffordable spending habits abandoned.

Difficult as it already is to make ends meet, especially in the face of the austerity measures demanded by our IMF/EU paymasters, the real test is going to be creating enough places on your Ark for all the people you’d like to accommodate until we spot blue skies and dry land again.

 

Civil disobedience

Civil partnerships have only been legal for a year, but the loopholes are already being exploited in the legislation. Last week, Tim Bracken, the co-author of The Probate Handbook, a very in depth and welcome guide to inheritance issues, recounted the case of two heterosexual women, life-long friends, one a widow with terminal cancer, the other a divorcee, who undertook a civil partnership.

The motivation for the civil partnership was that the widow wanted to leave her estate, including her home and extended pension rights to her friend, who she loved dearly and was in straightened financial circumstances. Had she simply named her as the chief beneficiary in her will, the capital acquisition tax bill would have eaten up a huge proportion of the inheritance.   

This way, the widow’s entire capital estate transferred tax-free to her friend, even though they had never lived under the same roof or co-habited in any way. 

I don’t have any problem with the idea of tax-free inheritance: better someone of your own choosing gets to spend or squander your accumulated wealth than the government, which would have already taxed it many, many times. 

I just don’t think this was the idea the government had in mind when they finally agreed that committed same-sex couples were entitled to the same tax and financial considerations as heterosexual, married ones.

Whether this tax-avoidance loophole can or will be closed will probably depend on how annoyed the Revenue becomes if it catches on.

Not such a daft idea 

The furore over the €50 septic tank charge had just about died down when the Daft.ie economist Ronan Lyons delivered his paper late last week to a Dublin economic workshop on his proposed version of a property tax, a site based valuation tax based on 4500 districts, just five different house types and 10 valuation bands.

The Lyon’s formula, which he claimed could raise a whopping €3 billion from year one, at least reflects the view that people who live in cities where they enjoy a myriad of amenities and local authority services, should pay the most and rural dwellers, who have to supply their own sewerage and have no street lighting, pay less.

However, because it is also the site,  not the property that will be valued, the owner of a large garden on which a miserable bungalow sits in the middle of pastoral Meath or rich dairy country in Cork or Limerick is going to pay more than a bungalow owner in a central Dublin neighbourhood.

Property tax is going to be the toughest nut this increasingly inept and unpopular government is going to have to crack next year and no pricing mechanism is going to be acceptable or satisfactory.

My guess is that any residential property owner, bar the most humble, who ends up paying less than .5% of the site or market value a year a year when the barricades have been pulled down and the dust settles, will be very lucky indeed. 

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Insolvency law designed to help creditors, not borrowers

 

The draft Personal Insolvency Bill, published last week, has raised more questions than it has answered, especially about the extent of the power of the banks to veto debt write-downs that are at the core of the non-judicial personal insolvency options.

Some parts of the new bill seem very lenient, like the way Debt Relief Certificates will allow the swift writing off of up to €20,000 of unsecured debt held by people with no assets and no income. Will there be a surge of arrears now from others, perhaps with impaired credit records, who will only see the upside of letting the arrears build up on their high cost credit card bills or car loans?

There’s also the question of how much the new Insolvency Agency is going to cost. Their job will be to that will administer the new scheme, recruit, train and supervise the army of accountants, lawyers and financial advisors who will become personal insolvency trustees. No funding provision was made in Budget 2012, and no one seems to know how many billions in personal debt – especially unsecured debt, could end up being re-scheduled or written off.

The Minister for Justice has at least admitted that he’s only guessing when he suggested that in year one (probably starting this time next year) only three or four thousand debtors will apply for Debt Settlement Certificates.  The same number, he said will be made bankrupt, and just 10,000 are likely to opt for the two non-judicial insolvency measures, the Debt Settlement and Personal Insolvency Arrangements.

These numbers seem very low. Perhaps the Minister isn’t fully aware of the known size of the problem, as determined by the Central Bank.

As of last September, 62,900 homeowners were in arrears of more than 90 days. Fifty percent of another 70,000 whose mortgages were restructured and have only been paying interest off, are in arrears of up to, or more than 90 days. These numbers will be higher when the fourth quarter statistics for 2011 are published.

Meanwhile, the non-judicial insolvency options are being touted by the government as a way for debtors with serious arrears and negative equity to keep living in their family homes and avoiding the stigma of personal bankruptcy. 

But where is the evidence that this is what the majority of insolvent homeowners really want?

Their desire to keep their homes, no matter what, may have been there at one time, but rising taxation, reduced services and the relentless rise of negative equity and arrears as property prices keep falling will eat away at anyone’s resolve, especially if they now regret buying at such an inflated price and perhaps in an unsuitable location?

Under these circumstances wouldn’t it be worth finding out how many how many insolvent homeowners will be willing or able to endure five or six years of personal financial trusteeship

Even the new bankruptcy option for those who have no chance of salvaging their home or other valuable assets, seems too harsh compared to the process in Northern Ireland and the UK mainland where personal bankruptcy can be discharged in a year to 18 months rather than the proposed three years here.

A couple I know who have opted for UK bankruptcy told me last Wednesday that even if they could go bankrupt “back home” tomorrow, or take up the Personal Insolvency Arrangement option that might let them keep their family home, they wouldn’t.

“We’ve been through three years of hell already, pleading, then fighting with the banks; hiding from bill collectors and the sheriff’s men; juggling bills and avoiding answering the doorbell and phone. We simply couldn’t bear another three, let alone five or six years of it. We only have another year to go [before discharge]. We’ll have to start from scratch again, but we can start living.”

Surely if the government really wanted to “assist those in unexpected difficulties as a result of the current fiscal, economic and employment conditions” they’d create a process that is as simple and compassionate as possible for the private debtor, and as fair as possible for the creditors.  Templates just like these have been in place for years in Britain.

Instead, what we seem to be getting is legislation designed mainly to protect the still loss-making but apparently well capitalised Irish banks, from the effects of tens of thousands of their customers, all seeking debt forgiveness and write-downs at once.

The order of the day, on so many fronts, seems to be to allow the great Irish debt crisis drag on interminably.

 

Oz is bubbling up

Will red-hot property markets in Australia and Canada end up burning some of our recent émigrés?

The Irish have favoured Australia as an emigration destination for many decades and Canada in more recent years, but just because their banking systems and employment numbers have held up, doesn’t mean they’re immune to the property bubbles that brought down our own economy and has devastated European banks.

Both are now experiencing small but steady nation-wide declines since the financial crisis began in 2007.

Since 1988, and the resurrection of a generous first time buyers grant scheme, property ownership in Australia has soared, reports MoneyWeek magazine. 

Between then and 2000, interest rates halved from a whopping 14% to 7%, which was a very good thing, but the amount of interest also doubled in proportion to their average Australian’s disposable income.

Then in 2001, after the dot-com bust scare and 9/11, the Aussie government doubled the grant and just as happened here, interest rates fell as central banks intervened bring down the cost of borrowing.

The expanding bubble has wobbled several times since 2008, but survived. 

According to MoneyWeek, “Australian home loan debt has soared to more than 85% of GDP. The debt now equates to 130% of household income: five times the 1988 level.” 

In 2011, prices dropped 3.7% and while many Australians are reported to be in denial about how vulnerable they are to a slowdown in China, their single biggest customer for their mineral wealth, the strong Aussie dollar and higher interest rates, a leading US analyst, Jordan Wirst is predicting residential property prices will fall by 60% or more over the next five years.

Hopefully our émigrés can recognize a bubble market when they see one, even in a Lucky Country. 

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Billion euro mess-up in the credit unions

Where is that €1 billion of taxpayer’s money when you need it, credit union officials all over the country must be asking this week after the Central Bank sent a ’special manager’ in to run the Newbridge Credit Union and is expected to do the same to at least 20 others.

The Minister for Finance has set aside €250 million to pump into struggling CUs this year and next, but the total bill is expected to be about €1 billion, he said last October, as bad CU debts balloon to at least amount.

Since all the previous estimates of bad debts in the industry have been incorrect, it’s hard to imagine that the final bailout bill for the credit unions will match this prediction. Bad debts, especially those linked to property loans are a moveable feast in this falling market, as anyone in Nama can attest. 

Many credit unions are in trouble not just because members have lost their jobs; too many of the unions permitted members to borrow towards the purchase of property that is now worth a fraction of the original cost. They also allowed, for too long, old loans to keep rolling over rather than seek the repayment of the capital and the part-time and amateur financiers on the boards of some unions made poor investment decisions with their surpluses. To their horror this money then disappeared as the leveraged property deals in which they were invested collapsed in the post-2008 crash.

Poor lending practices and inappropriate investments – the same events that brought down our once-prudent high street banks – has caused this credit union crisis.  Yet I couldn’t help but laugh last week when I heard anonymous credit union ex-officials on the radio, insisting that their troubles began and ended when the Central Bank came poking their nose into their business, weighing them down with layers of new lending rules and regulation.

The Central Bank has a lot to answer for, including facilitating the political decision to bailout our bankrupt banks, but tightening up the prudential and compliance rules under which all financial institutions must trade, isn’t one of them.

Meanwhile, it’s worth remembering that credit union deposits up to €100,000 come under the state government deposit guarantee scheme, but as with the banks, you don’t want to leave your money with a credit union that is insolvent, even if the taxpayer gets stiffed picking up the tab to cover your deposit.

Read the annual report. Attend the AGM. Find out for yourself if it is a safe place to leave your money.  Demand that your CU officials proactively correct the failings of the organisation, and if they don’t, withdraw your funds and vote with your feet.

Pensioner power

Tax compliant pensioners are justifiably annoyed about being included in the Revenue Commissioner’s recent and badly organised 115,000 strong mail shot to retirees whom they claimed owed more tax than their newly expanded records – care of the Department of Social Protection – suggested they were paying.

The fallout from this hastily organised data trawl between last November and 1 January has been well reported, but the angry and very public reaction by pensioners who knew they were fully compliant and were incorrectly targeted was heartening. 

Tens of thousands who got the letters complained to their public representatives, to local Revenue and Citizen’s Information offices, to Age Action, the Senior’s Parliament and to the media. This pressure eventually forced an apology for the cock-up from the senior Commissioner Josephine Fehilly when she appeared before an Oireachtas committee.

Would such an outcome have happened in the UK, where a 2010 report of the British parliament’s Public Accounts Committee suggested that pensioners are not very well treated by their tax authorities either?

That report has some sober warnings for us. The committee found that despite being considered the most tax compliant cohort in the UK (as they are here) 1.5 UK pensioners had overpaid £250 million in tax because of the discrepancies between HMRC’s records and the records of employers and pension providers. 

HMRC’s systems, it found, were incapable of easily dealing with the multiple sources of pensioners’ incomes. Sound familiar? 

The furore over the Revenue’s latest tax trawling exercise may have died down, but the mountain of data they received from the DSP will take a lot longer than two months to revisit properly this time.

The parliamentary committee made several recommendations in their report to improve the tax service to pensioners, including how to make it less daunting for an estimated 2.4 million people to collect £200 million of deposit interest refunds, but the National Audit Office subsequently predicted that with 20 million tax codes still unmatched in the UK, the system changes would take many years.

Pensioner tax discrepancies may or may not be as great here, but the UK experience sounds like an endorsement for hiring an independent tax advisor to deal with Revenue if there is any suggestion that you owe them money… or better still, if they owe you any.

 

Shining example

Counterfeiting is declining, report Central Bank, fell by 19.3% in 2011 compared to 2010.  Is this because the ECB is now so enthusiastically counterfeiting the currency itself – adding as it did €500 billion to the money supply in order to provide eurozone banks with a lending facility last De ember of last resort?

 The only other reason I can think that there would be such a huge drop in dodgy €20 and €50 notes (always the biggest sellers) being printed by the ODC’s –the ordinary decent criminals of the black financial economy, is that they’re also beginning to write off the euro as a credible, or even medium form of money.

 I mean, who would want to get stuck with a pile of dodgy euro if the balloon went up and we all reverted back to our old familiar punts, drachma, lira and peso? 

 Happily for gold and silver buyers, modern day counterfeiters, whether in the lofty halls of the ECB or in some damp garage, still haven’t worked out how to duplicate precious metals, which explains why both their value and sales keep rising.

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Mailshot not a red-letter day in the history of the Revenue

Revenue’s handling of Lettergate was properly excoriated by the Oireachtas committee members in front of whom the head of the Commissioners, Josephine Feehily appeared last week.

The purpose of this vast mail shot was spot on:  to make sure every pensioner in receipt of a state pension was paying their correct share of tax.

How anyone in the Revenue thought it was a good idea to take 560,000 files sent to them in November by the Department of Social Insurance and whittle those down to just 115,000 letters with some probability of underpayment by 1 January – a mere six week period that also included the Christmas/New Year break - is mind-boggling.

Any public relations junior could have told them that it might be better to start with  a smaller number of letters – say, the 2,500 to pensioners earning €50,000 or more whom the Revenue suspect owe them money and then only after they’d double and treble checked the figures to ensure that all the date being sent out correct and up-to-date. 

Instead, letters that were riddled with errors and out-of-date data were sent out, by their own admission, to the most tax compliant group of taxpayers in the country, who quickly made their disquiet known to the Revenue, their own tax advisors where applicable, their TDs and especially to Joe Duffy’s Liveline Show.  

It will take a little time for the Revenue to regain their reputation after this own goal, a reputation for toughness but that has been pretty exemplary in recent years and pretty much restored after the huge deposit account/amnesty scandals of 20 years ago.

Compared to their equivalents in some of the other PIIGS countries, especially Greece, our tax collectors are mostly seen as doing a difficult job efficiently, honestly and cost effectively, which is no less than any of us should expect from such key officials of the state.

However, the part of this story that has been lost in the headlines about angry pensioners is that this is the start of a change that should have happened decades ago:  the joined-up reporting and sharing of information between government departments and agencies.

Not only will the Revenue be updating our tax returns with the pension division of the Department of Social Protection in the future, but with the division that pays out unemployment benefits, the €550 million paid out every year for rent and mortgage supplements and the most controversial tax-free, universal payment of them all - child benefit.

The introduction of the PAYE system displaced – up to now – the need for most workers to file an annual tax return, but with about half the population in receipt of some state benefit, and the self-assessment system increasingly less reliable as the economy implodes, the re-introduction of universal tax returns is surely not faraway.

The Revenue’s resources will certainly have to be bulked up to accommodate that surge in tax reporting, but it would be fantastic news for tax advisors and accountants and for a company with which I first became familiar as a college student with part-time jobs many decades ago:  the ubiquitous H&R Block.

Set up in 1955, it has 22 million customers in the US, Canada, Australia and the UK and while it has expanded its services, its core business is still helping people, for a modest fee, fill out their annual tax return, mostly on-line.

 

Insolvent abuse

The bankruptcy proceedings against the former billionaire Sean Quinn doesn’t interest me as much as how closer our legislators are to producing the new bankruptcy legislation that will apply to the ordinary people of Ireland, who can’t pay their bills.

The tens of thousands of shop owners, service provider and mortgaged home owners who are now insolvent due to the economic collapse of this state – helped in many cases by their own over enthusiastic borrowing and the encouragement of their lender – deserve far more attention and sympathy than the likes of Sean Quinn and his fellow mega-bankruptcy tourists, most of them property developers, who owe billions to their creditors.

The numbers of mortgage holders who are theoretically insolvent and who could be forced into bankruptcy by their creditor, their mortgage lender, probably includes just about every homeowner in serious arrears.  Since that number is now accepted to be at least in the region of €100,000, realistic bankruptcy legislation should be the top priority for this new Dail term.

How any system will cope with the flood of applicants who genuinely cannot sustain their mortgages, is another problem that no one seems to want to acknowledge.

 

Class struggle

The 400 householders in Terenure West in Dublin who are seeking the redrawing of their constituency boundary may want to consider what impact, if any, it might have on their property values.

Once upon a time, a favourably amended postcode was believed to be a sure-fire way to increase the selling price of your house; now, with a property tax on its way that might take into account the site value, market value, square footage, or perhaps a combination of all three factors, artificially ‘upgrading’ your neighbourhood may not be in your financial interests.

The Terenure 400 believe their political interests are more in sync with those who live just across the road within the Dublin South East constituency that includes Ranelagh and Rathmines, Donnybrook and Ballsbridge and are represented by the smoked salmon socialist Ruari Quinn and Fine Gael’s Lucinda Creighton.

Meanwhile, Dublin South Central, in which this corner of leafy Terenure is included, along with Drimnagh, Crumlin, Ballyfermot and Inchicore is predominantly working class and includes Sinn Fein deputy Aonghus O’Snodaigh and People Before Profit’s Joan Collins.

Until it is decided how the upcoming property tax will be assessed – either as a site tax, a market value tax, one based on square footage or a combination of all three – these householders might want to hold their fire to see if constituency lines play any part in the way the new tax is assessed.

In our property-apartheid culture, my guess is that a pleasant three bed Edwardian terrace in Terenure/Dublin South East will always command a higher property price – and tax - than the same terraced house in Terenure/Dublin South Central.

 

 

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