Don't stand up and applaud the International Monetary Fund (IMF) just yet. In its concluding statement from its visit to Ireland in May, the global financial regulator tentatively backed unspecified support measures for homeowners in trouble with their debt. This was uncritically welcomed as an endorsement of a bailout for people in arrears or negative equity – a so-called "Nama for the people".
But scratch the surface of the IMF statement and it is clear the problem of over-indebtedness is actually no closer to resolution.
The IMF statement on mortgage debt – just one sub-paragraph in an 11-point summary – contains three elements. First, any support for borrowers would have to be "narrowly targeted" and "mindful of moral hazard". That means few would be eligible for help and the mechanism could not encourage borrowers to take on more debt. This would make it extremely restrictive and inaccessible to many of the estimated 60,000 people in debt distress.
Next, the IMF proposes that the banks could absorb the costs – in other words, take losses on underwater mortgages or write off arrears. Apart from Bank of Ireland, no Irish financial institution has raised its own capital since the start of the crisis, let alone reached the new elevated capital levels imposed by Financial Regulator Matthew Elderfield in March. All Irish banks need to have 8% capital ratios by the end of the year. Nothing can realistically happen on mortgages before then. Furthermore, Elderfield may not be keen on seeing that capital depleted by enforced mortgage losses.
Finally, the IMF says any kind of resolution of mortgage indebtedness depends on a reform of Ireland's bankruptcy regime. Until Irish borrowers can wipe out their debts more easily and start over relatively quickly, the mortgage arrears problem cannot be comprehensively dealt with.
Brian Lenihan's expert group on mortgage debt, headed by KPMG insolvency consultant Hugh Cooney, is delivering its interim report to the minister this week and is expected to recommend, essentially, that banks continue doing what they are doing.
The range of options includes extending mortgage terms, letting borrowers switch to interest-only payments and allowing payment holidays, all of which have already been used by banks independently of government leadership. The mortgage arrears group and the IMF are merely stamping their approval on the otherwise improvisational forbearance policies that have been in effect for nearly two years now.
To borrow a phrase from Elderfield, this is not the silver bullet.