Noonan rules out extensive debt forgiveness scheme

Extensive debt forgiveness for struggling mortgages borrowers was "not a realistic option", Minister for Finance Michael Noonan has said.

Speaking to the Oireachtas Committee on Finance, Public Expenditure and Reform today, the Minister said resolutions "must be found on a case-by-case basis through open and meaningful engagement between the distressed borrower and the lender".

He said there was no "magic bullet" solution to the problem.

“While there have been many contributions to the debate including suggestions for the granting of extensive debt forgiveness, this simply is not a realistic option,” he said.

People would be "queuing on Monday morning looking for debt write-offs" if there was a wide-ranging debt forgiveness scheme for mortgage borrowers, he said. "It is not possible," said the Minister.

Mr Noonan said that could "open the floodgates" for people who did not really need the help but
instead saw such a scheme as an opportunity. "Banks have been capitalised to cover bad debts for years, but that's not to say they have a pool of money to throw around in an ad hoc measure," he said.

He said it was important that mortgage holders in difficulty discuss their situation with their lender at the earliest possible opportunity.

Mr Noonan has promised to make the problem of mortgage debts "a priority" for Government after the latest Central Bank figures showed more than 55,000 homeowners were now more than three months behind in their payments.

Mr Noonan said the Irish banks had been extensively recapitalised and some of that capital could be used to write off bad debts.

"It is true to say that the domestic banks have been capitalised to an extensive degree arising from the Central Bank’s PCAR exercise last March," he said.  "Some of this capital is available to the banks to write-off bad debts but the banks, of course, must be prudent in their actions and not fritter away their capital base through widespread unwarranted debt write-offs."

The Minister, however, said the planned reform of the bankruptcy and debt settlement arrangements would be key elements in any consideration of potential policy options. He said the Government's borrowing costs had fallen sharply as "significant foreign buyers" were purchasing Irish sovereign debt in the bond markets but that the costs could rose again if market turmoil returns.

"This is very volatile and the volatility could return," he said. He described August as an "extraordinary rocky month" in the financial markets.

Mr Noonan said he euro bonds or some form of cross guarantees of euro zone sovereign debt are "going to come." This, he said, will help solve the euro zone debt problem.

He said the interest rate reduction on EU bailout loans agreed in July could save the State between €6 billion and €7 billion when all loans were drawn down. This included about €500 million to €600 million in 2012.

Mr Noonan reiterated that he may seek savings beyond the expected €3.6 billion in December's budget to reduce the Government deficit to the target of 8.6 per cent of GDP. If economic growth for next year fell below the Government's estimate of 2.5 per cent next year, then he would have to consider greater savings.

The International Monetary Fund estimated that savings of €3.6 billion would be sufficient to meet the target, while the European Commission said that savings of €3.8 billion would be required, the Minister said. The figure would depend on how the global economy performed, he said.

"With the international situation changing we may have to mark that down," said Mr Noonan.

He said that it was "too soon to call" what level of savings would be needed in the budget but that a decision will be made by October. He ruled out bringing the budget forward. "We don't want to depress the economy by taking premature action," he said.

Mr Noonan said the cost of the most recent recapitalisation of the banks to the State was €16.4 billion and that the remainder of the latest €24 billion bill was raised from forcing losses on subordinated bondholders and from private investors.

It would be helpful to reschedule the promissory note or IOU under which the State is pumping €3 billion a year into nationalised Anglo Irish Bank for 10 years over a longer period, said the Minister. However, he would not press for this if it created another capital hole at Anglo. He was determined to resolve Anglo once and for all, he said. "I would like to close off Anglo," he said.

Mr Noonan said the Government was restructuring the banking system around two "pillar" banks, Bank of Ireland and AIB, and was hopeful there would be "a third banking force" in future but there were no immediate plans for this.

The Minister reiterated that he intended to raise the possibility of so-called burden-sharing with unguaranteed senior bondholders at Anglo and Irish Nationwide with the troika of the EU Commission, the European Central Bank and the International Monetary Fund this autumn.

Asked if he plans to raise the possibility of forcing losses on senior bondholders at Anglo, Mr Noonan said: "It is going to be a difficult argument but I am going to make this argument."

The Minister said that the Government was sufficiently funded until the end of 2013 but would be "putting our toe" in the debt markets before then to borrow for "a big jump obstacle" in January 2014 - a €12 billion bond repayment.

The Government would run "a parallel stream" of drawing down loans from the EU and IMF and the National Treasury Management Agency borrowing in the money markets ahead of that repayment.

A blanket write-off of mortgage debt has also been ruled out by Tánaiste Eamon Gilmore, who said the Government’s focus would be to protect the family home. “The suggestion that there be a blanket write-off of mortgage debt is not realistic and is only giving people who are in genuine mortgage difficulty false expectations, which is not doing them any good,” said Mr Gilmore.