The publication of guidelines in relation to personal insolvency yesterday has at least two positive features:
- consideration of a living income is very much under debate and this is to be welcome
- some individuals and households in situations of mortgage or other debt distress are likely to move towards greater certainty in relation to what happens next.
it is to be very much hoped that those in situations of mortgage distress will retain their homes (although this will depend ultimately on the banks who have final say over any individual arrangement). What is not clear at this point is how exactly the new proposed arrangements will work, how many households will be involved and the extent to which this approach will be effective in addressing the huge overhang of personal debt arising from the economic meltdown of recent years.
Stepping back from the details of the new arrangement the question must be asked - to what extent are institutions and individuals which were culpable in helping to bring about the current personal debt crisis sharing the burden of debt re-structuring? Many of the problems stemming from debt overhang at the household level (and public finances) mirror problems that originated in the financial system. Unfortunately, the 'rules of capitalism' did not apply to many senior creditors with loans to financial institutions in Ireland. This has had a major distorting effect on bank balance sheets and, ultimately, public and households balance sheets. This is not the whole story but it is a vital part of it.
The degree of monitoring and scrutiny is now to be applied to a large number of households in distress. With indicative guildelines on spending at the household level is it likely that many cases of approved financial outlay will place households in the broad €1,000 to €1,800 monthly spending range. This is not necessarily poverty level income levels (a lot depends on household composition and circumstances) but it is certainly not anywhere near an average level of spending for say a household of 4 persons of which 2 are children. Budgeting will be extremely tight. Households will need to take great care to avoid unforeseen accidents and breakdowns whether a broken tooth, a car that is too expensive to fix and get back on the road or medical expenses for a child. The guidelines are not meant to be overly restrictive or 'prescriptive'. That is limited comfort for households already struggling to make ends meet as real wages continue to fall in most sectors and charges and taxes increase.
The best way to tackle the debt problem is as follows:
- negotiated and realistic debt write-downs coupled with levies on wealth and profits especially when banks start making profits in the future (which is after all the plan so that they can be sold off the highest bidder).
- measures to stimulate domestic demand and income (or at least declare a truce in the on-going fiscally driven war on domestic demand).