The Irish government does not have the resources to fund a significant debt forgiveness programme for troubled mortgage holders and will likely bring in legislation to restructure the debt instead, a junior minister said on Monday. Ireland's ruling coalition has promised to examine ways to ease the burden on mortgage holders struggling to cope with a financial crisis that forced the country into an EU-IMF bailout and sent unemployment rates soaring.
Junior minister for housing Willie Penrose, a member of junior coalition partner Labour, on Sunday said the government should consider a proposal to write off up to 6 billion euros ($8.7 billion) worth of mortgage debt. But Fine Gael's Brian Hayes, the junior minister in the department of finance, said this was not realistic. "It would have to be a state-wide compensation fund, that the state would put billions (of euros) in it. Quite frankly the state doesn't have that kind of money at the moment," Hayes told Reuters. Almost 90,000 mortgages are either in arrears or have been restructured, some 11 percent of the total residential mortgage market, according to the last Central Bank figures released in May.
Many mortgage holders are stuck with their huge loans as house price falls of around 50 percent in some areas prevent them from selling the property to pay off the debt. High repayments on mortgages taken out during a dramatic property bubble are a significant drag on the domestic economy, which is struggling to recover from one of the deepest recessions in the eurozone.
The government appointed KPMG accountant Declan Keane to consider options of how to ease pressure on struggling mortgage holders and he is due to report in September. The government will likely make a decision in the autumn, Hayes said. "I don't see it as radical as some economists have suggested. The cost of it would be prohibitive, " he said, referring to a proposal by University College Dublin economist Morgan Kelly, who last week called for a blanket forgiveness programme of between 5 billion and 6 billion euros.
The government has already footed most of the 70 billion euros bill to save the banking sector from collapse, pushing Ireland's debt to around 100 percent of GDP from 25 percent before the housing bubble burst. Hayes said Kelly's proposal was a non-starter due to the risk of moral hazard in rewarding people who borrowed more money that they could pay back.
The fact that half of Irish mortgages are held by foreign banks would also make it impractical, he said. He said the banks would be involved in consultation in any new measures. One possible measure would be to allow people to move their negative equity to a new house, while another would allow mortgage holders to halt payments for up to two years.
"The banks have allowed mortgage holders to put aside mortgage payments for the guts of a year. We are looking at whether that could be extended to two years," he said. Hayes said the government was looking at the idea of publishing a three-year plan of cutbacks and tax increases in the autumn. "There may well be merit in the idea of putting out there a more detailed three-year plan," he said. "Any further clarity we can bring to bear on the situation is good for taxpayers, is good for markets and is good for international confidence." Ireland's government has made a commitment to cut its budget deficit to under three percent of Gross Domestic Product (GDP) by 2015 from an estimated 10 percent this year.