Ireland is grappling with a series of challenges that are impacting our citizens’ quality of life. TheJournal.ie is examining solutions to these issues which have worked or are currently being trialled in other states and asking: Would It Work Here?
AFTER THE COLLAPSE of Iceland’s banks during the financial crash, Iceland’s response to the economic downturn was somewhat different than most.
They ‘burned their banks’, refused to pay their creditors, and sent the bankers responsible for the crash to jail.
But their mortgage debt forgiveness, or ‘jubilee’ as it’s nicknamed, is the most interesting, and has been described as an “outside-the-box, practical solution to a real problem”.
That problem is namely, mortgage taken out by someone is more than the current price of the property they bought with it. This problem, known as negative equity, is one faced by a lot of Irish people after the crash.
So, should Ireland forgive some of that debt so that it matches the current price of their properties, both freeing people from debt, and ensuring they stay in their homes?
How did they do it?
In Iceland, a lot of mortgages adjust with inflation. And when the financial crisis hit, it caused a lot of inflation. So much so, that the total amount people owed the bank went up – in some cases by 30%.
So when Iceland’s Progressive Party found itself with very low poll numbers, it proposed the jubilee – in Icelandic, they called it ‘the correction’.
The party promised to return mortgage debt on properties bought between 2006-2008 to 110% of its real value, along with some other measures.
Thórólfur Matthíasson, an Icelandic economics professor explains this in his paper on the banks’ response:
“The principle of writing the value of debt down to the value of the income stream of the firm was adopted to property and to mortgages.
The twist was not to look at the discounted cash-flow but to evaluate the asset value of the property. In principle, the two should be equal.
The money to pay for the jubilee would come from a tax on three dead Icelandic banks – banks that many people blamed for Iceland’s part in the financial crisis. A lot of people were really into the proposal. The Progressive Party ran on the jubilee idea and won.
The idea behind the jubilee, or ‘the correction’ according to Thórólfur Matthíasson, was two-pronged: stop people from being evicted from their homes, and to ‘correct’ the record.
“It would save some real costs. Banks even losing money save money down the line, as when it takes over a property, it has lots of costs to cover buying the property, and it can be slow in getting money back.
“It also gave people a chance of staying in their homes. The Spanish system is crazy. Banks can evict you if you fall behind on one payment. There are stories of occupants being evicted and replaced by other people who’ve been evicted – it’s like musical chairs.”
Although the exact amount the debt forgiveness measures would cost is still unsure, as there were a range of measures and not every debt write-down was because of the jubilee, it was thought at the total cost for the country would be €1.4 billion – amounting to around €24,000 per household.
So could it work in Ireland?
“I think that Ireland should have done something similar at the height of your crisis,” says Matthíasson, adding that he hasn’t looked in any great detail at how the policy could be implemented in Ireland.
He explains that the plan was targeted at those with one dwelling and one car, and who bought mortgages at a certain time.
He add that Ireland has more options than Iceland did – Ireland have a scheme that allows people to sell their properties back to the government, who sells them to vulture funds, allowing the former-owners to rent the same property out.
“The Irish interest rate is quite low – ours is at 3-4%. That would not have worked in Iceland because of high interest rates.”
But it’s good to have a range of different things that work, he says.
He admits that a time could come where they might have to introduce a jubilee again. “I hope not, but I have a feeling 2007 is coming back.”
Past discussions
The idea of debt forgiveness was discussed by ministers and economic commentators in back in 2011 following a call from the UCD economist Morgan Kelly for the government to back a write-off scheme to the tune of around €5-€6 billion.
Joan Burton was among those who said that there needed to be a form of debt forgiveness that would be fair to both the debtor and the lender – using Iceland as an example of where the amount repaid is linked to the current value of the property.
Her comments appeared to echo those of housing minister Willie Penrose who said at the weekend that the idea should be discussed by the government.
But there was no write-off. Brian Lucey, economist at Trinity College Dublin, echoes the other side of the argument when he told TheJournal.ie that at the end of the day “someone’s got to pay for it”.
“Debt jubilees can make a lot of sense if you can pay for them. Focusing on the hardest-pressed, the most-deserving, and that’s fine, I can see the moral argument.”
But those debts are carried on bank balance sheets as assets, he explains, meaning that whether the banks pay out or the government does – that’s loss of capital.
That might have been something to discuss during the bailouts, but I can’t see someone doing that now. We might be better off if the government used that €10 billion to build houses instead because supply of housing is a real problem.
Lucey says that the money could be better used in Ireland to build houses, as the homeless crisis isn’t caused by evictions, but by a lack of supply which is driving up demand.
The disillusionment with the policy is mirrored even by those it sought to benefit directly from it.
Problems with the ‘jubilee’
Heida Dora Jonsdottir got into debt the way most people do. She bought something she loved that she didn’t quite have the money for – in this case, a small wooden house in the capital of Iceland – Reykjavik.
She and her friend Baldur Hedinson, told podcast Planet Money about how their similar set of circumstances had very different outcomes after the jubilee.
Although Heida would get about $12,000, or €11,100 from the jubilee, Baldur got nothing.
Baldur has a mortgage too but bought it just after the cut-off for the jubilee. When asked by Planet Money reporter David Kestenbaum how it feels to be left out, Baldur understandably says ”It doesn’t feel great.”
“I mean, I had a student loan during that period, and that went up like crazy. I don’t see why they – if they’re doing this for mortgages, why don’t they do this for student loans, as well? So, I mean, I’m happy for Heida that she’s getting it, but the overall thing – it feels very unfair.”
Both agreed that the jubilee, though a nice idea, was more about correcting past mistakes, than about creating an environment that’s good for the future.
Outside the box
“It’s good to have an army of mechanisms that you can use,” says Thórólfur Matthíasson. “And it’s good to think about what to do in bad times during the good times. You pick up a smoke detector before a fire starts.”
In that sense, Iceland’s government did act as well: it set up a Debtors Ombudsman to liaise with debtors and banks about their options, and to check that the banks were doing all they could for people in trouble.
For businesses that were ‘underwater’ and should have gone to the bankruptcy court, that was stopped. The government again used the dead banks to bail the companies out, and most are still alive and doing well now – both big and small businesses.
I thought during the crash that the unemployment rate would go up to 20-5%. But it never went higher than 11% – I think it’s because Iceland were doing the right thing.
“Think outside the box, and look at how is the real economy working.”
So are there any plans for a jubilee, or to establish a Debtors Ombudsman here?
TheJournal.ie are still waiting for a response from the Department of Finance.
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