THE CHIEF CIVIL SERVANT at the Department of Finance has told bankers that households which have accrued debts they simply cannot repay should have their debts simply written off.

John Moran, the chief civil servant, told an Irish Bankers’ Federation event that the Department of Finance believed levels of personal debt were a greater risk to the economy than the growing number of householders in negative equity.

This was because while the numbers in negative equity were growing, the vast number of mortgage holders were still able to meet their mortgage obligations every month.

A bigger problem, however, was the amount of their income that households were now saving to prepare for other debts – instead of feeling more confident about their financial affairs and spending cash to stimulate the economy.

Ireland’s household saving rate now stood at 14 per cent, Moran said, which was one of the highest rates in Europe and well over the 8.25 per cent savings rate seen before the economic crisis took hold.

“While the level of arrears is continuing to rise the pace of the increase is falling and it is estimated that arrears will stabilise at the end of 2012, albeit at a high level,” Moran told bankers.

“The fact that unemployment is also showing signs of stabilizing is certainly assisting in reducing the growth rate in mortgage arrears.”

He said it was fair to conclude that the inability of some households to meet their debts – even though they were still trying to do so – meant this would need to be the focus of government efforts to bring about a turnaround.

Moran said the financial sector faced two major obstacles: encouraging banks to lend to viable borrowers, and “implementing the right solution for totally unsustainable levels of debt”.

Neither problem could be solved by forbearance alone, he said – suggesting that banks could not merely delay enforcement procedures against those who owed them money.