Do the Brits know why Cameron said no?

The angry student in me, the anti-United States of Europe part, is impressed with last week’s rejection by David Cameron of amendments to the EU Treaty that would move us towards tighter fiscal union. It had to be Britain, didn’t it, with a history steeped in sovereignty, colonialism and that first-to-the-pole attitude. It is hard not to admire Cameron’s decision; on the face of it he is putting the interests of his people first, refusing to be swayed by the collective criticisms of the world’s most powerful people. UK citizens appear to agree with him. The first poll conducted since the Brussels summit shows that 62 per cent of British people agreed with the Prime Minister’s stance, with just 19 per cent against. (http://www.dailymail.co.uk/news/article-2072616/David-Cameron-got-right-Most-voters-agree-PM-vetoing-EU-treaty-changes.html#ixzz1gKJijL76)

This public support is questionable given that Mr. Cameron rejected the treaty change in the interests of Britain’s financial services industry. He held that the pact lacked the safeguards to protect the City of London against future regulations that might not be in its best interests. This includes the financial transaction tax that I discussed in a previous post, a tax that George Osborne has been publicly and repeatedly critical of. Yet the latest Eurobarometer poll evidenced that two thirds of all British people surveyed were in support of the introduction of such a tax. UK citizens have consistently expressed a strong level of support for tighter regulation of the banking industry. Perhaps their support for the Prime Minister’s EU treaty veto is down to a lack of awareness about the reasons behind it. Or perhaps the British people have simply had enough of EU policy and continued integration, regardless of the actual reasons given for Cameron’s decision.

Financial transaction tax has merit but little support

At a meeting of European finance ministers in Brussels yesterday, attention was finally paid to the Commission’s proposal for an EU-wide financial transactions tax. Despite the backing of Merkel and Sarkozy it was met with a negative response from the majority of EU states, mostly on the grounds of a lack of planning for its practical implementation. Gordon Brown was heavily dismissive of the tax, quoting research on job losses and GDP reductions. Ireland followed suit with Michael Noonan claiming that any such tax, if not also implemented in the UK, would be disastrous for Ireland.

I continue to be surprised by the lack of consistent support for this type of levy, the proceeds of which could go some way towards reducing national deficits as well as providing finance for humanitarian concerns like foreign aid. There was a surge of interest in the tax in 2008 and 2009 at the height of the financial crisis but this has since receded despite the continued validity of the idea. Given that the recent global economic distress was partly attributable to the activities of banks it seems right and proper to tax financial transactions.

The capital that this tax could raise is impressive. The Bank for International Settlements reported in 2008 that the total value of the world’s annual derivatives trading was $1.14 quadrillion (a quadrillion is a thousand trillions). It is likely that in reality the figure is even higher, since over-the-counter trades are mostly unreported so their size is unknown. A mere 1% global tax on $1 quadrillion in trades would generate $10 trillion annually. We are looking here only at derivatives and not at the finance that could be raised by similarly taxing other types of trades.

The most common argument raised against this tax is that any such levy, by increasing the costs associated with trading, would have a dampening effect on transaction activity and thus would ultimately reduce profits and liquidity. Personally I remain unconvinced. There is huge money to be made in the derivatives market and a minor tax is unlikely to deter traders. The only real risk here would perhaps arise if the tax were applied only to a minority of banks or states; those groups would then be at a clear disadvantage in comparison to tax-free traders. The solution is obvious; it is imperative that the tax be applied to a sufficiently large catchment area to keep the playing field relatively level. An EU-wide tax or US tax would cover enough institutions to silence the argument that a select few have been put in an anti-competitive position. Obviously this will be difficult to implement but surely not impossible.

It should also be noted that the jobs losses and profit reductions that Gordon Brown referred to yesterday as a probable result of this tax will occur mostly within investment banks themselves. Implying limitations on a major industry that has an enormous turnover will naturally result in job losses and lowered profits within that sector. It has also been almost universally accepted that the banking industry is somewhat bloated and needs to be tempered in some way.

Critics also refer to the Swedish example. Sweden implemented a similar tax scheme in the 80s which saw its banks pass on the costs garnered by the tax to private individuals and investors. The answer here is strict regulation. The lax regulatory culture that permeated the financial world pre-2008 (particulalry on the issue credit but in many areas of bank activity)was in many ways the single largest contributor to the global recession and is thankfully coming to an end. We know now why vigilant supervision of the banking industry is in the public's interest. Strict regulation and monitoring of how a financial transaction tax is implemented will be necessary to ensure that banks absorb the associated costs themselves rather than passing them directly on to investors.

Taxing long-term investments that raise vital capital and provide sustainable returns is also a point of issue. It is important that a financial transactions tax primarily targets short-term speculative trading, the kind that was a major cog in the banking collapse. The tax structure must penalise short-term, high frequency activity, the type of trading  that provides no identifiable social benefit. Long-term investments should be subject to a very small levy but short-term movements – holdings for minutes or days – should be more heavily levied on an incremental scale.

Many of the finance ministers present yesterday felt that the biggest stumbling block standing in the way of a financial transaction tax is the practical difficulties involved in its implementation. Since it must be applied globally or at least at EU or US level, a requirement exists for cross-jurisdictional legislation and a practical plan that must cover thousands of institutions. However this is in no way an unattainable task; financial institutions communicate thousands of pieces of information every day through international networks, dealing electronically with complex and dynamic products. The creation of an instantaneous electronic method of taxation with an EU reach is not impossible. Similarly the tax will require a clear framework for the distribution of funds. Personally I favour a system that pays into the state coffers of the country where a trade takes place, with emphasis on sovereignty. However there is obvious merit in passing funds on to international schemes like UN healthcare and climate change programs.

Proposals for this tax were essentially sent back to the drawing board yesterday and a more detailed and practical plan must be formulated before EU finance ministers will debate this issue again. Hopefully the powers that be in Europe will not leave this concept to linger until public unrest at the activities of investment banks has receded.

'Pensions crisis for beginners' on Huffington Post

My article on the pensions crisis is now available on the Huffington Post, have a look:
http://www.huffingtonpost.co.uk/sarah-mccabe/the-pensions-crisis-for-b_b_1018261.html

Your pension should not be at the state's disposal

State expropriation of pension funds is not, despite what our newspapers represent, an exclusively Irish phenomenon. Pension grabs have been seen in a number of countries over the last four years, garnering surprisingly little international attention. ‘Expropriation’ is really just a nice word for confiscation. Pensions are another form of savings and thus these activities have effectively allowed the state to dip into the private saving of individuals.

Governments have managed to draw upon pension funds for finance through several different methods. In 2008 the Argentine Government nationalised the state’s private pensions, generating much of the capital it needed to meet its debt repayments and avoiding its second default of the decade. This nationalisation gave the state control of assets totalling $23 billion, which with new contributions has since risen by approximately $4.5 billion a year.

In November 2010 private pension holders in Hungary were forced to choose between handing their retirement savings back to state-managed funds or giving up their state pensions altogether. Workers who opted against returning to the state system stood to lose 70 percent of their pension claim. A similar scheme was implemented in Bulgaria, where the government forced the transfer of $300 million of private early retirement savings into state pension schemes.

In 2010 France withdrew €43 billion from the state’s reserve pension fund to tackle a short-term pension deficit. Retirement savings that were to be used in the years 2020 to 2040 will now be used between 2011 and 2024. In March of this year the Polish Government implemented sweeping pension reforms seeking savings totalling €48 billion. The new scheme slashed from 7.3% to 2.3% the proportion of an individual's salary that can be paid into private pension accounts. The 5% difference has been paid into Poland's national social security scheme.

Plenty of justifications are provided for these actions. In times of economic turbulence, national guilt over uncontrolled expenditure encourages citizens to readily accept these kinds of massive changes to financial policy. Others hold that pensions are safer in the hands of the state than in private funds. This argument, presented in favour of the actions of the Hungarian and Bulgarian governments, is rarely true in times when a Government is struggling to keep its own financial house in order.

In Ireland the Government has made an interesting move by taxing its citizens’ retirement savings. This year saw the introduction of a 0.6% levy on the capital saved in private sector pension funds. This tax will apply for four years. It levies not only future savings but also those funds put aside in the past; such a retrospective tax is arguably unconstitutional. The chunk of change held in our pension funds obviously proved too attractive for the Government to ignore. Economist David McWilliams estimates that at present the Irish people have €48 billion scurried away in defined benefit private pensions and €23.7 billion in defined contribution schemes.

On top of this levy the Government has introduced an additional mechanism to allow it to benefit from private pensions savings. Traditionally pension funds have only been permitted to invest in safe, relatively low-return financial products. However in 2010 a new scheme was established to allow the National Treasury Management Agency (NTMA) to issue new types of Government high-yield bonds, to be made available to Irish pension funds. These bonds have since allowed pension funds to buy into Irish sovereign debt paying out an impressively high 9.4% yield. On the face of it this is a rosy idea: in theory the scheme provides a high return on investment for struggling pension funds while also providing an additional source of finance for the state. Yet there is a reason that pension funds have traditionally been forced to avoid high-yield bonds; high yield means high risk. Many of us are now investors in pension funds that are betting on a state that has just required us to tax that very same fund just to ensure its survival. Though it may not look like it, this is further dubious use of private savings to fund a Government shore-up attempt.

We work away our daylight hours with the hope of progressing, achieving and ultimately earning. We earn to provide for our futures and our children’s futures. Retirement funds are not just mere savings accounts, they are idealogical in nature; we work hard now so that we can afford ourselves security in our old age, regardless of the fact that we may not live to enjoy it. Many of us faithfully put aside a portion of our earnings each month for our pension despite the fact that we are struggling to live on a low disposable income. It is a shame that this most treasured of financial assets has been targeted.

The pensions crisis for dummies

Online pension forums and advice websites often tend to be very specific. Pensions are quite a complicated subject and though I’ve repeatedly come across discussions of the current pensions crisis I haven’t been able to pinpoint exactly the sources of the problem. The following is an analysis of the pensions emergency from a beginner’s point of view.

Pension plans can generally be classified as either defined benefit or defined contribution schemes according to how benefits are determined, though hybrids of the two do exist. Defined benefit plans place most of the fiduciary responsibility on an employer. The employer guarantees that the employee will receive a certain payout at retirement according to a fixed formula, usually dependant on the individual’s salary and their number of years' of membership in the plan. So this type of pension might see a company guarantee a post-retirement annual payout of for example 60% of an employee’s salary averaged along their working life.

Defined contribution plans remove the responsibility from the employer and place it on the employee. This type of scheme provides a payout at retirement that is dependent upon the amount that the individual themselves has contributed into their pension fund over their working life and also on the performance of the investment choices that they have made. Contributions usually consist of employee salary deferrals. In most cases an employer will agree to match at least some percentage of these contributions, so the employer does still play at least some part in the accumulation of a pension (besides the obvious).

In the 50s, 60s and well into the 70s, benefit schemes were the most dominant form of pension fund. Employees could expect them as standard. Most of my friends’ parents, regardless of whether they worked in the private or public sector, are now drawing down this type of pension. Generally they provide a very adequate standard of living for the retired recipient.

Today these schemes are far less common. The majority of firms in the private sector have abandoned benefit plans in favour of contribution plans. There are a multitude of reasons for this shift, led both by employer and employee, including a desire for increased control over one’s pension investments and support for a less paternalistic type of company structure. However the most obvious reason for this change is that contribution schemes pose less cost to employers. The employer has less fiduciary responsibility and in some cases can avoid making any contribution to the employee’s pension fund altogether.

The problem is that left to its own devices, the average individual’s contribution pension fund is very vulnerable. Many of us (and unhappily I include myself at this point in my life) do not possess the financial savvy to choose the correct investment vehicles, or do not have the discipline to voluntarily contribute money to retirement accounts. An individual needs to save two hundred grand over the course of their working life and have their contributions matched every step of the way by their employer to ensure a meagre annual pension of just over €23,000. That means putting aside €8,000 every year for 25 years – very difficult if you are on the average industrial wage of €36,000 (that’s pre-tax). Granted, pension contributions are often tax-deductible, but we are still dealing with a big number that will be deducted from one’s discretionary income.

Both types of pensions took a massive hit as a result of the recent downturn but this hit was borne in crucially different ways. Employees covered by defined benefit plans suffered less, since regardless of investment fluctuations their retirement benefits were guaranteed. Their employer always bears the brunt of any falling investment values. On the downside, one unfortunate shortcoming of this type of scheme is that weighty pensions obligations can sometimes cripple struggling corporations. Aer Lingus, a company know to have trouble with cash flow, currently holds a worrying debt in pension responsibilities. But short of a company going bankrupt, workers with this type of pension are safe.

Contribution pension funds tell a different story. This type of pension was decimated by the recession. In the United States the nation's 100 largest corporate pension plans fell by $303bn in 2008, going from a $86bn surplus at the end of 2007 to a $217bn deficit at the end of 2008. The average Joe, who possesses neither financial training nor the time to devote to monitoring his investments, saw the value of his pension massively decline. Pensions fell even as some companies made big gains and expanded; employers were not responsible for the health of their employees’ pension.

Civil servants are by and large the only remaining recipients of defined benefit pensions. This has created even more discourse between workers in the public and private sectors. It is hardly fair that public sector pensions are safe while private sector pensions have taken such a hit. 

We now know how difficult it is to build up a contributions-based pension, and how those who have managed it have still seen their savings diminish. The end result of these factors is that the state will be forced to bear the burden of financing the old age of this generation. Our struggling public purse will have to fund the retirement of those who in many cases worked for employers who could have easily afforded to pay for their pensions. The state can not afford this. Life-spans are increasingly getting longer. This will cause particular problems in countries like the US that have adopted an anti-immigration stance, since flows of immigrants are not available to counteract an ageing population (thought the US’ high birth rate will stave this off in the medium-term). Countries with low birth rates, including most of Europe, will really struggle.

To conclude I must say that having grasped the roots of this problem, I can’t quite see a solution. As always comments are welcome from sources with a better grasp of this subject than I.

Forced to appeal to the High Court over incorrect bank charges

The number of complaints formally made by consumers against banking institutions has grown year on year since the inception of the Financial Services Ombudsman (FSO) in 1995. The FSO is the statutory office tasked with independently inspecting complaints made by the general public about their dealings with financial service providers that have not been resolved by the providers themselves. Between 2008 and 2009 the office saw an increase in complaints of 28%. There is no doubt that this increasing figure is not only a result of mounting consumer difficulties in making repayments on loans and mortgages, but also a result of the growth in anger at and thus scrutiny of the practices of Irish banks.

The procedure for successfully resolving a complaint through the Financial Service Ombudsman is, unsurprisingly, complicated. The consumer must first lodge a written application. On the basis of this the FSO will decide whether the issue falls within its remit; in 2010 it found that a whole 859 did not. We have no idea as to what happened to these claims as they are not tracked any further by the office. If a complaint is found to fall within its remit the FSO then notifies the financial institution in question and affords the institution twenty five days in which to resolve this complaint internally. If no solution is reached the FSO will offer a mediation service. How this works in practice remains a mystery as the office does not elaborate on what mediation involves. There are no clear guidelines provided as to what type of result will deem mediation a success. A mere token effort by a financial institution to placate an aggrieved consumer might be sufficient to halt the involvement of the FSO.

On to the investigatory stage. Only if the FSO itself declares that mediation has been unsuccessful will it begin an actual investigation into a complaint. There is currently a twenty week waiting time for the commencement of a new investigation following the ruling out of mediation; what happens to the aggrieved parties in the meantime we do not know. Investigations take on average six to eight weeks, involve an evidentiary assessment and potentially an oral hearing. Once a decision is reached it is legally binding on both parties, subject only to an appeal. In 2010, a year that saw a near-record 7230 complaints, only 2443 decisions were ever reached.

At this point we reach the most problematic aspect of the complaints procedure. The only way to appeal a decision of the FSO is to take an appeal to the High Court. The High Court, the second highest court in the state! At this level legal costs are prohibitive for the majority of the populace never mind those parties already in a disadvantaged position with their bank. The cost of taking on a solicitor and barrister to bring an appeal through the High Court would be well into the thousands and we can hardly expect applicants to represent themselves in an upper court where across the room will sit the type of well-paid and experienced counsel that banks can afford. As a direct result very few appeals are ever taken.As of 31st December 2010, there were only 32 High Court appeals pending against the FSO in a year where 2500 decisions were issued. We don’t even know how many of these appeals were brought by the consumer rather than by the financial institution involved.

In theory applicants could apply for legal aid to support their appeal. Unfortunately legal aid is very heavily means tested and the income bracket it accepts is extremely low. Anecdotally I know that even if an applicant meets the financial requirements to qualify for legal aid, the Legal Aid Board will generally turn them down on the merits test. A case must be likely to succeed before it will be taken on for legal aid and since the FSO complaints process is already so long-winded the Board are reluctant to bet on the success of an appeal. It would be interesting to see how many applications for legal aid in order to take such an appeal are dismissed every year but this kind of specific information is not provided by the Legal Aid Board.

I see the point of using non-judicial bodies like the Financial Services Ombudsman to make decisions on certain specific issues, since this reduces the costs to the taxpayer that would be incurred by full blown court cases. The Personal Injuries Assessment Board is a good example of this model working at its best. Yet the integrity of these non-judicial bodies is instantly cast in doubt when applicants are forced to go all the way to the High Court to appeal their decisions. As well as providing more clarity on its complaints procedures the Financial Services Ombudsman must set up a more realistic appeals process as a matter of urgency.

How healthy is your credit file?

I have noticed that several assumptions regarding personal credit checking in Ireland are circulating in the blogosphere. Perhaps it is exposure to US advertising that has resulted in the incorrect conclusion that there is a credit rating scheme in operation in this country and that almost any type of imperfect financial transaction will lower one’s credit score. In reality the only credit referencing procedure currently in existence is administered by a small private organisation, the Irish Credit Bureau (ICB), with much less scope than that of its US counterparts. A real lack of knowledge exists as to the powers of lenders to look into the financial history of citizens and as a result the actions of the ICB do not come under sufficient scrutiny.

The ICB is not affiliated with the Government in any way. It is owned and financed by ICB members, mainly financial institutions. The bureau operates a database that contains information on the performance of credit agreements between financial institutions and borrowers. Lenders register these details with the ICB on a monthly basis. Each time you apply for credit from one of these lenders, they can search the ICB’s records for an account of your performance under previous credit agreements with other lenders. Notably the ICB does not score or rate citizens on the basis of their credit history but instead just provides information relating to each credit transaction that a person has entered into.

So what do our files actually contain? Most credit agreements are covered, including mortgages, all types of loans and leasing and hire purchase agreements. All instances where an individual has missed payments are recorded. Credit card details are also included. In the past, these were supplied only if a credit card was revoked or cancelled. Now lenders have the option of supplying all and any information relating to credit cards, including a cardholder’s opening and closing balances. The only saving grace here is that because of the nature of credit cards the ICB waits thirty days before any negative records relating to card use are stored. In all other cases information is kept on the ICB database for the full term of the agreement regardless of whether it concerns a three year personal loan or a thirty year mortgage. When an agreement is either paid off or formally written off it is still stored for a full five years after the date of termination. This rule applies irrespective of whether the debt has been completely repaid or the borrower has failed to complete payment.

What is not covered by the ICB? Overdraft agreements are thankfully excluded, with the exception of those overdrafts that are the subject of legal proceedings. If borrower and lender have come to an agreement to postpone the payment of a loan, this will not be recorded either. This means, for example, that negotiations for payment moratoriums or interest-only periods under the Code of Conduct for Mortgage Arrears would not be included on an individual’s credit file.

The lender is tasked with recording the borrower’s performance in making repayments and this information is then sent to ICB where it is stored. This is a point of issue; can we really expect our lenders to faithfully represent our credit history? It would be preferable to assign an impartial organisation, even an independent arm of the ICB itself, with the task of reviewing our performance in credit transactions.

A second worrying aspect that I stumbled across while researching this piece is that virtually every person who agrees to a credit transaction with a financial institution signs away their information to the ICB without knowing it. Those lengthy terms and conditions that must be signed to activate a loan or credit agreement, rarely read in full by consumers, almost always contain a declaration of consent that allows the ICB to collect and store data on that financial transaction.

The final issue that I have with this system relates to the number of private investigative firms that offer a credit check service for a fee; google All Ireland Investigation or www.checkback.ie to see for yourself. The ICB database is designed solely for the benefit of partaking financial institutions and should not be accessible by other groups. We do not consent for investigative firms to have access to our financial information even if we sign an ICB declaration of consent as part of a loan agreement.

Published on the Huffington Post website

My article on Ireland's approach to personal bankruptcy has been published on the Huffington Post website, a great online news source. Check it out -
http://www.huffingtonpost.co.uk/sarah-mccabe/irish-bankruptcy-law_b_991686.html

A condemnation of Irish bankruptcy laws

As the presidential race heats up I have been disappointed to find that not one of the seven candidates has touched upon an issue of crucial importance to an Irish society currently under great pressure. Our bankruptcy laws are archaic and are not afforded the attention they deserve by either the media or our politicians. I continue to be astonished by this country’s approach to bankruptcy, which does much to exacerbate the financial woes of Irish debtors.

In Ireland personal bankruptcy has traditionally been associated with fraud and financial mismanagement and the law represents this mindset. Applicants are penalised for a full twelve years after a declaration of bankruptcy. Even prior to the recession these laws were clearly unreasonable. In the aftermath of the economic downturn this approach is causing immeasurable harm by neglecting to allow for the thousands of people who, when faced with a harsh negative equity policy and rising unemployment rates, have amounted unavoidable debts over the last five years.

That personal debt in this country has reached epidemic proportions is unarguable. The organisations that currently exist to assist the public in debt management and bankruptcy advice are massively oversubscribed. In their Pre-Budget Submission of this year MABS, the Government-funded Money Advice and Budgeting Service, reported that the average debt of their clients has grown from just over E6,990 in 2006 to E16,937 by the third quarter of 2009. The Free Legal Advice Centre has experienced a 100% increase in debt related legal queries from the general public in the past year.

The average person assumes that bankruptcy is a last resort out of their debt, a way out when all is lost and their debts reach a point where repayment is no longer viable. Unfortunately Irish bankruptcy laws mean that there is no way out; no person of sound mind would willingly freeze their ability to make any money for a full twelve years, particularly anyone between 25 and 45 who is in the prime of their money-making life. MABS actively advises its clients to ignore bankruptcy as an option regardless of the size of their debt. This situation is frankly ridiculous; punishing a bankruptcy applicant for a full twelve years is both cruel to the individual of no help to the rest of society. Releasing a person from bankruptcy is actually of benefit to the economy as at least it allows them to re-enter the market as a worker and consumer.

No other developed nation applies such a punitive approach to individuals in serious debt. US and UK laws provide for the possibility of a bankruptcy discharge period of one year. Cost and ease of access alone also pose difficulties for the Irish debtor. Irish bankruptcy applicants must be able to pay the expenses of the Official Assignee, the costs of the petitioning creditor and any other preferential payments owed. In the UK, people can file for bankruptcy online. In Ireland it involves a High Court proceeding.

Recent proposals for reform in this area still fall short of providing a fair and equitable form of relief for indebted individuals. The Civil Law (Miscellaneous Provisions) Bill 2010 proposes to change the minimum period of time after which a person declared bankrupt may apply to have the bankruptcy discharged from twelve years to six. Yet six years is still an excessive length of time to penalise an applicant; not only does it strangle their ability to rehabilitate their finances for more than half a decade, but it as mentioned above it prevents them from re-entering the market as a spender and thus asset to the economy. The Bill proposes that the same criteria apply for the six-year period as currently do for the twelve-year period - the assets of the applicant must also be totally realised and the same costs and difficulty of access apply.

The Law Reform Commission’s proposals on personal debt envisage a far more comprehensive reform and are worth reading, but these are mere proposals – a Bill has yet to be introduced. This should be condemned given that Ireland’s IMF bailout included a condition requiring the Government to modernise our bankruptcy laws by the first quarter of 2012.

ESBies versus all-out Eurobonds

Euro-nomics is a think tank created by a group of European economists with the aim of providing economic solutions impartial from the priorities of their home states. The organisation includes Irishman Philip Wall of my own alma mater Trinity College. In the past week Euro-nomics have published quite a comprehensive set of proposals on their response to the current Eurozone crisis. The key tenet of their report is the creation of a new type of bond known as European Safe Bonds (ESBies). ESBies, the group intends, would be issued by a newly developed European Debt Agency and would not require new fiscal integration legislation. They would consist of a liquid bond designed to minimize risk, issued in Euros and subject to the ECB’s anti-inflation commitment, much as generic Eurobonds might be. The new European Debt Agency would buy the sovereign bonds of member states according to the states’ relative sizes. The EDA would hold these bonds as assets on its balance sheet, and use them as collateral to issue securities.

What differentiates ESBies from Eurobonds is that ESBies are designed to be divided into two different types of security. The first security, the ESBies, would involve a senior claim on the sovereign bonds held by the EDA. The second security would have a junior claim on these bonds and would be first to absorb whatever loss is realized in the pool of sovereign bonds that serve as collateral. So any failure by a sovereign state to honour in full its debts would be absorbed by the holders of the junior tranche security. Both levels of security would be sold to willing investors on the market. Investors who want to hedge or speculate on the ability of European member states to pay their debt could trade junior tranches while investors seeking a safe asset denominated in a stable currency could buy ESBies.

So far, so good. I am a definite proponent of Eurobonds; though I consider myself Eurosceptic I am also Irish, and Ireland has taken on a colossal amount of debt rather than burn the holders of Irish bonds, ultimately preserving the security of the Euro. So I am naturally in favour of some reciprocal action on the part of the rest of the Eurozone (ie Germany) and think that the issuing of Eurobonds, EU debt guaranteed by all EU countries, is the best way forward. Any practical plan for the viable implementation of Eurobonds will find favour with me.

However one issue that concerns me is that I can’t see the market rushing to buy into these junior securities that will have to compete with other high yield products. Simply put, is the investment market so big that sovereign debt will be in demand to the extent that is required for this whole idea to work?

It is important to remember that both Eurobonds and Euro-nomics’ solution only provide a route for struggling banks to seek finance at a more reasonable rate than currently quoted on the bond market, thus avoiding automatic default. It does not in any way rectify the actual debt racked up by certain Eurozone countries. These states will continue to struggle with the burden of their debt, but they will at least have a method of financing it rather than being forced to default.

Mortgage to Shared Equity Scheme far superior to Mortgage Interest Supplement

At the last count, one in nine of all Irish mortgages were in arrears. That statistic does not even account for those many homeowners who are barely making their payments or are likely to fall into arrears in the near future. This crisis has inspired a passionate response. Those in debt are desperate for a solution and call for Government action while others condemn the idea of forgiving the debt of some while most of the populace are still struggling with other types of bills. There is no answer that will satisfy everyone but there is a potential solution that has been inexplicably ignored by the Irish Government. Shared equity schemes offer a realistic remedy to the country’s mortgage arrears issues.

Mortgage to shared equity schemes allow home owners who can no longer afford their mortgage to reduce their level of secured debt while retaining a stake in their home. Such a scheme sees the Government take on a portion of the mortgage and in return gets a stake in the property’s equity. This does exist in Ireland at some level, in the form of the Shared Ownership Scheme. However this is aimed at first-time buyers only and so does nothing to address the current problem of existing mortgages that have moved into arrears.

Scotland’s Mortgage to Shared Equity scheme operating under their Home Owners’ Support Fund is a model example. The scheme was established in 2009 and assists homeowners who are in danger of having their homes repossessed. It involves the Scottish Government taking a financial stake in a mortgagee’s property. The individual still owns their home and continues to have responsibility for maintaining and insuring it. But they will have reduced the amount they must pay their lender every month, since the Government will now pay a portion of the mortgage proportionate to the equity stake they have taken on.

In my time working with mortgage arrears lobbyists, if ever a suggestion of a shared equity scheme in an Irish context was floated it was shot down as too expensive for the state to absorb. This is a foolish response. Currently the only relief available for people in mortgage arrears is Mortgage Interest Supplement, a payment operated by the Department of Social Welfare. MIS was enacted in 2007 and not designed to bear the volume of mortgage arrears cases we are seeing today. Envisaged as a temporary form of assistance, in some cases MIS has now been paying the interest of certain mortgages for more than five years. The most scandalous aspect of MIS is that all payments go directly into the pockets of the banks; the state gains nothing. This is wasted money.

A mortgage to equity scheme would at least gives the State a portion of a property’s equity in return for taking on the proportional shared debt. Thus when the property is later sold or redeemed back by the original mortgage-holder, the state gets the benefit of this equity. Obviously this may be reduced in cases of negative equity but the State, unlike individual debtors, will not be forced to sell at a low point in the market. They have the liquidity to retain their equity in these properties for an extended period, say ten or twenty years, by which time property prices will hopefully have stabilized and increased.

The number of people accessing MIS increased by more than 260 percent between 2008 and 2010 to 15,100 families, according to the interim report of the Mortgage Arrears and Personal Debt Review Group. In 2009, the supplement cost more than €60 million, compared to €12 million in 2007. In 2010 the average payment was in the region of €367 per month. This is the definition of expensive since these payments are essentially money down the drain. It is time for the Government to scrap this supplement and look to the Scottish example by providing a more viable solution in the form of a mortgage to equity scheme.

North to South currency exchanges: money is falling through the cracks in the border

I have recently started a new job in Northern Ireland. It has not been any great move; on our little island only an hour and a half’s drive from Dublin results in a new currency and jurisdiction. Still I’ve been surprised to find how difficult it is to transfer money online from a Northern bank account to a Southern one without incurring a ridiculous fee.

I have expenses that must be paid in both the North and the South, in Sterling and Euros. Thus like many people I have a bank account in both states. I also have a full-time job that makes it difficult for me to physically visit my banks to withdraw and lodge money. Instead I am an enthusiastic user of online banking, a service that consumers now view as standard and expected. Despite the fact that some taxpayer-funded Southern institutions have the gall to begin charging us for this service, a large portion of society now perform most of their banking online. So I was surprised to find that it is not possible to move money online from an account with a bank in Newry to an account in Dundalk, ten minutes drive away from each other, without being charged a ridiculous international transfer fee.

I can transfer money online from an Irish Euro account to Romania for a smaller fee than to transfer money to Northern Ireland. All EU countries except the UK are subject to SEPA, the Single Euro Payments Area initiative. SEPA dictates that a bank must charge the same amount for SEPA Euro credit transfers as they charge for domestic credit transfers.

Although there are vaguely less costly ways to transfer money cross-border, including by bank draft (which generally involves a £5 or £6 charge) or by physically withdrawing and lodging the money (where travel expenses alone will add up), I must stress that I am only concerned with what options are available online. So what options currently exist for the Northern employee with Southern bills who is tech savvy but time poor?

I bank with Bank of Ireland who as it turns out are one of the least helpful institutions on this issue – you simply can not make cross-border transfers online with this bank, even though they have dedicated northern and southern branches. I found it a challenge to gather comprehensive information on any bank’s transfer rules but eventually a BOI advisor was able to explain that the only way to perform such a transaction was through a bank draft at a cost of £10. The receiving bank in the South would then charge a commission as well as its own (usually unfavourable) exchange rate – if you moved money from BOI North to BOI South that commission would be 1% of the overall transfer on top of everything else. Expensive.

AIB do thankfully offer an online cross-border transfer service. Transactions are completed through their Paylink service. Again these are performed according to the bank’s own unfavourable exchange rate. High Street banks rarely offer competitive rates to consumers; they make quite a substantial profit from the general public’s purchase of currencies that are initially bought by banks at a lower market rate on the interbank market. Unfortunately a standard charge of £15 applies to Sterling-to-Euro movements with AIB and a €15 charge is applied vice versa. Ulster Bank operate a similar scheme; you can make cross-border electronic payments but they will cost you £18.75 per transaction. These fees are still too hot for my blood; I want to move money regularly so need a cheaper option.

Our country’s banks should be able to provide us with this basic service for a reasonable price. They do not and so I was forced to explore less familiar options. I had only come across Paypal in the context of eBay payment options but it is championed online by foreign exchange enthusiasts. By establishing two PayPal accounts, one in Euros and one in Sterling, and attaching them to two different bank accounts, users can perform cross-currency transfers online for one of the lowest going rates. Paypal do not charge a transfer fee for this but instead will charge an extra 3% commission on top of market currency rates. This is still a reasonable rate. When looking at any transaction involving currency exchange it is important to take note of both the transaction fee and also the competitiveness of the exchange rate.

The most competitive options that I stumbled across were offered by online currency exchange companies, of which Xe.com appears to be the most popular. Xe’s service requires you to wire your chosen sum to them (which can be done online), for which there is no fee. They convert this to your desired currency at a very competitive rate, as the company specialises in foreign exchange and does not have to cover the same overheads generated by a bank. If you are changing Euros into Sterling you can even wire the exchanged money to your UK bank account for free, through Xe’s EFT service. If this seems too good to be true, regretfully it is. This free EFT process seems like a loss leader designed to attract customers, because there is still a charge to wire Sterling into an Irish account, and for many other types of currency exchange; only certain countries can avail of Xe’s services while avoiding some kind of transfer fee. But this fee is still low in comparison to what you would experience with a High Street bank. Xe also offer a draft option, where your exchanged money can be posted to your bank in draft form for free. This is a much slower method but since the majority of Irish banks do not charge a fee to cash Euro drafts, we are in the money; here, at last, is a low cost option for moving Sterling into Southern Euro accounts.

Bless the UK Post Office because they also offer a somewhat free service. No fees are applied when sending or receiving money from a post office account, transfers can be made online or by phone and they charge no commission on transfers. Their exchange rate, while not as competitive as currency specialists Xe, is at the time of writing reasonably good. My only issue with the Post Office’s service is that they require a £250 minimum transfer amount for every transaction; given that the median UK salary is only £26,000, this is quite a sizeable amount for the average Joe.

There are still other routes available, including smaller online companies and global banks with internationally-themed packages. However the majority of these feature tricky criteria, as with HSBC who offer free international transfers at a low rate only to Premier customers, those with a running balance of £60,000 or more. The other options that I have discussed are the most realistic and viable solutions for the Northern Irish taxpayer with Southern bills. It is frankly ridiculous that our own banks don’t offer this service for free – the customer should be entitled to expect this as a matter of course.

Proactivity a must when facing mortgage arrears

Most of us are all too familiar with the little mental sigh brought on by coming home to a small mountain of unopened envelopes. As a teenager I adored receiving post; now I am pleased when greeted with an unadorned mat beneath my letter box. Today any message of affection comes by email or text while the postman is commonly the bearer of bad news, the bringer of bills, eFlow notifications and loan payment reminders. It is easy to let these officious-looking envelopes build in an unopened pile.

However there is just no room for this type of behaviour in the face of the current mortgage crisis. At present one in nine homes faces repossession; that is just over 55,000 households at the last count. The debate continues as to whether Government intervention on this issue is both insufficient and overdue but the fact remains that people in mortgage arrears have actually been afforded some level of protection since 2009. Further safeguards were established with the introduction of the revised Code of Conduct on Mortgage Arrears at the beginning of this year. A crucial theme that undercuts all of this protective legislation is the need for mortgage owners’ vigilance and proactivity in relation to their debt.

The Code of Conduct on Mortgage Arrears provides a framework that lenders must follow in their dealings with borrowers who are in arrears or facing arrears with their mortgage. The aim of the Code is to avoid the repossession of family homes by putting in place alternative repayment arrangements for the mortgage where the borrower can’t make full payments. Though its provisions have been reasonably well publicised by Citizens Advice Bureaus and non-governmental organisations, many mortgage borrowers remain unaware of the protections offered by this piece of legislation. This is an awful shame because the Code is really the only route towards gaining some sort of peace of mind and preventing (or at least delaying) the repossession of a family home in the event of mounting mortgage arrears.

Among other things it requires that all mortgage lenders establish dedicated mortgage arrears support units in each of their branches, that they notify customers immediately of any arrears situation and most significantly that they negotiate some alternative temporary payment plan if the mortgage is at all viable. Alternative payment plans include interest-only payment periods, extensions of the overall mortgage period and even all out payment moratoriums. The Code also protects borrowers from the repossession of their family home for twelve months from the time that they fall behind with their mortgage payments.

Crucially, the Code requires that a person in arrears on their mortgage ‘cooperate’ with their lender. A lack of communication with a lender for three months or more will be considered as non-cooperation. This means that any mortgage owner who in fear and panic ignores communication from their bank for just three months could exempt themselves from the Code. Admittedly it is flawed piece of legislation and its weaknesses have been heavily criticised by commentators and debtors, but it is the only legal mechanism available that offers room for air to struggling mortgagees. The Code offers protection not just to those in arrears but also those in ‘pre-arrears’, people who are likely to fall behind with payments in the near future - again, the emphasis is on proactivity.

There is no ambiguity here; even when mortgage debts seem insurmountable it is obviously preferable to talk with your lender and give yourself a bit of breathing room. It becomes difficult to save the day the longer the problem is ignored. Lenders are reluctant to negotiate alternative payment plans with parties who have ignored communication for six months. Worse still, if you end up before the courts, a lack of willingness on your part to communicate with your lender casts you in a negative light; the courts do not look kindly on those who put their heads in the sand. So open those letters and contact your bank.