Belfast Telegraph

Saturday 20 September 2014

Recovery will be a long, tough road

At last the recession is easing. The up-turn is welcome but is tentative and uneven. Recovery must take place against unrelenting and continuing pressure for the UK government to adjust the public sector finances and further decrease the excessive public sector deficit.

Recovery must also take place alongside the restructuring and reform of the banking sector. Rebuilding business and personal confidence with a damaged ability by the financial institutions to fully facilitate the supply of additional funds is a very serious challenge.

Added to this challenge, adjustments are still needed to the impaired financial abilities of firms and individuals who are either in negative equity in property assets or are in default on existing loans.

For the banks, the current prospects are focused on more than surviving the hangover of defaulting loans. Impairment provisions have not gone away. The fundamental problem is that even on normal trading the banks need to enhance their operational profits. Neither Danske Bank nor the Ulster Bank (on an all-island basis) is earning satisfactory operational profits. Half year operating profits of £27m and £174m respectively are inadequate to reward the capital invested. Bank branch closures and higher bank charges must be agenda items.

The banks are between ‘a rock and a hard place’. Retrospective analysis of the mistaken lending decisions of the last decade and the attribution of blame is a largely fruitless exercise.

The momentum of former collective madness cannot sensibly be converted into a blame and change recipe.

Similarly, if not equally, many borrowers and mortgage holders, with repayment obligations should not be given treatment justified only by the full rigour of commercial law.

An awareness is developing that the interaction of legal mechanisms to deal with debt repayment, the restructuring of parts of the banking sector and the release (and revival) of enterprising business people and property owners, calls for fresh initiatives. The present structures are likely to produce serious degrees of paralysis.

The Irish government, through the creation of Nama (National Asset Management Agency), responded uniquely to the situation of the Irish banks. The UK Government, slightly differently, was able to maintain the banking systems through direct financial intervention.

In Northern Ireland, the main commercial banks, Irish and British registered, were sustained. No bank closed its doors and customers did not lose their deposits as if market forces had prevailed.

The immediate rescue served its purpose but that does not sensibly rebuild a workable recovery model.

To deal with the debt of individuals and small businesses, the Irish government, partly because the scale of negative equity and non-performing loans is large (and partly because of influence from international agencies), is being innovative. New legislation, if it works as planned, is designed to break the logjam.

Essentially, the Irish legislation starts from the sensible assumption that some mechanism should be in place to force lenders and debtors to rationalise their relationship and, where necessary, partial debt write-offs should be agreed.

As a result, banks (and other lenders) would write-off hopelessly irrecoverable debt and individuals would be set realistic repayment schedules. The controversial element is that, subject to supervisory intervention, banks would take a partial write-off and take a hit on their balance sheet.

The scale of the problems facing a recovery in the financial sector in Northern Ireland is similar. The main commercial banks are still loss making from asset impairments and from poor operational trading margins. Recovery calls for a combination of tighter operational efficiency (and some branch closures) along with more radical debt management.

Leaving individuals and small businesses simply to hang-on to postpone bankruptcy, repossession and/or liquidation without a realistic expectation of survival will delay wider recovery.

If the banks and other lenders cannot agree a voluntary scheme similar to the Irish legislation, is new Finance Minister Simon Hamilton prepared to bring in similar legislation in Northern Ireland?

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