BUSINESS OPINION:Mechanism to handle widespread insolvency is clearly needed now – so why the delay?

THE CREDIT Institutions (Stabilisation) Bill would now appear to be a case of too much, too late. The decision of the President to refer the Bill to the Council of State signals that there are at minimum some doubts about the constitutionality of the powers the Minister for Finance has granted himself.

If the Government had sought somewhat less draconian powers two years ago we, and they, might have been better off. One thing they would almost certainly have avoided is the fiasco over the AIB bonus payments, an issue which will only become more tendentious now the Bill’s passing into law has been delayed.

The decision of the Government to wait until now to give itself the powers it needed to reorganise the banking system seems inexplicable. That they have had to wait until the EU-IMF told them to do it is just embarrassing. But at the same time this latest humiliation is actually entirely in keeping with the endemic denial that characterised the Government’s response to the banking crisis.

If confirmation of this denial was needed, it came last week courtesy of Wikileaks and the publication of a cable from the US embassy in Dublin to Washington on foot of a meeting between US representatives and the then second secretary general (now secretary general proper) of the Department of Finance, Kevin Cardiff.

The US officials left the meeting with the clear impression that the Irish Government had absolutely no concept of the trouble they were in. It follows from this that they had no idea of what was needed by way of radical action to fix the problem. The incremental and ultimately catastrophic policy response that followed just proves the point.

It is probably unfair to single out the department, as the-head-in-the-sand mentality ran right through the Government, the regulator and the banks themselves, not to mention the various lawyers and bankers that advised all of them, often all at the same time. Nobody within this group had anything to gain by confronting the true extent of the problem.

Indeed, it was probably beyond the ability of some to comprehend, because of what it meant for them personally and professionally.

It is interesting in this regard that the IMF has insisted the next review of the banks be carried out by advisers with no previous connections to the banks. In the same vein, AIB is now being run by accountants from PricewaterhouseCoopers in London.

Without a doubt some lessons have been learnt the hard way. But clearly there is more learning to be done if the less-than-demanding timetable for overhauling the bankruptcy legislation is anything to go by.

The updated staff report on Ireland released by the IMF on Friday is just the latest analysis to identify the lack of clarity about losses on non-Nama loans as one of the issues undermining the banks and thus the wider economic recovery. Residential mortgages, which account for 25 per cent of private sector credit, are a particular concern according to the IMF.

It would seem only prudent for the Government to start to prepare now for a possible problem in this area by expediting the introduction of both a new bankruptcy regime and also specific measures to deal with the issue of residential mortgage defaults.

Indeed, according to the IMF staff report “the [Irish] authorities estimate that initial uptake of the improved in-court and new non-judicial proceedings will be significant given the extent of household financial distress.”

Strange then that the sort of incrementalist approach adopted for the wider issue of the banks with such drastic consequences seems to apply to the issue of private-sector debt. The new legislation to reform the bankruptcy process is not due before the Oireachtas until early 2012 according to the support programme agreed with the EU and the IMF.

This is despite the law reform commission report – which is to be one of the key inputs into the legislation – being published last week. Likewise, the final report by the Mortgage Arrears and Personal Debt Group – which looks at measures to deal with mortgage default – sits on the Minister’s desk.

The Opposition parties might be better advised to make the rapid advancement of both these initiatives central planks of their election manifestos.

Unilateral efforts to burn senior bond holders may grab more headlines, but they are doomed without the support of the IMF or the EU. The notion of putting in place the machinery to deal with potential widespread private debt defaults already has their support.

A comprehensive personal insolvency regime tied in with some measures to assist home owners would allow the tens of thousands of people struggling with unmanageable debts to start the difficult, but inevitable process of dealing with them and the true extent of the problem will become clearer.

Until this happens the economy – and the housing market in particular – will be held back and confidence in the banks continue to be undermined.