The Government wants to get out of the banking business. But for the moment it is stuck in the middle of two big rows, one over the interest rates changed to borrowers and the other about how to deal with those in mortgage arrears.
At precisely the same time the Government is starting to sell down a State stake in Permanent TSB, with the much bigger sale of AIB to come. However it will remain the majority shareholder in both for some time to come.
Of course it is all linked together. Banks need to deal with mortgage arrears if they are to return to anything approaching normality in their operations.
Yet dealing with arrears means repossessions, in some cases anyway, and this prospect is politically toxic.
And how banks deal with arrears and what interest rates they charge customers has an impact on costs, margins and profits, the key considerations for investors looking to buy into our banks.
The extraordinarily low level of interest rates may help the Government in performing the three-card trick of trying to address all this, but it is still going to be tricky. Despite fears over a possible Greek default and exit from the euro, financial market interest rates continue to head lower. During the week the interest rate on 10-year Irish government debt hit a new low of just over 0.6 per cent – and you would have to pay the Irish Government to lend it cash for any term less than three years. If this sounds crazy it is because it is, but all the Government can do is to take it while it is there.
Investors now face a big problem in getting a return on their money, with bond interest rates on the floor and the value of shares soaring. Permanent TSB has made progress, but it is still a loss-making bank with a large legacy of tracker mortgages. The strong interest from investors is driven by the imperative of finding places that might give a return on their money over the next few years – such as a stake in a bank in an economy like Ireland, which is showing decent growth.
This recovery, combined with low interest rates, means Permanent TSB should be able to reduce the amount of money it has already put aside for arrears, adding to its profits, and this is attracting a few big international investors.
Disentangle
The gradual sell-down of the State shares in Permanent TSB and AIB will eventually allow our politicians to disentangle themselves from the debate about how customers should be treated – but not in time to get this Government off that hook.
In part, its political dilemma is summed up by two separate groups going under the initials IMHO.
There is the long-established Irish Mortgage Holders Association, of which the public face is David Hall, which has proposed a range of measures to deal with mortgage arrears. Meanwhile, recently online a new group has emerged with the same IMHO initials, the Irish Moral Hazard Organisation, whose approach is neatly summed up at the top of its web site: “In mortgage arrears? Sorry, but do you really expect the rest of us to pay it?”
So the Government is going to face flak no matter what it does. The crunch issue is what it does for those who are a long way off being able to pay their mortgage, but can pay something. The question is to what extent should they remain in their homes, either renting or owning, and how this should all be organised and paid for.
The Government will probably try to find a way out of this by offering some help to those in major arrears, but limiting it to a fairly small, defined group to try to lower the exchequer cost.
Mechanisms will be put in place to arbitrate the relationship between banks and borrowers. Ministers will then hope that low interest rates and rising house prices gradually eat away at the arrears problem for the majority.
This will still leave a big rise in repossessions but the Government will say that anyone who engages with their bank, provided they can make a reasonable contribution to their mortgage, can stay in their home. What “reasonable” is will be a tricky question.
Mortgage rates
Low interest rates, combined with competitive and political pressure, will probably also mean some decline in standard variable mortgage rates sooner rather than later, even if these rates will remain above EU norms of less than 3 per cent. The gap between deposit and lending rates are high for the banks – 3.5 percentage points on new business.
In time new entrants may look at the market here and see pickings worth taking, but for the moment we have to rely on existing players to become more competitive with each other.
So, the magic potion of low interest rates may help the Government deal with its two key political problems on the banking front, as well as stoking demand for its stakes in Permanent TSB and later AIB.
But there is still a tightrope to be walked and in political terms it is a case of damage limitation. Repossessions will rise, both sides will complain about whatever new arrears measures are proposed, and while standard variable mortgage rates may fall it will be a slow process – depositors may also suffer more.
The bottom line remains that the Government will do nothing to upset the sell-off of Permanent TSB and AIB and neither will the banks themselves, who have been given the key objective of fattening themselves up for sale. There may be political pain to be shipped in the short term, but also kudos to be garnered if cash starts flowing in from the sale of State bank shareholdings.
And getting out of the troublesome business of banking would be a big plus.
Twitter: @CliffTaylorIT