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Dealing with debt forgiveness remains a big dilemma

The intractable issue of debt forgiveness for troubled mortgage-holders simply refuses to go away as people become ever more burdened with each passing month. It is a situation creating a major dilemma for the government which does not have the resources to fund a significant debt forgiveness programme but might well look at bringing in new legislation to restructure or reduce debt instead.

The Fine Gael-Labour coalition has said it will examine ways to ease the burden on mortgage holders struggling to cope with the financial crisis but says a blanket approach to debt forgiveness for mortgage-holders is unrealistic, in spite of the fact that as many as 40,000 mortgage accounts are believed to be in considerable difficulty in this country.

The debate was restarted by Ireland's 'Dr Doom', Professor Morgan Kelly, last week when he said a €6 billion bailout for those struggling to cope would end the crisis. A bailout for struggling homeowners would mean mortgages would be reduced to a level deemed affordable. The government looks set to resist such a move, though, with Minister of State for Finance Brian Hayes saying a proposal to write off up to €6 billion in personal mortgage debt was not a realistic option. Although he has received support from other economic commentators at the weekend, and from within some quarters within the government, Mr Hayes correctly pointed out two major problems with debt forgiveness - that it raises questions of fairness for people who are servicing their debts without any assistance from the State, often under huge pressure. The other is that the question of writing off up to €6bn in debt owed to Ireland's 'pillar banks' - which are gradually being taken off life support - remains extremely difficult to justify.

At the same time, it needs to be acknowledged that some kind of realistic proposal must be brought forward to alleviate the burden on those who are hopelessly indebted and are suffering great distress and worry as a result. AIB recently suggested the bank might offer some form of debt forgiveness for its mortgage customers struggling to keep up with their repayments, but only as long as other banks did the same.

The presumption that blood can be squeezed from a stone as banks continue to insist they will be able to collect full repayment of massive 100 per cent loans that should never have made in the first place remains is starting to come apart at the seams, and it's a situation that is mirrored in Europe, too, where an abject failure of collective political leadership to deal with the debt crisis is causing turmoil and contagion across the globe. Here, too, the issue of whether or not to write down at least a portion of the sovereign debt of Greece, Ireland and Portugal in favour of no-growth austerity programmes remains paramount.

Without strong economic growth, debt burdens will remain onerous for years to come. And while encumbered countries like our own are focused solely on paying down debt, it remains almost impossible to implement policies that will grow their economies. Getting the sputtering eurozone economies moving again will involve an acceptance that some debts will simply never be repaid, and the sooner they are forgotten, the better for all, allowing countries to move forward once again.

The classic argument against debt forgiveness is that it encourages bad behaviour in the future. The suggestion is that borrowers will recklessly take out large loans again because they believe, when push comes to shove, they will be bailed out again. However, the best argument in favour of debt relief is that it helps to free the productive potential of the economy, while over-indebtedness smothers growth. And that is exactly the position some of Europe's periphal economies find themselves in at this point in time.

The sticking plaster strategy of the euro area's political leaders is not working but this type of hand-wringing is often a prelude to eventually arriving at tough but necessary decisions. It may well be that the only alternative for Europe is some measure of debt forgiveness on sovereign debt to reduce it to what is manageable while at the same time continuing to apply pressure for fiscal reform.

The current debt level of Greece, for instance, at €340 billion is unmanageable and it is a charade to pretend otherwise. The markets have given their answer to that in the clearest of terms. Governments already have shown a willingness to bail out systemically important banks, so why not treat countries the same way?

Forgiving massive amounts of sovereign debt would neither be easy nor cheap, but the alternative of tinkering around the edges may well condemn Europe to a decade of recession.