David Prosser: Forbearance stores up trouble for the future: in Greece and at home

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The Independent Online

Outlook Who would be a banker just now? It's not simply that you are public enemy number one – now you're not allowed to ask many of your customers to pay back what they have borrowed from you. Certainly not Greece, whose debts you are required to roll over (though you must not call it a default), and not your mortgage customers back home either, to whom you must show "forbearance".

The latter issue is one thatconcerns the Bank of England's new Financial Policy Committee, which now has the job of watching out for threats to financial stability. Its first set of recommendations, published on Friday, included a call for banks to disclose more information about the forbearance they have granted struggling borrowers at the behest of this Government and its predecessor (not that the FPC is calling for them to start getting tougher).

Yesterday, the Governor, Sir Mervyn King, developed the theme, telling MPs that he did not expect there to be a sudden spike in repossessions once the Bank's Monetary Policy Committee finally begins to raise interest rates, flatly contradicting the head of UK Asset Resolution, who is in charge of £80bn of mortgages and warned of a possibility of a flood of bad debt cases.

Sir Mervyn's argument is that a shift to rate rises is only likely once other more positive trends have been established, such as an improvement in the jobs market.

Still, even leaving that argument aside – though note that the Council of Mortgage Lenders is already predicting a rise in repossessions of more than 12 per cent next year – we should at least question who actually benefits from forbearance.

In the short-term at least, the answer seems obvious – the beneficiaries of the policy are those who might otherwise be losing their homes. Well, that's fine, but it is not as if struggling borrowers are having their debts written off. Rather, the size of their borrowing is rising by the day and a good number may not be able to avoid repossession in the end, especially if interest rates start to rise. In the meantime, they face the debilitating stress of living at their lender's mercy.

As for the lenders, they too are short-term beneficiaries of forbearance. For as long as they do not call in these borrowings, they can avoid writing them off as bad debt (this sweeping of a balance sheet headache under the carpet is what most concerns the FPC). It is, of course, a problem deferred rather than avoided.

In fact, the crisis in Greece and the case of the UK mortgage market's hidden nasties have much in common. Both problems have prompted policymakers to come up with a similar fudge in order to get past a difficult bump in the road, but in doing so there's a real risk they are turning the possibility of a much more severe crash to come into an inevitability.

The case for a VAT cut gets even stronger

When the UK clawed itself out of recession, many people breathed a sigh of relief that the downturn had claimed only the very weakest retailers – the likes of Woolworths, for example. But it seems that significant damage was also done to a whole raft of slightly stronger retailers, many of which are now in real trouble because of the slowdown in the pace of recovery.

How should we address this growing crisis on the high street? Well, there is no case for a direct intervention at strugglers such as TJ Hughes, Jane Norman and Habitat. But the mounting joblosses at these retailers, as well as those such as Thorntons, whose problems fall short of administration, cannot be ignored. They're miserable in their own right, but also of the sort of magnitude that creates vicious circles, particularly when we are trying to replace job losses in the public sector.

When Ed Balls suggested earlier this month that the moment had come to consider at least a temporary reversal of the VAT rise imposed in January, the Chancellor, George Osborne, chose to make political capital of his opposite number's proposal. Such is the rough and tumble of Westminster, but the case for a cut in VAT is mounting by the day.

It isn't just that the headline cost of cutting VAT from 20 per cent back to 17.5 per cent, put at £12.5bn, is misleading; though it is because mitigating factors include the additional revenue raised from higher spending, as well as the tax revenues earned from retailers that do not have to shut up shop after all. Another argument is that a VAT cut would be of most help to retailers right at the sharp end of the consumer spending downturn.

For it is noticeable that a good number of the worst-affected retailers are those that sell big-ticket items and have exposure to the stagnant housing market: Carpetright yesterday, but also Habitat and kitchens company Homeform. It is these companies that have most to benefit from lower VAT because the effect of the cut is so much more noticeable on bigger ticket items.



The wrong way to tax the banks

José Manuel Barroso, President of the European Commission, will have his work cut out if he proposes, as expected, to impose a financial activities tax on European Union banks today, with the proceeds going straight to Brussels.

For one thing, the Commission said six months ago that it thought such a tax was a bad idea unless applied globally. For another, many member states will be enraged by the attack on their sovereignty imposing such a tax would represent, even if it paid for lower contributions from countries to the EU budget. And for yet another, those countries on record as supporting this tax – not the UK, which has the most to lose since it has the biggest financial services sector in Europe – think the money should go towards aid and development, not into Brussels' coffers.

It is probably best if Mr Barroso thinks again.

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