patrick honohan : addressing the impact of the distressed property market introductory remark by mr patrick honohan, governor of the central bank of ireland, at the central bank conference “ how to fix distressed property markets? ”, dublin, 13 february 2013. * * * i can think of few themes that are more topical for the central bank, not only in ireland, but in many other countries as well. household financial distress is at unprecedented levels in ireland as can be seen, for example, from the extraordinary rates of arrears on the servicing even of mortgages secured on owner - occupied homes. it is sixteen months since the previous economic research conference organised by the financial stability division of the central bank on the problem of mortgage indebtedness and mortgage arrears. before then, alert to the danger that some creditors might pursue distressed mortgage debtors in an aggressive and unfair manner we had already moved to insist on fair and proportionate treatment through the code of conduct on mortgage arrears. following the two pcar reviews ( march 2010 and march 2011 ), we had ensured that the banks secure sufficient capital to enable them to absorb the both expected and unexpected losses on distressed mortgages. and we were ramping up our engagement with the banks in recognition of the fact that they seemed to be behind the curve in addressing the problem of mortgage arrears on a sustainable basis. many people ’ s view on what the priority should be in dealing with the mortgage arrears situation is coloured by their direct experience of friends or family. most borrowers continue to service their loans. indeed, i suppose that, despite the challenging times and widespread over - indebtedness, most people in ireland subscribe to the general proposition that – to quote a recent authority on the need for debtor - friendly insolvency arrangements – “ debtors should fulfil their obligations if at all possible, and freedom from legitimately incurred obligations is a privilege, potentially subject to abuse, that should therefore be a carefully guarded last resort ” hence, while long - term debt modification involving permanent debt relief is a necessary ingredient in the resolution of arrears, it is relevant chiefly for cases of over - indebtedness involving or bordering on insolvency. to date, the banks have dealt with the emerging situation largely by means of two devices : capitalisation of arrears and a temporary move to an interest - only payment schedule. such temporary forbearance measures do provide cash

are currently still lower than they were before the crisis. it ’ s a different matter, of course, for the many affected by unemployment. in contrast, international wage competitiveness of the uk has been strongly assisted by the weakness of sterling since the crisis began ( albeit at the cost of rising inflation ). the sharp decline in the value of sterling, especially from late 2007 to early 2009, has of course been inconvenient, to say the least, for businesses in the republic exposed to uk competition – and let ’ s not forget that we have long been and are still among the uk ’ s largest trading partners. the contrasting exchange rate regimes and policies have certainly complicated life. achieving cost savings sufficient to offset the exchange rate movement – albeit partially mitigated by higher uk inflation – has proved difficult, as is well understood by businesses in border counties such as cavan. achieving lower nominal wage rates is not easy. but it is undoubtedly an essential component of a pro - employment recovery strategy for ireland – and not simply a means of achieving budgetary savings. i want to end with this message, as i think that it is both the most important policy message that i can deliver in the current environment, and one which highlights in a dramatic way the similarities, contrasts and interdependencies of the economies of the republic of ireland and the united kingdom, as we both face the volatilities and surprises of the globalized world.