Irish banks may need life-support as property prices crash
The Dublin government appears to be almost powerless to prevent a severe downturn.
From The Daily Telegraph
Ambrose Evans-Pritchard reports
The Irish banking system faces acute strains and may require a phase of temporary nationalisation as the property slump leads to a wave of defaults, according to a leading Irish economist.
The banks, working in cahoots with the real estate agencies, have hyper-inflated the Irish economy by talking up the value of Irish property. They knew the risks their strategy posed, and should pay the price. The Irish taxpayer has already paid almost almost £150 million to bale out one Irish bank in the not-too-distant past and received none of that money back when that bank subsequently started posting record profits.
If the banksters live by the sword, they must be willing to face dying by it.
Morgan Kelly, of University College Dublin, said the government is almost powerless to stop the downturn becoming a severe slump. "We're in a classic post-bubble recession, yet we can't do anything that a country would normally do in this situation because we're inside the eurozone," Prof Kelly said. "We can't cut interest rates, we can't devalue, and there is a lot less room for fiscal stimulus than people think. We're stuck.
Too damn right we are stuck. We hitched our wagon to the Eurozone train and now we are paying the price. And yet we are being asked to abbrogate what remains of our sovereignty by voting for an EU treaty that is purposely written in a manner that obfuscates its true purpose.
"We have a domestic recession now colliding with a global recession. It is the state of the banking system that will determine how terrible this will be, and frankly that is looking very shaky."
The domestic recession is all of our own making, or rather made by our politicians, banks, property developers and real-estate agencies - with various "economists" who were wheeled onto national radio and TV operating as cheerleaders - telling us that everything was just hunky-dory when it was plain that it was not. The fact is you can not build sustainable economic growth by relying almost totally on a construction boom to generate that growth. Spain and Ireland, among EU countries, are living proof of that. You also can't create a stable economy based on ever-spiraling personal debt. It just doesn't work. Unfortunately, our "economists" don't seem to have grasped that basic concept.
Irish house prices fell 7pc last year. The pace of decline has accelerated so far this year. The damage is spreading to the broader economy. Unemployment jumped to an eight-year high of 5.2pc in February, from 5pc in January.
"We are going to see banks on life-support with very big bail-outs. The precedent for this is what happened in the Nordic countries in the early 1990s when they had to take over the banks. We may have to do something similar," he said.
Two of Sweden's largest banks were nationalised before being nursed back to health and refloated. The Nordic rescue is seen as a model of how to tackle a banking crisis. However, Sweden succeeded only after it left the ERM's fixed exchange system and regained control of its monetary instruments.
Mr Kelly, you can forget nationalising and nursing back to health any bank in this country with my taxes. If they are nationalised, then they should remain nationalised, but I believe they should be forced to pay the price of their greed. LET THEM FAIL - and then let's reconsider the wisdom of perpetuating the fraud known as fractional-reserve banking.
The Bank for International Settlements said in its latest report that there had been a surge in euro bond and note issuance in Ireland in the third quarter to $35bn (£17.4bn), up from $10bn. This is a huge sum for a country of 4.2m people.
It is a huge sum, but then again so is the level of public and personal debt, thanks to the appetite on the part of government for infrastructure projects that inevitably involve massive overspends and the public appetite for keep-up-with-the-jones's properties, cars and trinkets.
It appears to reflect a distress move by banks to raise money for use as collateral at the European Central Bank after the credit crunch hit. "The increase in net issuance came mostly from financial institutions, whose borrowing in securities markets had largely dried up," said the BIS. Irish borrowers built up $123bn in cross-border liabilities.
Ireland has been a star performer over the past 20 years, transforming itself from a high-tax backwater in the early 1980s to a free-market tiger. However, the country is the most exposed in the EU to both the dollar and sterling blocs, leaving it more vulnerable to trade and investment effects of the soaring euro.
Ireland's economic performance has never been more than a mirage, a smoke-and-mirrors act.
Prof Kelly said Ireland had lost 20pc competitiveness against its trade partners since the launch of EMU.
Eurozone rates of 2pc in the early part of this decade fuelled a credit bubble that has gravely distorted the economy. Household debt has reached 190pc of disposable income, the highest in the developed world. Bank lending rose by 30pc annually. Construction reached 15pc of national income, with 280,000 employed there,
It is very easy to blame "low interest rates" for the debt-bubble. This is like blaming the opium-poppy for heroin addiction. The banks chose to push low-interest loans. They chose to push 100% mortgages. They chose to allow mortgage borrowing of up to seven times annual income. The cause of the problem isn't the interest rate, it is the licentious behaviour of the banks.
Matthew Taylor, a credit expert at Fitch Ratings, said 27pc of all outstanding loans by late last year were to property and construction, leaving banks heavily exposed. Irish Nationwide Building Society has been downgraded from A to A-.
"If the downturn proves more severe than expected, a wider range of rating actions on Irish banks may be required," he said. For now, the problem looks "manageable".
Over 55pc of all mortgage loans are at floating rates, with several banks offering 100pc mortgages at the top of boom. Interest-only loans made up 16pc of the total borrowing in the third quarter of 2007. Anglo-Irish Bank, Allied Irish Banks, Bank of Ireland and EBS, all have a big stake in the property sector.
One of the above list has already received a cash-injection for the taxpayer. Fool me once, shame on you. Fool me twice, shame on me.
The establishment has pretended it's business as usual. But the mood is now changing. The Irish Independent warned this week that the country is sliding into a serious slump.
The establishment has always misrepresented the true economic position, using "economists" as their mouthpieces.
"Look at all the signs: every single one is screaming that the economy is in big, big trouble. Housing market dead, new car sales dead, consumer confidence is dead, record job losses, exporters being killed off by a strong euro, fuel prices spike, housing repossessions increase," it said.
Of course house repossessions are on the increase. Families have stretched themselves to the limit to buy them at silly prices - with the attendant risk that they will not be able to keep up repayments if the economy has so much as a hiccup.
Why the surprise over consumer confidence? Prices for basic necessities have gone through the roof, yet prices for comparatively useless electronic consumer goods continue to fall. We can't eat 42" LCD televisions.
Ireland is the only country to hold a referendum on the EU's revamped constitution, now called the Lisbon Treaty. The darkening economic picture may greatly queer the pitch.
Here's hoping!
