I get annoyed listening to McWilliams when he supported the nama bailout as well. He has an irritating habit of making adjustments to his arguments and pretending that’s what he was thinking all along.
Excellent discussion here:
http://www.youtube.com/watch?v=MdZpXxqkPDE
http://www.youtube.com/watch?v=r4rfoyruGQ4
http://www.youtube.com/watch?v=pjt6ZliH2HY
Role of the eurozone very interesting in all of this
Morgan Kelly has another magnum opus in Monday’s Irish Times - the doom just got doomier 
If you thought the bank bailout was bad, wait until the mortgage defaults hit home
THE BIG PICTURE: Ireland is effectively insolvent – the next crisis will be mass home mortgage default, writes MORGAN KELLY
SAD NEWS just in from Our Lady of the Eurozone Hospital: After a sudden worsening in her condition, the Irish Patient, formerly known as the Irish Republic, has been moved into intensive care and put on artificial ventilation. While a hospital spokesman, Jean-Claude Trichet, tried to sound upbeat, there is no prospect that the Patient will recover.
It will be remembered that, after a lengthy period of poverty following her acrimonious divorce from her English partner, in the 1990s Ireland succeeded in turning her life around, educating herself, and holding down a steady job. Although her increasingly riotous lifestyle over the last decade had raised some concerns, the Irish Patient’s fate was sealed by a botched emergency intervention on September 29th, 2008 followed by repeated misdiagnoses of the ensuing complications.
With the Irish Patient now clinically dead, her grieving European relatives face the melancholy task of deciding when to remove her from life support, and how to deal with the extraordinary debts she ran up in the last months of her life . . .
WHEN I wrote in The Irish Times last May showing how the bank guarantee would lead to national insolvency, I did not expect the financial collapse to be anywhere near as swift or as deep as has now occurred. During September, the Irish Republic quietly ceased to exist as an autonomous fiscal entity, and became a ward of the European Central Bank.
It is a testament to the cool and resolute handling of the crisis over the last six months by the Government and Central Bank that markets now put Irish sovereign debt in the same risk group as Ukraine and Pakistan, two notches above the junk level of Argentina, Greece and Venezuela.
September marked Ireland’s point of no return in the banking crisis. During that month, €55 billion of bank bonds (held mainly by UK, German, and French banks) matured and were repaid, mostly by borrowing from the European Central Bank.
Until September, Ireland had the legal option of terminating the bank guarantee on the grounds that three of the guaranteed banks had withheld material information about their solvency, in direct breach of the 1971 Central Bank Act. The way would then have been open to pass legislation along the lines of the UK’s Bank Resolution Regime, to turn the roughly €75 billion of outstanding bank debt into shares in those banks, and so end the banking crisis at a stroke.
With the €55 billion repaid, the possibility of resolving the bank crisis by sharing costs with the bondholders is now water under the bridge. Instead of the unpleasant showdown with the European Central Bank that a bank resolution would have entailed, everyone is a winner. Or everyone who matters, at least.
The German and French banks whose solvency is the overriding concern of the ECB get their money back. Senior Irish policymakers get to roll over and have their tummies tickled by their European overlords and be told what good sports they have been. And best of all, apart from some token departures of executives too old and rich to care less, the senior management of the banks that caused this crisis continue to enjoy their richly earned rewards. The only difficulty is that the Government’s open-ended commitment to cover the bank losses far exceeds the fiscal capacity of the Irish State.
The Government has admitted that Anglo is going to cost the taxpayer €29 to €34 billion. It has also invested €16 billion in the other banks, but expects to get some or all of that investment back eventually.
So, the taxpayer cost of the bailout is about €30 billion for Anglo and some fraction of €16 billion for the rest. Unfortunately, these numbers are not consistent with each other, and it only takes a second to see why.
Between them, AIB and Bank of Ireland had the same exposure to developers as Anglo and, to the extent that they were scrambling to catch up with Anglo, probably lent to even worse turkeys than it did. AIB and Bank of Ireland did start with more capital to absorb losses than Anglo, but also face substantial mortgage losses, which it does not. It follows that AIB and Bank of Ireland together will cost the taxpayer at least as much as Anglo.
Once we accept, as the Government does, that Anglo will cost the taxpayer about €30 billion, we must accept that AIB and Bank of Ireland will cost at least €30 billion extra.
In my article of last May, when I published my optimistic estimate of a €50 billion bailout bill, I posted a spreadsheet on the irisheconomy.ie website, giving my realistic estimates of taxpayer losses. My realistic estimate for Anglo was €34 billion, the same as the Government’s current estimate.
When you apply the same assumptions about lending losses to the other banks, you end up with a likely taxpayer bill of €16 billion for Bank of Ireland (deducting the €3 billion they have since received from investors) and €26 billion for AIB: nearly as bad as Anglo.
Indeed, the true scandal in Irish banking is not what happened at Anglo and Nationwide (which, as specialised development lenders, would have suffered horrific losses even had they not been run by crooks or morons) but the breakdown of governance at AIB that allowed it to pursue the same suicidal path.
Once again we are having to sit through the same dreary and mendacious charade with AIB that we endured with Anglo: “AIB only needs €3.5 billion, sorry we meant to say €6.5 billion, sorry . . .” and so on until it is fully nationalised next year, and the true extent of its folly revealed.
This €70 billion bill for the banks dwarfs the €15 billion in spending cuts now agonised over, and reduces the necessary cuts in Government spending to an exercise in futility. What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?
What is driving our bond yields to record levels is not the Government deficit, but the bank bailout. Without the banks, our national debt could be stabilised in four years at a level not much worse than where France, with its triple A rating in the bond markets, is now.
As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them.
For a country or company, insolvency is the equivalent of death for a person, and is usually swiftly followed by the legal process of bankruptcy, the equivalent of a funeral.
Two things have delayed Ireland’s funeral. First, in anticipation of being booted out of bond markets, the Government built up a large pile of cash a few months ago, so that it can keep going until the New Year before it runs out of money. Although insolvent, Ireland is still liquid, for now.
Secondly, not wanting another Greek-style mess, the ECB has intervened to fund the Irish banks. Not only have Irish banks had to repay their maturing bonds, but they have been haemorrhaging funds in the inter-bank market, and the ECB has quietly stepped in with emergency funding to keep them going until it can make up its mind what to do.
Since September, a permanent team of ECB “observers” has taken up residence in the Department of Finance. Although of many nationalities, they are known there, dismayingly but inevitably, as “The Germans”.
So, thanks to the discreet intervention of the ECB, the first stage of the crisis has closed with a whimper rather than a bang. Developer loans sank the banks which, thanks to the bank guarantee, sank the Irish State, leaving it as a ward of the ECB.
The next act of the crisis will rehearse the same themes of bad loans and foreign debt, only this time as tragedy rather than farce. This time the bad loans will be mortgages, and the foreign creditor who cannot be repaid is the ECB. In consequence, the second act promises to be a good deal more traumatic than the first.
Where the first round of the banking crisis centred on a few dozen large developers, the next round will involve hundreds of thousands of families with mortgages. Between negotiated repayment reductions and defaults, at least 100,000 mortgages (one in eight) are already under water, and things have barely started.
Banks have been relying on two dams to block the torrent of defaults – house prices and social stigma – but both have started to crumble alarmingly.
People are going to extraordinary lengths – not paying other bills and borrowing heavily from their parents – to meet mortgage repayments, both out of fear of losing their homes and to avoid the stigma of admitting that they are broke. In a society like ours, where a person’s moral worth is judged – by themselves as much as by others – by the car they drive and the house they own, the idea of admitting that you cannot afford your mortgage is unspeakably shameful.
That will change. The perception growing among borrowers is that while they played by the rules, the banks certainly did not, cynically persuading them into mortgages that they had no hope of affording. Facing a choice between obligations to the banks and to their families – mortgage or food – growing numbers are choosing the latter.
In the last year, America has seen a rising number of “strategic defaults”. People choose to stop repaying their mortgages, realising they can live rent-free in their house for several years before eviction, and then rent a better house for less than the interest on their current mortgage. The prospect of being sued by banks is not credible – the State of Florida allows banks full recourse to the assets of delinquent borrowers just like here, but it has the highest default rate in the US – because there is no point pursuing someone who has no assets.
If one family defaults on its mortgage, they are pariahs: if 200,000 default they are a powerful political constituency. There is no shame in admitting that you too were mauled by the Celtic Tiger after being conned into taking out an unaffordable mortgage, when everyone around you is admitting the same.
The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War, but with one crucial difference. Whereas the Land War faced tenant farmers against a relative handful of mostly foreign landlords, the looming Mortgage War will pit recent house buyers against the majority of families who feel they worked hard and made sacrifices to pay off their mortgages, or else decided not to buy during the bubble, and who think those with mortgages should be made to pay them off. Any relief to struggling mortgage-holders will come not out of bank profits – there is no longer any such thing – but from the pockets of other taxpayers.
The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue.
However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly.
While the current priority of Irish banks is to conceal their mortgage losses, which requires them to go easy on borrowers, their new priority will be to get the ECB’s money back by whatever means necessary. The resulting wave of foreclosures will cause prices to collapse further.
Along with mass mortgage defaults, sorting out our bill with the ECB will define the second stage of the banking crisis. For now it is easier for the ECB to drip feed funding to the Irish State and banks rather than admit publicly that we are bankrupt, and trigger a crisis that could engulf other euro-zone states. Our economy is tiny, and it is easiest, for now, to kick the can up the road and see how things work out.
By next year Ireland will have run out of cash, and the terms of a formal bailout will have to be agreed. Our bill will be totted up and presented to us, along with terms for repayment. On these terms hangs our future as a nation. We can only hope that, in return for being such good sports about the whole bondholder business and repaying European banks whose idea of a sound investment was lending billions to Gleeson, Fitzpatrick and Fingleton, the Government can negotiate a low rate of interest.
With a sufficiently low interest rate on what we owe to Europe, a combination of economic growth and inflation will eventually erode away the debt, just as it did in the 1980s: we get to survive.
How low is sufficiently low? Economists have a simple rule to calculate this. If the interest rate on a country’s debt is lower than the sum of its growth rate and inflation rate, the ratio of debt to national income will shrink through time. After a massive credit bubble and with a shaky international economy, our growth prospects for the next decade are poor, and prices are likely to be static or falling. An interest rate beyond 2 per cent is likely to sink us.
This means that if we are forced to repay the ECB at the 5 per cent interest rate imposed on Greece, our debt will rise faster than our means of servicing it, and we will inevitably face a State bankruptcy that will destroy what few shreds of our international reputation still remain.
Why would the ECB impose such a punitive interest rate on us? The answer is that we are too small to matter: the ECB’s real concerns lie with Spain and Italy. Making an example of Ireland is an easy way to show that bailouts are not a soft option, and so frighten them into keeping their deficits under control.
Given the risk of national bankruptcy it entailed, what led the Government into this abject and unconditional surrender to the bank bondholders? I have been told that the Government’s reasoning runs as follows: “Europe will bail us out, just like they bailed out the Greeks. And does anyone expect the Greeks to repay?”
The fallacy of this reasoning is obvious. Despite a decade of Anglo-Fáil rule, with its mantra that there are no such things as duties, only entitlements, few Irish institutions have collapsed to the third-world levels of their Greek counterparts, least of all our tax system.
And unlike the Greeks, we lacked the tact and common sense to keep our grubby dealing to ourselves. Europeans had to endure a decade of Irish politicians strutting around and telling them how they needed to emulate our crony capitalism if they wanted to be as rich as we are. As far as other Europeans are concerned, the Irish Government is aiming to add injury to insult by getting their taxpayers to help the “Richest Nation in Europe” continue to enjoy its lavish lifestyle.
My stating the simple fact that the Government has driven Ireland over the brink of insolvency should not be taken as a tacit endorsement of the Opposition. The stark lesson of the last 30 years is that, while Fianna Fáil’s record of economic management has been decidedly mixed, that of the various Fine Gael coalitions has been uniformly dismal.
As ordinary people start to realise that this thing is not only happening, it is happening to them, we can see anxiety giving way to the first upwellings of an inchoate rage and despair that will transform Irish politics along the lines of the Tea Party in America. Within five years, both Civil War parties are likely to have been brushed aside by a hard right, anti-Europe, anti-Traveller party that, inconceivable as it now seems, will leave us nostalgic for the, usually, harmless buffoonery of Biffo, Inda, and their chums.
You have read enough articles by economists by now to know that it is customary at this stage for me to propose, in 30 words or fewer, a simple policy that will solve all our problems. Unfortunately, this is where I have to hold up my hands and confess that I have no solutions, simple or otherwise.
Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.
From here on, for better or worse, we can only rely on the kindness of strangers.
Morgan Kelly is Professor of Economics at University College Dublin
Unfortunatly… Morgan tends to know the score.
I can only hope that there is something there that the ECB are going to help us out seeing as we’ve been so good to allow the few people who pay income tax to pay for French and German bondholders for the next 15-20 years.
If there is no ‘understanding’ in place then we’re going to the IMF in the spring and thats that.
It’s sad to see that so few have made decisions to gamble the future of Ireland away and have lost.
Yours etc,
GSH.
7.91 pc
What happens if, as is hinted at above, 200,000 people stoped paying their mortgage next week?
Yours etc,
GSH.
He does have irritating habits and can it get annoying listening to him but he didn’t ‘‘support the nama bailout.’’ He did suggest an initial, temporary blanket guarantee but fell out with Lenihan over extending in to bondholders ad infinitum . He was for letting the banks go to the wall
it will be added to the cost of the bank recapitalisations.
as with the rest of this farce, the taxpayer foots the bill.
until we reach the point at which we simply run out of cash, which would be an actual liquidity problem, which is what the banks initially claimed they were experiencing in sept 08, this will be dragged out as per the usual “pray and delay” strategy.
how this would impact at local level is harder to say.
given how most people now interact with banks via ATM, unless we run out of notes there won’t be any tangible impact on joe soap.
thanks for this sid,
there’s a thread on the pin with morgan’s musings from as far back as 06
he has to be considered as the most authoritative commentator on this whole sorry mess based on his record of accurately predicting how much this will all cost in the final analysis.
if he’s at the “capitulation” stage of the cycle of emotions, it can’t be much longer before the rest follow suit.
That’s bleak. Peig Sayers bleak. Could well be on the ball in calling the rise of the hard right as well. Right wing sentiment has put down deep roots over the last ten years.
I’d be inclined to believe that immigrants rather than travellers will bear the brunt, but far be it from me to contradict the man himself. Ganley to make his return to politics?
Definitely. It’s been here for a while as well and you’d happen across it much more often than you’d like. Typically, the article or clip will endeavour to present itself as a sound economic argument, followed by a long list of comments spewing forth every imaginable racist slur which the original contributer will enthusiastically support. There’s no end of cunts who love to play the stern, authoritative role who will lap this up. You can already see it in a range of other issues.
We’re front page news on the New York Times today.
The whole idea of NAMA was to clean up the bank’s balance sheet and take the hits on the bad loans up front, they achieved this by swapping say €10bn of good government bonds for €20bn of crap loans. The banks were then supposed to be more or less finished taking write-offs and could finance themselves in the repo market usig the government bonds. No I’m no accountant but surely there is a chance that the banks will have to record impairments/write-offs on the government bonds given the state the government finances are in, once this happens they bank’s capital needs will rise again and the government will need to write a bigger check to recapitalise them meaning more government borrowings meaning more write-offs on the government bonds and on with the same thing. In short we’re fooked before we even get to the mortgage problem Morgan is talking about.
AIB and BOI are tanking again today anyway.
Given that we don’t have the ability to even pay for the day to day running of the country and that we are now broke due to the 50-80 billion that the bank bailout will cost, how can it be just added to the bank debt that the taxpayer needs to pay?
I would expect that we are already at a situation where we will need ECB/IMF bailout funds and for them to be running the Irish Economy by mid-2011.
What I was thinking then is that if people just stop paying mortgages then can they buy another house in 2 years time even thought they owe 400k to BOI for eg? Do they qualify for social housing? Can the ever even get a loan for a car for eg or is their only choice to leave the country if they want to get money from banks? (if thats even an option).
Yours etc,
GSH.
We’re the first two stories on my Bloomberg app too.
This story is really gathering pace.
Bruton is spouting some guff here. Finger in the dyke, green jersey, comical Ali stuff.
[quote=“Garda Sean Horgan, post: 518406”]
we are now broke due to the 50-80 billion that the bank bailout will cost, [/quote]
That’s a very optimistic figure. 100 billion plus I’d say.
Morgan Kelly is completely right when he says that AIB is a black hole as bad as Anglo. Their last set of results were fantasy. They only project a E3billion loss on their non-NAMA loan book of E81.5 billion - 85.5billion if you inculde the 5-20 million range loans that were put back on their balance sheet a month or so ago.
Excellent article from Morgan above.
McWilliams can be infuriating sometimes but:
a) he’s a media personality. He tries to be a bit lively and it’s no harm. Saw his show thing in the Peacock and it was decent. Not many economists are that engaging.
B) he’s allowed to change his mind. One of the problems in this situation is nobody seems prepared to do that so we get the goverment backing up an emergency decision they made a couple of years ago for very different reasons to the reasons why they’re supporting the banks today.
c) he didn’t actually support NAMA as Souldressing says.
Fair play Sid there is a couple of thinks I’d like to speculate on here out of all the people who can’t pay I’d love to know how many of them are choosing not to pay and secondly how many of those mortgages are on the primary residence, how many are on foreign properties and on investment properties and second homes.
I see a good few vacant houses around, I suspect we all do, all you have to do is have a look at the amount of houses for sale in a small place like Gort but I have yet to see anyone being thrown out of their house.
PS Sid will you post up the funeral details, there will be a big crowd at that you know