If the chink of financial light that shone from Brussels late last week can be used to address the growing mortgage crisis, then the news that the Europeans might cough up for the next round of mortgage defaults may be worth celebrating.
Make no mistake about it: the way the domestic economy is going and the way mortgage arrears are rising, there will be a need for further recapitalisation of the Irish banking system.
Obviously the eurozone chief bottlewashers didn’t say they would pony up for Irish mortgage defaults, but that’s what the decision last Friday could mean.
As losses mount on one side of the Irish banks’ balance sheet, someone will have to write a cheque on the other side of the balance sheet – the thing has to balance.
The way mortgage arrears are headed in Ireland, it looks like only a matter of time before the banks need new capital. There will only be two places from which that can come. The money is either from the Irish taxpayers or the taxpayers in other European countries. The ESM is other European taxpayers’ loot.
Last Friday there was lots of talk about being able to claw money back from the Europeans, money that we had already put in. This doesn’t look likely – not least because Irish taxpayers have injected around €32 billion into AIB, PermanentTSB and Bank of Ireland and the total European fund for bust banks is only €60 billion. It doesn’t seem reasonable to think that 50 per cent of a fund which is supposed to be sufficient to cover all bank debts in the eurozone would go to a country with 2 per cent of the eurozone population.
In addition, as the European fund would only take a position in the Irish banks after buying shares, it might be worth remembering that Bank of Ireland’s total market capitalisation is just over €4 billion and AIB much less. In fact, AIB is probably worth nothing. If it had value, don’t you think the government would have flogged it by now?
So, even if the ESM bought both entire banks, we, the taxpayers, would be massively out of pocket to the tune of possibly €28-odd billion.
More likely, and a better bet now, is that the cost of further recapitalisations could be met by the ESM with real money.
This is what the state may play for now. But why, you might ask, would the Irish banks need yet more money?
After all, weren’t we told that Irish banks were the best-capitalised banks in Europe?
Yes, they were, as long as they didn’t open for business. As long as they were safe deposit boxes for deposits, they were grand. But as soon as the banks’ balance sheets came into contact with the real world of excessive debt, arrears and mortgage defaults, the notion that they had loads of capital became farcical.
The latest news from the Central Bank shows that arrears are mounting relentlessly. Anyone who works in the real economy knows why. People simply can’t pay their mortgages, because incomes are falling. Taxes erode the incomes of those in work, and unemployment destroys the ability to pay of those on the dole.
This is simple stuff, really. As income falls, it doesn’t really matter what the rate of interest is. The ability to pay is reduced.
But why is your income falling? It is because someone else is not spending. After all, my income is your spending; and your spending is my income. So your income falls because my spending has fallen and my savings have risen.
Normally, when someone chooses to save, someone else chooses to spend those savings and the system rights itself. But this balancing mechanism is not happening, because the banks are petrified to lend.
But the very fall in income makes the banks more neurotic. This neurosis is because, even though your income has fallen, your debts have not fallen in tandem. In fact, because the interest rate is positive, your debts are actually rising.
When the banks see income falling, the debt-to-income ratio of their existing portfolio rises. This prompts more hushed conversations between the bank manager and head office. They get even more worried and lend out less, not more.
This process means that the banks simply sit on deposits and don’t recycle cash through the economy. This pattern is how the economy gets stuck.
Without fresh credit into the economy, income falls further and arrears rise, which is why the latest Central Bank figures show that ordinary people are slipping further and further into the mire.
According to the bank: “There were 95,554 (12.3 per cent) private residential mortgage accounts for principal dwelling houses (PDH) in arrears of over 90 days at end-March 2013, up from 92,349 accounts (11.9 per cent) at end-December 2012.”
If it was not clear that Ireland needs a large deal on personal debt up to now, it should be very clear from the latest figures. Such a deal could be executed by a large debt-for-equity swap whereby the banks take equity in the house and reduce the mortgage accordingly.
The ESM could pay for this, allowing those in debt to recover and begin to see a little bit of hope for the first time in years.
A debt deal of this type would put money back in people’s pockets, and would have the advantage of doing so immediately.
Many opponents of debt forgiveness or debt deals like this cite something called moral hazard. But shouldn’t we be more worried about real hazard – the real hazard of tens of thousands in mortgage arrears, the marriages breaking up, the mums and dads with no jobs?
This is a real hazard, and it is the real risk of a lost generation, living in a country with no hope. Should not this be what we worry about?
The idea of debt forgiveness is rooted in common sense as much as economics. It is as old as the Bible. Readers of the good book will turn to Leviticus or Deuteronomy to see chapters devoted to how you need to forgive your neighbours’ their debts.
The expression “the jubilee year” originates from the Old Testament. The wisdom of the Bible was that, if you don’t forgive your neighbours and you continue to subjugate them in a debtor’s prison, they eventually lose hope and turn against you.
As Tony Soprano might say, debt forgiveness is only “good business”. Bad business is grinding your neighbours down and not expecting them to stand up against you.
If last Friday’s European bank deal allows for recapitalisation funds to be used to reduce the debt burden on our neighbours who need a break, well then it should be seized immediately.
Because the clock is ticking. On Thursday, the Federal Reserve signalled a dramatic change in policy. Having kept interest rates low for five years, the Fed has now moved to a policy of pushing up rates. When US rates go up, global interest rates tend to follow, and you don’t need to be a genius to figure out the negative implications of this for Irish mortgages in the near future.
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http://www.faz.net/aktuell/wirtschaft/europas-schuldenkrise/wege-aus-der-schuldenkrise-biz-sieht-grenze-der-lockeren-geldpolitik-erreicht-12241432.html Well lets hope Ireland gets in there first #cause there isn#t enough money to further continue bailing out banks. Die Bank für Internationalen Zahlungsausgleich (BIZ)Bank for International Settlements issued a warning in its yearly report.
Mr. Wolfgang Munchau writes about this in the FT at the weekend.
http://www.ft.com/cms/s/f4577204-d9ca-11e2-98fa-00144feab7de,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Ff4577204-d9ca-11e2-98fa-00144feab7de.html&_i_referer=http%3A%2F%2Ft.co%2FlJLya8MQiH#axzz2X7UiFMwG
The SPD don’t like the new ESM decision one bit. There will be a lot of pre-election handbags in the Bundestag as an antidote to Wolfie Schäuble’s crowing.
My aunt, visiting from the US, thought I might like to have the weekend’s Irish Times property supplement, the front page of which featured a country house in Louth with a tennis court and outdoor swimming pool (in Louth?!). Looking at it, I didn’t know whether to laugh or cry. Property supplement vs. mortgage arrears. Us vs. them. Haves vs. have-nots. The defining theme of our time. Or rather, we’re waking to the fact that it’s always been the defining theme of our society even if for the last couple of generations we thought we had achieved more of a… Read more »
The cost of borrowing money from private sources has risen since 2008 unless you are borrowing from a central bank. If the yanks stop the QE game there will be one less central bank supplying cheap loans and the market price of money should rise further. However as long as the ECB keep their rate down the average Irish tracker holder is laughing. They should stay down until the european economy improves which wont be any time soon. If however the Germans manage to get ECB QE banned then the cost of Eurpean money will rise rapidly and then it… Read more »
I remember 15-20% interest in Ireland and the vision of increasing interest rates in the current situation is truly horrifying, especially as we have absolutely no control over whether rates rise or not we are the flea on the tail of the dog… the suggestion by the Master of the High Court is becoming more and more appetising,” pay the banks with an IOU”…get the bit of mortgage money being paid back into the economy and we will see a recovery of sorts, worry about the banks later, they don’t really care about us as long as they are on… Read more »
This can only work with repossessions.
1) BTLers not paying their mortgages are repossessed and the property put on the market.
2) People who are unemployed will have to be repossessed. Otherwise we will have one group of unemployed with houses they “own” and others on social housing.
If this doesn’t happen the rental sector will be paying taxes to prop up their landlords.
“the Fed has now moved to a policy of pushing up rates”
Really? I thought they were just considering slightly tapering the buying of mortgage backed security, nothing about interest rates!
https://brianmlucey.wordpress.com/2013/06/22/the-lack-of-joined-up-thinking-in-irish-governance/
Worth a read.
Surely Mortgage defaults is a result of lack of communication between borrower and lender. If a borrower cannot afford to pay the mortgage in full then a partial payment akin to a weekly rent should be negotiated. Its not in anyones interest that a bank take a property as there are only so many properties a bank can sell on. Things will look better in ten years as regards the true value of a property. If an individual leaves there house they will need to apply for social housing and therefore its also in the states interest to resolve the… Read more »
It’s what all the banks did of course.
http://www.zerohedge.com/news/2013-06-24/anglo-irish-picked-bailout-number-out-my-arse-force-shared-taxpayer-sacrifice
Isn’t “debt forgiveness” such an enormous concept? Where do we draw the line with debt forgiveness? What group does this debt forgiveness apply to? 1. Does it apply to the group who have so called been “fully participating in the economy”, with all their partying, pompously flaunting their possessions, their properties, their holidays abroad, their useless electronic gadgets, cars, handbags, alcohol, you name it? 2. Does it apply to the group who think they have such brilliant careers ahead of them because they happen to have been lucky enough to be born in the “right” family with the “right” people… Read more »
A Moral Hazard – those in the know don’t know the known knowns – private companies are running a small government… The Anglo tapes, Mr Bowe then says: “If they (Central Bank) saw the enormity of it up front, they might decide that they have a choice. You know what I mean? “They might say the cost to the taxpayer is too high. But if it doesn’t look too big at the outset … if it looks big enough to be important, but not too big that it kind of spoils everything, then, then I think you have a chance… Read more »
David’s paragraph… “But why is your income falling? It is because someone else is not spending. After all, my income is your spending; and your spending is my income. So your income falls because my spending has fallen and my savings have risen. Normally, when someone chooses to save, someone else chooses to spend those savings and the system rights itself. But this balancing mechanism is not happening, because the banks are petrified to lend.” … can be summarised as… “But why is your income falling? Because the banks are not lending.” Simple. We operate in a debt-based monetary model.… Read more »
I find it interesting that for Spain which had a lot of numerical parallels with the Irish situation has an arrears rate of just 4%. ( following link in Spanish – apologies ) http://economia.elpais.com/economia/2013/06/18/agencias/1371544152_012053.html Spain has actual quick evictions that happen about 50 per day so ( 16000 per year). It also has a partial no-recourse return the keys law. And a lot of mortgages are for a longer duration than Ireland. If anyone can read Spanish ( I think D McW can ) here is an interesting well organized support group for those affected by mortgage problems they managed… Read more »
not directly mortgages related and not for the faint hearted … The taped conversation between Anglo Irish executives John Bowe, head of capital markets, and Peter Fitzgerald, director of retail banking, took place three days after the collapse of Lehman Brothers in September 2008. It reveals how Anglo Irish was seeking €7bn in financial aid from the Central Bank of Ireland even though senior executives knew the bank would need more cash. 12 minute phonecall .. http://www.youtube.com/watch?v=er4QniOrqg8 so if Euro 7bn was the ‘magic number’ for Anglo to keep the show on the road,what will be the magic number for… Read more »
“The way mortgage arrears are headed in Ireland, it looks like only a matter of time before the banks need new capital. There will only be two places from which that can come. The money is either from the Irish taxpayers or the taxpayers in other European countries. The ESM is other European taxpayers’ loot.” The third way to get money is to bail-in all the depositors .All countries are set to raid the bank accounts of the depositors just as was done in Cyprus. If you do not want to be a direct contributor to the banking deficits remove… Read more »
I know somebody above mentioned Munhau above, but why not spell it out: Wolfgang Muenchau writes in todays’ FT, that potential loses of Eurozone banks can be anywhere between 1 trillion to 2.6 trillion euros thus making any discussion of using the ESM to recapitalize banks, or the European Commission to be the regulatory authority as next to useless. He estimates the balance sheets of Eurozone banks, with an error margin approximating the size of the economy of Italy, at 26.7 trillion Euros. Given the fact that the banking systems of Ireland, Greece, Spain, Portugal and Slovenia are carrying potential… Read more »
Interesting article David. The comment that the Fed signaled a dramatic change of policy last Thursday doesn’t really stand up to scrutiny. All that Bennie and the inkjets said was that they would “probably” taper their bond and toxic mortgage backed crap purchases at some stage. They call this their exit strategy which is total garbage. They were saying the exact same thing in early 2009 and they did absolutely nothing. The reason behind this is because the Fed are now by a long way the largest purchaser of treasury bonds and if they stop or even slow down their… Read more »
http://www.youtube.com/watch?v=YR505LR5XcU
Iceland’s president says let the banks fail and the economy recovers. Too simple for some.
“More likely, and a better bet now, is that the cost of further recapitalisations could be met by the ESM with real money”
There is no real money today. ONLY DEBT BASED FIAT MONEY PRODUCED OUT OF THIN AIR THAT FURTHER IMPOVERISHES THE PEOPLE.
It is time to learn your lessons on what real money actually is instead of providing further misinformation.
“But why is your income falling? It is because someone else is not spending. After all, my income is your spending; and your spending is my income. So your income falls because my spending has fallen and my savings have risen.” It could be nothing to do with savings, David. You do not spend because you are too far in debt and have no money left and have no savings. It is the debt trap and the debt suffocation of the economy David. In any event most peoples savings are already deployed in the bond market and spent by government… Read more »
“Without fresh credit into the economy, income falls further and arrears rise, which is why the latest Central Bank figures show that ordinary people are slipping further and further into the mire.”
This idea of requiring credit to stimulate the economy has got to cease. Credit is defined as debt. Credit is a liability. You propose that increased borrowing and further indebtedness will improve the situation.
Totally bizarre.
Good article Sir I am surprised not to hear you mention the Anglo Tapes as the story is plastered all over the Indo. Fionnan Sheehan wrote a good piece and after hearing the tapes he appears to be raging with anger. He looks like a chap who is barely in control of his contempt at the best of times and I can’t blame him He believes the country is heading for decades of penury and so do I because the content of these tapes suggest that the vultures in the banks are criminally insane and need to be locked up… Read more »
“Such a deal could be executed by a large debt-for-equity swap whereby the banks take equity in the house and reduce the mortgage accordingly.” That is what a mortgage is. A debt for equity swap. In the underwater houses there is no homeowner equity left. The banks already have it all and then some. All they need to do is foreclose to take possession (Assuming they still have ownership of the mortgage document) Either you are confused or I am. All this social engineering does not work so let the chips fall, the failures take place and lets get on… Read more »
http://www.crown.org/library/ViewArticle.aspx?ArticleId=314 Debt Jubilee of 7 years was because the maximum length of a loan Jew to Jew was 7 years. It was otherwise with dealing with a Gentile. “Now it shall be, if you will diligently obey the Lord your God, being careful to do all His commandments which I command you today, the Lord your God will set you high above all the nations of the earth….The Lord will open for you His good storehouse, the heavens, to give rain to your land in its season and to bless all the work of your hand; and you shall lend… Read more »
http://campaign.r20.constantcontact.com/render?llr=n7vdaxbab&v=0013fJXCVJ8X4Gi6dBd8wedxV2ZLiRSN-oZSZqzMJ1e_W3z9y9GsA7YlrjK5oELHl23pVmxWMUGK2JNoxGJ_3tn4I3jf96mt9gfP431lrpaGGXoO_cXG7_wyJdGnKoROI45
International financing beginning to unwind
Economic comments of precision and prescience.
http://campaign.r20.constantcontact.com/render?llr=n7vdaxbab&v=0013fJXCVJ8X4Gi6dBd8wedxV2ZLiRSN-oZ0diIam_tXpJPvCYnXydjjDXJoSoMOFBrn5mH5ahbsqgtIo2jqzs5cVdOL0G4Hncyd2LlsKw7wOyA1HuFQhqQD1BCrI_F_E5w
The Indo Tapes make the issue of moral hazard irrelevant when Europe wakes up to the reality that Anglo and possibly the rest of the Banks here were fully aware that the German taxpayer would be the ultimate payer. Singing “Deutschland Uber alles” as the Guarantee was blatantly rifled will certainly get their attention. We are a mockery of what representative democracy is about. It represents only those in the know and with the pull. Enda empathizes with your pain and no doubt will be given the excuse to given another 100 Million or so to our legal eagles as… Read more »
Hi,
Off topic but very important observation re gold. Jim rogers is the guy who set up the quantum fund with George Soros.
http://www.youtube.com/watch?v=v0sWPX49lgA&feature=youtube_gdata_player
The jokers on the Anglo tape kept their jobs for 2 and 3 years afterwards ! Having destrotyed First Active, Cormac Mc Carthy slid onto the Paddy Power board, NO ACCOUNTABILITY for overpaid lending managers.
Told you so : http://www.independent.ie/business/irish/abuse-the-bank-guarantee-dont-get-caught-david-drumm-29369275.html – Anglotapes
The crisis was engineered by insiders running the banks.
I was right.
I Told Ya So!
Bubbles and fiat money were manger delinquent’s group-think college collaboration.
World hegemony bowing to the insidious USAs Wall Street…
Police the banks – love or loathe it the banking union will happen.
“U2’s Bono talks religion, praises George W. Bush in new interview”
Read more: http://www.foxnews.com/entertainment/2013/06/24/bono-talks-religion-praises-george-w-bush-in-new-interview/?intcmp=features#ixzz2XEdW8pbx
David, the primary reason why your argument is at best naive is because the national integrity which is meant to support a proper currency and debt management system is completely compromised even at a global level. In a looney asylum run by psychos where reason and compassion have no place. But surely you must know this. A little note on our rating agencies from last week (S&P and Moodys etc)…http://finance.yahoo.com/news/the-last-mystery-of-the-financial-crisis-154447818.html?page=all The individuals are clearly detached from reality (one of the clinical markers for psychotic behavior). One wrong word from these guys and 100s of 1000s suffer and/or die. It is… Read more »
Minor austerity hits BC to attempt to balance the budget.
http://www.taxpayer.com/news-releases/b.c.-s-balanced-budget-2013–a-hat-trick-of-tax-hikes
We just need to listen a little more!
http://www.youtube.com/watch?v=-4EDhdAHrOg
ANGLO BANKERS JOKE TAPE
HA HA HA … HA HA !
BUT WHAT WE HAVE NOW is -> CONSPIRACY TO COMMIT FRAUD
AND CONSPIRED FRAUD WAS COMMITED -> A CRIMINAL CASE
ALL CONTRACTS ENTERED INTO BY DECEPTION CAN BE LEGALLY RECINDED
ALL SUBSEQUENT ACTIONS TAKEN BASED ON FRAUDULENT CONTRACTS CAN BE DECLARED LEGALLY NULL AND VOID.
ALL CONTRACTS ENTERED INTO BASED ON FRAUDULENT PRIOR CONTRACT ARE NULL AND VOID.
HA HA HA.
In any other business it is call price setting ad collusion and is totally illegal.
Same for the daily price set of the gold and silver by a handful of bankers behind closed doors
http://www.thedailybell.com/29299/Mark-Carney-Golden-Boy
DMcW, I’m afraid you have been upstaged by the Anglo revelations, behind the curve, or actually shock wave, something your economics mates cannot comprehend.
The simple reason is the failure to concentrate on the banking system, splitting it, Hamiltonian Credit. It is a high price to pay, but these are high stakes.
The Anglo Elite tricked the Irish people and the state to protect their failing bank.
This is worse than almost anything so far. And we have seen nothing yet!
Time for a Pecora Commission! Pecora, son of an immigrant shoe salesman, put JP Morgan on the dock in front of camera’s in 1933!
Kenny tells the dail the gardai (and so one can conclude the government) have had access to the tapes for FOUR YEARS! fucking hell. This government must have had knowledge of these tapes since coming into power in 2011. Why has it never acted on them?
http://www.thejournal.ie/enda-kenny-anglo-tapes-four-years-966077-Jun2013/?utm_source=twitter_self
Kenny also rejects the option of an independent banking enquiry favouring instead an inhouse enquiry. Why?
– to quote a tweet from Shane Ross -” …Enda proved at Leaders Qs politicians incapable of independent inquiry.Must be independt of Oireachtas.”
Busted flat in Baton Rouge,
Waiting for the train
http://www.youtube.com/watch?feature=player_embedded&v=skQGve3XksU
looking for Snowdon
On the topic of what is facing those in mortgage arrears –
https://www.mortgageholders.ie/media/130624-letter-to-minister-noonan.pdf
http://www.goldmoney.com/gold-research/james-turk/mid-year-gold-market-review.html?gmrefcode=gata
So the outlook for gold and silver remains very bullish, and will continue to be as long as central planners intervene in markets, instead of taking the prudent course which is to return to sound money based on precious metals.—James Turk
http://www.thedailybell.com/29300/ “The article makes monetary policy sound scientific and the creation and application of central banking sound reasonable. In fact, creation and control of money is insanely controversial and downright deadly. The only lasting, rational solution is to privatize money – not hold more Congressional hearings on how the Federal government can reconfigure the system. Conclusion: US policymakers are probably getting ready to do something about the current system, which is fast eroding. A main challenge, among others, is to make us believe that what they have in mind is logical and rational. But it won’t be.” Ridding us of… Read more »
From the IT today…maybe the Germans might save us the bother of an enquiry…The Frankfurter Allgemeine Zeitung puts its traditional restraint aside in today’s edition, recommending that former Anglo executives are put in a “big sack” along with all shareholders, creditors, members of the last Irish government and relevant members of the Irish Central Bank and Irish and European regulatory authorities. “Then one hits the sack with a club until the screams of pain are unbearable,” it advised in an editorial. “Afterwards, all decision-makers in Europe take citizens by the hand and assure them that a debacle such as that… Read more »
“But why is your income falling? It is because someone else is not spending.”
Actually David as we discussed income is falling because as loans are repaid to a bank the money that was in people’s current accounts no longer exists.
“This process means that the banks simply sit on deposits and don’t recycle cash through the economy.”
But as you know banks don’t lend other people’s deposits?
Dirty rotten bankster song by Carl Klang
http://www.youtube.com/watch?v=yYviBBV3Qj8
A sensible approach, as usual upstaging :
MP Tapsell tells Osbourne: Restore Glass-Steagall
BBC reports: Chancellor warned of ‘another banking crisis’ unless Glass-Steagall is restored
A Conservative MP and former fund manger has warned the chancellor of a second banking crisis unless the government properly separates high street banks from their investment arms.
Sir Peter Tapsell made the plea during Treasury questions on 24 June 2013.