This week, let’s consider the probability of another banking crisis. Mortgage defaults – both owner-occupier and buy-to-lets – could overwhelm the banks’ fragile capital buffers, meaning the banks will need more capital in the next few years. Because the Irish state is bust and has no capital to give, this new capital can only come from two places. The first source is the European institutions (or the taxpayers of the richer countries). The second source is the depositor in the Irish banks.
What happens if the taxpayers of other countries don’t feel like giving the Irish banks cash?
In such an event (which is quite likely) the capital will have to come from a smash and grab exercise on Irish deposits. This is exactly what happened in Cyprus earlier this year. The precedent is there in black and white. More significantly, it is a precedent hatched and copper-bottomed during the Irish presidency of the EU. We can hardly orchestrate a depositor raid from Dublin on Cypriots and then cry foul if the rest of the EU suggest that this is exactly what we have to do to ourselves in the event of a new banking crisis.
There is another solution to a new banking crisis. It is to leave the euro, beef up our own Central Bank and ask it to inject new Irish punts into the banks to avoid a deposit raid.
For many, this would be a step too far. But it is only a step too far if we can avoid having to make the choice.
If faced with the prospect of robbing deposits to keep the banks afloat or reverting to our own currency, what’s the likely choice of politicians who want to be re-elected?
It might not come to this. Germany may bail us out. But there has to be a reasonable doubt about this outcome.
Given that “bail-ins” (robbing deposits from today’s voters) are the new bailouts (lumbering future voters potentially with more debt), a deposit seizure looks possible.
However, the future is brighter if we get strong economic growth over the next few years which raises people’s incomes, reduces their debt-to-income ratios and, in turn, reduces the levels of mortgage defaults. But who knows whether this will happen?
One thing is sure: the present policies followed by this administration, overseen by the ECB and the Troika, are highly unlikely to create the environment where people like me – who employ others – are encouraged to employ more workers.
Let’s now examine the macro-economic policies of Ireland with a view to assessing whether they will facilitate growth. Second, let’s see whether growth will be sufficient to prevent another mortgage driven banking crisis. Third, let’s consider the options in the event of another banking crisis and finally, let’s examine what choice is likely to be made by democratic politicians who want to be re-elected.
How many times over the past few years have you heard the battle for the survival of the Irish economy referred to as a “war”? It is probably a fair description of the ongoing fight for competitiveness in an increasingly globalised world where everyone is in competition with each other, all the time, everywhere.
But while it may be a fair description of what is going on in the global economy, surely a country wouldn’t enter into such a battle with no artillery. Yet this is what Ireland is trying to do. The main two macroeconomic weapons open to a sovereign country that intends to grow are: (A) monetary policy – the power to raise and reduce the interest and exchange rate; and (B) fiscal policy – the latitude to raise taxes or expenditures and vice versa when you deem it necessary.
It is clearly understood that a country in recession should reduce its currency and interest rates, and should borrow when the economy is weak and pay back when the economy is strong.
These weapons are what are commonly understood to be the heavy artillery of economic policy, essential if an economy is to have a hope in this global struggle. In addition, if there are huge debts and a broken banking system, the country should have its own central bank where it can “park” the debts at no cost until it is strong enough to consider paying them back.
But Ireland has given away both monetary and fiscal policy and we don’t have an independent central bank. We have no weapons. We are turning up to a gunfight with a penknife and expecting to win.
Now we all hope that the economy will grow, but hope is not a strategy and it tends to leave us with just that, hope.
With no economic tools, how do we expect the economy to grow? Well we could hang on the coat-tails of others, but with our major trading partners growing fitfully at best, there is no prospect of an export surge sufficient to drive general incomes up or general unemployment down.
And if we don’t grow, arrears will rise and so too will defaults on mortgage books. Let’s just look briefly at the numbers.
According to the Central Bank, by the end of June this year, there were 770,610 owner-occupier mortgage accounts to the value of €109.1 billion in the country. The total value of those who were more than 90 days in arrears was €18.6 billion. This is 16.6 per cent. There were also 148,529 buy-to-let mortgages in the country with a total value of €30.6 billion. Of this, 30,326, or 20.4 per cent of the total, were in arrears of more than 90 days. This is more than €6 billion.
Thus the banks have more than €24 billion of mortgages “in trouble”, and no doubt more to come as we work through the mortgage solution process in the months ahead. Not all of this money will be lost, but a significant amount will. Yet only €9.5 billion has been provisioned to cover this. So where will the rest of the capital come from?
Maybe the Germans will feel generous and pay for this, but on recent evidence, that particular parachute might not open. In this case, the money will have to come from you, the depositor in the Irish banks. Or it could come from the totally logical next step of reinstating the Irish punt, allowing the Irish Central Bank to inject the capital in punts and that part of the crisis at least, would be over. The likely fall in the punt would also make Irish industry, agriculture and above all the multinational sector with Irish labour inputs phenomenally competitive.
The next banking crisis, itself a product of too much debt, not enough growth and insufficient capital, is likely to cause another banking crisis. The government knows this, which is why it secured another €10 billion loan the other week from the Troika. But that new loan is simply borrowing from tomorrow to pay for yesterday and it does nothing to improve the growth and competitiveness position of the economy.
Big choices lie ahead for the political system. And if it is the choice between robbing ordinary people’s deposits to pay for the banks or reinstating a sovereign currency, the choice will not be that easy to make.
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…..OMG Its Monday
The choice is simple, rob the money from savers as these idiots didn’t buy property like the clever the ballsy guys, …phfff losers!
We represent 1% of the population of the EU. We have no real power other then becoming a nuisance. Cyprus happened a few weeks after Lagarde was in town and a week or so after the Irish government pulled the bank guarantee. All of this is theatre and we are pawns and our leaders the puppets. Irish banks are not capitalised sufficiently. Here is how it might play out; we will have a bank bail within 36 months. The burden will be split between EU, Irish State and depositors. Depositors over 100k will take hair cuts of 10 – 35%,… Read more »
Hi David and readers,
I sometimes watch Max Keiser on RT.com and he has a guest called Reggie Middleton who has a lot to say about the European Banking mess and Ireland in particular at http://www.boombustblog.com/blog/item/9144-exactly-as-i-warned-cyprusization-goes-mainstream-ireland-on-tap-next-up-for-citizen-fund-confiscation-again
What do you think Deposit Guarantee Schemes are good for David?
You better chose your bank more carefully now before you lodge more than 100,000 with a reckless bank just to reap a few more euros on higher interest rates.
The Government have socialised Bank Debts now they will socialise peoples engagements with Banks and that means they will know everything about you before you do .
Attach Attach Attach Attach …………..Attachment ORDER ….and now you have nothing.
Back to my narrative – dangerous aggregation where fewer and fewer have taken “responsibility” for more and more of the daily running of your life by a process of offering one stop shopping. What David describes is the outcome of increasing non-representation of the average man in the street brought on by excessive aggregation (excessive because it is only properly controlled by the aggregrators with no regulation – when regulation was seen as unneeded). The other problems of aggregation is lowered employment (optimisation)and a concentration of power. So highly aggregated units like banks and centralised governments (as Ireland’s is to… Read more »
Suddenly removing the Seanad makes sense doesn’t it? If the muinteoirs can get rid of the only possible nay sayer in town, they can do whatever their masters in Europe demand. No doubt they are all eying a lucrative retirement position in the bowels of the EU. To our government being seen to be “making difficult decisions” in order to please the big boys in the EU seems far more important than forcing emigration or impoverishment on it’s citizens. By asking us the citizens to vote on the abolition of the Seanad they are getting us to do our dirty… Read more »
Viscount Hugh Gough David in his parable creates a vacuum where a choice of two must happen .In other words something must ‘Suck’. Its called Sex. I am reminded of the Opium Wars in China when the British who then were unable to pay in gold / silver for the imports from China because they were on the Gold Standard then decided to sell Opium from India .China then was a prosperous place and the Quing Dynasty was in power .Britain received gold for their Opium and were thus able to buy the tea and other products from China .… Read more »
“The likely fall in the punt would also make Irish industry, agriculture and above all the multinational sector with Irish labour inputs phenomenally competitive.”
Doesn’t going back to the punt amount to the same thing for depositors. Their Euros will be converted at the value when launched but the resultant fall in the punt is the same as if the bank went in and took their money. The only differece is that the central bank is the one stealing from their savings by pumping and devaluation.
Open Question: Are Irish Prize Bonds safer than Irish Bank Deposits from confiscation? An acquaintance recently told me he has his life savings in Prize Bonds on the logical basis that an Irish bank, as a private institution, bust or not bust, can do whatever it deems necessary with its customer deposits as legally/lawfully it is the bank’s money (a fact not generally known). Essentially a bank bail-in is a private arrangement between two private commercial parties (the bank and the depositor) WHEREAS Prize Bonds are government IOU’s to its passport-bearing citizens so the same commercial capitalization logic of a… Read more »
Exactly. And even if as David says, this would be made palatable by the fact that we now have sovereign control on fiscal and monetary policy, we are still hampered by a Government that serves EU and no one else.
Third option – like occurring in Britain – “print, guv’nr, print”. Actually, there is also the Irish taxpayer, who is supposedly stumping up the money for the bank “recapitalization”. And who is paying a polciy of no bondholder left behind. Apart from anything else, the unemployment rate suggests that Ireland is not being effecive at working itself into a state of overall productivity such that the debts will be reduced. The property sector is extremely optimistic that there will be a bottleneck in the economy concerning real estate. To be honest, the damage is done. We should never have joined… Read more »
The solution is to start finding all the gold held by the Leprechauns and then paying off our debts with that. That’s what I read whenever someone mentions bringing back the Punt. The. Punt. Will. Not. Come. Back. Give. Up. This. Pointless. Line. Of. Argument. The likely rise sea levels over the next century will be very expensive and risky for the Netherlands. Even to the point of overwhelming flooding defences for the country. From an engineering view, the sensible thing would be to seek out an alternative location. Work out a deal to buy land at a more sustainable… Read more »
One of the great paradoxes of the current Irish state financial situation (banks, NAMA, various semi states inlcuded) is that it was supposed to function as a “debt servicing machine” – along lines required by the ECB, EU Commission and IMF. This is necessary to keep the entire Ponzi scheme afloat. It is essential to what David called the VietNAMA policy of containment. The same thing is going on currently in Spain, except the ECB is even less transparent in how they are organizing that. But, really, the so called debt servicing machine itself is running mad on borrowing. And… Read more »
I can only keep repeating the same basics (which one would never guess from reading David): 1. Issuing banks are mere management agents for mortgage bonds. 2. Issuing banks are not guarantors of mortgage bonds. 3. Mortgage bondholders are not depositors and are therefore not secured by bank capital. All that has to happen is for the Government to enforce the bond contracts. There is no bank crisis, there is only a bondholders’ crisis. The U.S. quickly solved the same crisis using a combination of “short sales” and loan “modifications”. Ireland has its head up its ass. Sorry David but… Read more »
“The state is actually compromised in the exercise that it is undertaking by the needs of the state” – Excellent!
It’s suspended by the “defy-reality field” as it spins around inside the Bertie bullshit Todoide.
http://awakenlongford.wordpress.com/2013/09/16/a-parting-shot-across-the-bows-of-irish-politicians/
David is correct. With the UK being Ireland’s largest trading partner a weekend conversion to the Punt would be welcome, especially as that could in all likelihood be done in a fixed exchange rate system with the UK Pound, similar to that which Scotland and Isle of Man, Gibraltar and the Channel Islands already have.
I suspect this is indeed plan B and the groundwork for such a thing will be already in place should Dublin be rebuffed by Brussels (read Berlin).
The argument goes as follows: We must protect the taxpayer from further bailouts so we bailin with your deposits. Brilliant!
Switzerland has a better idea, Swiss Parliament Glass-Steagall Vote Sends The World a Powerful Signal.
Now woul’nt it be time to ‘fess up and admit either break those banks hiving off the synthetic losses or fave total robbery, lawlessness? The Swiss alone in Europe have got it right!
Who’s going to pay those gambling debts! NO-ONE!
http://businessetc.thejournal.ie/readme/column-mortgages-are-contracts-–-its-not-ok-for-them-to-be-dishonoured-1082433-Sep2013/
I’ve asked the question before. The real Irish financial success story? The Credit Union System. Locally accountable, prudent (with a few local exceptions who went belly up with reckless lending). It’s now being centralised with local faces but a “professional” back room “management” who will control operations. Are Credit Union shareholders about to get a bail in on their deposits just like Cyprus? After all the vampires who run this little cesspit of a State have sucked the blood out of everything else.
Really I don’t know what you guys are talking about……
The recession is over ,Ireland & Europe are recovering
Unemployment is falling
Emigration is now a choice , not a necessity..
O.E.C.D says will be fine
Mini-property boom in South County Dublin
Banks fully capitalized & lending
Less business start ups failing
I mean,I really cannot see what your all talking about..?
Just so negative
very good Paul
keep flyin the flag…
Remember the black knight guarding the forest in Monthy python’s “The Holy Grail”..?
Have a great evening Paul
Barry
Trolls are playthings. Good Entertainment.
I’m a little confused, why wouldn’t €9.5B cover losses on €24B in mortgages that are in arrears? That is 40%.
Hi E Kavanagh
You are right at the moment, there would have to be massive defaults arising from the present arrears, but the trend is getting worse and given that house prices are down 50%-60% the equity in these loans is already halved or more. So if the banks were to begin to writedown to fix the problem, the buffers wouldn’t be too robust.
It is an ongoing issue.
All the best
David
This article begins by asking who will pick up the tab for the gambling losses of the banks and ends on a political question. The answer to your question is simple. Everyone but the banks will pick up the tab and are doing so as we speak. If you look at the increasing suffering and misery in the UK and listen to the response of tory government ministers it will give you a clue as to how these guys think. But they are outnumbered because according to the British Social Attitudes survey most people are in favour of the welfare… Read more »
“I was just good at arithmetic when I was in primary school,” says Noonan and obviously the way to fix the problem is with a surplus, dangled before the markets. A grown up schoolboy good at sums!
So what are you worried about DMcW?
“I was just good at arithmetic when I was in primary school” says Noonan and obviously the way to fix the problem is with a surplus, dangled before the markets.
A grown up schoolboy good at sums!
So what are you worried about DMcW?
For grovelling this takes the biscuit, or Royal Canine brekies :
“Compliance is an increasingly costly activity for banks,” the former Taoiseach told the annual conference of the Federation of International Banks in Ireland..
I am sure Glass-Steagall would send such grovelers barking up the wrong tree!
Now here is a truly brilliant plan :
Zombie Banks to finance EU Green Agenda.
Mindlessness? No wonder Adam Smith is so revered….
Michael Noonan bears an uncanny resemblance to the Hession Horseman of Sleepy Hollow Lore… with a bit more meat on board!
I mean it says a lot about the place.. Here is a man who was an absolute disgrace of a Health Minister. Just over a decade ago following an election drubbing people were stomping all over his posters, he was a laughing stock! i.e. washed up has-been.
Fast forward to the present and the position he currently has which as a separate point he in not even qualified to hold… well it’s a scenario worthy of any great political satire.
&The longer he remains in situ the greater the swathe of destruction he& his fellow collaborators will cleave.