Morgan Kelly’s most recent
horror novel research paper available online – The Irish Credit Bubble.
A taster –
By pushing itself close to, and quite possibly beyond, the limits of its fiscal capacity, the Irish state has succeeded in rescuing Irish banks from their losses on developer loans. Despite this, these banks remain as zombies entirely reliant on continued Irish government guarantees and ECB forbearance, and committed solely to reducing their own debts.
While bank capital levels are, probably, adequate for the markedly smaller scale of their future lending, we will see below that even fairly modest losses on their mortgage portfolios will be sufficient to wipe out most or all of that capital. Having exhausted its resources in rescuing the Irish banks from the first wave of developer losses, the Irish state can do nothing but watch as the second wave of mortgage defaults sweeps in and drowns them.
In other words, it is starting to appear that the Irish banking system is too big to save. As mortgage losses crystallise, the Irish governments ill conceived project of insulating bank bond-holders from any losses on their investments is sliding beyond the means of its taxpayers.
The mounting losses of its banking system are facing the Irish state with a stark choice. It can attempt a NAMA II for mortgage losses that will end in a bond market strike or a sovereign default. Or it can, probably with the assistance of the IMF and EU, organise a resolution that shares property losses with bank creditors through a partial debt for equity swap. It is easy for governments everywhere to forget that their states are not wholly controlled subsidiaries of their banks but separate entities; and a resolution that transfers bank losses from the Irish taxpayer to bank bond holders will leave Ireland with a low level of debt that, even after several years of deficits, it can easily afford
Hat Tip Irish Economy.He correctly identifies the Banking Guarantee as a major source of our current problems..
Although the crisis had been building for 18 months, the government and financial regulators appear to have been taken entirely by surprise. At a late night meeting with banks, the Irish government committed itself to the unusual step of guaranteeing all existing senior debt
of Irish banks (among European economies, only Denmark subsequently did this) as well as deposits. In addition, as well as guaranteeing the two large retail banks (AIB and Bank of Ireland) and two smaller mortgage lenders; for reasons that have never become clear the
Irish government agreed to guarantee two specialist property development lenders (Anglo-Irish Bank and Irish Nationwide Building Society) despite already well known deficiencies in their corporate governance.
The most likely rationale for the Irish governments actions is that it still believed that the liquidity problems of the Irish banks merely reflected market nervousness in the wake of the Lehmann collapse, and not justified concerns about the solvency of these institutions
So the Irish government was caught on the hop, but what about David McWilliams? One of the consistent voices of restraint throughout the boom, and one of the architects of the guarantee?