Ireland: 2012 – We Were Warned!

Not only by the Mayans – Morgan Kelly is back. This time he estimates that banking losses could turn out to be much more severe than predicted during the Nama debates, which will bring our very own Greek tragedy to our shores.

Whatever happened to Ireland?

Adding these bank losses to its national debt will leave Ireland in 2012 with a debt-GDP ratio of 115%. But if we look at the ratio in terms of GNP, which gives a more realistic picture of the Ireland’s discretionary tax base, this is a debt-GNP ratio of 140% – above the ratio that is currently sinking Greece. Even if bank losses are only half as large as we expect, Ireland is still facing a debt-GNP ratio of 125%.

Ireland is like a patient bleeding from two gunshot wounds. The Irish government has moved quickly to stanch the smaller, fiscal hole, while insisting that the litres of blood pouring unchecked through the banking hole are “manageable”. Capital markets may not continue to agree for long, triggering a borrowing crisis which will start, most probably, with a run on Irish banks in inter-bank markets.

Ireland may therefore present an early test of the EU bailout fund. However, in contrast to Greece, Ireland’s woes stem almost entirely from its banking system, and could be swiftly and permanently cured by a resolution which shares the losses of Irish banks with the holders of their €115 billion of bonds through a partial debt for equity swap.

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  • Alias

    That’s actually an optimistic assessment from Prof Kelly. He assumes that 66% of debt to property developers is recoverable (laughs) and that 90% of debt on outstanding mortgages is recoverable (laughs louder) and that 90% of debt outstanding mortgages to businesses are recoverable (falls of chair laughing).

    The thing about bubbles is that they don’t leave anywhere near 90% of their surface area when they burst. The vast built of that borrowed wealth from the eurosystem was translated into assets that have collapsed in value. It is not a case of recovering the wealth: it is a case of generating new wealth to replace the vanished wealth.

  • Alias

    Typo: “..that 90% of debt in outstanding loans to businesses are recoverable…”

  • DC
  • Alias

    Exactly, DC- and hence it is nonsense to expect property developers to generate tens of billions in profits to replay their existing debts when the massive oversupply of commercial and private property means that their industry is redundant for the next few decades.

    The same applies to mortgage holders and business owners. These folks are meeting their debt repayments out of cash flow and reserves because the government has told them that the problems in the economy are temporary and that it will be business as usual in the economy ASAP – never mind that business as usual over the previous decade was simply the dismal practice of borrowing 1.67 trillion from the eurosystem and spending it. Ireland traded its economy for an overdraft when it joined the eurozone, and now it has to stop borrowing it and start paying it all back. Once they realise that things are not going to improve, those folks are going to default on their debts.

    Indeed, the poor sod who paid 10 times his annual earnings for a shoebox apartment that is worth a fraction of that (if he could sell it) has likely seen his wage cut and must now pay a higher percentage of his income toward his mortgage or is worried about losing his job or will see his mortgage repayments increase as Germany demands higher interest rates from the ECB. They’ll all do what they did last time: hand the keys back and emigrate, leaving the taxpayer stuck with their 500k mortgage and another property to add to the ‘board-up or bulldoze’ file.

    And what is the government doing? Well, it decided that car showrooms who invested millions in glass buildings should be propped up with a scrappage scheme because this helps EU states that manufacture cars by sending tens of millions out of the Irish economy and into other EU economies and, of course, stops some car dealers from defaulting on their bank loans in the short term. So, being good europhiles, their Keynesian fiscal stimulus package was all about stimulating other EU economies at the expense of the Irish economies. And that’s the same europhilia that made them underwrite EU banks – which is what they actually did by underwriting Irish banks. These loans reside within the eurosystem being external debt, not within Ireland. It is the banks in the eurozone who are owed the 1.67 trillion. The government is simply acting to ensure that these foreign banks do not suffer any losses as a result of their reckless lending to private companies outside of their own state, and it is doing it by nationalising the debts. It is extending systemic risk from the Irish economy to the EU and putting the interests of foreign banks before the Irish national interest.

  • What appears to be desperately needed, Alias, is a completely new business to generate wealth.

  • SammyMehaffey

    Surely default must be an option? I seem to remember that some south American countries defaulted on their debt not very long ago and the sun still rises and sets there, people eat and sing and have a jar and if I am not mistaken people still lend them money. So where is the problem?

  • Drumlin Rock

    Its not an option within the Eurozone Sammy, thats why there is such a panic over Greece.

  • [quote][i]Its not an option within the Eurozone Sammy, thats why there is such a panic over Greece.[/i] …. Drumlin Rock says: 18 May 2010 at 8:39 am [/quote]

    Of course it’s an option, Drumlin Rock, but that then renders the remote control of countries by money makers and parasitic lenders and manipulative bankers, broken, and that’s why there is such a panic over Greece.

  • John Joe

    There is a farce underlying a lot of the current economic crisis – that the international financiers lending to the banks must be repaid in full even though they must have known that the banks were giving loans that were not secure and that it was all taking place within a property bubble. It seems the only people not exposed to risk were those offering the biggest money (the multi-billion loans) at low interest rates to the banks (i.e. facilitating this whole process). Mind you, this is not to excuse the greedy clowns running the banks. But caveat emptor should apply all across the board. If the people at the very top bought loan bonds from the banks, they should have done their homework better and made a full and realistic appraisal of the risk. Since they didn’t (and there seem to have been plenty of people suggesting that there were problems coming down the tracks), they should equally bear the pain of this crisis, within which ultimately they are a very significant actor.
    The Irish government should be strong-arming the banks (that they now practically own anyway) into offering a reduction (e.g. 60c in the euro) or default. The banks, rather than the state, can do this, so it won’t breach eurozone rules.
    Remember, though, that this is a dress rehearsal for what is going to happen with the UK economy.

  • Mack

    Greece may well have to restructure it’s debt (i.e. partake in some kind of default).

    If Ireland’s position turns out to be as bad as Morgan Kelly suggests so will Ireland.

    I think strategically, it would make most sense for Ireland to default after all the bad loans had been transfered to Nama – as at least we should have a funcitoning banking system for our pains – (of course it would have been better just for the banks themselves to default in the first place).

    But.. if lenders think we’re going to default down the line, and are just strategically borrowing money, we never intend to repay, to recapitalise our banks – they won’t lend to us and default will come earlier..

  • Greenflag

    You can bet your bottom dollar that the interests of ‘foreign’ banks is everywhere paramount not just in Ireland .

    As for new ‘businesses’ to generate wealth . The USA economy is forecasted to grow lots of new jobs over the coming decade -80% of which will be in low paid service type jobs in health care , retail and fast food etc etc while the higher paid jobs will be in the high tech sector . The in betweens will be catered for by a static public service sector which will be strapped for cash for the next several decades .

    The cupboard is bare for the American and European next generation of middle class earners or wanna bee earners .

    Now if there is any political party in any western country who has an economic policy or policies which will , would or could address that issue I haven’t come across it . And no SF don’t have an answer either same as DUP, UUP, FG , FF or the Conservatives or Labour in the UK .

  • Mack

    Be wary of such predictions Greenflag! Not all service jobs are badly paid.

  • NordTrader

    A couple of things I think are being missed in the Kelly analysis – they might prove significant.
    1. Ireland is a much more open economy than Greece. Will the euro falling and destined to remain weak this means Irish export led growth is on the way back and will probably be stronger than currently forecast.
    2. Ireland has a better fiscal record and therefore more credibility with the international money markets. It also has about 50 billion in cash and reserves so can ride out any short term dislocations in the markets. The problem with Greece was they had no money and much of their debt was due this year. 8 billion of it is due for repayment tomorrow I believe!
    3. Default is fine as long as you don’t mind paying 15-20%+ interest rates for the rest of the decade. And that’s after people start lending to you again. You’ll be shut out of the markets for at least a year after.