Having handed the keys to Ireland’s silver to the ECB…

MOrgan Kelly is back in the Irish Times telling it like it is. And it’s not pretty. The question of why Fianna Fail/Green government chose to bail out high risk investors in Anglo (that notorious subordinated debt) to the tune of £9 billion is now a mere academic question for historians, or investigative journalists and/or restless bloggers. Ireland PLC no longer has that option. Kelly explains:

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.

Kelly reckons the winners were the French and German banks who (like they had in Greece) had massive exposure to the wave of irresponsible lending of the Irish banks. They are now saved, even as the Irish taxpayer now has to take the burden:

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.

He makes mention of a spreadsheet he prepared last year which estimated the losses of Anglo at €38 Billion. Since, after all the shuffling of governmental feet that’s occurred it now comes in at €34 billion one wonders why the government could not have come up with a truer picture sooner.

Since Kelly had also AIB coming in with €37 billion last year, it does not augur well for the scale of future liabilities, and may be just one reason why the Irish government’s credit rating is now equivalent to that of Pakistan.

Scary stuff. But not as scary as the way he ends up pointing to the real demographic time bomb: the mortgage default tsunami amongst the under 35s:

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.