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SEVEN YEARS AGO when the Celtic Tiger’s asset price bubble began to grind to a juddering halt, the government of Ireland owed its creditors €44bn.
Today that number is €206bn, equivalent to 124 per cent of GDP.
Today, December 15, may be the day we recover a part of our lost sovereignty. It is a good day indeed.
But we are still accountable in many ways to external forces. And the problems we face are bigger than ever before.
Just how sustainable is our programme of debt management? Right now global interest rates are on the floor and, after years of tight management and austerity, the government can borrow long term capital at an interest rate of under 4%. But there is no guarantee that this will remain the case.
Either way the burden of servicing existing debt means that next year we will pay our creditors €8,190m in loan interest. This is more than four times the interest bill of €2,000m which we incurred in 2007.
State revenue earmarked for interest payments
For the foreseeable future a large part of government revenue is going to be earmarked for interest payments even before it is collected. And that ignores the whole question of capital repayments.
Like any sensible borrower the government has been doing its best to string out the process of repaying the sovereign debt.
The ‘average maturity’ of loans provided to us by the European Financial Stability Fund (EFSF) under the bailout programme is 21 years, for example. The NTMA will go on trying to push out the date on which capital repayments are made, rolling the debt forward where possible.
But ultimately our capacity to repay our debts must depend on the extent to which we grow our economy.
The recent growth record is not good.
Ireland’s economy contracted by 2.2% in 2008, by 6.4% in 2009 and by a further 1.1% in 2010.
After growing by 2.2% in 2011, it began to contract again: by 0.2% in 2012 and again by an estimated 0.2% in 2013.
The government hopes that the country will grow again by 2% next year. But there is no guarantee that this will be so. Among our sixteen partners in the Eurozone only the Germans are growing at a respectable pace. And our economy is hugely reliant on exports as a source of growth.
Setting the scene: The early 1990s
In previous periods such as the early 1990s we were lifted out of the mire by a combination of lower taxes and cheap credit. The government brought down the top rate of income tax from 65% to 40% while, for the first time, borrowers had access to a flood of cheap European capital. This created a buoyant local economy in which jobs were plentiful.
Today we are back where we were in tax terms, taxing modest incomes at marginal rates of 52% or even 55%. And the banking system, which we rescued at a cost of €64bn, has largely shut down as an engine of credit creation for ordinary households and therefore of growth in domestic demand.
Finance Minister Michael Noonan signalled Friday that the tax issue is now his top priority.
Asking single workers on €33k a year gross to pay 52% in PAYE, PRSI and USC is clearly daft. It is also sending out all the wrong signals to overseas investors who will be sending key executives to work in Ireland and seeking to recruit skilled staff from other countries.
So it is vital that he finds the resources to pay for a very big widening of the standard rate income tax band.
Deadbeat banking system
But the real sickener for Noonan and for his cabinet colleagues lies in our deadbeat banking system. Instead of lending more to business and to households, the banks are lending less and less. They don’t think small firms are a good risk. And, apparently, they don’t think that mortgage loans should be given to ordinary people either.
Into the future they may be thinking of a completely different type of banking model.
Consider the following. At some of our biggest banks the rate of default on existing buy-to-let (BTL) mortgages is currently approaching 30%.
You might imagine that this horrific, almost unprecedented, bad debt experience would scare banks away from BTLs altogether. Yet in recent days banks have begun cutting the rate charged for BTL loans as they drum up new business. Simultaneously there are reports that global capital funds are creating new lending vehicles for Ireland which will specialise in BTL lending.
Have the banks taken leave of their senses? Again?
Vulture funds and global property investors have also been snapping up blocks of apartments in Greater Dublin.
Why is this happening? Have the banks taken leave of their senses, again?
Clearly the banks and the professional investors believe that there is a big future in the rented property market in Dublin and other urban centres. If young people, especially those in fixed contract employment, are not going to get mortgage loans in the future then they must, by definition, become permanent renters.
Already rents are rising sharply in Dublin. The BTL market may actually be the place to be for the banks and capital providers of the future. If the borrower is affluent enough to put up a substantial part of the cost of a property in cash, then the risks in new BTL lending are acceptable.
Similarly, the pillar banks are beginning to offer new five-year interest-only credit to property purchasers provided they can put up half the cost of a property in cash. The target borrower in frequently a high net worth individual living overseas.
‘Professional’ investors v owner-occupiers
The view in the top echelons of banking seems to be as follows. The banks have gone through a terrible time losing pots of money on tracker loans. The 12% default rate on ordinary home loans has pumped up average loan losses. But there has to be a future in lending for bricks and mortar provided you de-risk the lending sufficiently.
This means much lower loan to value (LTV) ratios, completely flexible lending rates and much more rapid methods of dealing with default. This in turn may mean a bank chooses to deal with ‘professional’ investors in property as opposed to owner-occupiers.
If, in the process of changing the lending strategy, you pump up the price of the existing stock of property then so much the better. Ultimately, you may recover some of the capital you thought was lost during the boom.
This may be one of the most important legacies of the boom and the crash. The banks haven’t gone away. They may simply re-invent themselves as property lenders in ways that alter human behaviour quite significantly.
As regards lending to small business, well that’s another day’s work altogether.
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The Irish banks are the problem; they are not part of the solution.
The Irish banks, when unleashed on defaulting home mortgagors, will cause pandemonium and will trigger even greater holes in their capital adequacy. The Irish banks are actually insolvent. Some buy to let lending on property is just a superficial pretence that they are back in business.
The elephant in the room is that the Irish banks are bust, insolvent, broken, wrecked and no one wants to recognise that hard reality.
The true extent of mortgage debt default has not yet been properly accounted for by the Banks.
One magazine broadly agrees with your analysis.
http://moneyweek.com/money-morning-ireland-irish-economy-property-and-stocks-60900/
one room to the other room lucky to have the house ..who do you think you are codding Mr Kenny
The emperor has no clothes. Today does not change our dismal economic reality. Combined public and household debt is unsustainable. The burden of debt is too great for Ireland.
The reality is that Ireland is a failed economic state and a steadily failing economy. We can deny that reality for a while but reality will will come knocking on the door.
Platitudes about recovering part of our sovereignty are meaningless and trite.
The article above is a much needed reality check but people will not listen to that reality.
The dismal legacy of he false boom years is a permanent yoke on the necs of the Irish people who, according to Enda Kenny, have only themselves to blame.
The Banks will continue to pursue strategies which are mildly beneficial to the banks but deeply damaging to a failing economy. The mortgage impairment crisis in 2014 and 2015 will be the final nail in the coffin. There is no escaping our fate. The centre cannot hold.
Damien is right to point out the myth that banks have much interest in the real economy of businesses, employment and production of goods and services.
The real economy is merely a sideline that gains them entry to the real game of rent extraction in partnership with the rich, plus, recently, the marvellous public ‘insurance’ that ensures any losses are passed on to ordinary citizens or ‘socialised’.
Globally, this ‘laissez faire’ model has been promoted thru’ deregulation over decades.
Banks have become funds for the purchase of existing assets to be rented out at excessive profit and/or capital gains, with a banking licence tacked on.
Integration with the payments system and various cross connected derivative bets ensure that any failure topples them all in a domino effect, so that governments are obliged to cover any losses they make. This construction was no accident, rather quite deliberate.
And absolutely nothing has been done about it by the political classes. In fact, these ‘systemically’ important ‘too big to fail’ banks are now bigger than ever.
The payments system banking of the high street needs to be separated, as it was following the 1929 crash, from the casino and ‘derivative’ bet banking operations, as a minimum.
But it would appear that the banking lobby has already effectively bought politics and most of the public service advisers, media and mainstream academe.
Mike Hall, well and truly said.
DEFAULT THE ONLY OPTION
So Damien you are basically saying young Irish Citizens were screwed by developers in the noughties, screwed by the Troika for the past three years, and are going to be screwed by bankers and vulture capitalists for the rest of there lives. How did we let this happen under our noses and did nothing?
Welcome to Ireland David. The elite in this country screw it up time and time again. Generation after generation. Just watch reeling in the years, its the same story decade after decade. The PAYE worker foots the bill, and theres no accountability for those who screw it up.
The PAYE will pay.
The law should be set up in away that if the borrower can’t service the loan he just has to hand back the house ,the bank made a decision when they loan the money that the value was in it ,I know it Is not a simple as it sound,s but some mechanism could be worked out ,it would make them more cautious ,it would alter the power they have and stop the big jump in value and it would also control the house selling agents that were riding the wave .
Actually it is as simple as it sounds and works in places such as the US. There are several advantages to the system one of which is that banks that push up a property bubble by imprudent lending pay the cost when mortgages default and they can’t just hound the borrowers forever.
Foreclosure is the name of that system but now it is too late for that solution. The Irish Banks will find that they can’t get blood out of a stillness.
It was the lending policies of the Banks which caused the massive asset bubble. Now they will try to get their pound of flesh. They will fail. The money is not there. The reality is that any home possessions will simply crystallise large losses.
The banks will end up carrying out massive write downs but only after they have caused untold misery.
The situation is totally unsustainable but we comfort ourselves with the delusion that we have successfully exited the bail out.
At least we no longer have to hear commentators describe the Irish electorate as the most intelligent and sophisticated in the world. This electorate putFianna Fáil coalitions into government three times in a row. Madness.
A property obsessed nation followed its love affair with property like a moth to a flame.
Property has been our destruction hastened by plentiful cheap euros.
The Baron of Ballsbridge showed us the madness at work but he was just holding up a mirror to the rest of us.
Ronan Lyons explains here the stimulus for a “no brainer” speculative culture.
http://www.ronanlyons.com/2009/06/12/property-a-shining-example-of-never-a-better-time-to-save/
Most newspapers want this reality hidden from us so their beloved coalition can boast about “regaining sovereignty”
“A Nation once again” – me hole.
It is rather depressing reading the above and the comments. What a mess this country is. I think the saddest thing is the meek reaction of the people. Where is our fight or sense of pride? Why are we not standing up for ourselves.
I guess the reality is that the majority are comfortable enough – in jobs and without huge debts – and not overly willing to see any real change. For the minority who are unemployed or underemployed it is a case of suck it up.
What hope is there for young people who want to get decent employment, start a family and have a home? People are simply locked out with no opportunity. What a legacy has been left.
Where do you arrive at the figure of 52% of pay deducted in Paye/Prsi & Usc? If a Single person is on €33k, they pay €7900 in the three taxes. That works out at 23.8%. A long way off 52%
Good analysis! Question is: what happens next? It doesn’t need an accountant to tell you Ireland is enslaved forever.
If you haven’t seen the Oscar-winning documentary ‘Inside Job’ already I recommend you do now.
Only the little people get hurt, only the little people. We need an Oliver Cromwell to deal with this.
politican vs banker = golf buddies
Great article – a day after a TD suggest Nama are selling off greatly reduced properties to developers. Will we ever be able to stop the money junkies ie bankers, politicians, charity bosses, developers etc? They can’t wait to get their next fix. Like most junkies the price is paid for their addiction by others. It won’t stop until somebody kicks them out of their homes and their comfortable jobs.
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