Coming disastrous collapse of credit in Irish banking system?

[patslatt]

Ireland may be facing a disastrous collapse of credit. As bad loan writeoffs cut into bank shareholder capital,the time may come when banks are unable to raise enough new capital from the government or the private sector to offset those writeoffs in the banks' shareholder capital and maintain the required European Central Bank (ECB) reserves of shareholder capital. The resulting capital deficits would force banks to cut back on credit.

The bad news is that these cutbacks in credit would be far greater than the reduction in required capital:The cutbacks would be a high multiplier of that,a function of the reserves ratios. If say a) €10 billion in loan writeoffs out of a larger total of loan writeoffs of say €30 billion in banks were not replaced by new capital and b)if the reserves ratio of banks were 1/10th of loans,then the effect of this would be to reduce credit by €10 billion divided by 1/10th which is equal to €100 billion.

This multiplier is known as the money multiplier and it has always expanded money and credit in most economies since the Great Depression.

Now that there is a high risk that credit could contract,Ireland lacks the means to offset it by printing money,unlike the US or the UK.

For the time being,the ECB is helping out. Irish banks are buying Irish government bonds and using those bonds as collateral for ECB loans to replace the bank cash used to buy the bonds. This has the same effect as if the ECB bought the Irish bonds directly. And the banks make a very good spread on the high yields of over 5% on Irish bonds by borrowing short to invest long.

Apparently,the ECB is only allowed to buy EU governments' bonds as long as they are considered sound investments. With the bank rescues tying up maybe €40 billion in the next year plus borrowing of maybe €29 billion a year,the government has maybe a year to sharply cut its budget deficit. If it doesn't,the ECB may no longer buy Irish bonds without an IMF intervention,which would mean a drastic cut in government spending,including in all the sacred cows, wages,social welfare and pensions.

If the ECB fails to lend enough money to enable the Irish government to prevent a credit contraction that could be up to €100 billion,about half the M3 money supply,Ireland would have no choice but to quit the euro and print money. That would mean a very disruptive jump in the prices of all imports and foreign travel.

[cactusflower]

A bit late to reply. The ECB moneys also are intended for liquidity only and are not a bail out, as far as I understand it. Difficult days ahead.

[Ecoguy]

I know of a couple, both of whom have permanent steady full time jobs that pay above the average industrial wage and still as first time buyers can't get a mortgage of 140K with a 15 % deposit. How times have changed!!, a few years ago the banks wud have thrown a 500k 100% mortgage at them plus a car-loan etc. This country really is screwed

[MsAnneThrope]

The concept of a State owned and run bank, with a clean slate, surely warrants serious consideration???

At least for a few years and until we're sure these "green shoots" aren't weeds...

[H.R. Haldeman]

Yet another reason why our property morkesh has so far yet to fall. NAMA, FF, Tom Parlon, the bankers and whoever the hell else wants to can try and prop the whole thing up, but it is futile. There simply are not the necessary numbers of people on the necessary wages with access to the necessary credit, and that ain't changing in the next 10 years. Property has another 40% to fall in the next 2 - 5 years, with many homes faring even worse.

It drives me fkn insane that people now readily acknowledge that there was an enormous property bubble and that there is now an enormous recession and yet still find reasons to believe that somehow property prices are immune and will stay high. This is a cretinous non-sequiter. They've simple transferred their "Ireland is different" boom mantra to a "property is different" recession mantra. We are clearly slow learners in this country.

[HanleyS]

I know of a couple, both of whom have permanent steady full time jobs that pay above the average industrial wage and still as first time buyers can't get a mortgage of 140K with a 15 % deposit. How times have changed!!, a few years ago the banks wud have thrown a 500k 100% mortgage at them plus a car-loan etc. This country really is screwed

That sounds to me like a very tall tale or you are leaving out a crucial detail. That loan would be less than two times earnings with a low LTV ratio. Based on the information provided they would be very very low risk and would have easily qualified for a loan even in the early 90s.

[MsAnneThrope]

Yet another reason why our property morkesh has so far yet to fall. NAMA, FF, Tom Parlon, the bankers and whoever the hell else wants to can try and prop the whole thing up, but it is futile. There simply are not the necessary numbers of people on the necessary wages with access to the necessary credit, and that ain't changing in the next 10 years. Property has another 40% to fall in the next 2 - 5 years, with many homes faring even worse.

It drives me fkn insane that people now readily acknowledge that there was an enormous property bubble and that there is now an enormous recession and yet still find reasons to believe that somehow property prices are immune and will stay high. This is a cretinous non-sequiter. They've simple transferred their "Ireland is different" boom mantra to a "property is different" recession mantra. We are clearly slow learners in this country.

Excellent post. Just like there are 21 yr old unemployed bricklayers who are being told to "retrain" and "upskill" to something else, perhaps Fás or some other body can retrain our political establishment to realise that property is not the solution to our problems. Even yesterday in Maynooth Cowen was foaming at the mouth with excitement that he'd heard there was an increase (maybe 3 newlywed couples this month) in interest for new houses

One trick ponies...

[Malbekh]

Early morning crew eh? Can't sleep - that's my excuse. I'll have a cup of milk and a banana.

Mr HanleyS is right. I am above the industrial wage, but not excessively so. I can re-mortgage for €215k on my salary, without bringing the wife into it. In fairness one of the reasons is a low mortgage:asset value.

Having been in the market to re-mortgage and going through a broker I can tell you that the banks are just not lending at the moment. Period. Not to business, and not to house buyers.

So I would say that the case that Ecoguy is referring would be an instance of the bank saying to the government 'of course we're lending out money, sure didn't we just offer Jim & Liz 100k to get that house, but sadly they just don't have a big enough deposit.'

@ the original OP. The banks cannot get money to lend from the markets, because no-one in their right mind would lend money to Irish banks. The markets have been ahead of the Gov all along. You may remember in July that Anglo Irish went on a road show to the US to drum up some money and left empty handed? Because even at that stage the market knew it was broken.

This was a few months before the government guaranteed all the deposits in the bank and the best part of a year before 'we' nationalised it.

Now the government put in the deposit scheme and the €7b into our two main banks on the basis that they would loan again to Irish businesses and home owners, and they've done nothing of the kind.

However, to be a bit more cheerful, there is a fund that the ECB have set up which Irish banks can and will avail of. I'm too knackered to bother looking it up, but I read it somewhere - so it must be true! Apparently these quite substantial loans can be availed of, but they have to be ring-fenced within the banks to be used as loans to SME's.

I believe the banks are waiting for this money to come through before they start lending again, means they can keep the our money to stay afloat.

@HanleyS - still waiting for the costs on our infamous cycle path. How's the weather over there? I hear it's pretty chilly. You should come home mate, it's a scorcher here.

This is what I look like now down to lack of sleep

[HanleyS]

@HanleyS - still waiting for the costs on our infamous cycle path. How's the weather over there?

Not too shabby. QLD is a little rainy this week but it's still 20 plus. :mrgreen:

I hear it's pretty chilly. You should come home mate, it's a scorcher here.

I'd sooner buy an investment property in Dublin. Not for love nor money.

[Ecoguy]

That sounds to me like a very tall tale or you are leaving out a crucial detail.

The only detail i've left out is that the bank said initially there should be no problem but now their broker is saying the bank is stalling and looking for more info at the last minute