Monday, November 8, 2010

An Irish revolution will be next

If you thought the bank bailout was bad, wait until the mortgage defaults hit home

Ireland is effectively insolvent – the next crisis will be mass home mortgage default. 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.

Posted by drewster @ 10:54 AM (1843 views)
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7 thoughts on “An Irish revolution will be next

  • Mark Wadsworth says:

    “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.”

    Yup, another practical thinker who tried to point out that our main protection against banks is the debt-for-equity swap. Did anybody listen?

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  • “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.”

    It’ll be interesting to see how that plays out.

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  • And I thought we’d been screwed by our last government! This article certainly puts things in perspective – I wouldn’t want to be living in Ireland over the next few years.

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  • Note the slightly iritating shortening of ‘Anglo-Irish’ to ‘Anglo’ when speaking disparagingly of the bank. Every opportunity to stir it up and make everything look like it was the fault of the English… I dont doubt that, if the report was about how well the bank was doing, it would be given its full name.

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  • orcus,

    I actually envy the Irish. They have only one way out – bankruptcy – and it will have to happen soon. When that happens they can clear the slate and start afresh, without all the legacy debts.

    Meanwhile in the UK, it looks like we’re going to be stuck with our Japanese-style debt burden for the next 100 years. We will have higher taxes than Ireland and the bankers will continue creaming off their share. We won’t have any fundamental reforms; whereas I expect the Irish will learn some fundamental truths about land and lending. Plus ça change…

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  • drewster – had a top fund manager stand up at a presentation today and publicly state that Ireland and Greece will both default in near future.

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