Euro bill
First, the Irish government bailed out the banks, saving them from their homemade destruction, as they couldn’t pay off their lenders.
Then, the Irish government bailed out the banks, saving them from their homemade destruction, as the banks had lied about how much they owed their lenders.
Now, they think that after having poured about €96 billions in total into the black holes that is called “banks”, money that we will never see again, that this is all “done and dusted”.
NAMA says that they will recover the money, but that would be based on a year on year economic growth of about 10% for ten years.
The economic growth next year, is expected to be around 1.5%, give or take a bit, which is a far cry from what NAMA needs to ever be able to recover the money (before the properties has fallen to bits).
I just happen to think that they forgot something, which may very well be the undoing of Irish economy.
Either that, or they are not talking about it, for fear of what is to come.
The Irish unemployment is very high, the economy is struggling, and now, they plan to take 10% of the money out of the economy, making bad things worse.
There are about 800,000 mortgage holders in Ireland, and 36,000 are in arrears already.
Recent estimates reveal that 1 in 5 mortgage holder are on the line of running into difficulties, and the extra burdens put on the people and companies through taxes and levies, will push many of these people into the red, where they will simply have to chose between food, heating and other essentials, and paying the mortgage.
With a total mortgage stock of about €118 bn, and if 20% of that stock fell into arrears, as an expected result of taking 10% of the money out of the economy, which is the net effect of the austerity plan, this would mean that the banks, who borrowed short to lend long, would eventually be unable to repay the bonds as they matured, and this would be another hole of about €24 billion, to be added to the by then, already swallowed pile of €96 bn.
But NAMA will recoup the money you say?
Well, anything is only worth something, if there is a buyer.
The banks will have ceased to lend as a result of this, because they won’t be able to find capital on the open market, unless they pay extorsionate interest rates, so there will be no mortgages to be had, and where mortgages are offered, the securities required, will be so high, that it will hardly be worth the hassle approaching a bank.
This lack of funding, will in turn depress the market even further, and with a housing stock in Ireland, that covers the expected needs up to 2067, there will be no buyers for the excess stock.
NAMA is already talking about large-scale firesales, and this will depress the market even further, and firesales has already been done in the west of the country, apartments that at the boom would have cost €200,000-300,000, went for €17,000.
Why should anyone sensible put in for a mortgage for a house on the market, if they can get a NAMA firesale offer, for a fraction of the price, and where does these sales leave NAMA in terms of recovering the money?
NAMA, will mostly be a case of a complete write-off.
What are the banks to do?
Now that the banks realize that some €24bn of mortgages won’t get repaid, and they will be sitting with worthless houses on their hands, what are they to do?
They will have very few options, because the scale of these losses will yet again scare off bondholders, leaving the banks without funding, and trading insolvent.
One option they have, is to start pulling in short-term credits, such as overdrafts, credit cards and other types of loan facilities, something that has already begun.
It will only to some extent finance the banks, at the cost of businesses going under due to the immediate cash-flow problems this will create, and if the banks start pulling the credits, the problems will escalate outside the banking sector, with even more people being unable to pay their mortgages due to being made redundant etc. It’s an evil downward spiral.
The other option is for the banks to go cap in hand to the taxpayer yet again, for yet another bailout.
The problem with this, is that the state will at this point, be essentially broke, as they have used up all their existing internal resources in terms of pension funds and other assets, to fund the banks in the second round, and the state will not have the capacity to borrow more money from the EU/IMF.
The only option left, is to hang he banks out to dry, forcing them to default on some of their senior debts, and the majority, if not all of the junior debts.
The net effect of this, will be that the banks fail and drags the Irish state down with it, robbing the taxpayers for all that has already been taken from them, and then some.
By this time, we are looking at a minimum of €120bn plus interest gone, money that will never be recovered, simply due to the way the whole thing was set up.
Add to this, the interest premiums that the tax payers will have to stump up for the borrowed money, to “bail out” the banks.
After all, a bail-out, is supposed to be a permanent solution, but the Irish banks has proven time after another, that they are nothing but black holes, and the only reasonable treatment of a black hole, is to leave it alone, and not to poke around in it, even with a very long stick.
I said it before, the only way to save the economy, long-term, is to allow the banks to fail.
Banks are private entities, who has borrowed money from willing lenders, who understand the risks, and therefore charge interest in return for taking that risk (some you win, some you lose), and it is NOT the taxpayers job to keep private interests safeguarded at any cost.
A loss of a bank, will be costly, yes, but managable, and over time, cheaper than to bail out the banks time after another, as the banks will learn not to take the risks that kills them.
The only way for the banks to survive, long-term, from where they are now, is to re-negotiate the terms of the existing bonds, and start trading their way out of the hole they have dug for themselves, paying off their debts from trading profits, like any other private company has to do, or go under.
The option?
The Irish banks holds about €120 bn in savings, and this would be the cost of letting ALL the banks fail.
What would be the better option?
Save ONE or TWO banks, transfer all the savings acounts into these (which, will no longer need a bailout, as the deposits will secure the banks needs for covering their outstanding bonds).
There will be losses as the savings guarantee will have to kick in in the failing banks, but the overall losses will be limited compared to what we are seeing now.
Add the costs of the full savings guarantee, and we would have an equal figure, or less, compared to the total cost of the “bailout” to day.
We would know what it would cost – €120bn.
Add to this, the cost of all the businesses that will fail simply because of the banks actions, refusing loans and pulling agreed credits for no other reason but be able to repay their own loans, sacrificing the base of the economy along the way.
Also add the social costs that falls on the state as an immediate result, and you will soon see that the costs will stretch much further than just the banks balance sheets.
If the politicians had taken the bold step right from start, and let the banks fail, or perhaps saving a single bank, the cost would have been manageable, around a ceiling of 100-120bn.
Unfortunately, today, we no longer have this option of letting the banks fail, as allowing this to happen now, would mean that there would be an additional cost of about 100-120bn, on top of what has already been sunk into the banks, taking the costs to a minimum of €240bn, far beyond any capacity of the state.
The only option left, seems to be going “la la la la la la – don’t hear ya! la la la la….”", and hope for the best, all thanks to incompetent Irish politicians in power and the weak authorities looking the other way, all while everyone else has been effectively sold-out and blatantly robbed, leaving the bankers laughing all the way, as they got away with it, yet again.
I sincerely hope i am wrong.
