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

http://www.irishtimes.com/newspaper/opi ... 65400.html


It will not be so bad here, because we have not guaranteed the banks but we do have more mortgages, though possibly not as underwater as Ireland, and our government will probably change course in order to get re-elected. It does show that my analysis of Ireland has been accurate. It will be much worse in a year here.

That's one hell of an article , I'll finish it tomorrow...

So, did you?

No it wont.

simple short answer.

a hell of a state to be in
they may have to place a hold on the banks making any repossessions ...

I will do later

Wouldn't that just open the door for these "strategic defaults"?

It's an intersting article though, well worth the time and effort.

Better not emegrate to Ireland then

That article seems to contain an interesting blend of defeatism and self congratulation, but the analysis looks a little weak.

Particular weaknesses in my view would be:
1. He doesn't really justify why the other banks will cost at least as much as AIB, he just assumes that mortgages will drop to such a level as to make those other banks equally worthless.
2. He justifies much of his assumption about the falling mortgages on his valuation of the banks above, as it is the titanic cost of securing them that causes much of the disaster he predicts.
That's too circular.

He also assumes that certain economic laws will drive the events he predicts, but appears to believe that other laws will be suspended for no particular reason. This is most graphically demonstrated again by his assumptions regarding house values. He says that a house is worth what a bank is prepared to lend against it and refers to unavoidable effects thereof. But this is simply not true. Objects are worth what purchasers are prepared to pay for them, this is true at all times and in all places.

If funding via incumbent Irish banks has in the past driven prices some assumed objective worth (which seems to be held as axiomatic in that article), then it is true that those banks could run out of money and so potentially drive the value of property back down. But this objective value doesn't suddenly evaporate, if it was axiomatically true before, then it must remain true. So the effect should be that Irish banks would be supplanted by non Irish ones, or bought by them, as the difference between the current retail value of the houses and the medium term 'actual' value would make them simply too tempting an investment. Supply and demand applies to both the houses and the investment capital with which they are purchased, but Kelly has assumed - without argument - that lack of bank supply means the end of all supply irrespective of demand.

Furthermore, he assumes that an interest rate of 2% is the most that can be afforded (on grounds of predicted GDP growth and low inflation), and implies that 5% would be a likely actual rate for an ECB loan.

I'd agree that 5% would be a bit steep, but would also point out that Ireland is in a much better position to expect better terms than Greece. Basically, Ireland has already put painful austerity measures in place, that demonstrates good faith, which is something that the ECB certainly ought to be taking into account as it reduces their risk, and it is standard practice to offer lower rates for lower risk.

I'd also question whether inflation and growth can both remain as low as he predicts. The Irish approach to this crisis, given the non availability of currency devaluation, has been internal devaluation - ie, pay cuts, pay freezes, job losses. The purpose of this is to boost competitiveness in the international market. For both inflation and growth to remain low, the policy would have to fail spectacularly. Inflation at least is pretty much guaranteed to return with a vengeance after a process like that, and I would expect growth to be fairly unavoidable too.

As for his claim that insolvency for a country is equivalent to death for a person, well that's just shameless histrionics of the most moronic variety.

The other banks will have had similar lending though some might have less of one type and more of another. It does depend on the risk profile the banks took. Not all the banks here in the UK took the same level of risk as RBS or Northern Rock, but they are all vulnerable to a property collapse as they have around 80% of lending tied to it. Also buyers price in property inflation or deflation. While buyers are overly optimistic, lenders become pessimistic when there is a squeeze. It is why lending standards are now much tougher.


Yes but the majority of house buyers will only be able to get up to a level depending on loans plus equity. Also factor in that Ireland have few first time buyers because much of that generation are in the process of emigrating. The numbers are as high as during the famine years. First time buyers are what are needed to support house prices. When buy to let investors supplanted first time buyers the market could still climb but it meant that there was a lot further for prices to crash. Most governments efforts have been with the intention of holding up house prices as much as possible to stop a rush of foreclosures driving down prices.


Yes but the problems were caused by cheap foreign money and do you think that cheap foreign money now is going to save Ireland now? They are considered a very high default risk. Also medium term values are probably lower than now. As the article says many are still paying the mortgage even though they are unlikely to ever pay it off. This is holding prices artificially high. Also long term house prices has been a much lower multiple of a single income but just because money is cheap does not mean that much higher multiples are the new norm. These will fall back, and with falling incomes Irish house prices have along way to fall.

Also the Irish economy was boosted because it was a tax haven. It has no more industry to help it than before.


Actually Ireland are paying around 7.6% already. If they get ECB support it will be at 8%. There was an article somewhere on the forums about people struggling if imortgage nterest rates went up from 0.5%, so imagine that on a national basis.


Longer term rates need to be higher to discourage property speculation, and encourage a better balance of debt to equity ratios within businesses. Greece will probably default within a couple of years, Ireland shortly after.


Yes Ireland are taking the internal deflation route, as is the UK. Though you would not hear them admit it. The UK also has the currency route to devalue. The downward pressure on all benefits will undercut the incomes of many. Landlords will be particularly hit. Buy to let landlords will be very vulnerable. This could mean that as they go bankrupt the foreclosures will depress local housing markets, pushing more into negative equity. Also with the high emigration there will not be the population to support high house prices, so that will not help the banks out of their mess. There is a huge over supply in Ireland.

Inflation will be hard in a depressed economy. It is more likely in the Uk were a depreciating currency is already flowing into food prices. Irelands growth depends on exports which are quite substantial. Though with the rest of the world slowing, though there will not be another world recession like 2007. Its internal domestic growth will be dependant on fiscal measures which means it could be rough for a couple more years.


Agreed, insolvency of a nation is not that extreme. It is a big embarrassment. There is a lot of anger at the politicians in Ireland.