Ireland’s banks drag economy to the brink
A clearer picture of the mess that Ireland’s banks are in is only just emerging. So too are the damaging effects the situation is having on economic recovery for the republic.
Niall Carson - PA
Ireland was once known as the Celtic tiger for its vigorous economy, but today it is more like roadkill.
Despite the government bailing out the banks, much of the sector remains insolvent and continues to hinder the country's economic recovery rather than help power it through vigorous lending.
While the Irish government is hardly unique in being forced to rescue banks, no other country in the EU - not even Greece - harnessed such a close and unhealthy relationship between lenders, property and the government. The result is that the struggling Irish taxpayer is on the hook for more than anywhere else in the EU.
The republic has dumped bailout costs worth just over €12,500 (£10,000) on each member of the 4.5 million-strong population.
A bank of two halves
Things could get even worse: last week, the Irish government decided to split the state-controlled Anglo Irish Bank into two parts.
One half will hold customer deposits and the other the troubled property loans that have already cost the state €23 billion (£19 billion). This somewhat resembles the splits made between 'good' and 'bad' banks that we saw at both Northern Rock and Bradford & Bingley in the UK.
Brian Lenihan, Irish finance minister, said: "Resolution of this, our most distressed institution, is essential to the promotion of confidence and stability in our financial system."
You can say that again. The full horror of the losses made by the lender has only gradually emerged. Credit-rating agency S&P reckons that the full cost of Anglo Irish's problem loans may reach €35 billion (£29 billion). This would add another €2,660 (£2,219) of bailout costs for each man, woman and child in the republic.
The troublesome three
Last year, Dublin paid €54 billion (£45 billion) to take £64 billion of non-performing property loans from Anglo Irish, Allied Irish Bank and Bank of Ireland into public ownership.
At the time, Ireland was praised for taking decisive action. Although that rescue appeared to cost the banks a lot from the face value of the loans, the market value was even less.
Why would the government pay more than the market price for distressed debt? The answer was that to do otherwise would mean the bondholders of the banks would lose money - and that in turn might spook those who hold Irish government bonds. In hindsight, though, it was an over-generous use of taxpayers' money.
Ireland's government bondholders are worried anyway. They fear that the state has bitten off more bank trouble than it can chew. Buyers only want Dublin's ten year bonds at prices that give them 6% of income, whereas they are happy to get just 2.3% for safe German debt.
The European Central Bank has been intervening to help support the price of these bonds, which is a clear signal the market has worries.
The speculative frenzy of Irish housebuilding
How did it all begin? Well, it's been brewing for years. Spurred by the booming economy of the 1990s and low eurozone interest rates, Ireland went property mad. Developers scenting profits built more homes per head than anywhere else in the EU.
Indeed, such was the speculative frenzy that, in the peak year of 2006, the republic built 90,000 homes in 2006 - almost half as many as the entire UK built, which has 15 times the population. Around 17% of Irish GDP came from housebuilding, and 64% of bank lending went into it by 2007. Despite this, 15% of these homes were empty, partly because they were still too expensive for first-time buyers.
Let this be a lesson to those who, along with the Bank of England's former monetary policy committee member Kate Barker, think that Britain can build its way to affordable housing.
Now, the bubble has well and truly burst. Irish house prices will stabilise in the next year at 45% below their peak, according to thinktank The Economic and Social Research Institute. That is more than twice the fall experienced in the UK.
A quarter of a million Irish households are thought to be in negative equity, while rents have been falling continuously since 2001.
Effects on the UK
This isn't going to leave the UK unscathed either. Ireland is one of Britain's five largest trading partners. Plenty of businesses here depend on Irish customers.
Irish workers have traditionally sought work in the UK, especially during lean times, putting more pressure on vacancies. Irish banks are also active in the UK mortgage market and, with capital short, there may be fewer good offers available.
I wrote about my concerns for the Irish economy back in June 2007. I wasn't alone in worrying that by binding the whole economy so closely to the housing market, the republic would be hit even harder than Britain by the next property bust.
I received quite a few emails from Irish readers who thought I was being too gloomy. It turns out my outlook was probably a little too rosy.
Damage spread far and wide
The Irish stock market index, ISEQ, is down 75% from its 10,000 point peak in 2007. The three banks, the housebuilders and construction groups that all made up such a huge part of the economy have all fallen together. While Britain was also hit hard by the banking crisis, the FTSE 100 is only down 17% on its 6,700 peak.
The Irish economy grew 2.7% in the first quarter of 2010, but when the profits of foreign corporations (many US firms use Ireland as an English-speaking eurozone headquarters) were removed, it was weaker than the previous quarter and still in recession, according to Ireland's business and finance portal Finfacts.
Jonathan Loynes, an economist at Capital Economics, said: "I don't think market worries for Ireland are over. I wouldn't be surprised to see the Irish economy deteriorate again in the second quarter and beyond."
At 64% of GDP, total Irish debt is lower than Britain's 68%, but its government deficit this year stands at 14%. This is the highest in the EU. Being in the eurozone, the Irish economy doesn't have access to the two most powerful economic engines because it controls neither interest rates nor exchange rates.
Sound familiar? Well, that's exactly the same problem facing the EU's other troubled economies - Greece, Portugal and Spain.
The Irish economy is arguably more vigorous than the EU's other laggards but, for now, a return to the Celtic tiger looks like a very distant prospect.
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The AIB above pulled the plug on my job so you can guess my thoughts.
Fortunately the Irish have Guinness, Leprechauns and New York policemen, the IRA, The RIRA, the PIRA and no poisonous snakes.
perhaps they will be OK
Sadly we are in a state of fiscal doom, and yet, we can always find cash for disaster victims, here and there, and to bail out other european bankrupt country's, who have failed there own population's wealth.
Charity begins at home, we have very needy people, and business here who need the help of banks, and the government support, to create and sustain jobs!! we have to offer manageable funds to business, or we will never recover.
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