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Damien Kiberd We recover part of our sovereignty - but banks still losing their senses

The target borrower for banks is often a high net worth individual living overseas: ordinary owner-occupiers can go and whistle.

SEVEN YEARS AGO when the Celtic Tiger’s asset price bubble began to grind to a juddering halt, the government of Ireland owed its creditors €44bn.

Today that number is €206bn, equivalent to 124 per cent of GDP.

Today, December 15, may be the day we recover a part of our lost sovereignty.  It is a good day indeed.

But we are still accountable in many ways to external forces. And the problems we face are bigger than ever before.

Just how sustainable is our programme of debt management? Right now global interest rates are on the floor and, after years of tight management and austerity, the government can borrow long term capital at an interest rate of under 4%. But there is no guarantee that this will remain the case.

Either way the burden of servicing existing debt means that next year we will pay our creditors €8,190m in loan interest. This is more than four times the interest bill of €2,000m which we incurred in 2007.

State revenue earmarked for interest payments

For the foreseeable future a large part of government revenue is going to be earmarked for interest payments even before it is collected. And that ignores the whole question of capital repayments.

Like any sensible borrower the government has been doing its best to string out the process of repaying the sovereign debt.

The ‘average maturity’ of loans provided to us by the European Financial Stability Fund (EFSF) under the bailout programme is 21 years, for example. The NTMA will go on trying to push out the date on which capital repayments are made, rolling the debt forward where possible.

But ultimately our capacity to repay our debts must depend on the extent to which we grow our economy.

The recent growth record is not good.

Ireland’s economy contracted by 2.2% in 2008, by 6.4% in 2009 and by a further 1.1% in 2010.

After growing by 2.2% in 2011, it began to contract again: by 0.2% in 2012 and again by an estimated 0.2% in 2013.

The government hopes that the country will grow again by 2% next year. But there is no guarantee that this will be so. Among our sixteen partners in the Eurozone only the Germans are growing at a respectable pace. And our economy is hugely reliant on exports as a source of growth.

Setting the scene: The early 1990s

In previous periods such as the early 1990s we were lifted out of the mire by a combination of lower taxes and cheap credit. The government brought down the top rate of income tax from 65% to 40% while, for the first time, borrowers had access to a flood of cheap European capital. This created a buoyant local economy in which jobs were plentiful.

Today we are back where we were in tax terms, taxing modest incomes at marginal rates of 52% or even 55%.  And the banking system, which we rescued at a cost of €64bn, has largely shut down as an engine of credit creation for ordinary households and therefore of growth in domestic demand.

Finance Minister Michael Noonan signalled Friday that the tax issue is now his top priority.

Asking single workers on €33k a year gross to pay 52% in PAYE, PRSI and USC is clearly daft. It is also sending out all the wrong signals to overseas investors who will be sending key executives to work in Ireland and seeking to recruit skilled staff from other countries.

So it is vital that he finds the resources to pay for a very big widening of the standard rate income tax band.

Deadbeat banking system

But the real sickener for Noonan and for his cabinet colleagues lies in our deadbeat banking system. Instead of lending more to business and to households, the banks are lending less and less. They don’t think small firms are a good risk. And, apparently, they don’t think that mortgage loans should be given to ordinary people either.

Into the future they may be thinking of a completely different type of banking model.

Consider the following. At some of our biggest banks the rate of default on existing buy-to-let (BTL) mortgages is currently approaching 30%.

You might imagine that this horrific, almost unprecedented, bad debt experience would scare banks away from BTLs altogether. Yet in recent days banks have begun cutting the rate charged for BTL loans as they drum up new business. Simultaneously there are reports that global capital funds are creating new lending vehicles for Ireland which will specialise in BTL lending.

Have the banks taken leave of their senses? Again?

Vulture funds and global property investors have also been snapping up blocks of apartments in Greater Dublin.

Why is this happening? Have the banks taken leave of their senses, again?

Clearly the banks and the professional investors believe that there is a big future in the rented property market in Dublin and other urban centres. If young people, especially those in fixed contract employment, are not going to get mortgage loans in the future then they must, by definition, become permanent renters.

Already rents are rising sharply in Dublin. The BTL market may actually be the place to be for the banks and capital providers of the future. If the borrower is affluent enough to put up a substantial part of the cost of a property in cash, then the risks in new BTL lending are acceptable.

Similarly, the pillar banks are beginning to offer new five-year interest-only credit to property purchasers provided they can put up half the cost of a property in cash. The target borrower in frequently a high net worth individual living overseas.

‘Professional’ investors v owner-occupiers

The view in the top echelons of banking seems to be as follows. The banks have gone through a terrible time losing pots of money on tracker loans. The 12% default rate on ordinary home loans has pumped up average loan losses. But there has to be a future in lending for bricks and mortar provided you de-risk the lending sufficiently.

This means much lower loan to value (LTV) ratios, completely flexible lending rates and much more rapid methods of dealing with default. This in turn may mean a bank chooses to deal with ‘professional’ investors in property as opposed to owner-occupiers.

If, in the process of changing the lending strategy, you pump up the price of the existing stock of property then so much the better. Ultimately, you may recover some of the capital you thought was lost during the boom.

This may be one of the most important legacies of the boom and the crash. The banks haven’t gone away. They may simply re-invent themselves as property lenders in ways that alter human behaviour quite significantly.

As regards lending to small business, well that’s another day’s work altogether.

Read Damien Kiberd’s columns for TheJournal.ie here>

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    Mute Cormacklemore
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    May 4th 2015, 9:32 PM

    The Chinese – a great bunch of lads

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    Mute Damien Rogers
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    May 4th 2015, 9:50 PM

    Well done

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    Mute skeyes
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    May 4th 2015, 9:57 PM

    Pmsl… Ted comments always roll off the tongue here on the journal but that has to be the most appropriate use of a ted quote yet. Well done!

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    Mute Damien Rogers
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    May 4th 2015, 10:02 PM

    Rehashing old tv quotes from cancelled tv shows is the height of humour.

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    Mute Pearse Mc Mullen
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    May 4th 2015, 10:29 PM

    The timing of such quotes is the height of humour,
    And the unnecessary bitchiness on a funny and innocent quip is the height of ignorance.

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    Mute Gaeltán
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    May 4th 2015, 11:04 PM

    An tír is mó ar domhan agus an an spórt is fearr ar domhan. Craobh na Síne le teacht -íosfaidh siad na Cait!

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    Mute David O Connor
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    May 4th 2015, 11:23 PM

    Father Ted was never cancelled either.

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    Mute James Gorman
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    May 5th 2015, 12:13 AM

    Big pick

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    Mute Damien Rogers
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    May 5th 2015, 12:35 AM

    U wot m8?

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    Mute Kedgeo
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    May 5th 2015, 12:44 AM

    Yer a bit of a big ole dope Damian :-)

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    Mute Terence
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    May 5th 2015, 1:30 AM

    Damien, oasis or blur?

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    Mute Damien Rogers
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    May 5th 2015, 1:59 AM

    Terence your joke or someone elses?

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    Mute Baz
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    May 4th 2015, 10:32 PM

    I can hear Michael O’Muircheartaigh already.

    “Lu wins the breaking ball, passes it out to Chow who drills it down to Mein on the full forward line who is tackled and wins the free off Jackie Tyrrell. Lu Chow Mein – I ordered that in my local Chinese in Maynooth last night – and it too went down as easy as Mein there”

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    Mute J
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    May 4th 2015, 10:43 PM

    I hear you’re a racist now father….

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    Mute Graham Doyle
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    May 18th 2015, 8:04 AM

    It’s not the Chinese he’s after, it’s the Greeks!

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    Mute B A C
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    May 4th 2015, 9:53 PM

    Its the best game in the world. My dad won a dublin championship medal in the late 60s and im still so proud

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    Mute Jonathan Hayes
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    May 4th 2015, 9:36 PM

    Michael Rice and Lee Chin gonna pop in?

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    Mute Paul O'Donohoe
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    May 4th 2015, 9:46 PM

    Lookit I know that was a bit of a controversial comment. But in fairness I did laugh at it. Have a thumbs up

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    Mute John Barry
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    May 4th 2015, 10:33 PM

    +1 Mr. Hayes!!!!

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    Mute Al Ca
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    May 4th 2015, 10:54 PM

    I really like this….wonder if we’ll ever get to see the show with subtitles…the Chinese have a great sense of humour just like us…they’ll be laughing their heads off at each other trying to hit that sliotar.
    Great for tourism.
    Anyone know where we can get a link to that show! :)

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    Mute Gerard
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    May 5th 2015, 1:44 AM

    You have very clearly never seen Chinese TV. It’s all recycled clichéd trash with zero artistic value. It’s all about making money. Not just for the channel, for everyone involved.

    Not that they there aren’t funny people in China, just you won’t see them on TV, like Jia Ling. Who you’ll only ever see on a (very funny, admittedly) Wrigley’s ad.

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    Mute Louis Eivers
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    May 5th 2015, 5:56 AM

    Chinese TV humor is total slapstick. I think we’re a little ahead of that….

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    Mute Qwerty
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    May 4th 2015, 11:43 PM

    500 million people! Brilliant publicity for the sport.

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    Mute Kevin Ryan
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    May 4th 2015, 9:38 PM

    You’re playing Sino hurling now, lads.

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    Mute Grumpeee Oldman
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    May 4th 2015, 11:41 PM

    Is it true the producer of the show is Mr Fun Hur Ling ?!

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    Mute Luke
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    May 4th 2015, 9:36 PM

    The fact that people like you still exist is worrying to a lot of people.

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    May 5th 2015, 9:48 AM

    Hoo Lee Fuke

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    Mute Ivan Murphy
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    May 5th 2015, 12:25 PM

    What’s the craic with the black hurlies?

    Can you imagine the deforestation of Ash trees should it catch on in China? I might plant a few :-)

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