Bailout

The underwhelming Irish bailout

By Felix Salmon

Color me underwhelmed by the Irish bailout. By all accounts it’s going to be less than ?100 billion — probably in the ?80 billion to ?90 billion range — and that sum has to cover the country’s entire borrowing needs for the next three years. The NYT has a breakdown:

While a precise breakdown was not given, analysts and people involved in the talks said that about 15 billion euros was likely to go to backstop the banks. As much as 60 billion euros would go to Ireland?s annual budget deficit of 19 billion euros for the next three years.

That leaves a few billion euros left over for one-off expenses and emergencies — but I worry that Ireland’s banks are going to need a lot more than ?15 billion. The banking system is on its knees and it has roughly half a trillion euros in assets. The black hole in commercial real-estate alone — over and above the ?50 billion or so that the Irish government has already shelled out — is estimated at somewhere in the ?20 billion to ?25 billion range and that’s before you even start thinking about residential mortgages:

Where the first round of the banking crisis centred on a few dozen large developers, the next round will involve hundreds of thousands of families with mortgages. Between negotiated repayment reductions and defaults, at least 100,000 mortgages (one in eight) are already under water, and things have barely started.

Banks have been relying on two dams to block the torrent of defaults ? house prices and social stigma ? but both have started to crumble alarmingly.

When a residential property bubble as big as Ireland’s bursts, there will be always enormous bank losses. But because those losses haven’t materialized yet, everybody in Ireland and the EU is sticking their heads in the sand, pretending that they’re never going to arrive at all.

The best-case scenario, then, is that the EU bailout will kick the Irish can three years down the road. But in implementing the plan, Ireland’s banks will effectively be nationalized and any future mortgage losses will have to come straight out of these bailout funds. Which aren’t remotely sufficient for such a task. If the spike on mortgage defaults comes sooner rather than later, this particular bailout package could prove to be very short-lived indeed.

Full post as published by Macroprudential on November 22, 2010 (boomark / email).