Friday, December 31, 2010

Ireland and her growing deficit

In the late 1990s Ireland was one of the most fiscally prudent countries in Europe. It regularly recorded budget surpluses.

However, no one was watching over the banks. Throughout the last decade, Ireland's financial sector made appalling loans to property speculators and other folk of an unsavoury nature. Now, those loans can not be paid back.

Rather than passing losses onto the bank's creditors, who foolishly financed this farrago, the Irish Government decided to place the burden for paying for this disgraceful speculation on the poor taxpayer.  While the government is raising taxes, cutting services and reducing the public sector salaries, it is also taking on defaulted loans so that French and German banks don't have to reduce their dividends to their shareholders. If a government runs that kind of economic policy, it will quickly accumulate a 32 percent of GDP budget deficit.

Ironically, Ireland's mortgage holders continue to service their debts. Arrears are running at about 5 percent. That is a little higher than the UK, but given that the Irish economy has imploded, it is surprising that the default rate hasn't risen higher.


  1. Default rates low now as it's a matter of pride for the newly enriched to keep their home, while political expediency and the distraction of much larger defaulting loans from developers has kept the banks from pursuing the homeowner who is struggling. However, this social compact will unravel in 2011 when the IMF / EU restrict credit and insist mortgage loan rates are priced relative to Market reality. Irish 5 year swaps would suggest much higher rates. If rates go up then property prices may tumble again. Then, I think the jingle mail seen in Las Vegas, Dubai or Florida will begin to appear in Dublin as homeowners opt for eventual default rather than rates of 6% - 8% .

  2. Chris,

    That is the fear; that Ireland's debt distressed mortgage holders will start to default and create a second wave of banking sector problems in Ireland.

    Thanks for the comment.