June 22, 2008

Bumpy ride on a bad debt cycle

Posted in Banks · 74 comments ·

The Central Bank must move, as the Fed did in the US, to prop up Irish banks before a major catastrophe.

Ireland is now going into the early stages of a classic bad debt cycle. While many are still talking about the credit crunch, the crunch is only a mild forerunner of the greater challenge.

When one bad debt begets another, the financial system falls victim to a contagious spread of bad or unpaid debts. This is a bad debt cycle.

As people stop paying back, trust disappears and the collateral demanded to cover the risk of any new loans rises. This tightening causes liquidity to dry up, making bad debts worse. Because the financial system is based on people paying back the cash they owe, if a sufficient amount of people begin to default, the system seizes up.

The banks – as the lubricants of this engine – are the first ones to suffer. In the past few months. we have seen the unsustainable. situation where the maniacally overstretched Irish banks, have been compelled to borrow money at higher interest rates than they can lend it. If they raise commercial rates, whatever limp demand there is out there will be snuffed out.

The effect of this financial brace is to send bank shares plummeting. It is now becoming clear that Irish banks are run by bull market traders, who took enormous risks with shareholders’ capital in recent years.

When the dust settles there needs to be widespread culling of the top brass in the Irish financial industry as they have been exposed as reckless, even predatory lenders.

In this they were aided and abetted by scores of middlemen at our mortgage brokers and estate agents. They should count themselves lucky if they just face losing their jobs. In the US the FBI has been rounding up bankers and estate agents who are now due to face criminal charges over sharp practice in the property boom.

In Ireland, as we have suggested many times, the positive contagion of the past few years has naturally given way to negative contagion. Now everyone is scrambling for cash only to realise that the trough is dry. So while our banks’ quarterly results might suggest that they made good money in the past months – that was yesterday before today’s reality dawned.

It is quite clear that the Irish banks will need to raise substantial amounts of cash in the next few months. The reason is simple: no matter how the banks’ management try to spin things, construction and property apart, there was precious else going on in the Irish financial sector.

Last year, 83 cent in every one euro borrowed was going into either property or property related investments. In addition, in summer 2007 close to half all money being lent by the Irish banks was being borrowed by the banks abroad and injected into our bloated bubble. Our banks turned themselves into little more than leveraged, out-of-control hedge funds that speculated on property.

Now this strategy — which was based much more on raising their share prices than building a proper banking business – is unravelling and the bad debt cycle is taking over.

We can feel it everywhere. As credit in our economy dries up, the stories of payment defaults and bounced cheques are getting more and more commonplace.

The other day a businessman friend, who is owed a substantial amount of money from a well-known developer, was told he’d be paid ‘‘in apartments’’. When he suggested he didn’t particularly want to own apartments as he had to pay his debts in cash and wanted cash not half-constructed shells, he was told ‘‘you’ll get apartments or you’ll get fuck all!

Similarly a banker told me this week that the greed of the past five years is now putting huge stress on the system. During the boom, people didn’t want to sell anything to finance new purchases and nor did the banks care because they, too, believed the hype. Rather than selling assets to buy more stuff, people simply borrowed against the value of their existing holdings.

This financial extravagance is creating a massive dilemma, because as prices start to fall, the banks are looking for more interest rate cover on the ‘margin’ needed to cover their loans. The situation was well summed up by a prominent liquidator recently who observed that ‘‘the quality and reputation of our clients is improving by the day’’. You’re getting a better class of bankrupt these days.

The bad debt cycle leads progressively towards a countrywide, fire sale, where sellers have to sell at prices way below their original purchase price. We are talking negative equity on a monumental scale.

This the next phase of the bad debt cycle is termed the ‘‘distressed phase. In this stage, asset prices fall precipitously and banks need to make huge write-offs against these bad loans.

Rather smugly and with typical self-delusion, the Irish banking sector has looked across the Atlantic and claimed: ‘‘Well, we don’t have sub-prime mortgages, so things won’t get that bad here. Unlike the US mortgage banks, the Irish banks have not re-packaged their mortgages and sold them on to snake oil salesmen in Prada.”

But this actually makes the situation worse. An on-balance sheet bad debt cycle will take longer there to unravel. When your debts are off balance sheet – as they were in the US – you take one large big hit, but as these debts were off balance sheet, your ability to lend is unimpaired.

On the other hand, if like the Irish banks, the debts are on the balance sheet, it takes much longer to work them through. In the early 1990s, the Swiss banking system went through something similar following a housing bust in Switzerland and it took the mighty Swiss banks five years to recover.

Now let’s look at our financial options. We can sit back and take this, allow the bad debt cycle to lead to distressed selling and facilitate global vulture funds to pick off the corpse of the Irish property boom. This is what happens in the US when individual states have property crises.

However, Ireland is, as we were reminded last week, a vibrant, independent democracy with its own agenda. Whatever the economics of monetary union might conclude, politically, we are not a client state of the United States of Europe, not yet anyway. So we need an inventive central bank that has the vision to realise that Dame Street has the solution to Ireland’s bad debt crisis.

We can’t change our interest rates. However, the Central Bank can inject huge amounts of cash without changing the interest rate – if it is prepared to take a risk on commercial banks’ shares. It is now time for the Central Bank to organises a massive sale and repurchase arrangement with Ireland top five banks.

The Central Bank would lease the shares of the Irish banks for a rolling three-month period, in exchange for euro. This would give the banks the cash they need, it would put a floor on where bank shares could fall and it would allow the balance sheet of the country to be rebuilt.

This is what the Federal Reserve has been doing since last January. Not only that but the Fed has organised the bailing out of Bear Sterns, brokering a deal with JP Morgan and giving JP $30 billion to do the deal. When leadership was demanded the Fed gave that leadership.

Can Dame Street offer the same example? Is it brave enough? Or will it wait until one of our banks has a real funding crisis, leading to a panic?

Ireland is facing a crisis and we need all our state agencies to act decisively. The central bank has a responsibility to all of us not to let the bankers mistakes of the past cripple the people’s prospects of the future. A bad debt cycle could ruin this country for a number or years, but the solution is simple.

Let’s hope cowardice and indecision does not prevail. ‘‘Cometh the hour, cometh the plan.”

  1. David, it looks to me like you are advocating moral hazard. Why should any institution be bailed out from a crisis completely of their own making, fuelled by greed, delusion, arrogance, and stupidity? The banks should be forced into a round of rationalisation, like any other company in distress ; I am sure that they could make huge savings if push came to shove (BTW I don’t see any of them quite down in the gutter yet)

    Who would pick up the tab if the shares provided as collaterol in your suggested scheme, continued to slide?

  2. Trex

    David ,

    Why are we picking up the bill after their reckless attitude in lending and speculating with their property friends? I dont see anything wrong with irish banks being taken over by other financial institutions from around the world. Some Private Equity funds already looking for distressed assets in europe . irish banks would be prime targets for these bargain hunters. are we ready for Arab Irish bank or Russian Bank of ireland :-)

  3. Malcolm McClure

    David: you provide an excellent and clear statement of the problem but your solution, to fork even more funds into the gaping maws of failing banks, places the taxpayer at too much risk. Will Hutton, in todays Observer, provides a much better solution for the parallel crisis in Britain.
    “the US has only been able to avert disaster in its mortgage market via the guarantees offered by two huge public mortgage banks – Fannie Mae and Freddie Mac – which directly or indirectly have provided 80 per cent of all new US mortgages over the last six months. Together, they guarantee more than half of the US’s £5 trillion of mortgage debt.
    In the US, a bank has the safety valve of being able to turn to one of the public mortgage banks which will either buy or, in effect, insure the mortgage and so keep mortgages flowing in bad times. Without them, the US would have suffered an even bigger house price crisis. In Britain, our banks and building societies have no such safety valve and are paralysed. Nor is any immediate relief promised by lowering interest rates. Instead, Bank of England governor Mervyn King threatens a rise.
    We are looking disaster in the face. A British version of Fannie Mae and Freddie Mac must be created now. Legislation to create a Gordon Mac should be introduced before the summer recess. It should be operating by the end of September. ”

    In my opinion, if Ireland set up a “Paddy Mac”, it would be a much more practical solution to the mortgage crisis than the state simply pumping funds into banks that richly deserve to fail.

  4. Nostramartus

    “When the dust settles there needs to be widespread culling of the top brass in the Irish financial industry as they have been exposed as reckless, even predatory lenders.”
    “In this they were aided and abetted by scores of middlemen at our mortgage brokers and estate agents. They should count themselves lucky if they just face losing their jobs. In the US the FBI has been rounding up bankers and estate agents who are now due to face criminal charges over sharp practice in the property boom.”
    This is one of the most important points in the article, no new business can emerge until the fear of bad debt contagion is eliminated and as david points out the best way to renew confidence is a cull of those responsible. But David leaves out one important group, the solicitors, this inbred “self-regulating group” were the linchpin of every property deal and a couple of high profile token cases doesn’t constitute a cull.

    What confidence can we possibly have in their professional advice when common sense tells you that their inflated pay-checks during the boom makes them the poster boys for negative equity through investment, they are hardly impartial advisors. Hopefully more website solutions like irishdivorceservices.ie will emerge to displace the disproportionate influence of a profession that’s made itself an irrelevent bureaucracy in an e-commerce world.

    The irish public have already passed judgement on illegible contracts like the Lisbon treaty. The Milgram experiment effect of a guy in a suit clutching an economics degree wheeled out every week to tell the Irish public” now is the time to buy a house ” has run it’s course leaving the reputation of every professional in tatters, when there is no longer any confidence in the system, the system is replaced or ceases to function.

  5. Ciaran

    R the moral hazard point, surely the point is the banks have to be bailed out (like it or not) because their failure will have major negative effects on the economy as a whole. You would hope that an FBI style investigation would be launched and result in criminal prosecutions but in a State where immunity from white collar crime is virtually a constitutional guarantee, what chance!

  6. B

    Let the banks go. We bailed them out before. This time let them go sing.

  7. B P Woods

    David, good analysis of problem but poor solution. To swap doubtful equity for genuine money (cash or credit line) is foolish in the extreme. Irish financials must be allowed to fail if they become insolvent – that’s the market! Painful for shareholders, bondholders and employees – that’s business! On a slightly different matter what is your economic model? Permagrowth (status quo), or slow, controlled descent into terrain?

  8. shtove

    Is it clear at this stage that Irish banks didn’t buy in to the American debt nightmare?

    UK banks are being very slow to announce writedowns on US mortgage backed securities – RBS is getting there, but Barclays is a tight-lipped dead man walking.

    It’s a fair assumption that the monkeys in D4 see the practices in the Square Mile and simply do the same thing.

  9. Are our savings safe? Even under the scheme guaranteeing first 20 k?

  10. Philip

    Banks have to burn and the brass with them…Cleansing needed.

  11. I think the solution should come from the system itself. These banks hasn’t done what they should, so the market value must plunge and the shareholders pay the price of keeping those bad managers in place. And once the value is bad enough and if there is any chance of getting good value from what there is left, someone will pay for it and start again.

    You’re more worried about not losing they “irishnesh” of those banks than about having good banks. It could be that even those arabs you are so worried about could be better managing banks than they current managers.

    Or perhaps some of german, or japanese, or multinational bank could buy the irish banks and inject money and start this show again.

    The real problem here is “Is there value for money in the irish banking system?”. If there is any, there will be money, if Ireland has gone to expensive to make any business having good value for money, there will be noone there to invest here, no matter what the Bank of Ireland does. Let the market work and everyone pay their mistakes.

  12. James

    I don’t understand this article. Did the banks donate their massive profits with the taxpayer during the bubble years?

    Why should the taxpayer bail them out because of their reckless lending in the pursuit of greed? To enable them to prop up unsustainable bubble inflated asset vlaues with even more reckless lending?

    This piece reads like ‘privatise the profits, socialise the losses’ to me. A very disappointing article.

  13. Nick

    Let the banks go under if needs be…we need to clean out the toxicity from the system before we can rebuild it.

  14. Malcolm McClure

    Since no-one seems to have picked up my suggestion above that the government establishes a ‘Paddy Mac’, here’s another idea. Instead of picking up the bank’s debts, the govenment could purchase and lease-back the bank’s premises and cash machines. This would provide the taxpayer with tangible assets and the bank with new operating capital. It would remind failing banking companies that they are not indispensable elements in the social fabric, as these tangible assets would continue to function even if they failed.

  15. Philip

    This is an integrity issue for the state. It is now clear (as article says) that the bullish speculators who ran our banking system in collusion with the legal system and the government need to be cleared out. The hollow state of the economy needs to be bared and witnessed by all and the current delusional state of public conscienceness needs to be wiped away. We have a significant issue here that cuts across Government, Public Sector (Health, Education etc. Leave out Semi-State for now), Property Development, Banks and Law. What is common across them all is that none of them make any wealth we can export. They churn money or just consume it and usually make a complete mess of it while they are at it. That does not mean they are not valuable…far from it. But they are too much the mainstay for the rest of the economy. That is dangerous. And worse, they are hampering the domestic wealth generators.

    I can understand David’s point of Dame St doing a Fed. on it. The damage to the country might be significant if there is a crisis and the banks start to go under. But lets see what we are damaging here. Banks are just service businesses – not national institutions. Get the Germans or similar in. We buy their cars. Let the local operations burn. We have no problem changing our shopping habits – why are banks so special?

    As for the man on the street and the small businesses? Life goes on. They had little to start with and when all this nonsense dies down, he/ she may see a more receptive attitude from our so called respectable public institutions who by then my see their cushy positions less secure and under more scrutiny.

  16. Garry

    Bailing them out just doesn’t work, at least in the United States people will spend time in jail for fraud, that wont happen here. If you run a small business, failure has consequences but apparently none for banks? Without consequences, all you’re doing is penalizing the prudent, and sending out a signal to work away, the idiot taxpayer will pick up the tab. In fact, when youre at it, why not put a floor under house prices, say 250k for a shoebox in the midlands… sure everyones happy then.

    Will the sky fall in if one of so called Irish banks fail (or more likely gets sold off cheaply to some bigger bank)? Why not use the same solution our policymakers have been using to control wage inflation, particularly in the low wage area … immigration? Lets invite some foreign competition in…. give them some incentives and let our domestic banks sink or swim? Or is that policy only for the little guy?

    Thankfully, I think the EU rules on state subsidizing of domestic companies means this turkey wont fly.

    Disappointed David; in this cash starved world, the taxpayer should be acting as the biggest meanest vulture capitalist of them all, not the fall guy in the pyramid scheme!

    to end the rant Wheres the accountability for our financial regulator? would we not be better employing a few hundred hospital cleaners with that budget vs wasting it on idiots who don’t actually achieve anything other than advertising?

  17. MK

    Hi David,

    You correctly point out that there is a banking/debt crisis, indeed crises across the globe, but the solution of a government/central bank bailout is a bad one. Time and time again, people say that ‘we cant let such and such a bank go under’, yet time and time again the very practice of saving it is hording up a future problem, indeed a much bigger one with moral hazard supported.

    We had a boom, it was a frenzy, lenders and lendees and flippers became intoxicated with the “no-brainer” property frenzy. Our Central Bank did NOT intervene enough during this frenzy ‘party’ period, to limit lending practices to cool the whole thing down. They in fact saw the party and thought that it was okay and allowed it to happen. They allowed the banks to get loans to re-loan out, etc. To use an analogy, you cant blame the students at a bar-extension promotion with all drinks at 1 euro for getting drunk, can you? But it would be stupid to give the student money for food the next day, if he has spent his budget.

    We should let the banks fail or get stressed (its unclear yet if anyone of them will actually fail). Of course, there will be costs. Every party has a hangover. Consumers may need to reduce their deposit account levels to match those of guaranteed amounts in case a bank should fail. Better have 10 accounts of 10k perhaps than one of 100k. The UK rescued Northern Rock who is now on record as wanting to get rid of its mortgage customers. The US rescued Bear Stearns and gifted JP Morgan with 29 billion. Other rescues may happen, but the EU needs to tread carefully. Ireland saved the AIB once before. Should we really do so again, an Anglo, a BOI? Once bitten, twice shy.

    The US sub-prime bad debts were sold off to other non-US institutions (such as UBS, Credit Suisse) as CDO’s, etc, through securitisation. Many of these ‘products’ were incorrectly rated as ‘safe (triple-A). Mis-selling and mis-rating may incur huge court cases in the future, I dont know, unless the dealers didnt read the small print. Irish banks as far as I understand may have sold off some of their debt securitised, but its probably not that much, and I dont have any visibility on their risk levels on their loan books. The share prices have been hammered of late so investors are expecting fallouts that have yet to happen.

    Across the globe though there are huge levels of debt. Derivatives are what scare me and comments that there is ‘too much cash’ waiting on the sidelines. Where is all tis cash coming from? Most of it is loans. We have for example seen a private-equity frenzy in recent years (across the globe) with more and more money using cheap credit as a basis to flip businesses as well as property. Indeed, eircom was flipped several times. This is much bigger than Ireland’s property bubble.

    But can the globe support so much debt? We may be facing a bigger storm, and whether it is now or forestayed for the future, it could happen. Those that have oil and cash should do okay. Although a mega-storm will hit if cash is no longer king. You cant eat paper cash, you cant eat 000′s on an online bank statement. Make sure you have an allotment and a supply of seeds!


  18. Brian

    “Instead of picking up the bank’s debts, the govenment could purchase and lease-back the bank’s premises and cash machines. ”

    That would be a better idea, if AIB and BOI hadnt already sold and leased back their property at the height of the boom.

    David, I’d be keen to hear your views on what this further injection of Euro ‘liquidity’ would do to inflation. There are precedents, I’m sure you know them. I agree that we can’t let the banking system fail, as was allowed to happen in the Great Depression, and I agree that the bank boards need to be cleared out, and hopefully jailed. But dumping billions of euros into the banks so that they can lend more, is surely not the answer. I gather you are saying to do just enough so that ‘trust’ returns, but people, and banks, are going to remember the burning they get for a lnong time, and wont put their hands back in the fire.

    I fear we need a recession to clear out the system.

  19. John Q. Public

    We need new banking regulations to ensure reckless lending does not happen again in the EU. Are there any such EU regulations? I doubt it. There should be a fixed bar at a percentage of a person’s or couple’s salary.
    With all the bureaucracy and regulations in the EU you would think there would be more stringent banking rules with regard to credit, the all mighty ‘imancipator’ of our workforce.
    You can’t put all of the blame on the banks, they are there to make money legally, it is up to the powers that be in Europe to enforce lending rules to prevent borrowers from entering into a fools paradice.

  20. walnut

    I noticed many of the posts are highly critical of the banks, government, estate agents, solicitors etc, and rightly so. But I think it is important to realise that it is the “plain people of Ireland” who are the drivers of all these players. We, as a nation, got incredibly greedy fumbling in the greasy till, dreaming of having a drink with Sean Dunne & Andrea Roach in the Shelbourne every weekend! Bear in mind that nobody put a gun to anybody’s head to buy a property. What is happening now is bigger than we can even imagine; and the scariest thing is that there is nothing the Fed, ECB, Government, EU can do to stop it!

  21. Ed

    The Government are the main culprits – they behaved with total abandon to get re-elected and now when all are ensconced on big salaries + expenses, Brian does a wobbler and kills off any little confidence that remained out there. We’ve entered turbulent waters and the captain has jumped ship – interesting time ahead.

  22. coldblow

    David’s suggestion, or something similar, is right and surely urgent. While I well understand the desire to let the banks go under is it a runner? What would happen then, is there a historical precedent (not a rhetorical question – I simply don’t know)? If this had happened to another utility, say the ESB had got themselves into trouble, would we leave the generators standing idle just to prove the point as to whose fault is was? It is possible to distinguish between the banks per se and their senior officials?

    I believe the most important step Roosevelt took in the early 30s was to regulate the banking system (not the TVA and the rest) and still the Depression lingered right up until they entered the War. What happened since then was that deregulation was allowed to return. An earlier comment that the market should be allowed to sort this out is therefore laughable. This crude ideology resurrected itself from the grave, zombie-like, and has been allowed incredibly to run amok all over again. The Conservatives over the water (they’re in the same boat) and their ilk have no remedy but more of the same – they still believe in it. If the US cannot reform itself second-time round then the EU should provide a workable alternative.

    The biggest difficulty would be political. It was hard enough for the government to convince people over Lisbon. So imagine how hard this would be.

  23. Dermot

    I cant see the Banks culling their top brass for any reason. After all this is Ireland and the fast buck prevails – they did their job and made money for the banks. As to the way out of it, I’d be seriously surprised if they went and did the right thing by their customers.

  24. Geckko

    Sorry Foppy, you’ve flipped. Seek professional help immediately.

  25. Garry

    My understanding of Davids suggestion is “We can spend public money propping up property values and banks by taking away risk and providing operating cash in return for a rolling lease of share certificates…”

    But the price of residential property is still way above rental returns. I don’t know commercial but the price of farmland is the highest in Europe and cannot be justified by returns from farming. So why fight it, let the bubble burst, it will anyways…. And lets use public money to pick off the “corpse of the property boom”, whether thats getting prime sites for public projects or essentially solid banking businesses at deeply discounted prices which could be re floated at a profit in a few years time.

    Can someone explain why the consequences of a bank’s firesale, a takeover or even a failure are so severe that the public purse should spend or even be exposed to many many billions saving them?

  26. Malcolm McClure

    Brian said, (quoting me first)
    “Instead of picking up the bank’s debts, the govenment could purchase and lease-back the bank’s premises and cash machines. ”
    “That would be a better idea, if AIB and BOI hadnt already sold and leased back their property at the height of the boom.”
    I wasn’t aware that this was the case. It just makes the banks’ asset situation tragically worse. Unless, of course they were far-sighted enough to sell to an untouchable overseas subsidiary. What were the regulators doing when all this was going on?
    Who was guarding the public interest by ensuring that the banks’ houses of cards were sitting on some tangible (ie seizable) assets?
    Was it all smoke and mirrors?
    As a very minor bank share-holder myself, I must accept some of the blame, and the punishment of seeing my holding decrease in value by 20% in the past week.

  27. Philip

    Lets assume the banks freeze up…what will really happen? Any ideas on a scenario for the average business?

  28. John Q. Public

    I can see the financial services industry cutting costs across the board. This will entail laying off people. Look what happened at Hibernian insurance today. Run of the mill white-collar jobs will be lost just like builder’s labourers have lost theirs’ in recent times. These job losses will start a trend eastwards to India.

  29. Nagelz

    Fundumental economics and various monetaryspeak soundbites are the current refuge of the illegitemate sons of the Celtic Tiger.

    In all it’s illusive grandeur Ireland had a very small working population with which to prop up such a tiger economy, both the banks and ourselves were of the view that utopia would be everpresent.

    How quickly it all unravelled, twelve months ago the roof started caving in.
    Yet the time for action passed and the current state of myopic malaise is going to be with us for some time.

    The blundering will no doubt come full cycle back to the 80′s with the crows coming home to roost on a Fas scheme maintained community graveyard.

    It sickens all of us to realise that we’re probably in a worse situation than we were in the terrible 80′s with no exit strategy.

  30. David, I’m surprised you contemplate the bailout of any bank without recommending massive internal restructuring and cost-cutting first. This is what would happen in any other company ; so why not the banks?

    Any that go under deserve to do so. It is for the long term benefit of Ireland that the most reckless institutions be exposed to the full lessons of the market. They have created the current problems ; if they are bailed out, they will recreate the problem again in the future.

  31. Paul

    We are in the great depression part II (will be obvious by 2010), when is the last time we had a great credit withdrawal on this scale?
    At this stage people with 100% of their savings in any one Irish bank need to seriously take precautions to avoid loosing all their savings. Go open an account with rabodirect, Rabo is the only bank on the Irish market that is AAA rated.

  32. B


    This was all coming for a long time. The dogs on the street knew it. People were being warned but the messenger was shot and killed and called a “talker downer”.

    I dug myself out of all debts I had from 2003-2007 and it was not fun at all. I had a few residual euro out on a personal loan and my credit card was ugly. Instead of buying a house with the SSIA as I was being goaded into at the time I zeroed all the debts and since then what comes in has to cover what goes out. Its that simple. I have no mortgage or dependents and although it was unpleasant my goal was increased flexibility and I could wear the short term pain. Mortgaged with a litter of kids will make it hard for people.

    My car is old but it is MY car and no bank has dibs on it. That car was bought in the last recession and is likely to see this one out too.

    I share living expenses and shop in Aldi for the basics. I go on an annual exotic holiday but its paid for before I leave. It may be boring but having the bank chasing you with a red hot poker that they want to shove up my ass to get money out of me. My job is untangling other peoples business messes and our phone has started to ring off the hook with work.

    It is really boring and sensible to minimise your exposure to the banks. Life is a little bit less colourful and the Range Rover comes with a Diesel and cloth seats instead of the V8 and the leather and not having a yacht on the never never isn’t trendy but then again neither is the bank jumping your wall and half inching the 08 D.

    My own business was not needed in the boom because any plonker could get a loan. These days its harder and the aforementioned plonkers are being deprived of the air they live on. Cheap credit hides structural problems in a company and supernormal profits can mask a business that cannot weather any kind of a storm. We get sent in before they default.

    I predict a wave of distressed sellers with Nissan Navaras and free apartments at knockdown prices.

  33. B

    but having the bank chasing you with a red hot poker that they want to shove up my ass to get money out of me…is no fun either.

  34. I don’t think David wants the Banks to be bailed out to help them, it’s to help us, as other wise it could slow our future down to a crawl for years.

    So credit killed the Celtic Tiger!

  35. Philip

    Man the roads were empty this morning! No traffic at all. Can a whole nation go into shock? (as I reason from the particular to the general – one of my favourite passtimes). And … I think the ESRI is optimistic. That’s because George Lee thinks so :).

    Here’s a dumb question…if savings are in trouble if banks go under…what about loans? Do they dissappear too? Why do I get the feeling that this is not the case? Can someone explain to my small intellect why this is so? Surely if the securities are worth zip, what happens to the punter who used them? What does it really mean when youre bankrupt? How does it stick?..and if you emigrate?

    The disturbing answer I believe is that bankruptcy destroys ones ability to raise credit and carry on until all debts are paid. So you stay here and wallow or dissappear abroad. Lovely scenario that…I wonder what proportion may be the new emmigrants?

    I actually think the situation is far more dire than in the 80s. At least then, there was no money. People had no debt worth speaking of either. But now we are staring at personal freezeups with no line of credit. This is where I think David McW is hinting. Comments?

  36. My Lost Generation

    I agree with Philip up above.
    ‘I actually think the situation is far more dire than in the 80s. At least then, there was no money. People had no debt worth speaking of either. But now we are staring at personal freezeups with no line of credit.’
    The situation will be worse and emigration will not be an option as your debts will follow you, mortgages on houses unsellable because nobody wants or can buy it and because it is only worth 50% of what you paid for it; ‘Locked’ in in Ireland.
    This is going to be much worse than the 80′s for some people.
    Let’s find the people who made the money during these ten years and make them pay for it. Let’s cut in half all these crazy wages of 250 000 + that are not seen anywhwere else in the world.
    Let’s start revolution!…or maybe since some people seem to think ‘We talked ourselves into recession’ then ‘We could talk ourselves back into an unprecedented economic growth!’ What a lot of rubbish, has anybody heard anything like that before ‘Talking yourself into recession’ what an Irish thing to say, you would nearly expect somebody to say after it ‘Don’t think about it, it’ll be grant’ with all respects Dave that could be a good title for you next article.

    I am awaiting Dave’s new article.

  37. Brian

    “Unless, of course they were far-sighted enough to sell to an untouchable overseas subsidiary”

    Not sure of all the ins and outs, but I’m pretty sure a builder owns AIB Bankcentre.

  38. Garry

    Nice, so the builder owns the banks buildings probably with a loan from some banks secured against the banks building and a lease guaranteeing rental income!

    And we are supposed to be on stand by to rescue the banks from their bad debts?

  39. alpha lau

    Why oh why did Ireland join the dead duck euro?.Our most important trading partners are the UK , China and America yet policy makers pretended that we were as european as the Dutch and Belgians!.Most of Irelands problems stem from interest rates set at half the level that they should of been set at and the crazy boom that it caused.The Brits stayed out because they knew the housing market would overheat just as it did when they shadowed the dmark in the late eighties.Ireland needs an exchange rate of $1.4:1 euro and a 10% depreciation in the value of sterling to remain competitive.As ever it will be the kids from the poorer parts of the country who will have to chance looking for work in America and the rest of the English speaking world as a result of our dangerous flirtation with the Germans.Lose control of your monetary policy and you may as well give up living!.

  40. Observer

    Ireland’s Economic Mess was its own doing…….. there were warnings as far back as 2000 about joining the Euro; this is partly due to all the nations signing upto the deal having economies at different stages.

    I’d also mention that it is stupid to be economically interdependent and tied into member states markets: if one member takes a nose dive, the others are bound to suffer aswell. You need only compare this to Dwight Eisenhower’s “Stack of Dominoes”

    According to other rumours: 60,000 people arrived here from January to May & last year out of 55,000 jobs in Ireland…… 90% were given to Foreigners.

    RTE has now informed us the ESRI declares we are now in a recession……… I get the idea social unrest soon will erupt.

  41. Brian

    “Why oh why did Ireland join the dead duck euro?”

    Because our gombeen parish pump politicians don’t understand geopolitics. It’s all horse trading, and we inevitably get donkeys.

  42. My Lost Generation

    Yes that is so true, we were doing so well before we joined the bloody euro! Remember? After all England is only one hour on the ferry. Unfortunately, the mess we put ourselves in is more due to a lack of regulation and intervention from the Irish financials institutions than us joining the euro. We only have ourselves to blame. Now we only have Lisbon 2 to look forward to.

  43. Ire-in_Exile

    You hinted in “The Popes Children” that there could be hard times ahead, though with a sense of incredulity that it hadn’t happened already sooner.
    It has now happened with an unprecendeted force and speed that leaves the Nation stunned (and if not also- Shamed).

    As a patriot (Like Ernie O Malley) who preferred to live abroad rather than witness the culture of the Country plummet in a rapacious bloodfeast. I was more than laughed at and abused by friends and family for continuing in the then struggling German economy and for not taking part in the easy haymaking at home…
    But I informed them still even then, that I was actually the richest person I knew, simply because I held no depths, owed nothing to a bank and had my own, albeit modest, existence entirely in my own hands.

    Today I get to have the last laugh. But while you advocate bailing out the institutions responsible for the current disaster, there is no advice for the minions of hapless people who trusted these conmen- many of whom now stand to lose their lives savings, wealth and security because of the actions of a few corrupt and greedy individuals..
    “Widesperad culling of the top brass”?


    I know that’s what Ernie O Malley would have recommended…

  44. Brian

    One thing is for sure, we’ve never needed a decisive leader like we do now. A good leader will take action to restore confidence. Not by bailing us or the banks out, but mapping out a future for Ireland. Because at the moment I dont see one, and I’m off at the earliest opportunity. Probably within a year.

  45. Bob

    These institutions have bled their customers mercilessly and now is payback time.They should not be bailed out, their incompetent managers should be dragged out and flogged.Their multimillion Euro bonuses should be confiscated and they should be banned from ever working in the sector again.
    Lack of professionalism and ethics has been the bane of Irish business life since the foundation of the State.
    One of the major banks has been bailed out by the taxpayer on two occasions.Thats enough.
    Private enterprise must stand on its own two feet, ask IBEC or ISME for an opinion on that. They don’t want taxpayers money spent on wages and spare no opportunity to say so.
    “Whats good for the goose” etc.

  46. Ed

    The AIB made a smart move by selling its property on lease back when it did – they’ll now be repossessing it and offsetting the debts – the taxman will loose out and they’ll again own all their property – nice one. Is that type of move called foresight or forecon?

  47. Ger Kennedy

    Wow. What a difference a year makes.

    In a previous article some years ago David said that economics books in the future will discuss crazy booms like the dutch tulip boom, the 1980′s Japanese property boom and the early noughties Irish “Celtic Tiger” boom as textbook frenzy booms. I think that his prediction will come true pretty soon.

    Anyway, I feel sad for my old county. Our people were duped by the cabal of snake-oil salesmen that are developers, real estate agents, bankers and mortgage brokers for the past 5 years. They must have known that it was foam. At least some of them must have. But the smart ones at the absolute top made their profits on the backs of the Irish consumer flogging crap houses in crap locations at crazy prices. These same people are now living in their beautiful houses in south county and further afield with the cash squirrelled away for their offspring and beyond while the poor paddy is left to pick up the pieces and keep paying the mortgage to keep a roof over his kids heads. It was fraud. Plain and simple. The property porn, the “prices will rise for ever”, the “get in now or you will never be able to to”, the “8 times income” “stress-tested” mortgages. It was fraud. However unlike in the US, no-one will go to jail. Sure a few heads will roll at the big banks and a few developers will go under. But lots of sub-contractors and small businesses will go under and it is going to cause chaos. While these kingpins of “Irish Business” retire or quietly get fired with a big severance package to shut them up and dissappear. Their kids and grand kids will enjoy the privelege of wealth and influence for generations on the backs of the ordinary Irish Joe.

    I really hope that some of the top people that defrauded the irish people are prosocuted. I doubt it however knowing how Ireland works.

    I genuinely hope it is not back to the 80s. I really though that that was impossible even a few weeks ago. Now I am not so sure. Hold on folks.


  48. Colin


    People did not get duped. They parked up their intellect, suspended it, and then decided with their own brain cells in their own head to buy property. Nobody put a gun to anyone’s head telling them to buy property.

    My Dad, used to think i was a loser, because most of the people i my age i grew up with were living in nice large houses, driving big brand new cars, eating in tasty restaurants on a weekly basis and holidaying 3 times a year, whereas i went back to college to get an education i had to pay for myself. I’m now working abroad, happy and safe in my employment, living within my means as ever.

    Those years as a mature student were hard for me, i worked part time in term, full time in summer and christmas holidays, paying the bank back as soon as i could. All around me at this time were people living the high life. I did feel a little envious, but i kept the faith and believed i was doing the right thing.

    So, now, the people who liked to show the world they had it all are the losers. I don’t take delight in it, but i have absolutely no sympathy for people who are in trouble now. They helped to fuel the fire at the time and now all thats left are ashes.

  49. Malcolm McClure

    We need to show a bit of restraint on this blog when discussing the good fortune and bad experiences of fine ordinary people, who are just trying to make a living. Otherwise it becomes a matter of ‘begrudgery flips to schadenfreund’. Maybe its time to reassess the merits of the ‘protestant ethic’ or at least try to apply plain old Christian forbearance and neighbourliness.
    Ire-in-exile’s suggestion of putting people to a firing squad just inflames an already bad situation. The best way to survive in hard times is to realize that there is more camaraderie in genteel poverty than you will find on a Caribbean beach.
    Quarter of sugar anyone?

  50. B

    I am with Colin on this one. I was laughed at for not buying a house. I had the means but buying a shed off the plans is not for me.

    I rent and will continue to rent until I see the bottom. Even then I might not bother. It was a scam and only now we are noticing when the ship has hit the iceberg.

    As for having any sympathy I have very little. I am fed up with haughty proprerty “developers” who without access to credit wouldn’t be able to find their arse with both hands.

    I do feel sorry for people who were duped but they do have a brain too.

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