August 4, 2016

Our massive tracker mortgage debt is a ticking time bomb waiting to be set off by an ECB rate hike

Posted in Irish Independent · 49 comments ·

What is going on in the Irish banks? It’s perplexing that after all the billions of euro pumped into the banks, they are still fragile and — according to the latest European stress tests — Irish banks are among the weakest in Europe. How could that be when the economy is growing at three times the EU average, when the demand for credit is strong and when interest rates are at their lowest level in years, underpinning local demand?


The latest tests looked at what would happen to Irish banks if there were a massive economic shock to the system, with the Irish economy contracting by over 10pc.


The bad news is that the banks would not have enough capital to withstand this eventuality. The good news is that this eventuality is quite unlikely.


However, if there is no problem, why are Bank of Ireland shares down 50pc this year alone?


To me, that fall in the share prices sounds about right because the very nature of banks has changed, thankfully. Bank shares are a bet on the future prospects of the bank. Years ago, banks were leveraged profit machines —risky, short-term, profit machines but profit machines nonetheless. By lending hand over fist, the banks booked massive profits without any real attention to the underlying quality of the loan. This all looked good, until the borrower started to default because the clients — the borrowers — were bull****ing the banks about their ability to repay and the bank — the creditor — was bull****ing itself about the quality of the loans it had made.


Profits soared and so too did bank share prices.


Today, banks are heavily policed by regulators and they are debarred from making these crazy loans, and bank share prices will behave more like the share prices of utilities, such as privatised electricity or gas companies. So their share prices should not ever again soar to the skies.


Therefore, bank shares — everywhere, not just in Ireland — are likely to remain fragile and the higher the possibility of the banks having to raise more new capital, the lower the share prices.


When we stand back, we can see three remaining problems for the Irish banks: one is technical, one more economic and the third is geo-political — that is, Brexit-related.


Let’s examine the technical issue first. Back when the banks were going bust, and had to raise money from anywhere possible, they desperately issued IOUs.


The stress test looked at what would happen if interest rates went up rapidly. If you have issued very high-yielding bonds, the prices of these bonds will fall dramatically and the cost of repayment will rise significantly if base rates rise. Therefore, the Irish banks, because they owe so many of these bonds, would find their position very fragile if interest rates moved up suddenly.


The good news is that the banks are paying back all these IOUs quickly, so they should be off their balance sheets before any shock to the system. But they are a cause for concern.


In my opinion, a much more worrying source of fragility in the Irish banking system is the tracker mortgage problem. This is because trackers are long term and people have got used to repaying them at very low rates; if that changed, all bets are off.


A tracker mortgage pandemic spread like a virus though the homes of Ireland from 2001 to 2007. When the tracker virus crossed into the general population, it multiplied extraordinarily swiftly. Today, the figures are startling.


Today, trackers account for 60pc of Permanent TSB’s €26bn book of Irish residential mortgages. They account for 54pc of AIB’s €27bn book and 23pc of the €16bn book at its subsidiary EBS. Some 62pc of Bank of Ireland’s €28bn book is made up of trackers.


All told, that works out at €51bn, or about 52pc of total residential mortgages at the four main banks. A higher proportion of buy-to-let mortgages, about 70pc, are on tracker rates.


Some 85pc of trackers were lent between 2004 and 2008, when they financed the vast majority of the new estates that were built in our suburbs.


The banks knew they would lose money on trackers, but were confident that once they had you on a tracker, they could make money by lending to you for cars, kitchen extensions or holiday finance on top of your overdraft and credit card.


The number of people affected was staggering. The tracker went from 0pc of all Irish mortgages in 2001 to 15pc in 2004 and over 50pc by 2008. This enormous debt is the great unexploded financial time bomb ticking away in Ireland, waiting to be detonated by rising ECB interest rates.


If either rates increased or the economy contracted rapidly, defaults on trackers would increase significantly and the banks would end up with more bad debts.


The third adverse issue for the banks is Brexit. The Irish banks have significant businesses in the UK and, of course, the UK economy is extremely important to us. So any material slowdown in the UK would have a knock-on impact here.


When you take all these factors together, you can see how a massive shock to the economy or a significant crisis or rapidly rising interest rates could knock the banks backwards.


Does this mean the Irish banks are going bust again? Definitely not. Does it mean the share prices are far too low? Possibly, but all bank shares are performing poorly. Does it mean we should be chilled about the latest news? No, it does not.


But, for now, a bit of perspective is required. There is no new Irish banking crisis on the horizon, not yet at least


  1. michaelcoughlan

    Morning all.

  2. michaelcoughlan

    “However, if there is no problem, why are Bank of Ireland shares down 50pc this year alone?”

    I don’t know if these guys are short David but I’d say that’s a big part of the reason BOI shares are dropping;

  3. michaelcoughlan


    Owing IOU’s is one thing but they still also owe the wholesale money markets the money they borrowed to lend to their customers no?


    • Fractional reserve banking allows the money loaned by the banks to be produced from thin air and conjured into existence. That is the banks owe nothing to anyone . The loans put out used fictional money. The banks make the interest on nothing. These mortgages are highly profitable.
      The banking system is a scam.

      It is the derivative betting casino that puts the banks at risk.

      Can capitalism function efficiently at the zero bound?

      No. Low interest rates may raise asset prices, but they destroy savings and liability based business models in the process. Banks, insurance companies, pension funds and Mom and Pop on Main Street are stripped of their ability to pay for future debts and retirement benefits. Central banks seem oblivious to this dark side of low interest rates. If maintained for too long, the real economy itself is affected as expected income fails to materialize and investment spending stagnates. —-Bill Gross

  4. lion_bar

    Doesn’t this ignore that a lot of the principle amount on trackers issued from 2001 – 2008 has been paid down and that interest rates were much higher at times during that period.

    Therefore David may be overstating the issue?

    • McCawber

      Assuming most of the tracker loans were 25 years duration and that most of the principle is typically paid down in the second half of the loan period then it’s a fair bet that the banks are only just reaching the tipping point where the risk created by the trackers starts to reduce significantly.
      Big question tho’ What kind of event would trigger rapid interest rate rises and thus a tracker meltdown.
      The amount of trackers on BOI’s books is a lot higher than I was aware.
      BOI were late into the “optimistic” banking practices of the other Irish banks so if their tracker profile worse than the other banks one wonders.
      Personally (I’m not a financial guru but I am a BOI shareholder) I reckon I’d be far better off, if the banks were prevented from issuing dividends for at least another couple of years until this “irish miracle” is fully bedded in and the tracker mountain has become a hill.
      One bad exchequer’s monthly set of returns is not indicative but it’s still a wake up call to Official Ireland – Don’t get too smug, we are where we are because you’ve been screwing us and there isn’t any fat to spare.

    • Hoggie

      A 25 year tracker issued in January 2004 would today (the halfway point) have circa 43% of the principal remaining to be paid and circa 11% of the interest (at current rates).

      • McCawber

        Looks like the Tracker thingee is already beginning to wind itself down.
        That being the case then what IS the REAL skeleton in the bank’s closet.

        • McCawber

          Which form of the many forms of gambling are they exposed to and could it be identified from their annual reports or their auditors or indeed the taxman.

  5. McCawber

    In times of peace prepare for war.
    In times of war prepare for peace.
    There is financial peace at the moment but it is a very uneasy peace.
    Clouds are looming, Official Ireland seems to think it’s ok again to start demanding and getting pay increases that are significantly better than Real Ireland is getting.
    As usual, Official Ireland aren’t looking past their noses.
    I still think Strategic Thinking badly needs to be taught in our schools and starting at an early age too.
    Even at this stage of their lives, our politicians and civil servants (starting with Ministers and Senior Civil Servants) could badly do with a course in Strategic Thinking and even more importantly for them a way of identifying (and utilizing ) the natural strategic thinkers already in their employ.

  6. Pat Flannery

    “The lady doth protest too much, methinks”. The simple truth was uttered by a newly-minted (naïve) Taoiseach, Enda Kenny at the World Economic Forum in Davos, Switzerland, on 26/01/2012. He said the ‘’People ‘went mad’ borrowing during the boom’’.

    He was immediately excoriated by the Irish for telling the world the truth about them.

    Today David has reiterated that same truth with:
    ‘’The number of people affected was staggering. The tracker went from 0pc of all Irish mortgages in 2001 to 15pc in 2004 and over 50pc by 2008. ‘’

    But he is wrong in his prediction of the result ‘’This enormous debt is the great unexploded financial time bomb ticking away in Ireland, waiting to be detonated by rising ECB interest rates.’’

    That undoubted financial ‘’ticking time bomb’’ hanging over the world is our guarantee that neither the ECB, the Fed, the BoE nor any other central bank anywhere can ever again raise interest rates. That is the new reality of the capitalist system in which we all now live.

    The era of money earning money is over for ever. The whole concept of money was changed for ever during the so-called ”boom”. We now have a nuclear-style MAD (mutually assured destruction) financial situation.

    David’s thinking is out-of-date. The world can no more have a MAD detonation of ‘’rising interest rates’’ than it can have a nuclear exchange between super-powers. It is time for new thinking. It is time to find new ways of fulfilling the age-old functions of money. And Tony, GOLD is not the answer.

    • McCawber

      I would still prefer gold to bitcoins just the same.

      • Pat Flannery

        I knew I shouldn’t have mentioned the word GOLD. It is like a red rag.

        • BS Pat. You were confrontational quite deliberately.
          You have your opinion but you NEVER issue any reasoning for having your opinion. You are simply an anti gold bigot without any reasoning why.

          So lets hear your arguments/. But then we never said gold was the answer to the failing economy as that is a problem of corrupt actions and thinking. The use of the current money system is the result of that thinking and the result in part is a deliberate diatribe against any form of honest money and accounting. The corruption is deliberately induced by those that control the system and who obtain the benefits. Generally it is the old establish banking houses that have been the controlling influence for the last 350 years. They are masters of the art of propaganda that everyone falls for. You have had a red rag pulled over your eyes.

      • Sideshow Bob

        There was an interview with the owners of a company (Canadian based ) who have created a gold backed crypto currency on the Keiser Show recently, maybe 3-4 weeks back. The show was filmed in Toronto I think the company are called Goldmoney. Sounded interesting.

    • michaelcoughlan

      Your response Pat is wrong as Usual.

      The market WILL rise the rates sooner or later!

      “That undoubted financial ‘’ticking time bomb’’ hanging over the world is our guarantee that neither the ECB, the Fed, the BoE nor any other central bank anywhere can ever again raise interest rates.”

      Only an accountant would say something so stupid.

      Gold IS part of the Answer as GDX Gold miners are UP 50% in the last couple of months.


      P.S. Pat; Don’t take my comments personally. I have learned my lesson from the time Tony Brogan gave me a yellow card and sent me to the sin bin for my previous response. I am trying to play the ball and not the man.


      • michaelcoughlan

        AS for “we borrowed too much”

        Wrong again. The People who borrowed the money DIDN’T fail first and bring the banks down it was the OTHER way round. The capital markets seized up when all the NINJA (no income jobs or assets) loans went sour after they had been moved on and the buyers realised the swaps didn’t protect them from the losses being incurred.

        The banks couldn’t get the moola from the markets to keep the show on the road and had to try and call in the retail loans which shouldn’t have been made first day.

        Manny developers who had decades of experience and decades of track record paying back debts etc couldn’t

        And guess what? all the accountants who run the banks and more unforgivably the Auditing practices are STILL IN THEIR FIGURE SALARY JOBS.


      • “The market WILL rise the rates sooner or later!”

        Absolutely correct Michael. The artificial construct of lower interest rates is a policy of the central banks. They are backed into a corner as they use QE to infinity which now results in trillions of dollars worth of bonds showing negative interest rates. This will sooner or later be overpowered by the real market. Private money will cost high interest to be obtained while central bank money will offer negative rates.

        The economy is grinding to a halt partly because of this policy.

        I’ll repeat Bill Gross’s comment here.

        Can capitalism function efficiently at the zero bound?

        No. Low interest rates may raise asset prices, but they destroy savings and liability based business models in the process. Banks, insurance companies, pension funds and Mom and Pop on Main Street are stripped of their ability to pay for future debts and retirement benefits. Central banks seem oblivious to this dark side of low interest rates. If maintained for too long, the real economy itself is affected as expected income fails to materialize and investment spending stagnates.

        • “Finally, the most practically relevant section, and the one that almost verbatim ghosts Gundlach’s own sentiment on what one should do at this time, is Gross’ answer to “What should an investor do?”

          In this high risk/low return world, the obvious answer is to reduce risk and accept lower than historical returns. But don’t you have to put your money somewhere? Yes, of course, except markets offer little in the way of double digit returns. Negative returns and principal losses in many asset categories are increasingly possible unless nominal growth rates reach acceptable levels. I don’t like bonds; I don’t like most stocks; I don’t like private equity. Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories. But those are hard for an individual to buy because wealth has been “financialized”. How about Janus Global Unconstrained strategies? Much of my money is there.”

          Note the above recommendation by the “Bond King”..
          “Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories. “

  7. Sideshow Bob

    Constantin Gurdgiev has been covering this one for a while now there are multiple articles comments and updates on this one over on his site from a the last year or so and in particular highlighting the state of the Italian banks. I don’t recall him mentioning tracker mortgages or Brexit as being involved in the risk estimation for Irish banks. I could be wrong though, he is heavy on technical language and detail and goes through these issues briefly in a way that I far from understand fully. Anyhow, if you are curious I suggest venturing over to his blog at True

    • McCawber

      Only if he is prepared to listen to my dissertations on Quantum Entanglement so that he realizes it’s not all about the economy – (eh stupid)

  8. Another opinion


    If there was any doubt that there is a massive ‘Bogey Man’ in the basement of this Global Economic Ponzi, then today’s turn turtle by our Gang At Threadneedle St should quash it!..

    Carney and his cronies have now come in with another 25% Rate Cut and a re-instigation of The QE Program!.. All in all even more dovish than The Markets were expecting!..

    Some Turn Around given that 6 Months ago and they were all about Tightening and how quickly,..

    Now I can continue to bark like a student on all this,.. I could remonstrate still louder on all that’s finally being recognised across much of the Media, Markets and even ‘Tow The Line’ Economists; The cold hard truth that Zero/Negative Interest Rates and Giant Dollups of QE in the last 7-8 years has done little to improve The Real Global Economy and have only accentuated the growing disparity between ‘the Haves’ and ‘Have Nots’,..

    But that misses the point entirely,.. Carney clearly also knows that Zero Rates and additional QE is horribly inefficient and horribly imbalancing in a World already totally out of kilter following almost a decade of Emergency Central Bank Policy,.. So let’s just assume he’s neither mad nor stupid and therefore, instead of barking at him, ask more importantly why he and his Global Central Bank Alliance continue blindly on this path of such obvious destruction,..

    I don’t have the full answer to this, with the exception that I have to reason that they have little other option or choice!..

    When those in the know, continue to pursue a path of hopeless and increasingly destructive policy, they have to be doing it for a very good reason,.. In the same way as handing a fiver to a beggar on the street is clearly not going to change his hopeless situation in any material way but at least it will keep him fed or high for another night,..

    Central Bankers have been playing this game for a long time now and their subject is really starting to smell,.. At first they could get away with this because very few understood it’s anaemic and damaging consequences,.. That sympathy and support is dwindling fast,.. The Revolution’s growing,..

    We are perhaps on the cusp of what will go down as a Pivotal Point In Time in Modern History when we all finally got it!.. When we all finally understood that there is to be no return to normal policy,.. When we all finally understood that there can be no return to normal policy,.. When we all finally understood that the system’s completely and irrepairably broken,.. When we all finally understood that the only game left in town is to keep stoking in the ‘Funny Money’ because there’s really nothing else, without the entire House Of Cards being allowed to collapse!..

    When we all finally understood that Protection lay in Gold/Silver!..


    Rich (Live from ‘The Bridge of the Silver Rocket Ship’)

    Richard Guthrie
    Broadland Properties Ltd
    Telephone +44 (0)1723 373461
    Fax +44 (0)1723 500021

    • StephenKenny

      The question really relates to the overall state of the economy, and value of money in relation to it.
      Total global debt as risen by something like $70Trn since 2008 (global GDP is about $75Trn a year). 0% interest rates and money printing indicate the the world’s economies are little more than walking corpses.

      We’ve been doing this so long (25+ years) that culturally we’ve adapted to this situation, so speculative assets have become dominant investment sectors in most ‘advanced’ economies. For example, enormous effort is spent on trading second hand properties, and new properties are bought simply for their anticipated price growth. The so-called ‘financial’ industries spend all their time, effectively, finding more and different ways for everyone to take on more debt.

      Socially, this has created a culture of easy, effortless, money: Entire economies are focussed on: Buy something; Wait; Sell it. This is so much easier than all the effort of building a product or service to improve a system, and so to make a better product or service, and a better system, and ultimately a better society.

      So money is borrowed, and the majority enters the asset speculation sectors, which generates little or no actual wealth.

      It seems to me that the 0% interest rates are giving us an indication of the marginal real value of money to the global economy. Nothing. The value of an extra $1bn (or $1,000bn) to the world economy is, actually, nothing.

      The argument for precious metals is the same as it’s always been. The question is, what are the alternatives, and what are the arguments in their favour?

  9. McCawber

    What are the alternatives?
    A very good question indeed.
    1. Stop digging. No more QE or Interest raye reductions.
    2. Eliminate Official and Unofficial (yes private industry you are not as good as you claim to be ) waste
    3. Eliminate waste – This really needs an airing.
    4. Admit things are fucked up and what the plan is – Education and/or Communication.
    5. Oh yeah, almost forgot – Have a plan.

    • StephenKenny

      5. Oh yeah, almost forgot – Have a plan.

      The image I get in my mind after I see an announcement from a politician or central banker is of calm serenity in front of the microphone, and Daffy Duck behind closed doors.


    No one can be sure that Fed doesn’t meddle with futures or ETFs

    Chris Powell

    • StephenKenny

      It looks like it’s a little more global than that. For example, the Swiss national bank are buyers of US stocks (not just bonds) as is the Japanese central bank. It looks like the SNB have increase their holdings of US stocks by about $60bn, over the past few months.

      It’s pretty clear that central banks are operating together to support each other’s stock markets, and keeping important currencies within bands. Since they’re so secretive, it’s difficult to know how long it’s been going on, but it’s pretty clear it’s at least 5 years. Whenever there’s downward pressure of any significance, suddenly a massive buyer appears, and just keeps on buying until everyone gives up. It’s really strange.

  11. To get a real perspective on the structure of the welfare state economies, The results of using unsound money, The results of credit based investment, the problems and results of declining currency values and the problems of deficit financing of government shortfalls you will want to read this at least twice and then review again.

    You will have the answer to why increasing the money supply achieves no improvement to the gross domestic product, and why the answer for a productive economy is a stable base of fixed money supply backed by precious metals.

    This is the best article BY ALASDAIR MACLEOD of

    “The partying is over. The days of transferring wealth from the middle-classes and the poor through monetary debasement to benefit the welfare states, the banks and their preferred customers, are now numbered. The implications for future monetary policy are simple: the Fed, Bank of Japan, European Central Bank and Bank of England are working together to keep their respective GDPs from falling. The Bank of Japan is leading the way into deepening negative interest rates and more asset-supporting quantitative easing, and the others are all set to follow its example.”

  12. toner78

    Has anyone taken into account how the up coming financial melt down in Italy will effect the Irish Banks and the Eurozone???

    • McCawber

      Maybe you should be asking what are our banks and government doing to avoid/ameliorate those effects.
      No way and I mean no way should any bank be allowed pay out dividends in the short term.
      No bonuses or pay rises or anything remotely resembling increased remuneration until the banks are clean.
      How is it right that bank employees are given pay rises when their banks are scoring very poorly on stress tests and charging their customers interest rates well above the norm.
      Profits of hundreds of millions being reported.
      This is a disgrace given how those profits are generated.
      The simple logic to this is that if banks need bail in legislation then where is the quid pro quo for savers.
      Who is protecting the savers, the people who are actually holding the whole system togetther.

  13. mike flannelly

    Bubble gum bankers were the highly paid professional valuers of debt from 2004 to 2009.

    ” the borrowers — were bull****ing the banks about their ability to repay ”

    How is this possible?

    David discusses debt without EVER discussing the income repayment( rental or income) value of debt.

    In any snapshot of time there is a Real Value of debt based on rental income for buy to let investment mortgages and earnings income for home mortgages.

    Real Value Debt and False Value Debt has always been the problem.

    It is of course a Fixable problem.

    The Quality Assurance failure of the ECB and Irish school teacher politicians has been to ignore false value debt and not restructure it in a low interest environment.

    Michael Noonan is forcing the failure costs of his generation on the next generation.

    Throw them his Dirty Shirt.

    • McCawber

      Oh for the good old days of light touch regulation.
      Don’t Rock the Boat is still essential missive of Officialdom.

  14. mike flannelly

    Basically what David is saying.

    A 2 % interest rate hike will cause chaos with mainly “high debt ratio” investment mortgages but also “high debt ratio ” home mortgages.

    We spend 8 years being experts on BRIC countries,the tech industry, the Ukraine, brexit etc but


    “We must NEVER discuss high ratio debt”.

    Problems Caused.( including mental health)
    REAL Corrective Actions.
    Continious Improvement Suggestions.

    It is a Fixable problem.

    Failed 2003 to 2012 bankers should have been told to JOG ON. No witch hunt. Just piss off. Instead they are now Michael Vulture Lover ( cos the Irish economy looses ALL tax from Vulture rent) RIGHT HAND MEN with Irelands favorite bank.

    The sad thing is;
    Bank share price plus the knock on positive multiplier effect on the Irish Economy would improve after the Irish Banks restructured ( with the aid of the ESM FUND) all false value debt.

    Pity Irelands bubble gum economists had no high debt ratio mortgage restructuring skills.

    Firesales was Never the solution.

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