BlackRock Inc., the independent stress-tester of Irish banks, has discovered a €24 bn capital black hole in their balance sheets. For a fifth time, citizens of the Emerald Isle are told that this bailout will be the last.
As reported by the Wall Street Journal on April 1st, the tab will increase from €46 to perhaps €70 bn as a result, or €15,000 per capita.
Even if this were the final bailout, the evidence cited Thursday 31st by the WSJ correspondent David Enrich supports the view that, contrary to the Irish Government’s assertion, the Irish taxpayer will not in fact fund these amounts and sadly Ireland will be unable to avoid a default.
As any professional in the mortgage markets knows, a housing market in which 5.7% of mortgages are delinquent (90 days past due) is on the brink of a price collapse. When I was securitising European mortgage portfolios in supposedly stable conditions before the systemic banking collapse, my team would raise eyebrows if the 90 day figure was a tenth of this level.
This 5.7% figure, and the trend up from 3.6% at the end of 2009, should have been focussed on more closely by the Irish Central Bank. The problem with the stress tests is that they are static in time, as opposed to forward looking, and fail to factor in these expected future price declines.
Irish house prices, as expressed by wage multiples, will decline further as these delinquencies turn into forced sales and Irish citizens put off buying until a price bottom is felt to be reached.
The historian Niall Ferguson queried whether we should compare our big banks to dinosaurs on the verge of extinction in the Financial Times in December 2007,
The big question for our time is: are we on the brink of a “great dying” – one of those mass extinctions of species that have occurred periodically in the history of life on earth, such as the Cretaceous-Tertiary crisis that killed off the dinosaurs?
The answer to this question is yes. And the proof is in the last 3.5 years of major European bank bailouts.
Let us distinguish the 2007-2008 bailouts (Phase 1) from the recent and future bailouts (Phase 2). The importance of the comparison is that Phase 1 bailouts were accompanied by interest rate cuts. Now that we are in Phase 2, Central Banks have no further scope for reductions.
Promoters of Phase 1 bailouts failed to mention at the time the circular effect of the price inflation of bank-credit-dependent assets triggered by the bailout itself. Right after each bailout, house prices tend to rise, especially so because of the interest rate reductions.
Phase 1 supporters also failed to mention the artificial boost to banks’ apparent profit lines directly attributable to the interest rate cuts. Yield curves were shunted downwards and all bank owned assets subject to mark- to-market accounting were boosted in value, triggering the recording of future hoped for cashflows as higher up-front profits under poor accounting rules that exaggerate the apparent financial health of banks. These rules were brought into effect in an environment in which global authorities did not believe that banks could fail en masse.
During Phase 1 taxpayers were assured that economies would recover relatively swiftly and that the need for the bailout was a unique and unforeseeable banking liquidity hiccup which would be fixed by the proposed drastic action.
But the bailout surgery has failed. The drain of lifeblood from economies by way of tax to fund bailouts will be looked back on with amusement by future generations just as we smile when reading in our history books about unnecessary surgical operations performed on medieval patients. Our never-ending bailouts are simply worsening the condition of each national economic patient.
The cuts required to finance various national austerity programmes are provoking civil unrest (UK) destabilizing governments (Portugal), and stifling economic recovery (UK again – Dixons Retail and other “discretionary spend” businesses continued this week to revise downwards their profit forecasts).
Few of the banking big beasts have perished because of the scale of bailouts by Western governments.
These bailouts should now end. As the Irish case demonstrates, they cannot work. Their impacts are trivial and short lived, and their long term costs cannot be absorbed by taxpayers.