According to an article in the Independent,
FINANCE Minister Michael Noonan yesterday admitted that Ireland's banks might need to raise more capital to pass a new round of European stress tests, but said they "should" have enough "headroom" to cope with new targets.
This is not exactly a ringing endorsement of the solvency of the Irish banks given that banks have passed the previous two rounds of stress tests that needed to be nationalized shortly thereafter.
What makes the next round of recapitalization particularly distasteful, is that the banks are not using the capital put in previously to broadly address the problem of over-indebted homeowners and the drag they represent on the economy.
According to an Irish Times editorial,
Extra capital [based on the last round of stress tests] was then provided – mostly by the taxpayer – to allow [the banks to] meet the losses and thus reassure prospective investors and lenders.
The objective may have been to reassure the markets, but the Government has created an expectation that there would be mortgage debt forgiveness or at least a formal structure put in place to carry out some sort of triage on over-indebted mortgage holders, allowing them to resolve their situations and move on with their lives.
Instead the Government has put in place a safety net for those who are going to lose their homes and left it up to the banks to resolve the wider issue. It has suggested a few mechanisms such as split mortgages, but there is no compulsion on the banks to offer these alternatives or even exhaust them before moving to enforce their security.
The Financial Regulator gave a strong speech last Friday promising to make the banks do what is expected of them, but in truth the Government’s main contribution will be an improved insolvency process to allow you tie up the loose ends once the bank is finished with you.
As a result of all this, the over-borrowed remain at the mercy of the banks they have helped saved. Anyone seeking to resolve their situation has no certainty as to the outcome of the process once they walk into the bank and put their hands up.
It is likely then that the current situation will pertain where most people struggle on trying to service unsustainable mortgage debt rather than moving to put their financial affairs in order. Situations that could arguably have been resolved in six months will now play out over many years.
The short-term winners are the banks, as they can now husband the capital injected into them by the taxpayer to deal with these losses and drip-feed it out over the next five to 10 years.
The long-term losers are pretty much everybody, including the banks, as a very large cohort of people – the over-indebted – will continue not spending, adding to economic stagnation.
To understand why the Government went down this road you have to assume their mind is focused on the wider economic picture. Or that they have had their mind focused on it for them by the EU and IMF.
In very simple terms it’s more important for the Government to have strong banks right now than try to lever economic growth through some sort of resolution of the mortgage debt issue.
If and when Greece defaults the shockwave will run through the European banking system. A repeat of the credit crunch that followed the collapse of Lehman’s is not inconceivable.
Many countries may be forced to step in and rescue banks, with consequences for their own fiscal positions and credit ratings.
Ireland to a certain extent is ahead of the curve, having comprehensively recapitalised its banking system. This, plus the banks’ low direct exposure to Greece, should insulate Ireland from this aspect of the catastrophe should it happen.Except of course that the additional capital was not enough...