Meanwhile, back at the crisis! October 1, 2013Posted by WorldbyStorm in Economy, Irish Politics.
An interesting piece on the debt crisis and bank recapitalization in the Irish Times yesterday by John McManus. McManus is a lot less panglossian about the economic situation that the government.
Personal debt – and mortgage debt in particular – is the inconvenient truth spoiling the Irish recovery story. It reared its ugly head a few weeks back when the bank chief executives gave an account of their progress in dealing with over-borrowed homeowners to the Oireachtas finance committee. It was an occasion that overlapped with the opening of the new insolvency services and generated a good deal of noise, as it should, about how little progress is being made.
But the fuss faded away pretty quickly, drowned out by the news that we are out of recession again. The governor of the Central Bank pulled it back to centre stage when he appeared before the same committee last week – accusing the banks of wishful thinking – but nobody seems to care.
And he continues:
It’s easy to understand how a population exhausted by five years of austerity can put its collective head in the sand and prefers to believe the Government when it tells them we are on the cusp of recovery, even though they see little improvement in their personal circumstances.
Implicit in that is the sense that McManus does not believe what the Government is saying. He continues:
When you hear – as we did last week – that more than a million people think they have less than €50 a month left after paying bills, you can’t deny there is a problem. Whether they actually have only €50 to spend is neither here nor there. If that many people in a State our size feel broke, you must run the risk of a Japanese-style lost decade where people just stop spending, pay off debt and the economy flatlines.
I don’t actually find that figure at all unlikely. And it’s interesting that McManus also implicitly appears to cast doubt on it. That said he’s correct, functionally whether people do or do not have x amount if they act as if that is the case it has clear economic ramifications.
He paints a gloomy picture of the future too:
The level of unsustainable personal debt – including mortgages – is so large that the banks’ ability to absorb the inevitable losses has become a key determinant of the speed of any recovery. And as Central Bank governor Honohan noted last week, they are not – or perhaps cannot – move quickly enough: one suspects the corollary of that is that they cannot write off debt deeply enough.
As each day drags by the case for a further recapitalisation of the banks gets stronger. The problem is that we don’t have the money and probably can’t get it while also retaining the confidence of the bond markets. As a result we risk a prolonged and anaemic recovery – unless the bond markets wake up to the full extent of the problem and we are forced to take a second bailout to fix the banks again! Hard to know which would be worse.
But a second bailout would presumably… actually I wouldn’t even want to think about it.
Mind you, an interesting thought in comments too that in some respects the issue is political, not economic. Not that many, least of the Government, wants to see families evicted from their homes on a mass scale. So pin prick examples here and there will have to suffice for the moment. After all, no one wants to own up to the fact the crisis might actually be a catastrophe on a personal level for many many people.
Actually, that all brings up something that Cliff Taylor of the SBP mentioned the previous week where he noted in discussing the ‘recovery’ that:
The Central Statistics Office figures showed that in the second quarter we did have growth compared to the first quarter, but not every much. The level of economic activity as measured by Gross Domestic Product was just 0.4 per cent above the first quarter and still more than 1 per cent below the same period last year. There were some, limited, positives. Consumer spending was a bit better (though it was still lower than last year in volume terms); exports were picking up – led again by the services sector – and, when once-off were stripped out, there was some rise in investment.
Perhaps I’m not reading this correctly, but the media are talking about ‘recovery’ when economic activity is lower than it was this time last year and consumer spending is also lower than it was this time last year? Of course there are other factors that have to be considered, but that doesn’t sound like a recovery…
In fairness Taylor isn’t unaware of the contradictions:
For this [increased growth that will begin to diminish the banking deficit etc in the way that it is planned] all to work – politically and economically – the recovery can’t be delayed any longer.
Er, yes. But… that’s not likely on the current approach. Indeed it sounds like a circular argument, for the recovery to work the recovery must work.
The sums for the next few years are based crucially on higher growth boosting tax revenues, and also taking some of the pressure off spending, particularly by lowering the live register. If GDP does not rise as expected, then our debt ratio – the size of the debt compared to GDP which is due to peak at around 120 per cent this year – will just continue to go higher. And the goal of reaching a 3 per cent deficit target will move out of reach – without yet more cutbacks and taxes. And in turn these would drive growth lower again..
At which point we would require yet another ‘bailout’ with the measures taken to support that bailout being of a nature to drive growth down through expenditure cuts, etc. Yep. That all makes sense.