Banking Woes: IrelandáStill Long Way fromáOvercoming Debt Crisis

By Christoph Pauly in Dublin

Irish voters have approved the fiscal pact in a closely watched referendum, to the relief of European leaders. But the country is still a long way from solving its debt crisis, and its banks will soon need additional billions in fresh capital.

Posters for the fiscal pact referendum in Dublin (May 30 photo). Zoom
REUTERS

Posters for the fiscal pact referendum in Dublin (May 30 photo).

Henry Healy spent March 17, St. Patrick's Day, at the White House in Washington. His distant cousin Barack Obama had invited him. The US president has Irish roots on his mother's side of the family. "We went to a bar for a pint of Guinness," recalls Healy.

Last week, however, Healy, an accountant from the small Irish town of Moneygall, was no longer in a celebratory mood. "Joined the ranks of the recession brigade today!! #unemployed," he wrote in a Twitter message. His employer, an Irish supplier to the construction industry, had laid him off after six years. It was probably inevitable, Healy says without bitterness, pointing out that "the construction industry in Ireland is rapidly downsizing."

Healy is one of hundreds of thousands of Irish who have lost their jobs. Since 2008, Ireland has been struggling to overcome the financial crisis -- and can't seem to get back on its feet. The unemployment rate has stagnated at roughly 14 percent for months on end. Many young Irish have decided to leave the country altogether.

Illusory Confidence

In 2010, the European Union had to support the country to the tune of €67.5 billion ($84 billion). Ireland's local banks had gambled and lost on real estate loans, and had been bailed out with comprehensive state guarantees. Soon thereafter, the Irish and their fellow Europeans throughout the continent had great hopes that the worst was over. Recently, the Irish were considered a paragon for the entire euro zone. In 2011, the economy even grew, albeit only by 0.7 percent. But such confidence proved illusory.

As things now stand, Ireland will have to be bailed out a second time. The banks have proven to be a bottomless pit. They have to be recapitalized once again. The previous write-downs of the 10 largest consumer banks, amounting to €118 billion, are still not enough.

The country's financial woes were also the main topic of last Thursday's referendum, in which the Irish voted on the European fiscal pact. The majority of voters reluctantly backed the pact, initiated by German Chancellor Angela Merkel, which aims to impose budgetary discipline on countries and prevent the excessive accumulation of debt. Ultimately the Irish were motivated by the fear that the Europeans would otherwise cut off the flow of money.

On the evening before the referendum, European Affairs Minister Lucinda Creighton was still canvassing door to door in her Dublin electoral district to discourage voters from supporting the "no" campaign. The politician relentlessly pointed out to the many skeptics that Ireland will need €18 billion in 2014. It will take €10 billion, for instance, to pay teachers' salaries and support the unemployed, she argued. The opponents of the fiscal pact, she argued, couldn't say where the money is supposed to come from.

Paying for the Sins of the Past

This argument apparently convinced many of her fellow Irish. Indeed, only those countries that have signed the fiscal pact can expect to receive aid from the European Stability Mechanism (ESM), the permanent euro rescue fund which will be launched this summer with a war chest of €700 billion. Officially, at least, the Irish government is sticking to its plan to return to financing its budget deficit on the capital markets as soon as possible. But during their election campaign, even government ministers sowed doubt about the feasibility of this idea. Interest rates on long-term Irish sovereign bonds have risen to well over 7 percent since mid-May, in part due to the turbulence in Greece and Spain.

"The situation continues to be very serious," says Stefan Gerlach, deputy governor of the Central Bank of Ireland. Ireland's budget deficit is still over 9 percent of gross domestic product, which is significantly higher than in Spain or Portugal. "As an extremely open, export-oriented economy, we are directly dependent on developments in other European countries," explains Gerlach, who was born in Sweden and, until the fall of 2011, taught economics at the University of Frankfurt.

It is above all the financial sins of the past that continue to trouble the Irish. Five of the country's six main banks have been nationalized and received a total of €64 billion in support. The Central Bank of Ireland has provided an additional €40 billion in emergency aid, and all euro-zone member states have contributed billions more in aid via the European Central Bank (ECB). But that's not the end of the story. The banks need an additional €3 billion to €4 billion in fresh capital, according to a cautious statement by the central bank.

Even that is unlikely to be enough, though. There are ghost towns in Ireland where nobody wants to live. The newspapers are full of reports of liquidators looking to sell off real estate. In contrast to the situation one year ago, though, these days this leads to actual sales because prices have gradually dropped to a realistic level.

A group of hotel employees was able to purchase their rural hotel for €60,000, despite the fact that it had been built for many millions just a few years ago. Broc House, a three-story apartment block from the 1970s located directly next to a Dublin golf course, is currently on sale for €1.2 million. This is an 87 percent discount on the price from the year 2006.

Ignoring the Banks' Advice

Joe Kiernan, 55, a muscle-bound man with a crew cut, experienced the 12 wild boom years while working for a wrecking company. None of the old brick buildings in the Dublin inner city was safe from his wrecking ball and the bold plans of the real estate developers. During the boom years, such entrepreneurs set out to make the Irish capital fit for the future. "Sometimes it did seem like a shame," he says.

Today, Kiernan is standing in front of the unemployment benefit office on Redmond's Hill. For the past two years, this specialist for demolition and groundwork has had to report here once a month to receive his weekly allowance of €188.

This is enough to pay for Kiernan's self-rolled cigarettes, his beer and his rent. He is glad, he says, that he "never listened" to the banks that were determined to talk him into taking out a mortgage. Others were not so wise.

Over 10 percent of all real estate loans are plagued by irregular payments. Central banker Gerlach admits that an even greater number of loan agreements may be affected by delays in payment. "These arrears are one of the greatest national problems," he says. When the borrowers can no longer pay, the properties end up in state hands via the nationalized banks.

Resorting to Tricks

Until now, most financial institutions have not seriously tackled the problem of bad loans. The bankers are hoping for a miracle. Real estate prices have fallen by nearly 50 percent, which is lower than in the US, Spain or the other crisis-ridden countries. The track record for payments is so dismal that last week banks asked their customers not to finance their planned trips to the Euro 2012 soccer championship in Poland and Ukraine by skipping the interest payments on their loans.

Now, the central bank has set a deadline for the banks to finally abandon their policy of sticking their heads in the sand. "The banks need to know which loans can never be repaid and where adjustments may help," says Gerlach.

A new personal bankruptcy law aims to help individuals free themselves from the debt trap. The idea is sound enough. But analysts at Deutsche Bank are already warning of the billions in write-downs that this will entail.

In order to make life easier for the banks and ultimately itself, the government is resorting to all manner of tricks. According to conditions established by the ECB, the nationalized banks are supposed to pay 9 percent interest on the €31 billion in aid that they have received. Last month, the state itself borrowed money -- no less than €3.1 billion -- so that it could transfer the interest payments.

Ireland is being "disproportionately burdened" by the interest on the bank aid, says European Affairs Minister Creighton. She anticipates proposals from the ECB that would significantly reduce the interest rates.

A Knack for Recovery

So it's not surprising that this small nation is currently highly supportive of a proposal made by the Spanish, which would allow the ESM rescue fund to directly bail out their banks. Should the Spanish manage to push through their demands, the Irish are hoping that they would have a right to the same benefits. This approach has already worked once in the past. When the Greeks were granted low interest rates for financial aid from the EU and the International Monetary Fund (IMF), Ireland was also able to negotiate a discount.

Aside from that, there are major differences between Greece and Ireland. Thanks to low corporate taxes, a well-educated workforce and a functioning administration, the republic boasts -- in contrast to Greece -- an intact business and social model, including tax benefits.

American companies, in particular, are attracted to Ireland. Google, Facebook and Twitter have located their European headquarters here. Apple has pledged 500 new jobs. Intel also intends to produce its new generation of chips in Ireland and other locations.

And even Healy, the relative of the US president, is confident that he'll soon have a job again. The future, he says, belongs to the knowledge industry, arguing that he has excellent opportunities with his degree. "The grass on our island is growing again," he told the concerned president during his visit to Washington. The Irish, he told Obama, are very familiar with standing up again.

Translated from the German by Paul Cohen

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1. Germans do not understand their banks' role in the Euro Crisis, say the Irish.
peadar400 06/06/2012
Your article does not inform your readership of the real background. Some people have written: "German money should belong to Germans." (1) which is true, but therefore: "German private bank-loans should belong to German private banks", whether the loans make a profit or a loss. And this is what we're talking about here. Ireland (the Government & the Irish people) did NOT get this money! You wrote: "solving its debt crisis" - but this ignores that it was the debt of Foreign banks (including German) that Ireland was forced to (continue to) guarantee that is central to this crisis! You should understand that Ireland (the government & the people) DID NOT receive this money. This is unlike the situation in Greece, Spain, Italy etc., where the sovereign did actually get the money. In the discussion about money owed to bond-holders people use the phrase "if Ireland can't or won't pay it back". It is incorrect to use the word 'back'. What is being considered is whether to 'pay it', or not, but as we, the Irish citizens, never received this money in the first place it is wrong to talk about paying it 'back'. In fact not only did Irish taxpayers not receive the money, the fact that FOREIGN banks lent the money irresponsibly meant that the vast majority of Irish people were disadvantaged by massively inflated house prices. Sensible people never wanted this money to flood into Ireland in this way in the first place. Foreign PRIVATE risk-taking banks lent money to PRIVATE banks in Ireland. Later when these PRIVATE banks were going bust, in an attempt to stop a contagious disaster throughout Ireland and Europe, the Irish government said they'd try to guarantee this private debt (but the Irish citizens weren't asked and certainly did not agree to it). Professor Honohan and others said that Ireland prevented an event worse than the Lehman's collapse in Europe. When it was obvious that the little Irish citizen couldn't possibly pay this huge debt belonging to private risk-takers, and were not going to renew the guarantee, Europe (ECB etc.,with major German influence) stepped in and insisted that there should be no 'frightening the horses', and haven't yet let the debt be given back to those whom it belongs to. There was (& is being made again) a real solid economy, based on real things, before this cheap money flooded in, looking for private sector "investment opportunities". Ireland took ~30 years putting the pieces in place to create this solid economy, and then two parasite so-called professions - bankers (foreign & Irish) and property lawyers - came along and not only sucked the blood out of the economy, they expelled huge numbers of the next generation to emmigration. And they did this sitting in offices putting immoral contracts & 40 year mortgages down on paper, pushing house-prices out of reach for any sane calculation (but then lending 12 times salary to panicked novice first-time-buyers who are now also destroyed), they didn't create ANYTHING, they didn't even physically build any part of one of the surplus houses, and they could've done all that they did with 18th Century quill pens & ledgers and so on, so out of touch are they with what it means to contribute in a modern society. As one U.S. commentator asked (1): "Why should the Irish people be forced to bail out the Germans who loaned the Irish banks the money in the first place? Shouldn't the German bondholders who took the risks be required to take a major haircut? Isn't that how capitalism works?" Thank You, Peadar Coleman (1) New York Times article responses: http://dealbook.nytimes.com/2011/10/14/a-call-for-a-write-down-on-irish-debt/?hpw
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