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Ireland headed for massive mortgage defaults, economist warns

Falling housing prices and growing unemployment are a recipe for disaster says Irish economist David McWilliams.

 
Ireland headed for massive mortgage defaults, economist warns

Ireland is on track for the biggest mortgage default rates since the Great Depression of the 1930s in the United States, according to Irish economist David McWilliams.

The country was the first eurozone state to enter a recession in September 2008 after it was hit by the financial crisis. Prior to the downturn the economy boomed as the 'Celtic Tiger', although this led to rapid credit expansion and a property bubble. 

House prices in the country have fallen 55% since the height of the country’s property boom in 2007, though many people are locked into mortgages.

McWilliams commented: ‘What will happen in Ireland is the following: Ireland will suffer mass mortgage default, the type of which we’ve never seen since 1933 in the United States.

‘If you look at the balance sheet of the average Irish person who got involved in the property market, on one side of the balance sheet they have an asset, called a house which is falling still in value and on the other side they have the debt that they took out to buy that house which is fixed. So if your asset prices are falling and your debt is fixed, your income has to be rising very rapidly for you pay off that debt but that’s not happening in Ireland as incomes are falling.’

Currently 10.2% of borrowers are in arrears, a figure which is expected to increase as unemployment is also on the rise, with 14.5% of the work force out of work.  

The comments came at a talk at the Irish Cultural Centre (ICC) in London on Wednesday night. McWilliams along with Morgan Kelly, a professor at University College Dublin, is credited with predicting the rise of the property bubble as early as 2003.

He added that Irish central bankers and politicians are still playing catch up with the reality of the crisis.

‘The balance sheet is broken so let’s cut to the chase. The banks are still in a zombie state, where they open their doors every day but the fact is they are a safety box for Irish deposits. The big fear is a bank run where the Irish middle classes will take all their money out, so if we don’t want these things to happen the central bank has to begin to negotiate on the basis of the reality, not the world as we would like it.

‘Over the last four years every single time a politician says we’re turning the corner or its getting better, the gross domestic product (GDP) figures come out and they’re worse every single time. There have been 14 downwards revisions of GDP figures in five years for each quarter.’ 

He added that the new wave of emigration has also added to the country’s woes, as 76,300 people left the country last year.

McWilliams continued: ‘When you have a dilemma like this you need either mass debt forgiveness, which is where you control the issue, or mass debt default where you don’t control the issue, but either way people will not pay.

‘Unless we realise what’s happening the economy will seize up more and more, more people will emigrate, the tax base will decrease and the budget deficit will increase, we will miss targets and constantly be on the back foot.’

14 comments so far. Why not have your say?

Zaydac

Jun 21, 2012 at 17:57

This mess is not just in Ireland, it's in lots of places, and the cause is essentially an accounting fraud. The banks are lying about the value of their assets, the public are lying about their personal balance sheets, and the politicians depend on a ponzi scheme for financing the state - they don't publish any proper accounts at all. Niall Fergusson gave an excellent lecture on this on BBC Radio 4 yesterday. He was a quite gloomy about the likely outcome of all these lies.

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Peter Lawless

Jun 21, 2012 at 18:16

Niall Ferguson ? The same Niall Ferguson who was described by Paul Krugman as a 'poseur' who was all 'style with no comprehension of substance'.

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Murdo McSponge

Jun 21, 2012 at 18:54

And now the EUSSR's ECB is going to act as its own rating agency! You couldn't make it up! That has got to create the biggest conflict of interest on the planet!

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peter montgomery

Jun 21, 2012 at 20:42

Perhaps as I live in N.Ireland,my viewpoint has some objectivity.Most Southern Irish people were relatively 'late' into the house ownership cycle as mass prosperity didnt really occur until the early to mid 90s and there wasn't a real history of owner occupation up to then.Aided by the bountiful EECs farm policies and an uncanny ability to milk Regional Development Funds(eg street lighting schemes,roads to nowhere) plus huge FDI,the economy boomed.Fact. Many aspirants were lent huge LTVs with no experience to guide them in the event of a downturn,thus leading to the current impasse.Added to this was the endemic political and land based corruption,only now emerging,and the fact that many of these estates are virtual ghost towns,with nothing to support them.The bright talent is/has left,unlikely to return and the FDI tax holidays are drawing to a close.

Politicians and bankers still appear to live in an unreal world ,convinced that the good days are just round the corner.Yes,they could be,but that would be with the return of the Punt(remember that?) at 50% of the Euros present value.They often say that 'dumb money finds real estate';well it did!!

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Anonymous 1 needed this 'off the record'

Jun 22, 2012 at 09:31

Why is he talking about the balance sheets of home owners? You pay your mortgage from your income. It doesn't matter if the value of your house goes down (or up), you can be in negative equity but still meet your loan repayments.

Unemployment is rising, but you need to know how many of the 14.5% unemployed actually owned a house, and how many of those can't afford to now pay, for example a wife maybe unemployed but her husband may be able to cover payments (or vice versa).

The problem in Ireland is the politicians (as usual) who have talked up the possibility of debt forgiveness, once you do this you remove the incentive for those in NegEq to keep up payments (whether they can afford it or not).

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Raymond Hurley

Jun 22, 2012 at 11:16

interesting comments from all contributors so far.

The thing that concerns me most,is a rise in immigration from the distressed economies of Ireland,Spain, Porugal and others.

Perhaps it is time to rethink our 'open border' arrangement with the EU.

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Pertan

Jun 23, 2012 at 09:16

It just shows yet again that the EU model of an union without economic and fiscal union simply doesn't work in the longer term. Germany is being difficult but it should be remembered that it was one of the first to break the budget deficit rules (no more than 3% of GDP).Furthermore it benefited substantially from trade with all the other EU nations and even lent them money to buy their goods. Now they complain about german tax payers having to foot the bill, but they have enjoyed very high economic growth at the expense of other nations by benefiting from the relatively stable Euro and low interest rates. Had the germans had their own DM, it would have soared in value and interest rates would have risen, making their exports more expensive. Yet they have the gall to complain about higher interest rate in germany if they were to agree to Eurobonds.Merkel is leading Europe to disaster by not facing up to reality

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William Phillips

Jun 23, 2012 at 13:04

Ireland's problems really go back far further. Economically it was beginning to flourish by 1900, thanks to intelligent interventions by Westminster such as Balfour's. Then came the accidental slide towards republicanism as a byproduct of the Great War. The terrorists took over and shot the nation in the foot.

Ireland should never have left the United Kingdom, it should never have done so while severing its only industrial powerhouse, Belfast, it should never have accepted the rule of a backward-looking rural nostalgist, De Valera, and it should never have tried to break out of near-bankruptcy in the 1950s by battening on Europe (as well as the UK and USA for emigration).

Economically, 'Irish independence' has always been a sham. The country should have settled for home rule under the Crown, as advocated by Arthur Griffith, the founder of Sinn Fein, and as accepted by its most far-sighted and economically savvy Free State leader, Michael Collins.

Let the collapse of separatist fantasies in the harsh light of economic reality be a warning to the Scotch and Welsh. Britain is one unit-- Ireland is part of the British Isles-- and all the flags and anthems in the world cannot make you independently wealthy.

The Republic should swallow its pride, disavow the necrophiliac and priest-ridden past, rejoin the Commonwealth, build on the new spirit of co-operation with Ulster... and quit the EUSSR when the UK does. Otherwise its future will be that of a remote de facto colony ruled by banksters, Brussels bureaucrats and Berlin through a compliant Dail, and for ever on short commons.

Ireland will be as abject a beggar as at the height of the Famine, if no longer barefoot.

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Graham D-C

Jun 23, 2012 at 17:08

The Republic of Ireand was happy to harbour IRA terrorist killers of British civilian men, women, children, members of the Ulster Constabulary and British soldiers, Three IRA members found guilty and awaiting sentencing for assisting Columbia's FARC rebels to make pipe bombs for use against civilians, miraculously disappeared whilst under house arrest.. Lo and behold, where did they turn up but in the 'Old country' free as birds, there being no extradition treaty with Columbia. So why should we give a hoot about a country ,its people and a few PM, who subordinated themselves to the rule of terrorism, whilst Sein Fein MP refuse to acknowledge the Queen and thereby forfeit the right to take theit seats in the mother of parliaments. Perhaps Sein Fein/IRA MP's are also feeling the financial pinch and are now willing to shake the hand of the Queen in order to take her shilling in the form of a fat parliamentary salary plus expenses. .Lets not also forget that the Republic of Ireland negotiated a special dispensation from the EU that it would not require its forces to be part of NATO military conflicts. I wonder if acting as UN peace keepers pays more. Like Greece, The Irish Republic got itself into this mess by greedily grabbing the billions of euros thrown at it by the E.U. Let it sort its own problems out, after all, we have enough of our own to worry about..

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Zaydac

Jun 23, 2012 at 17:54

"So why should we give a hoot about a country ,its people and a few PM, who subordinated themselves to the rule of terrorism..?"

Because we are trying to put those days behind us and rebuild a better relationship. Your venom is not helpful. It would be better directed at those who perpetuate the lies I wrote about before the second wave of the crisis hits us even harder than the first..

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Peter Lawless

Jun 23, 2012 at 18:30

What a completely odious and unnecessary contribution from Graham D-C.

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Raymond Hurley

Jun 24, 2012 at 11:17

Peter Lawless may consider the contribution from Graham D-C as odious.

It is however an accurate summation, and I believe that most people in Great Britain would agree with his sentiments.

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Peter Lawless

Jun 24, 2012 at 22:01

' I believe that most people in Great Britain would agree with his sentiments'. How on earth can you believe that without evidence ?

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Irishtex via mobile

Jul 05, 2012 at 01:39

What about England? Who pays England's bill? The U.S. does that's who!

So what Ireland doesn't take part in NATO! Their not MEMBER of NATO!!! So why would they?

At one time the U.S. under the thug rule of the Limmies andthe U.S. rightfully so, broke away and then whooped the crap out of the Limmies and never looked back.

Why in the HELL would another nation want to be ruled by another and the gall of other to think they should be oppressed and like it.

What about terrorist? That's how the Limmies has stolen the riches of other nations.

But there is one consulation, a country once ruled by another, now rules that one!!!

The queen of England? Well she is our lap dog! Our bitch!!! We rule England!!! Don't ever forget that!!!

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