What Irish Banking Crisis?
I keep hearing that we have a banking crisis in Ireland. I’m just not too clear if I know what that means.
Right now there is no run on the banks as the state has provided a guarantee. AIB’s last bond issue was oversubscribed as they raised 1.5 Billion. What we see on the business pages and discuss over pints is a much smaller problem: The share price has collapsed as shareholders have lost confidence in the banks’ ability to generate acceptable returns in the next few years. Hence the shares have been dumped in vast quantities and the price is on the floor. Bad news for private investors and people approaching retirement age. Possibly good news for people who are seeking long term investments. A source of great war stories over pints. But this is not a systemic threat to the Irish economy.
So what is the “threat vector” that has the nation so disturbed? The threat is the lack of cash in circulation in the economy due to a lack of confidence. Banks are terrified of non performing loads, so they hoarding capital and being very slow to authorise loans to anything with an element of risk. It is not just the banks that are hording cash: As spending has stalled in Ireland the effective saving rate has soared. Consumers and businesses are holding onto cash at an unprecedented level. Calling this a banking crisis is to miss the point.
This situation has its own scary logic. People now boast about cancelling Christmas parties and no longer spends vast amounts on a Friday night in bars and restaurants. This causes the bars & restaurants to close and triggers another wave of belt tightening. There are now 2 restaurant leases available around the Triangle in Ranelagh alone! The landlord will not fill those premises quickly and will have to accept a reduced rent when they are taken.
This lack of spending is the problem which need to be solved right now. Ownership of the banks is a secondary issue. The only way to restore spending is to first restore confidence. People will not spend if they fear for their future. Restoring confidence will be a slow process as the effect of this shock work through the system. Right now we have a confidence crisis and we all will be much more cautious for a few years.
Obama’s infrastructure package in the States will help and we should bring forward large scale capital schemes like Metro North (and wave power?) to help kick some life into the economy. We should never again have an economy so relient on the property market. Most importantly now is the time to start thinking about the kind of economy we want in future. If not property then what?
Do we have the leadership skills to start that discussion?
Tags: Broken banks, Economics, Ireland