Showing posts with label Irish interest rates. Show all posts
Showing posts with label Irish interest rates. Show all posts

Friday, May 9, 2014

9/5/2014: Cost of Credit in Ireland Kept Rising in Q1 2014


Latest data from the Central Bank shows continued increases in cost of credit in Ireland in Q1 2014:
- Overdrafts rates for households are up 0.46 percentage points in Q1 2014 compared to Q1 2013;
- Loans for house purchases with original maturity up to 1 year: up 0.29 percentage points
- Loans for house purchases with original maturity of over 1 year and up to 5 years: up 0.08 percentage points
- Loans for house purchases with original maturity over 5 years: down 0.2 percentage points

- Consumer loans with original maturity up to 1 year: up 0.82 percentage points
- Consumer loans with original maturity of over 1 year and up to 5 years: up 0.3 percentage points
- Consumer loans with original maturity over 5 years: down 0.02 percentage points

- Non-financial corporations loans with original maturity up to 1 year: up 0.1 percentage points
- NFC loans with original maturity of over 1 year and up to 5 years: up 0.16 percentage points
- NFC loans with original maturity over 5 years: up 0.01 percentage points
- NFC overdrafts rates down 0.36 percentage points.

Thus, Irish 'repaired' banking system continues to extract higher costs out of households and businesses already strained by debt burdens.

Thursday, June 20, 2013

20/6/2013: Stalled Irish Banks Reforms: Sunday Times, June 16, 2013


This is an unedited version of the Sunday Times article from June 16, 2013


The latest data from the Central Bank shows that in two years since the current government took office, Irish banking sector is not much closer to a return to health than in the first months of 2011.

Objectively, no one can claim that the task of reforming Irish banking sector is an easy one. However, credit and deposits dynamics in the sector point to the dysfunctional stasis still holding the banks hostage. Despite ever-shrinking competition and vast subsidies extended to them, Irish banks are not investing in new technologies, systems and models. Banks’ customers, including businesses and households, are thus being denied access to services and cost efficiencies available elsewhere. In short, the Government-supported model of Irish banking is failing both the sector and the economy at large.


In April this year, total inflation-adjusted credit advanced to the real domestic economy, as measured by loans to Irish households and non-financial corporations, stood at EUR175,419 million. Since Q1 2011, when the current Government came to power, real credit is down EUR32,302 million. This figure is equivalent to roughly twice the annual rate of gross investment in the economy in 2012. Total credit to non-financial corporations has now been in a continuous decline for 48 months.

Half of this contraction came from loans over 5 years in duration. These loans are more closely linked to newer vintage capital investment in the economy, generation of new jobs, R&D and innovation activities, as well as new exports, than loans with shorter duration. Let’s take this in a perspective. The fall in total longer duration lending since mid-2009 is equivalent to losing 70,000-90,000 direct jobs. Factoring in interest income plus employment-related taxes, the foregone credit activity has cost us close to the equivalent of the tax increases generated in Budgets 2012-2013.

It would be fallacious to attribute credit supply declines solely to the property related lending. Based on the new data reported this Thursday by the Central Bank, loans levels advanced to private enterprises have fallen, between Q1 2011 and Q1 2013 in all sub-sectors of the economy, with largest loans supply declines recorded in domestic, as opposed to exports-oriented, sub-sectors.  All loans are down 6%, while loans to companies excluding financial intermediation and property related sectors are down 5.8%.

However, on the SMEs lending side, some of the steepest loans declines came from the exports-focused enterprises, such as ICT sector, where credit has fallen 9.7% on Q1 2011, or in computer, electronic and optical products manufacturing where loans are down 6.5%. Even booming agriculture saw credit to SMEs falling 5.7% over the last two years, while credit for scientific research and development is down 13.3%.

The picture is, in general, more complex for the levels of credit outstanding in the SMEs sector. On the demand side, in Ireland and across the euro area, there has been a noticeable worsening in the quality of loans applications filed with the banks during the crisis. In a research paper based on the ECB SAFE enterprise level survey data for euro area SMEs, myself and several co-authors have identified the problem of selection biases in companies’ willingness to apply for credit. In simple terms, SMEs more desperate for funding due to deteriorating balancesheets are more likely to apply for credit today. In contrast, healthier firms are more likely to avoid applying for bank credit.

ECB data also shows that Ireland’s problem of discouraged borrowers is much worse, than the euro area average. For example, in Ireland, 21% of all SMEs that did not apply for credit stated that they did so for fear of rejection, almost 3 times the rate of the euro area average and nearly double the second worst performing economy – Greece.


On the funding side, Irish banks have been and remain the beneficiaries of an unprecedented level of funding support compared to their euro area counterparts.

A recent research paper from the Dutch think tank CPB, titled "The private value of too-big-to-fail guarantees" showed that through mid-2012, the pillar banks in Ireland have availed of the largest subsidy transfers from the sovereign and Eurosystem of all banking systems in Europe. Funding advantages, accorded to the largest Irish banks, alone amounted, back in June 2012, to more than double the share of the country GDP compared to Portugal, and more than seven times those in Spain and Italy.

Removal of the explicit Guarantees was supposed to serve as a major step in the right direction. Alas, Irish pillar banks continue to depend for some EUR39.5 billion worth of funding on Eurosystem.  The latest Fitch report on the pillar banks shows that this reliance is likely to persist as loan/deposit ratios remain relatively high. Latest figures put Bank of Ireland, AIB and PTSB loan/deposit ratios at around 120%, 130%, and over 200%, respectively.

And there are further issues with funding in the system. By mid-2014, AIB is required to raise EUR3.5 billion to redeem the preference shares held by the National Pension Reserve Fund. Bank of Ireland will have to find EUR1.8 billion for the same purposes. In both cases there are questions as to how these funds can be secured in the current markets without either further reducing money available for lending or tapping into taxpayers’ funds.


Subsidies to the ‘reformed’ Irish pillar banks go hand-in-had with the regulatory protectionism, which completes the picture of massive transfers of income from the productive economy to the zombified banking sector.

Since 2008, Irish financial services continue to experience ongoing process of consolidation and, underlying this, the reduction in overall competition. Data from the ECB shows that the number of financial institutions operating in the country has fallen in 2012 to the levels below those recorded in 2000-2008. Dramatic declines in the fortunes of the third and the first largest lenders – Anglo and AIB - should have led to a drop in the combined market share held by the top 5 banks. Instead, the market share of top 5 credit institutions rose over the years of the crisis.

To a large extent, this reflects exits of a number of foreign lenders from the market. However, unlike in the case of the US and the UK, there are no new challengers to the incumbent players in the Irish asset management, investment, corporate and merchant banking, and credit unions sector. Neither the regulators, nor the banks have any incentives to encourage new players' entry.

And this has direct adverse impact on the overall health of the economy. When we studied the effects of banking sector concentration on firms’ willingness to engage with lenders, we have found that higher concentration of big banks’ power in a market is associated with lower applications for credit and higher discouragement.

As the result of the reforms undertaken in the Irish banking sector, our banking services are left to stagnate in the technological and strategic no-man's land.

Mobile and on-line banking systems remain nothing more than appendages to the existent services, with only innovation happening in the banks attempting to force more customers to on-line banking to cut internal costs.

Currently, worldwide, banking services are migrating to systems that can facilitate lower cost customer-to-customer transactions, such as direct payments, e-payments, peer-to-peer lending, and mixed types of investment based on combinations of equity and debt. All of this aims to reduce cost of capital to companies willing to invest. Irish financial services still operate on the basis of high-cost traditional intermediation and the Government policy is to keep hiking these costs up. Instead of moving up to reflect the true levels of risks inherent in Irish banks, deposit rates for non-financial corporations and households are falling. Interest on new business loans for non-financial corporations is up 105 to 197 basis points in April 2013, depending on loan size, compared to the average rates charged in Q1 2011. Over the same time, ECB policy rates have fallen by 75 basis points. This widening interest margin is funding banks deleveraging at the expense of investment and jobs.


Combination of the lack of trust in the banking system, alongside the lack of access to direct payments platforms means that many businesses in Ireland are switching into cash-only transactions to reduce risk of non-payments and invoicing delays. Currency in circulation in Ireland is up 10.3% on Q1 2011 average, while termed deposits are down 6.3%.

With big Pillar Banks unable to lend and incapable of incentivizing deposits growth, we should be witnessing and supporting the emergence of cooperative and local lending institutions. None have materialized so far. If anything, the latest noises from the Central Bank suggest that the credit unions can potentially expect to take a greater beating on the loans than the banks will take on mortgages and credit cards.

All-in, Irish banking system is far from being on a road to recovery so often spotted in the speeches of our overly-optimistic politicians and bankers. The credit squeeze on small businesses and sole traders is likely to continue unabated, and with it, the rates of business loans arrears are bound to rise.





Box-out:
In this month’s survey of economists by the Blackrock Institute some 64% of the respondents stated they expected euro area economy to get e little stronger over the next 12 months and none expected the recovery to be strong. In contrast, 74% of respondents thought German economy will get better and 81% forecast the same for the UK. In the case of Ireland, however, only 57% of respondents expected Irish economy to become a little stronger in a year through June 2014 (down on 75% in May 2013 survey). None expected this recovery to be strong. Interestingly, 69% of respondents describe Irish economy's current conditions as being consistent with an early or mid-cycle expansion - both normally consistent with above-trend rapid growth as economy recovers from a traditional recession. Thus, the survey indicates that majority of economists potentially see longer-term prospects for the Irish economy in the light of slower trend growth rates. Back in 2004-2005, I suggested that the Irish economy will, eventually, slowdown to an average rate of growth comparable to that of a mature small euro area economy. This would imply an annual real GDP growth reduction from the 1990-2012 average of 4.9% recorded by Ireland, to, say, 1.8% clocked by Belgium. Not exactly a boom-town prospect and certainly not the velocity that is required to get us to the sustainable Government debt dynamics.

Sunday, May 29, 2011

29/05/11: Who's to be blamed?

Here's an interesting chart based on ECB data for lending rates charged on various types of loans:
What does this hart tell us? Several interesting things:
  1. In so far as the euro area retail rates are linked to the ECB rates, it appears that the lenders were factoring in a positive risk premium on Irish companies for large loans and small loans alike 9as reflected by the positive premia on corporate lending of both types). throughout the 2003-2010 period, Irish companies borrowings were priced at a risk premium relative to the Euro area average.
  2. This premium has declined (bizarrely) for larger loans (as the risk of borrowers rose during the crisis, the premium fell) and it rose for smaller loans (presumably the SME effect - with SMEs being more risky as borrowers in the crisis).
  3. On the net, it is hard to make an iron-clad case that ECB was driving over-lending to Irish corporates, as these corporates did face a risk premium on their borrowings.
  4. Where things really break down is in the housing mortgages lending. Here, there was and remains a deep discount on Euro area average when it comes to Irish lenders rates. Only during 2010 did this discount briefly turned to a premium. The trend is still on an increasing discount, which would be consistent with a lenders' perception that Irish house purchasers are lower risk than Euro area average. Which, of course , is a farce.
  5. So the net result is that it is hard to make a real direct case that the ECB reckless interest rates policy was the sole or the main driver of Irish over-lending. Instead, the evidence suggests that it was our own lenders' (banks) enthusiasm for underpricing risk in housing finance that was at pay consistently before the crisis onset and since then.

Wednesday, February 2, 2011

2/02/2011: Irish interest rates

For the last post on monthly data release from the CBofI, let's take a look at the interest rates environment at the retail level.

First up - lending rates:

As of November 2010 (latest data available):
  • House purchases lending floating rate was at 2.95% (up 0.34% mom and 13.03% yoy - note, these are percentages, not percentage points); rates for over 1 year fixed were 4.10% average (up 0.24% mom and 14.53% yoy)
  • Consumer credit rate was 6.06% floating (up 1% mom and 30.32%yoy)
  • Non-financial corporations faced a floating rate for <€1mln loans of 4.49% (up 10.86%mom and 13.96%yoy) and over 1 year fixed rate for same level of loans of 5.14% (up 4.26%mom and 18.16%yoy)
  • The trends are up for all two borrower types year on year
Now, deposits:
So for deposit rates:
  • Household deposits attracted an average rate of 1.75% (up 6.06% mom and 17.45% yoy)
  • Non-financial corporations attracted an average rate of 1.25% (down 0.79% mom and up 39.98% yoy)
Now, consider the difference between deposit rate and borrowing rate:
For households, the gap between earnings on savings and cost of financing mortgages (I used house purchase, floating rate or up to 1 year fixed) has moved in favor of savers until November 2008, and there after switched in the direction of favoring borrowers. The switch is extremely volatile and since August 2010 the direction has changed once again. Thus, since August 2010 the banks are moving into more aggressively charging mortgage holders and rewarding relatively more savers.

Corporate rates differential has been moving in the direction of penalizing corporate deposits holders. This process in now being reinforced since July 2010.

So here we have it - deposit rates are becoming less attractive to the corporates, just as more and more of them abandon Irish banks... who would have thought that charging our customers out existence can be a bad thing?

Finally, using CBofI breakdown on loans by type and maturity, I conducted a simple exercise - what happens if the interest rates on new and ARM mortgages charged by banks go up by 1 percentage point (incidentally - PTSB is doing just that, apparently). By my calculation, added cost of interest finance will translate into roughly additional €1.67bn being taken out of the economy. That's like having another Leni's tax hike over again for Irish households.

Saturday, July 31, 2010

Economics 31/7/10: Credit flows in Ireland

Central Bank quarterly was published yesterday. Here are some updated charts on credit flows (data through May). The main conclusions are:
  1. Private sector credit continues to contract and is again accelerating in the annual rate of decline (-10.4% yoy in May as compared to -9.3% declines in April and March).
  2. Mortgage credit contractions are steadily declining (-1.8% in May against -1.6% in April & 1.4% in March).
  3. Non-mortgage credit is accelerating in the rate of decline (-12.8% in May compared to -11.4% in April)
  4. Nama - now through 50% of the loans purchases - has had no positive impact on credit supply. If anything, as charts for households lending show blow, it is being accompanied by a dramatic increase in the cost of borrowing for ordinary families.
Charts:
Aggregate private sector credit above. Disastrous trends of the last 2 year continue unabated, despite the already significant contraction in the credit supply. This suggests that we are in a continued downward spiral when it comes to business and household investment (future capacity is under continued pressure down and the only thing that provides some positive support to capital side is, most likely, MNCs own inter-company investments). This goes to explain why one cannot accept earlier DofF projections for 2013-2015 potential rates of growth. We are in a situation very similar to Japan in the mid-1990s, where existent production is being driven at the expense of capital stock.

Mortgages:Clearly, no signs of moderation in the rates of decay anywhere here. But the picture is more sluggish than that for non-mortgages lending:
The reason for the different dynamics is that it is easier for households to cut back on smaller credit demand than on massive mortgages burden. Hence, non-mortgages lending is a leading indicator for what we can expect to follow in the mortgages markets. Not exactly a bright future for the housing markets, then.

Deposits side of our financial system:
Notice that deposits are down, mom, across the board, except for shorter term maturity corporate deposits. But yoy all deposits are down. Combined decline in all deposits in volume since January 2010 is €1,869 mln, or 3.4%. Not a small change. All deposit rates are down year on year - we are being paid less to save, but are charged more to borrow.

Loans stats next.
Loans for house purchases are falling, while mortgages rates are rocketing. The orange line above shows just what is happening with the cost of financing one's own home in Ireland, courtesy of our regulators (keen on talking about 'moral hazard'), all the special 'Working Groups' aiming to address the problems in the housing markets, and Nama. Remember - our Government (by now pretty much every minister in the cabinet) had sworn to us that Nama will restore functional banking. May be this is what they had in mind...

Last year I predicted that the game in the mortgages markets will play as follows:
  • Once Nama starts transfers, incentives for the banks to play a Good Fella will diminish - repossessions will remain low, but rates will rise. We now can see this happening around us.
  • Once Nama completes transfers, banks will go in earnest at rebuilding their margins & capital, meaning - repossessions will accelerate dramatically and rates will rise to the levels where the burden of financing mortgages will become a driver for more repossessions.
  • 3-6 months after the above stage, banks will start hoarding repossessed property on their books. They will be forced to start selling it ca 6-9 months after February 2011 (completion date for Nama purchases).
  • Combined effect of massively more expensive mortgages credit and inflow of repossessed properties into the market will drive prices in housing markets even further down.
So far, we are through the 1st bullet point and getting closer to the second one.

Meanwhile, in the land of short term loans, rates are more steady and credit supply is falling gently.
Now, let me ask you this question. What should be the priority here? Making sure people are not being skinned to pay for their homes, or making sure that credit cards rates and car loans are being underpinned by more stable interest rates?

Credit to non-financial corporations is continuing to slide. Year on year, shorter term (working capital) credit is now off a massive 19.3%. Longer term credit is off 2.7% yoy. What does this tell me about the economy?
  1. Capital investment is going nowhere fast, with any rosy figures on volumes we might hear over the coming weeks being most likely driven by the MNCs own in-house investment flows; and
  2. Companies have no capacity to refinance shorter term credit obligations, resulting in a cash flow pressures and lack of operating capital.
Not exactly a success story for our financial system administrators and regulators, then.

Sunday, March 15, 2009

What if interest rates rise?

Just to stake some forward looking ground - here is a quick thought.

While we are preoccupied with the current crises, one has to wonder what the future might hold. Consider the following scenario.

Mid-2010 and German economy recovers slightly ahead of the rest of the Eurozone. Why? Because Germany is more exposed to global growth and thus will respond to renewed global demand for investment and consumer goods; and because German consumption has been suppressed since the mid 1990s, creating a significant domestic demand overhang. The ECB's response will be to immediately raise interest rates.

Of course, prior to German recovery, Manufacturing Purchasing Indices and other leading indicators will be flashing red for some time, prompting an earlier rise in interest rates in early 2010. So, say, Eurozone enters 2010 with 0.5-0.75% rate, goes to 1.0-1.25% by June 2010 and jumps to 2.0-2.25% by the end of 2010.

What happens then? Ireland, will by now have much higher taxes (three-tier rates structure of 25%, 48% and 52%), much lower standard deductions and standard rate ceiling, with higher PRSI and pensions tax relief at a standard rate. This will mean that before ECB rates hikes, our mortgages burden will be on par with those that prevailed at the onset of the crisis, but against a backdrop of lower disposable income. Now, as interest rates revert to rising, the burden of debt will start climbing up against decimated household incomes. Homeowners, with savings exhausted during the 2009-2010 downturn will be feeling more heat than they do today. Foreclosures will rise and personal insolvencies will go sky high. Consumption will remain suppressed, but this time, there will be no boost in savings. Ireland Inc might suffer a complete fall-out of the growth re-start.

An example
Here are some numbers. Assume we take a family with Q1 2008 after-tax income of €100 and a mortgage burden of €35 (35% of the after-tax income). By Q1 2009, due to falling interest rates, this family's mortgage costs will have fallen 26% (roughly 10% per each 1% fall in ECB rates). At the same time, the family income has declined to €91 due to increased taxation (Budget 2009) and recession. In Q1 2009, family mortgage burden was €26 or 28.5% of the disposable income.

Now, assume we are in Q4 2009 and recession continues and Mr Lenihan has stuck to his promises and raided the family income to 25-48-52% tax rates outlined above). The family after-tax disposable income now stands at €82, while the ECB has lowered the rate to 0.75% from current 1.50%. The family is now paying €24 in mortgage which constitutes a mortgage burden of 29.25% of the family income.

We go to Q1 2010 next. Recession and Mr Lenihan keep on robbing the family of income, so its after-tax take home pay is now €79.5. But due to advance leading indicators flashing recovery for Germany, the ECB tightens the rates a notch to 1.0%. Family mortgage burden jumps to 31% as the twin blades of higher taxes and interest rates inflict two simultaneous cuts to household's spending power.

On to Q4 2010. Things are going swimmingly in Berlin, so the ECB races with rates increases. We have three scenarios:

Scenario 1: relative stagnation in Ireland - so our income remains at €79, while German expansion drives rates to 1.75%. Irish family's mortgage burden jumps to 33.4% of the disposable income.

Scenario 2: recession in Ireland continues, with income falling to €76, while more mild German expansion drives the ECB to raise rates to 1.5%. Irish family's mortgage burden jumps to 34%.

Scenario 3: recovery shines upon Ireland and our income rises to €80, while rapid growth in Germany drives rates up to 2.25%. Our family's mortgage repayment burden is now at 36% of the disposable after-tax income.

Conclusion
May be Alan Ahearne, in his new capacity, can tell Minister Lenihan this much? Or anyone from a myriad of our vociferous social-democratic economists, begging the Government today to raise taxes. Little hope. His (and their) policy advice to date has been pretty much in line with the Government's efforts to demolish private sector workers in order to save public sector jobs. Then again, neither Ahearne, no Lenihan will be losing much sleep over ordinary families who will be unable to stay afloat in this WunderWorld of richly rewarded public sector and impoverished private sector workers that they are creating.

Recession? Raise taxes. Public finance busting at the seams? Raise taxes. Unemployment? Raise taxes. Public sector inefficiencies? Raise taxes. Exports plunging? Raise taxes. Banks falling off the cliff? Raise taxes. And always blame the outside world for any trouble we might land ourselves into. Classic economic problems with uniquely Irish responses.

"Pints!"