- 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).
- Mortgage credit contractions are steadily declining (-1.8% in May against -1.6% in April & 1.4% in March).
- Non-mortgage credit is accelerating in the rate of decline (-12.8% in May compared to -11.4% in April)
- 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.
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.
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?- 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
- Companies have no capacity to refinance shorter term credit obligations, resulting in a cash flow pressures and lack of operating capital.
All as you say, predictable. The euro falls and the deficit in Ireland seems to be unstoppable.
ReplyDeletePolitical leadership is entirely absent and that is because there is no accountability. Look at the Tipperary independent deputy. Dishonest but re-elected.
The Irish get what they deserve. This is not capitalism. This is clientelism, mercantilism, kleptocracy in fact. There seems to be no limit to the amount of land that can be revalued with money changing hands under the table. Who launders it?
What a sick place. Banking inn Ireland was too successful. Everyone who wanted a loan got more than they needed, but now regret it. As with all fractional reserve systems, the fractional is fictional and becomes evident once the demand drops! Ponzi! Chain letter anyone? Thousands protested the efforts to stop pyramid schemes. There are some people so greedy that to call them grossly stupid is understatement.
Why after the USA started into depression in 1999 and Japan in 1989, did it happen in Ireland? Those who supply capital know what happens. England destroyed France with John Law.
An edited comment from the reader:
ReplyDeleteFungus FitzJuggler III
"All as you say, predictable. The euro falls and the deficit in Ireland seems to be unstoppable.
Political leadership is entirely absent and that is because there is no accountability. ...
The Irish get what they deserve. This is not capitalism. This is clientelism, mercantilism, kleptocracy in fact. There seems to be no limit to the amount of land that can be revalued with money changing hands under the table. Who launders it?
What a sick place. Banking in Ireland was too successful. Everyone who wanted a loan got more than they needed, but now regret it. As with all fractional reserve systems, the fractional is fictional and becomes evident once the demand drops! Ponzi! Chain letter anyone? Thousands protested the efforts to stop pyramid schemes. There are some people so greedy that to call them grossly stupid is understatement.
Why after the USA started into depression in 1999 and Japan in 1989, did it happen in Ireland? Those who supply capital know what happens. England destroyed France with John Law."
It is indeed a dismal picture but it reflects several things factually which were already showing up on the micro.
ReplyDeleteMortgage credit in existence is dropping while deposits are dropping - repayment/prepayment is taking precedence over investment/savings. That is also in response to the rising mortgage rates.
Banks are not lending, but why would they take a risk on ANYTHING when they can get the risk free rate at 5.5% while having to accept less on a loan! It doesn't make sense, the only solution is therefore to see mortgage rates rise and rise until such time as they either breach government bond rates or bond rates drop, banks have no incentive to lend when they can make more money doing nothing.
Rather than address our issues the state will probably issue a directive forcing them to lend. In any case liquidity will build and build in the system which does bide well for credit expansion (eventually) when the risk free/risk relationship returns to normal.
In the meantime (and I say this as a mortgage intermediary) the slaughterhouse we call credit markets continues!
I think that you are correct in how things may play out in the mortgage market. However, a couple of issues will add further to the problems. These are:
ReplyDelete1. The banks will push for repossession while AT THE SAME TIME - NAMA will be trying to liquidate the inventory of apartments and foreclosed residential developments throughout the country. Which means that banks cannot trust valuations and will not lend except at a HUGE margin.
2. Because of the expansion of public debt and the likelihood of massive monetary expansion in Europe and the US in the next few years to pay down this debt, banks will be less willing to lend as more households have their incomes (and ability to repay any mortgage - even at a low rate) at risk.
This is a bit like Wylie Coyote in the Road Runner cartoons....so far, Wylie is running and is past the cliff edge but not falling yet. When he looks down, he will pause, then look at the 'camera', hold up a sign that says 'good bye' and then plummet to the bottom....right now, mortgage markets in Ireland are still at the running stage....by the end of 2011, the 'good bye' sign will be for everything to start falling in the housing market.....