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.


Georg R. Baumann said...

Before Greece went Belly up, ECB abolished their own requirements for collateral, which was investment grade before, and was ditched. Piraeus bank and EFG issued bonds to themselves, and Greece CB placed this junk as collateral, which the ECB accepted after they abolished investment grade requirements.

ECB sits on a big steaming pile of PIIGS shit, and will turn out that ECB is overexposed to worthless bonds.

As a result, on May 25th, EU Parliament voted to accept Gold now as a collateral.....go figure!

Unknown said...

(1) Wondering if higher value corporate loans were priced that way because the cost of facilitating and managing the transaction was lower per transaction? (i.e. it's cheaper to do a big deal than a bad deal);

(2) Was "Europe" treated as a single market, or were "averages" treated regionally (ie. Ireland treated as a statistically different grouping than France/ Belg, etc.);

(3) Was the Irish Retail debt subsidized (cross subsidised) by the Commercial sections of the banks?