Thursday, October 18, 2012

18/10/2012: ARMs - compounded effects of austerity and banks deleveraging

As the Irish banks are hiking ARMs, it is worth reminding us as to why this is a bad news for Irish economy:

Now, here's the Catch22.

  1. Irish banks funding costs are joined at a hip with the Sovereign funding costs, thus reducing these costs will require reducing Sovereign costs, which in turn means taking in more taxes and cutting back more Government spending.
  2. The former part of (1) means that households on the ARMs will be bearing all of the burden of the high funding costs for the banks.
  3. The latter part of (2) means that households on the ARMs are going to experience, alongside all other economic agents, the cost of Government deleveraging.
(2) + (3) means that in our 'fairness-concerned' society, ARMs holders will be paying twice the rate of the fiscal adjustment that any other group of agents.

Good luck, Michael Noonan, bankrupting the ARMs.

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