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.

16/9/2012: Who pays for the Banks Guarantee? Irish Mortgage Holders

Another interesting snippet from the IMF report on Ireland's performance:

"The already low net interest margin fell by 40 basis points in Q1, to 0.8 percent of average assets. Though funding costs fell by 35 percent from Q4 2011 reflecting the actions of a leading bank to lower deposit rates, this was not enough to compensate for weakening interest income due to higher loan impairments and the drag from low yielding tracker mortgages. The ELG fee remained high, at 110 basis points in Q1, absorbing some 40 percent of the net interest margin (up from 28 percent in Q4 2011)."

What does this mean?
1) Banks are suffering from lower margins due to declines in ECB rate having an adverse impact on their tracker mortgages book. They compensate by soaking savers (deposit rates down) and ARMs (adjustable rate mortgages are up).
2) Instead of allowing banks more funds to cover mortgages losses, the (1) above - soaking of savers and ARMs - goes primarily to fund Mr Noonan and the State (via ELG fees paid by the banks for the Guarantee cover to the Exchequer).

Great. As a holder of an adjustable rate mortgage, I get taxed by Mr Noonan once on household charge (soon to be replaced by a property tax) and  via ELG. Well done, 'low tax Government'. Of course, I am also being used to subsidize tracker mortgages, including buy-to-lets.