Interest rate elephant

Rin34

As we can all see the interest rate monster coming over the horizon why have the government or some of our famous economic minds not come up with solutions or suggestions about how Ireland will deal with mass defaults when rates as they will (including the golden tracker geese) rise to close to 10%.
Personally the more I read about Nama and developer loans I just can't understand why the government can't create a nama for domestic mortgages. Mortgage debt in Irish banks is @120bn with a real value of close to 60bn why not borrow this money from the ECB at interest rate of 5% over 20 years and offer all mortgage holders the same haircut on their loan but with the increased (in some cases) and guaranteed rate of 5% over the term of their loan hence guaranteeing both themselves and the ECB are paid back, recapitialising the banks and also cleaning their books of the bad debt. The bank becomes the dominant mortgage provider (nothing new here) and the customer gets the choice to pay back the loan in full without the haircut at prevailing rates or take the haircut at the long-term fixed rate.
Why not?
Other options see mass defaults as 200k+ mortgages reach repayment rates that become unsustainable and banks fail again

bmarley

Who said they will rise to 10 percent, in what space of time is this likely to happen?

Rin34

A quick glance at interest rate from the present to the eighties shows them even higher. I personally was paying 12% on my first mortgage and I'm just forty.
With Irish banks trying to recup money even if ECB moves to 5% they will need to charge 3/4% higher to maintain profitability or even sustainability.
This places trackers in the 6+ range and variable in the 9+ range, with PTSB and Ulster basically removing fixed rates they know its coming.
How many people who purchased in the last 5 years could pay their mortgage at 6+% range.
This and pensions is the real elephant in the room, forget paycuts or tax rises this will be the real killer of Fianna Faillers Ireland

okedoke

Who would you propose would pay to recapitalise the banks when you force them to write down €60bn off the value of their assets?

The taxpayers?

So basically you want the taxpayer to pay half of everyones mortgage? I'll pass but thanks for the offer.

quozl

Rin34 wrote: »

why not borrow this money from the ECB at interest rate of 5% over 20 years

Falls at the first hurdle. The EU/ECB freaked out at Ireland and forced the bailout because we had around 160BN of their money, and had, and still have the ability to make the ECB insolvent if we defaulted.

They are letting us print our own 10s of billions via the irish central bank through ELA in order to decrease their exposure to us.

The idea that they would give us another 120 billion euro is farcical. The idea that they would let us turn our 40 billion of ELA into 160 billion for this is also ludicrous.

So, ignoring the question of why irish tax payers as a whole should bail out the segment of society with bubble properties, the whole idea is completely impractical and fantastical.

D3PO

Firstly welcome to boards.

Now back on topic. Whilst I like your sentiment there are so many holes in your first post that a fisherman wouldnt even use it as a net.

Firstly when do you expect rates to go to 10% and you have prefaced this by saying including Trackers so your then talking with margin a generally estimated mortgage rate of 14 ish percent

Whilst I have no argument that this may happen at some stage, the timeframe is important as the number of persons impacted in the 04 - 08 period are ultimatly those likely to be worst affected.

However if you consider inflation the timeframe here becomes critical. With ECB guidelines to keep inflation running just under 2% I think its fair to assume that even with growth shooting back into the eurozone region you wouldnt see anything like kind of ECB base rate this for a minimum 5 years. Thats being agressive more likely your talking a significantly longer timeframe.

Given capital replayments on mortgages, and inflation this then has less and less impact on those worst affected the longer it goes, to the point I would argue that it may have a significantly smaller impact to defaults for those currently servicing their mortgages than we are currently in.

the big flaw in your post however is the suggestion the banks borrow long term money from the ECB at a rate of 5%. Because thats not how the money markets work. The ECB do not provide long term bonds to banks like this. If they did then banks would not be losing money on trackers as they would have borrowed at the baserate for the term of the mortgages giving them somewhere between 1-2% margin. But of course this isnt the case.

now I wont even get into the subject of 120 billion more to recapitalise the banks, which by the way in your example doesnt even happen becasue your talknig about borring 120 billion at 5% and paying back the current 120 billion. that equals ZERO recapitalisation and besides which the ECB would tell the backs to F**K off anyway

there are far more suitable mechanisims to reduce default exposure from homeowners that could be looked this suggestion im afriad OP falls flat on its arse

Rin34

First of all who mentioned giving money directly to the banks, the government obtains the money thru the european recovery fund, purchased at a fixed rate, are we not currently doing this to recapitalise banks on develop loans which will never be paid back and to support the day-day expenses. This is why taxes are increasing because the money we are borrowing will never be paid back by the people who took the loans out and by a government who is spending more than it is taking in.
With regards the banks assets, what is the true value of these so called assets 120bn not a chance giving the banks 50cent on the euro for still depreciating assets sounds like value for money to me.
Where are these other solutions which are going to head these problems off...
People ask why should we be paying for so called reckless buying but we are already paying and if we don't stop the mass defaults we will continue to pay for decades why not come to a solution where the paid who made the mistakes pay the large portion because if we allow them to default we will not only pay for their existing debt but we will also pay to house and keep them in state funding

D3PO

Your way overvaluing the impact of potential defaults there is an estimated 300000 mortgages in neg equity it's estimated those in distress will peak at about 100k this isn't why banks are in the mire it's the cash they leant developers et al that are the strain on them plus the depositbooks that are hemoragging about 30 billion a month or so that's the two main challenges to them

quozl

Rin34 wrote: »

First of all who mentioned giving money directly to the banks, the government obtains the money thru the european recovery fund, purchased at a fixed rate

Once again I'll ask - what on earth makes you think the countries of Europe would agree to increase their exposure to the basket case of Europe by so much given the points I have raised.

They won't, and hence your whole idea is built on a fantastical premise.

Treehouse72

Rin34 wrote: »

Other options see mass defaults as 200k+ mortgages reach repayment rates that become unsustainable and banks fail again

You mean facing up to reality? Yeah, we should do whatever we can to avoid that.

D3PO

Rin34 wrote: »

First of all who mentioned giving money directly to the banks, the government obtains the money thru the european recovery fund, purchased at a fixed rate, are we not currently doing this to recapitalise banks on develop loans which will never be paid back and to support the day-day expenses. This is why taxes are increasing because the money we are borrowing will never be paid back by the people who took the loans out and by a government who is spending more than it is taking in.
With regards the banks assets, what is the true value of these so called assets 120bn not a chance giving the banks 50cent on the euro for still depreciating assets sounds like value for money to me.
Where are these other solutions which are going to head these problems off...
People ask why should we be paying for so called reckless buying but we are already paying and if we don't stop the mass defaults we will continue to pay for decades why not come to a solution where the paid who made the mistakes pay the large portion because if we allow them to default we will not only pay for their existing debt but we will also pay to house and keep them in state funding

im sorry but there is zero thought process in what your saying.

your essentially saying get the government to borrow money from the ECB basically have NAMA buy every loan from every Irish banks loan book for 50% value.

So riddle me this then

a) why would loan this country that money
b) how do you figure the banks then function if they have no revenue streams
c) who do you think picks up the bill for the recapitalisation of the banks for the 50% writedown
d) how do you figure there would be no civil unrest from thouse that either never bought or own their own houses
e) how do you figure crystalising the banks losses at 50% makes sense. That would mean that 50% of their loan book value would have to be unperforming thats not the case.

seriously mate you need to think about how your suggestions would work before typing them out