Irish banks are where money goes to die |
Twenty years ago this month, the Celtic Tiger died. It was not until two years later, August 2008, that the full depth and horror of the crisis became apparent with a run on the Irish banks. But the damage was done two years previously.
This is how bankruptcies happen: at first slowly, and then very quickly. August 2006 was the first month that house prices failed to rise. Once that occurred, it was all over, but most people, even Irish bankers, didn’t have a notion about what was going on.
In a highly-borrowed financial system like Ireland’s in 2006, where everything is cross-collateralised, and everyone has lent and borrowed against property, the machine doesn’t run on prices. It runs on the change in prices and, more accurately, the change in that change. When banks are falling over themselves to lend, they come up with “teaser” products designed to coax borrowers in with artificially low interest rates, on the understanding that those rates might go up in the future. But by this point, the “assumption” was that higher house prices would make it easy to refinance the loan.
The most notorious of these was the tracker mortgage – the single biggest destroyer of Irish wealth ever conceived. However, there were similar “teaser” loans at every tier of the pyramid. Using teasers, banks financed the developer and the builder with money it had borrowed. The banks also lent to the ultimate home or commercial office buyers via various tracker mortgage and structured loan products. Once that structure becomes the banking business model, the entire edifice is not designed to be repaid but to be refinanced again.
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