Author: Karl Whelan

Mortgage Arrears: March 2010

The financial regulator has released the latest summary data on mortgage arrears here. The data show a 13% increase in accounts more than 90 days in arrears. In total, 4.1 percent of mortgages are in arrears over 90 days, with 2.8 percent of these being over 180 days.

Balances on past due mortgages are higher on average than those not past due: The average balance for mortgages not past due is about 147,600 while the average balance for mortgages in arrears is 188,800. This means that past due mortgages account for 5.2 percent of the total balance of mortgages outstanding. Those mortgages past due over 180 days already have approximately 10 percent of the balance in arrears.

These calculations do not include people who are not in arrears because they have come to an agreement with their bank on a different repayment schedule.

These figures suggest to me that the Central Bank Prudential Capital Assessment Review’s “stress scenario” assumption of 5 percent looks more and more like a reasonable baseline. This is also the number the Morgan Kelly mentioned in his recent article as a conservative estimate.

How could this number come about? For instance, if the mortgages that need to be foreclosed on or restructured end up accounting for 10 percent of the total balance and the loss given default is 50 percent, then this would imply a five percent loss on the mortgage book. One could imagine more stressful scenarios than this.

Cowen on Ireland Defaulting

An Taoiseach has said the following in relation to Morgan Kelly’s article:

“Really implicit in some of the argumentation is the idea that it would be better for Ireland to default. But we simply don’t accept that at all and I think all of the implications from other countries where that happens greatly undermines, not just in terms of financial credibility but also the ability to retain confidence at home,” he added.

Let’s compare this with the following passage from Morgan’s article:

We need to explain that the Irish State has always honoured its debts in the past, and will continue to do so. However, the State is a distinct entity from its banks and, having learned the extent of the banks’ recklessness, we now have no choice but to allow the bank guarantee to lapse and to share the banks’ losses with their bondholders. It must be remembered that when these bonds were issued they had no government guarantee, and the institutions that bought them did so in full knowledge that they could default, and charged an appropriate rate of interest to compensate themselves for this risk.

So here’s a question. When Mr. Cowen says “Ireland”, does he mean “Irish banks”? If so, it would be nice if he was clearer about this matter in the future.

Maturity of Irish Bank Debt

Following on from John McHale’s post over the weekend, here‘s an expanded version of the document I sent to John. There seems to be some confusion out there about the extent of Irish bank bond debt, about the various types and about how much is covered by the September 2008 guarantee. The document draws together the relevant information on maturity of bank debt from the annual reports of Anglo, AIB, BoI, INBS and Irish Life and Permanent.

This information isn’t completely timely or perfect: A full Bloomberg trawl is perhaps the best way to do this. Importantly, none of the banks list September 2010, the end of the guarantee, as a maturity date in their tables. Instead, they list debt maturing up to the end of this year. It is well known, though, that the vast majority of the debt of Irish banks matures prior to the fourth quarter. An advantage of these calculations is that they come from publicly available sources and we can be clear about what it is we’re discussing.

The bottom line. By my calculations based on the annual reports showing the state of play at the end of last year—and feel free to correct me if I’ve got this wrong—these five banks had €71.7 billion in bonds due by December of this year with only €0.7 billion of this being subordinated. They then had a further €51.8 billion due after 2010, €14.4 billion of which are subordinated.

The very significant figure for bonds due this year shows that conjectures that the need to roll over bank debt could lead to a serious problem for the Irish government are essentially correct. Whether this scenario will actually happen, we don’t know, but one should be careful to dismiss those who say it could.

Update: The document had tables splitting debt securities into subordinated and senior debt. Because the total includes commercial paper and certificate of deposits, this might cause some confusion. I’ve edited the document to list the split as subordinated and other.

Coleman: Obsession with PhD Economists

Marc Coleman continues to fight the good fight against the evil that is economists with PhDs. Coleman seems to be taking his campaign to a new level with his latest claim:

Academia must also change. The obsession with producing only PhDs is the main reason the crisis happened.

I read the last sentence and then started thinking of the number of ways in which it seemed to be wrong. I lost count at about five and then decided to go back to plotting the downfall of the Irish economy along with my other PhD-qualified co-conspirators.

Merkel Proposing Orderly Default Framework

Mrs Merkel has been speaking in the German parliament about her latest financial proposals. In addition to defending the CDS and short-selling proposals, the Germans are apparently preparing proposals for an “orderly insolvency of euro-region states”.  In a separate story this morning, I see that former Fed Governor Rick Mishkin has been reported as follows: 

“What they should have done was to let Greece go and say we are going to ringfence the rest of the system,” Mishkin said. “Ringfence the banks, protect the other countries that have problems such as Portugal, Italy and Spain, which have not been fiscally irresponsible the way the Greeks have been.”

It’s interesting to see how far the consensus has moved. We’ve gone from the idea that no Eurozone country can be let default and the IMF can’t possibly be allowed to help to getting ready for orderly defaults.