No Smiling Eyes In Ireland These Days

Irish economist Morgan Kelly’s Op-Ed on IrishTimes.com is getting lots of play today. In it he puts forth three propositions.

  1. The Irish bailed out the European banks by repaying the loans that Irish banks took out with U.K., French and German banks with money borrowed from the ECB. In doing so, Ireland missed the opportunity to force those lenders to participate in a debt restructuring and are now burdened by loans from which they cannot escape.
  2. The ECB will act to preserve the loans it has extended to Ireland at the expense of the Irish economy. Specifically, it will force the Irish banks to shrink their balance sheets which will choke off the supply of mortgage credit thus provoking a collapse in prices and wholesale borrower default.
  3. Ireland will be made to suffer greatly by the ECB as it is used as an example to other European basket cases of the consequences of failing to control deficits. This will occur as the ECB sets the interest rates on its bailout loans at interest rates that prove impossible to service ultimately resulting in default.

There is more than a whiff of anti-ECB sentiment in his article and Mr. Kelly appears to be using his piece to make a few points about local political parties. Still, it makes for interesting reading, and the point about the property market is thought provoking.

Megan McArdle sees parallels with the US market in which the federal government controls mortgage credit. She postulates that without the government’s continuing intervention there might not be credit available and we would be facing an Irish situation in which prices would crater. Strange talk coming from someone with her Libertarian leanings, but perhaps home ownership has caused a reordering of priorities.

I think it’s just as credible to argue that the government’s intervention has forestalled the reemergence of a credible private mortgage market given the subsidy rates that the GSEs offer. It’s also worth noting that a sizable portion of recent sales have been to unleveraged investors who have little access to mortgage credit due to the stringent underwriting criteria of the government financiers. Perhaps we assign more importance to the availability of mortgage credit as the essential lubricant of a healthy mortgage market than it deserves.

On a larger point, I fail to see why the Irish continue to worship at the ECB altar. Mr. Kelly is probably right in his assertion that they missed the opportunity to avoid much of this pain when they decided to bail out the banks and their creditors rather than leaving them to their own devices, but why continue to compound the mistake by remaining in the currency union. By all accounts the real economy is robust, the consequences of withdrawing from the EU certainly shouldn’t be much worse than the future he proposes in his article and time will cure most of the ill effects.

If he is correct in his assertion that the coming crisis will give rise to a militant new political awareness in Ireland then it would seem like eventual decoupling from the Union is probably inevitably anyway. It seems unlikely that an aroused Irish populace will long tolerate policies that effectively grind it into semi-poverty. Better to get out and get on with life sooner rather than later.

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