Ireland\'s Next Blow Could Be

Ireland's Next Blow Could Be Home Loans

Wall Street Journal editors David Enrich and Charles Forelee assess the health of the banking Irish sector. Unlike the United States of America, the United Kingdom, Spain and other world leading states deeply affected by the crisis, Ireland has revealed a stronger banking sector, better able to cope with the crisis. The large majority of the problems encountered by the Irish commercial banks related to the restricted payment capabilities of their customers who borrowed money to build real estate properties -- mainly organizations. In terms of individual real estate buyers and home owners on the other hand, the situation proved rather stable.

The explanation of this perceived stability links primarily to the increased prudential regulations implemented by the Irish banks. But these regulations seem now unable to protect the banking sector. As the economic crisis takes its tool on populations, the Irish borrowers find themselves unable to pay their loans to banks. Enrich and Forelle explain:

A rising tide of Irish households has been falling behind on their mortgage payments. More than 36,000 borrowers, representing 4.6% of Irish mortgage loans, were at least 90 days behind on their loans as of June 30, according to Ireland's financial regulator. That compares with 26,000, or 3.3%, nine months earlier. Data for September, due next month, is expected to show another rise but remain below the U.S. rate, which was above 9% in June.

The situation is expected to worsen in the future, as more and more people would be defaulting on their loans. At a national level, several additional problems would be encountered. At the level of the real estate industry, this would continue to decline and the prices of the real estate properties would continue to decrease. In a context in which the prices of the homes are worth significantly less than the home itself, the risk of default would increase.

Then, the demise of the real estate industry brings about the demise of the linked industries, such as the automobile industry, the furniture industry, the home electronics industry and so on. The demise of these industries would translate into the bankruptcy of numerous economic agents, the loss of jobs of millions and people, with the direct impact of a growing socio-economic problem of unemployment and the subsequent pressures of the federal budgets. Specifically, the Irish budget would have to support more and more people living on social welfare, rather than wages. Basically, if the second wave of the real estate crisis hits Ireland at the degree estimated, the country would deepen in the financial crisis.

The Irish regulators are intensifying their efforts to reduce the risk of credit defaults. Two relevant examples in this sense are constituted by the obligation of banks to wait 12 months before they seize the property of the debtors, and the recent decision of the federal social system to cover part of the mortgage interest for the people who are suddenly out of job. Critics however argue that the measures are not able to resolve the problem, and that in fact, the mortgage situation is a suspended crisis and that the governmental measures are only really postponing the problem, not dealing with it (Enrich and Forelee, 2010).