Economic recovery depends on banks lending again

Austerity continues: Over 100,000 people joined street protests in Dublin and other Irish cities on 9 February to voice their anger at the huge cost of the Irish bank bailout. Irish trade unions, which organised the demonstrations, say the European banking crisis has so far cost each Irish resident €9,000, compared to a European average of under €200
Austerity continues: Over 100,000 people joined street protests in Dublin and other Irish cities on 9 February to voice their anger at the huge cost of the Irish bank bailout. Irish trade unions, which organised the demonstrations, say the European banking crisis has so far cost each Irish resident €9,000, compared to a European average of under €200

Dan White discusses how the economy will struggle to recover in any meaningful way until the banks make good on their promises and start making finance available to business again.



13 March 2013

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The disastrous January retail sales figures and the poor February exchequer returns served as an overdue reminder that the Irish economy is still in intensive care. Unless and until the banking system can be made to function properly, any sustained recovery remains a long way off.

Since first coming to office two years ago, the present government has made a determined effort to "talk up" the Irish economy. This was not an unreasonable thing to do. As Ireland collapsed into the arms of the troika, sentiment towards this country, both foreign and domestic, collapsed with it. 

While sentiment is by its very nature intangible, it matters. In fact as most economists will reluctantly concede confidence is ultimately what drives most economies. With confidence anything is possible. When confidence disappears consumers stop spending, businesses stop investing, overseas investors stop lending and the whole economy grinds to a halt.

That was the trap from which the new government was desperate to escape in March 2011. It has enjoyed some success. The interest rate on our troika loans was reduced, the banks recapitalised and the promissory notes renegotiated. Even unemployment seems to have stopped rising, with the numbers on the live register at the end of 2012 being more than 11,000 fewer than at the end of 2011. 

This in turn has led to a dramatic reduction in the yields which overseas investors demand to lend us money while at home consumer confidence recovered to a post-crash high. As a result the Irish economy, which had shrunk for four consecutive years between 2008 and 2011, seemed to be growing once again.


The bad news


That’s the good news. The bad news is that there are still almost 429,000 people on the live register, retail spending is down by a quarter from the peak, property prices have fallen by at least 50% and the Irish state will have to borrow EUR*12.6bn, the equivalent of almost 10% of national output as measured by GNP, to pay its bills this year.

Which is another way of saying that, while things may have stopped getting any worse, we are still in a pretty desperate situation. Although we may be in a recovery phase, which economists technically define as two or more consecutive quarters of economic growth, the fact remains that Irish GNP is now almost a fifth smaller in nominal terms than it was in 2007. That’s not a recession, more like a full-blown 1930s-style depression. 

Further proof of the reality that the Irish economy is stuck in a deep depression is provided by the latest retail sales figures and exchequer returns. According to the CSO, the value of retail sales was 1.7% lower in January than it had been during the same month in 2012. Then came the February exchequer returns which showed that tax revenues were down by 8.4% in the second month of the year. While the government blamed the decline in tax revenues on "one-off" factors, it still demonstrated just how fragile any Irish economic "recovery" actually is.


Carnage in retail sector


Even before the publication of the latest official figures it was clear that any pre-Christmas recovery in the retail sector had been a purely temporary, or should that be "one-off", phenomenon. In January a slew of retail chains hit the rocks. HMV closed its Irish stores while both B&Q and Pamela Scott called in the examiners. The carnage continued into February when formal wear retailer Black Tie went into liquidation. Then in March the Irish arm of Monsoon Accessorize, which has 18 stores in this country, went into examinership.

This was followed by the latest consumer confidence index from KBC Bank which showed that the recent improvement in consumer sentiment went into reverse in February. 

So why, despite the government’s undoubted achievements over the past two years, has the "real" economy been so slow to display any symptoms of genuine recovery?

The answer almost certainly lies with the country’s battered banks. 

One of the first actions of the new government in 2011 was to give the go-ahead to a massive recapitalisation of the Irish-owned banks. This saw a further EUR*24bn injected into our broken banks in what we were assured would be the last such recapitalisation. The 2011 recapitalisation brought the total cost of "fixing" the banks to a massive EUR*64bn, the equivalent of almost 40% of GNP. For that we were assured we would get a fully-functioning banking system capable of lending once again. 


Refusal of banks to lend


Except that things haven’t quite worked out like that. Almost two years on from the recapitalisation it is clear that the banks still aren’t lending. Despite all of the expensive advertising campaigns from the banks assuring us that they are "ready to lend" the reality is very, very different.

According to the Central Bank, loans to Irish households fell by a further 4% in the 12 months to January while loans to Irish companies were down by 3.3% over the same period. Ready to lend my ——, well you know where!

This refusal by the banks to lend, the recently-published Bank of Ireland results show that its Irish loan book shrank by another EUR*4bn to just EUR*56bn in 2012, means that the economy is gradually being asphyxiated. Companies are unable to secure new loans and are having their overdrafts slashed or in some cases withdrawn altogether.


Refused credit


Over half of all companies surveyed by small business group ISME reported that they had been refused credit by their banks in the quarter to the end of December, an increase of 4% on the previous quarter’s survey.

Meanwhile new mortgage lending is now running at just over a tenth of peak levels. 

The reluctance of banks to lend to businesses is making desperately-needed new investment by many companies virtually impossible with knock-on implications for employment while the effective withdrawal of the banks from new mortgage lending makes the house price collapse even worse and more prolonged than it would otherwise have been. 

This combination of a poor jobs outlook and a mortgage-starved housing market makes any meaningful economic recovery difficult going on impossible. That can only change when and if the banks start lending again. Until they do the Irish economy is going nowhere.




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