The Irish Times runs a story today 15th July which explains that Irish Banks are no longer able to offer tracker mortgages. The banks no longer regard the ECB’s official lending rates as fair and realistic estimates of the cost of raising interbank money, at least for Irish banks that is. This is another way of saying that the Euro, supposedly a single currency, has increasingly different values in different countries.
In Germany there is no risk premium over ECB rates, while in Ireland and in other notorious locations, such as Italy, lending rates are widening, reflecting the increased risk that lenders are being required to face. The risk being priced in by lenders, cannot be the ability of the borrowers to repay, as the loans are all secured on property. The risk is the possibility that Ireland, Italy and others may individually face a crisis with their own banking systems, and as a result, decide to, or have to quit the Euro.
As the battle rages over Lisbon, and Sarkozy threatens the Irish with various negative outcomes if they don’t ratify the Treaty, financial markets inevitably take note, and see that the chances that the Euro area could unravel, without a coherent political basis, are growing. The abandonment of tracker mortgages following ECB lending rates,are just one sign of the growing collapse of confidence in the European economy, and the ECB.
The Irish electorate might start to feel the heat from such moves, and be persuaded to vote in favour of Lisbon next time they are asked. No doubt the pro-campaign will argue that Ireland has undermined the EU, and the Irish are now paying dearly for having done so with higher rates of interest.
The anti-campaign might point out that the same interest rate effects were being felt elsewhere, even before the Irish vote. The problem is that the ECB is not a Central Bank with powers to underwrite the risk being run by commercial banks in the different countries. Each country has to support its own banking systems, but without the power to control their own rates of interest, or exchange rate policy.
Each country carries the financial risks alone, without the power to act if action is required to forestall a crisis, making the individual countries of the EU’s banking systems especially vulnerable. The Euro is, in this sense a facade, and not a real currency at all.
In facing down a financial crisis, this is the worst of all possible worlds. The Irish will do best to retake control of their own currency, maintain or even improve the competitive taxation rates that are attracting foreign investors, and look to a better future outside Lisbon, and the Euro. Only through retaking control of their own affairs can stability be restored, along with access to more attractive rates of interest, and the joys of tracker mortgages.
See The Irish Times article HERE.
EXTRACT – TWO MORTGAGE lenders have raised interest rates by a margin greater than the quarter point increase from the European Central Bank (ECB) earlier this month, passing on to customers higher funding costs due to the international financial crisis.
Permanent TSB, the State’s largest mortgage lender, raised interest rates on some of its mortgage products by a greater margin than the 0.25 percentage point ECB rise. A spokesman for the bank said this was to take account of the higher bank funding costs.
Halifax, the retail operation of Bank of Scotland (Ireland), increased its standard variable rate by 0.35 of a percentage point.
The argument about the EU in Ireland could soon be moving to include thoughts about currencies. Maybe Libertas, the successful NO campaigner should move on and bring forward a campaign to abandon the Euro, and bring back the Punt. It would keep the momentum going, that’s for sure!
UPDATE – The day after I wrote this post an article appeared in The Irish Times written by david MacWilliams called if all else fails then maybe it’s time to ditch the euro. Probably a coincidence except I had a good few hits on this from Dublin yesterday!
Extract from david McWilliams’ article – If a Martian economist landed in Ireland, he’d see straight away that Ireland is caught in a currency arrangement which will make our recession much deeper than necessary. This is an economic fact, not a political slogan. The euro is now part of the problem, not part of the solution.
Libertas – are you listening?
Declan Ganley is readying himself to fight the next Lisbon referendum as demanded by Sarkozy. But why not fight to ditch the Euro at the same time? Otherwise Sarkozy is being allowed to take all the initiatives and Ireland is made to play a weak hand, always defending and never attacking. Sarkozy must be placed on the defensive as soon as possible. This is surely the best way to do that.