Since the eruption of financial crisis, several countries have entered into a zone of bankruptcy. These leagues’ of countries include Iceland, followed by Greece and now Ireland. The hard truth can be convened by the fact that the two of Ireland’s biggest banks, Bank of Ireland (set up in 1783) and Allied Irish Banks (which consists of three banks founded in the 19th century) are already bust. One of the prime reasons for these banks facing tough times is because they have lent huge sums of money not only to the Irish property developers but also to Irish homebuyers.
The Irish financial disaster shares certain things with Iceland. According to the Irish economist Morgan Kelly, the estimated losses anticipated roughly at 106 billion Euros. In fact the Irish economy, which exhibited a surplus budget deficit three years ago, is now at -32% (negative). One of the credit analysis firms has judged Ireland the third-most likely country to default. Notwithstanding, the news contemplating Ireland’s weak financial position has made a large number of Polish population to decide on leaving Poland and seeking refuge in other countries for work.
With careful observation it was found that the Irish construction industry had shown a steep rise to reach nearly a quarter of the country’s GDP – compared to less than 10% in any normal economy – plus Ireland was building half as many houses a year as United Kingdom. On the other hand, the investment return on Ireland was extremely low, and hence, there was no expectation of capital to flow in to Ireland for it to grow. This obvious link between Irish real-estate and Irish banks is causing the Irish market go wary. If the banks’ start losing on their reserves; it will eventually cause an obstruction in their lending capacity, ultimately causing the Irish real – estate to perish.
Right now Germany is lending a helping hand to Irish banks. However, they can, anytime, decide to take their money back, if required. As far as the lending trend is concerned, since the year 2000, Irish banks have already entrusted the real-estate developers with 28% of their capital reserves. By 2007, these banks have already contributed up to 40% of their reserves’ to the real – estate sector. Recently, the news revealed is that the stocks of the three main Irish banks, Anglo Irish, A.I.B, and Bank of Ireland, had fallen by between a fifth and a half in a single trading session, and a run on Irish bank deposits had started. However the report presented by the Irish government completely disregards the current economic condition of the country and it states that “all of the Irish banks are profitable and well capitalised.”
In a nutshell, the Irish real – estate bubble, is more or less, disguised and involves a lot of complicated financial engineering instruments. The top executives of the Irish banks have also added in to the misfortune brought by these banks in to the Irish economy. These executives have bought shares in their own companies’ right up to the moment of its collapse, and continued to pay dividends.
Another worrying factor for the Irish homebuyers borrowing capital from the banks is that if, in any case, they cannot repay their loan amount, they cannot walk away by handing over their house keys to the bank, instead are permanently hooked with their banks.