Bailout of households crucial for weakened banks, says Citi
Published 14/05/2010 | 05:00
ANALYSTS at a leading international investment bank have added their voices to calls for a bailout for heavily indebted households in this country.
The European economics team at Citi, one of the largest investments banks in the world, said a large chunk of the debt of consumers would have to be nationalised.
Otherwise, it said, huge numbers of consumers risk being overwhelmed by debts which, in turn, will destroy the banks.
Citi has warned of rising bankruptcies among households -- which would infect banks across Europe as much of the borrowings of Irish citizens are from banks in other parts of the eurozone.
Growth during the boom was largely fuelled by a borrowing binge, but the financial crisis means that households can no longer borrow their way out of financial trouble.
The fact that heavily indebted households can no longer borrow means economic "growth will be hurt substantially".
The calls for a bailout for cash-strapped households echoed a television essay by broadcaster Matt Cooper as part of RTE's 'Aftershock' on Monday which called for mechanisms to be put in place to stop people losing their homes.
Citibank economist Michael Saunders said the high level of private sector debt in Ireland, Portugal and Spain posed a threat to the stability of the eurozone.
Cutting wages, reducing public sector pensions and raising taxes in these countries would only make matters worse, the investment bank said.
"In these countries it requires debt restructuring of the private sector in order to improve the outlook for the public sector fiscal position," Citibank said.
If this does not happen it will cause problems for other eurozone countries, as over-borrowed states would find it hard to raise funds to recapitalise further their banks.
"Given the size of the private sector's debts in Spain, Portugal or Ireland, this could generate a more destabilising financial shock for the rest of the economy under stress, and for all its foreign creditors," the report said.
Irish households owe €1.65 for every €1 in disposable income they earn, according to calculations by Goodbody economist Dermot O'Leary.
Along with Cyprus, Ireland has the highest private sector debt levels in Europe.
The output of the country is about €131bn a year (in gross national product terms) but households collectively owe less than €179bn, Mr O'Leary added.
Much of this borrowing of households needs to be restructured but because this would be so complicated to carry out, big chunks of the debt would need to be nationalised, Citi said.
"The alternative scenario would be one of a prolonged -- and potentially disorderly -- deleveraging of the private sectors via rising bankruptcies in household and non-financial corporations which would eventually spread into banks' balance sheets," the economists said.
However, the Citi analysts concede it is unlikely that there will be what some have called a "NAMA (National Asset Management Agency) for ordinary people" because of the unpopularity of bank bailouts.
Any large-scale bailout for indebted households is likely to prove highly controversial as a proportion of those in difficulties borrowed recklessly during the boom.
Following urgings from Communications Minister Eamon Ryan, the Government set up an expert group chaired by insolvency expert Hugh Cooney to consider ways to rescue mortgage holders in arrears.