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Paying the human cost of excess

IT is hardly a surprise any more that we are mainly saving, rather than spending, these days. Week after week another bodyblow hits Irish consumers, who it must be remembered are the main engine of growth in the Irish economy, making a bigger contribution than even exporting firms.

They want to get back on their feet, they want to stop saving at currently high levels and they want to see the economy growing again. But unfortunately they are not being allowed to make their contribution.

A series of lenders have put through a succession of variable mortgage increases in the last year, leaving some borrowers in arrears, others in severe financial distress and others simply in negative equity.

Yesterday one of the most aggressive hikers of rates, Permanent TSB, confirmed an extraordinary 1pc increase in variable rates. The scale of the increase is unprecedented even by the standards of recent hikes.

Banks normally raise rates by a quarter or half a percentage point each time, so to go beyond this in one move suggests Permanent TSB has no real sense of the damage such a move will cause.

Obviously the main impact is on the borrowers themselves, who either go into arrears or have to radically cut back their spending just to meet the new higher monthly interest bills.

The unfairness of this move is exacerbated by the fact that variable mortgage holders are at the mercy of lenders, whereas more fortunate tracker mortgage holders are paying far lower rates -- at least for now.

It is somewhat ironic that every other economy in Europe is trying to keep rates down so their economies can grow at the optimum speed, whereas Ireland is hiking rates just at the moment when a tentative recovery may be under way.

The bank's defence has merit on one level. Banks are paying more for their own money than ever before and this simply has to be passed on to borrowers.

But that is only part of the story. The banks have to source such a large amount of external funding because they recklessly ramped up their balance sheets during the boom and that was their own fault, not the fault of borrowers, who must now apparently pay the price.

More fundamentally, borrowers feel cheated because they as taxpayers propped up the banks during 2008, including Permanent TSB, with a guarantee and the only result for many is higher borrowing costs.

The problem here is very simple. What is good for the banks is not necessarily good for the wider economy. The timing issue is also relevant. While banks will ultimately have to push mortgage costs up in future if they are to return to profitability, now is not the ideal time for such a policy.

Alas, the outgoing government has had very little to say on this issue which affects so many.

Permanent TSB also yesterday announced up to 350 job losses in a fresh cost saving drive. This again makes economic sense for Permanent TSB, allowing the lender to cut its losses and gradually nurse itself back to financial health. But it is a terrible outcome for those who will lose their incomes.

Another round of job losses at this stage of the year will do nothing to engender consumer confidence, which is already fragile.

Unfortunately bank officials at many of the leading institutions are living on borrowed time. All the Irish banks have downsized dramatically in the last two years in terms of assets, but their staff numbers haven't reduced by the same amount. In that context substantial job loss programmes are likely to come soon from AIB and others. It will be one of the more unpleasant items in the 'IN' tray of the incoming government.

Just as there is a cold logic to the interest rate rises, this type of job losses are unfortunately inevitable.

Everyone connected with Irish banks is currently sharing the burden of their losses, from shareholders, to taxpayers, to junior bondholders, to the government.

Staff in the next few months will be asked to shoulder that burden too.

With more than half the banking system already nationalised, governments of the future will some day want to sell these banks back into the private sector at the highest price possible.

That means making these banks lean and ultra-efficient, which unfortunately means fewer people.

That is the harsh reality of the Ireland we now must carry forward.

Irish Independent