Ireland's Reckless Banks

Irish banks have placed themselves into a very difficult position. They have lended so much money to Irish property developers that they will find it difficult to remain solvent if the continued downward trends in the property market continues.

In a note, by Morgan Kelly of UCD, he notes that lending to builders and
developers continues to grow rapidly and now stands at almost €100 billion, an increase of
€20 billion on last October. To put these numbers in perspective, €20 billion is twice the market value of Bank of Ireland shares; while €100 billion is the approximate value of all public deposits with retail banks. Effectively, the Irish banking system has taken all its shareholders' equity, with a substantial chunk of its depositors' cash on top, and handed it over to builders and property speculators.

He adds international experience shows that developers will walk when markets turn down, leaving banks, and often governments, to pick up the pieces.

Therefore, all this money has been thrown recklessly into the irish economy by Irish banks. Creating positions which were completely unsustainable, once the tap was closed off. Thus, the returns for developers will be significantly reduced and perhaps in some cases result in developers holding loans greater than the returns possible in the current market conditions.

There will have to be major movement in the coming months in the economy for us to reach a position where the equilibrium is based on real market fundamentals and not on speculators greed.