In this weekend’s Sunday Business Post, commentator David McWilliams has an article under the title “It’s time to defuse the mortgage timebomb”. The piece concludes with:
“In addition, the longer this goes on, the more the banks become zombie banks incapable of breathing credit into the market. A deal must be done right now.
The banks set aside €16 billion in the last capitalisation round to cover bank loans in the residential market. Taking the total mortgage lending book of €112 billion, the implied total default on the entire book is where we are now in terms of arrears, 16 per cent. However, not all these arrears will be total write-offs, so there is enough cash in the tank now to do a debt for equity at 50/50 right now. The gives the punter a break and the bank an upside option over time.
But maybe the reason the banks have been tardy in moving – after all, they were dressed down by the Central Bank last week – is that they think €16 billion isn’t enough. If it isn’t, we need to go back to Frankfurt and come up with a figure that covers all bases and say to the ECB: “We need more cash and you will have to cough up”.
We know the Germans need a success in Ireland. We know that we can only have success if the total banking problem is solved, and we know that the pending mortgage crisis has not been addressed yet.
Wouldn’t it be sensible to put it all in one big bang solution?”
The trouble with “big bang” or soundbite solutions is that they are rarely effective for complex problems. At the top-level it seems the problem in the residential mortgage crisis is simple – too much debt – but there are a number of subtle complexities that mean top-level solutions will be ineffective.Tweet