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One of the biggest stories about the state of the Irish Economy came out on Friday to little notice.
THE IRISH Financial Services Regulatory Authority has instructed accountants PricewaterhouseCoopers (PwC) to assess the extent to which the banks are delaying the collection of interest payments on loans to builders and property developers.
If banks are not collecting interest on loans it is pretty clear that with the current state of finance they consider that there is no money to collect. If a company can not pay its interest it will probably go bust dumping a massive bad debt on to the banks balance sheet (and the tax payers laps).
Keep your eyes open for that report in the next few weeks. Also from the article
AIB said at the bank’s half-year results presentation, also in July, that it was “rolling up” interest for some property developers as there was no activity in the property market and no cash being generated to repay interest.
The bank said it was adopting “a very supportive approach
Emmm
You’re right. It’s a time bomb. At some point they have to decide whether to seize the sites or projects and write down the loans. Note the big picture worldwide now is that whereas Ireland was ahead of the pack just 3 weeks ago with the guanantee scheme, it’s now behind since nearly every other major country is doing direct equity into at least some banks. Even Switzerland. Odds on another budget within 3 months?
Well, it’s still hard to see how the property thing will pan out. If they’re new developments surely there’s a good chance that the real value of the property is higher than the value of the loan? The developers may not make much profit on them but in the medium run the banks may still be able to recoup most or all of what they’ve loaned on them: how high are margins for property developers? What proportion of the final sale price of a property was the bank lending? Call in the loan now and the bank is stuck with holding, perhaps finishing and eventually selling the development. That’s no fun: cheaper to roll up the interest for a while and hope that the house market unfreezes at a lower price point and the loans get repaid.
The real problem is the highly leveraged speculative property investors whose business plan was buy – hold for a few months – sell and/or refinance. Those are the loans that are most likely to go bad quickly, especially if the rents don’t cover the interest payments. I don’t know what proportion of the banks loan books are those sorts of loan, and I don’t know how much of it is secured only against the property in question. I know that for a while the banks have been requiring a multiple of the loan value as guarantee in some cases so that a 1m loan might require collateral of 2m or more, depending on how risky they assessed the market values to be.
I think much of the problem is that the banks model was.
Step 1. Loan to developer to build stuff.
Step 2. Loan to people to buy stuff from developer.
Step 3. Developer pays back loan.
Basically the banks loan the money for an development twice. Get paid back by the developer in a year or so and by the people over 30 years.
The bank ties up its loan book with instead of having a one massive loan it has 50 smaller loans over longer periods which is safer.
As 1 person more likely to go bust compared to 50 30 year mortgages.
Problem is step 2 is not happening because of the credit crunch. Which means that Step 3 can’t be done. Which means that the loan books have loans to wavering developers rather then 30 year loans which spread the risk of defaults.
But they don’t have the money to do step 2 at the mo. Basically the banks need step 2 to kick back in and fast.
Simply demanding the money is likely to trigger the equivalent of Lehman Brothers – a cascade of developer failures. The developers should be required to keep up their interest payments but not the principal, essentially extending the loan term.
Mark I would say asking some developers for any interest would cause them to collapse
Simon
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