The “doom loop” between the banks and the governments that dragged Ireland out of the EU / IMF rescue operation is being repeated this time. The European Central Bank (ECB) has warned that Kovid’s actions could link debt-ridden countries to risky businesses through loans and credit guarantees.
Its latest Financial Stability Review says businesses, including Ireland’s debt-funded stimulus package and $ 2 billion loan guarantee scheme, are helping businesses and employees cope with the epidemic, but prolonging action or dragging out too soon could lead to a crisis.
“The sharp rise in corporate and sovereign debt means the growing risk of financial stability from the emerging sovereign-corporate banking nexus in the medium term.
However, canceling support before businesses stumble may lead to problems that completely solve the liquidity problem.
If corporate borrowers are unable to cope with the debts currently building up, it will affect banks and national governments, thanks in part to access to super ECB-backed loans.
The Government Credit Guarantee Scheme has been extended to six months this week until June 2021. The Kovid Payment Break scheme run by banks has been in a state of disarray since September, but figures released yesterday show that the vast majority of mortgage holders who received a payment break have already made full payments.
The latest figures from the Banking and Payments Federation show that one in eight people who have been contracted to stop paying home loans are still unable to resume payments – a relatively small group compared to the level of arrears from the last financial crisis.
The latest trading updates from Irish banks show that loan losses are lower than previously allowed during the crisis.
However, ECB vice-president Luis de Guindos warned that the conditions adopted by euro area banks were “optimistic” in some cases. Pandemic support also warned that in some cases it could delay bank identification of losses.
Wholesale banks in the eurozone are paying smaller allowances for bad loans than they have seen since the last financial crisis, or are currently being calculated by peers in other jurisdictions, especially the US and ECB warns.
However, within the Eurozone, Goodbody stockbroker Emon Hughes said the most conservative Irish banking rules are based on ECB numbers.
“This is what we see with ECB data, our own analysis of Irish banks as one of the most conservative countries in terms of provision over the last few quarters,” he said.
He added that with the ECB’s decision to review the current restrictions on banks ‘dividend payments for next year, event regulators will return to shareholders’ payouts on a case-by-case basis, giving Irish borrowers the upper hand.