If You Thought the Bank Bailout Was Bad, Wait Until the Mortgage Defaults Hit Home

Ireland’s decision in September to borrow from the European Central Bank to repay €55 billion in bonds of bankrupt Irish banks calmed markets for the time being. The outcome satisfied large European banks that held the bonds, but left the Irish government with an open-ended commitment to cover losses amounting to more than 20 percent of GDP. Writing for the Irish Times, economist Morgan Kelly argues this is a prelude to a second and more devastating crisis – widespread mortgage defaults. A wave of defaults is anticipated as social stigma fades in the face of economic necessity and artificially low interest rates. Irish banks try to prop a floor under housing prices, hoping to stem the tide and losses. Ireland looks to negotiate a low-interest bailout next year, though the European Central Bank might not be generous as it seeks to convince Spain and Italy to rein in their budgets. Ireland, a sovereign nation slowly turning bankrupt by debts to foreign creditors, now depends “on the kindness of strangers.” – YaleGlobal