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Saturday 19 January 2019

Dan White: Why homeowners here are paying for Eurozone mistakes

With the ECB likely to push up official eurozone interest rates by at least 1.5pc by the end of next year, Irish homeowners face even more agony. As house prices continue to fall, and with more tax hikes on the way, mortgage defaults are set to soar.

The ECB is itching to put up official eurozone interest rates. By how much and when?

Ulster Bank economist Simon Barry is pencilling six consecutive interest rate increases from the ECB. This would push up ECB rates from their current level of just 1pc to 2.5pc.

Of course we in Ireland have long since left official ECB rates behind us. As the Irish banks have found it more and more difficult to borrow money from other banks, or to attract deposits from retail customers, they have had to pay more and more to attract funds.

This month Permanent TSB jacked up its variable mortgage rate by another 1pc and effectively scrapped fixed-rate mortgages. Other lenders, including the ESB this week, quickly followed suit.

With the Irish banks still in rag order, any increase in official ECB rates would quickly be passed on to variable-rate customers. With the Permanent TSB customers already paying a variable rate of more than 5pc, this could result in Irish homeowners paying mortgage rates of up to 6.5pc or even higher. These would be by far the highest mortgage interest rates suffered by Irish homeowners since we first joined the euro at the beginning of 1999.

Problems

A hike in the official ECB rate would also hit the 400,000 homeowners, more than half of all of those with homeloans, on tracker mortgages.

Tracker mortgage interest rates are capped at a fixed margin over official ECB rates. Any increase in official ECB interest rates is immediately passed on to the homeowners in the form of higher rates. A 1.5pc interest rate increase would add over €120 per month to the repayments on every €100,000 borrowed on a tracker mortgage.

The ECB's determination to push up interest rates illustrates the problems with the eurozone's one-size-fits-all interest rate policy. While the eurozone core of Germany, the Benelux and France is now growing rapidly and needs an interest rate increase to choke off the threat of higher inflation, the eurozone periphery of Ireland, Greece, Spain, Portugal and increasingly Italy, needs higher interest rates about as much as a hole in the head.

This widening gap between the core and the periphery is creating a fault line that is threatening to rip the entire eurozone apart. With over one million unsold residential properties in Spain, Ireland isn't the only country trying to cope with the consequences of a massive property bust and the resulting banking crisis. Italy is also suffering. While the outlook is certainly grim we should not be entirely without hope. Last week's sudden resignation of Axel Weber as head of the German central bank, the Bundesbank, shows that Germany is not getting things entirely its own way at the ECB.

Weber had been Germany's candidate to succeed Frenchman Jean-Claude Trichet when the latter retires as ECB president later this year.

When other eurozone member countries discreetly objected, Weber quit in a huff. He won't be missed. The sort of sado-monetarism favoured by Weber and his ilk is a recipe for disaster and would plunge Europe back into a 1930s-style depression.

Weber's abrupt departure shows that there is still time to rein in the ECB's dangerous predilection for higher interest rates.

Having seen off Germany's favoured candidate, the central bank governors of the peripheral eurozone countries, including our own Patrick Honohan, must band together on the ECB's ruling council and block these dangerous rate hikes before they destroy the entire eurozone.

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