Who's now the biggest obstacle to a national economic recovery: the Irish or the UK/foreign-owned banks? Because of their shoddy corporate governance practices and insatiable appetite for the Irish taxpayer's money, you would think the Irish banks.
But evidence is beginning to accrue that the foreign lenders, particularly the UK banks, are becoming a destabilising force in the Irish economy. In time, Brian Lenihan will surely have to address their lingering presence in the market, but the fear is there is nothing the government can do to align the interests of these lenders with the interests of the Irish economy. They simply will not mesh.
Taken from a strictly national economy perspective, the UK lenders are about a useful as an over-enthusiastic risk officer at an Anglo Irish board meeting. While they once provided 35% of the Irish lending book, several of the foreign-owned institutions have effectively pulled the shutters down on lending into the Irish economy.
That is their wont, but it must be deeply frustrating for the government that not only do the foreign-owned banks want to avoid catching falling knives, they don't want to lend into what remains of the productive segment of the Irish economy.
If the UK and foreign-owned lenders were simply withdrawing from property lending that would be one thing, but before the crash the UK lenders in particular funded much of the business lending that takes place in the Republic and their decision to painfully ration that form of credit now is a ticking timebomb for the Irish economy.
For example, Ulster Bank and Bank of Scotland (Ireland)/HBOS funded almost a third of the business lending in the Irish economy before the crash. Ulster Bank, Bank of Scotland and KBC funded around a third of the entire Irish mortgage market. Pull away that level of credit and you have a serious credit hole – one the Irish banks, in their fragile state, have no hope of filling.
The withdrawal of credit by the foreign lenders is one thing. But one now has to also contend with their management of Irish mortgage customers. Last week a report suggested in some cases UK lenders are levying a 5.9% interest rate on certain customers. This is only a few hundred basis points away from sub-prime levels of interest and such actions will surely push a large number of their own borrowers toward default and mortgage delinquency.
The problem is mortgage switching in the Irish market has dwindled to a mere trickle, potentially reducing Irish customers with UK lenders to "stranded'' borrowers – unable to switch because their property is in negative equity, but equally having no market power to prevent endless increases in their mortgage costs.
Again the UK lenders will talk about margins in Ireland being too low and the cost of funding being prohibitive, but from an Irish national economy perspective, this is irrelevant. Keeping defaults down and rates down in the short term is the desired end result.
The third problem is the UK lenders are still highly aggressive on deposits, reducing the pool of capital for Irish banks trying to heal their balance sheets. From a national economy perspective, the UK and foreign-owned lenders are doing the three things that most damage any chance of a recovery here: rationing credit, increasing margins on homeowners and pulling deposit flows out of the Irish market. The Irish banks are doing the same, it could be argued, but supposedly Nama is going to change that, if you believe the government.
While UK lenders are a big negative at this stage in the economy cycle, it must be remembered two of them (RBS and Bank of Scotland/ HBOS) are now effectively extensions of the UK treasury and no matter what reassuring noises they make about their roles here, their business plan is now to escape UK government control; expanding in a collapsing Irish market is not part of this strategy.
There is still the chance of aligning the interests of these lenders with Irish economic interests. But one suspects all across Europe lending will retreat to the large capital centres and Ireland is not one of them.
David Went of Irish Life & Permanent once said the UK lenders were nothing more than "suitcase bankers'' here for a short-term buck, but can anyone now say – at least technically – that he was wrong?