Citibank warns personal insolvency rates set to soar

Personal insolvency rates will soar when the Insolvency Bill is passed and Ireland will slip back into recession, according to research by Citibank.

In a grim assessment of the economy entitled ‘Ireland: Tough times ahead’, Citi- bank analysts said: “In our view, it is likely that personal insolvencies in Ireland will soar in the next year or two, with more use of default as a means of deleveraging, especially since long- term unemployment (a key driver of debt service capacity) continues to rise in Ireland.”

Citibank based their assessment on what happened in Britain when they introduced similar changes to insolvencies 10 years ago. Despite strong economic growth, the number of insolvencies doubled between 2001 and 2006.

A knock-on effect of an increase in insolvencies would be a further tightening of lending by banks.

Citibank analysts said: “Rising insolvencies are likely to cause additional losses — perhaps substantial — for Ireland’s banks on consumer credit and mortgage loans, and also may feed back to rising interest rates and tighter lending standards as banks seek to protect themselves against rising credit risk.”

At a national level, Citibank doesn’t believe Ireland will be able to meet the economic targets imposed by the troika. Its analysts believe as a direct result of the austerity measures, Ireland will be unable to return to the markets in 2013.

Citibank analysts recommend that the Troika allow Ireland renegotiate the Irish Bank Resolution Corporation (formally Anglo) promissory notes: “One relatively simple measure would be for the troika to allow Ireland to restructure the €28 billion promissory notes held by the IBRC at a much lower interest rate (say, 3% versus about 8% now) and a longer repayment profile.

“This would be equivalent to a debt restructuring as regards funding needs, but would not carry the stigma. It would cut the government’s financing needs, but would make only a modest dent in the general government deficit profile for the next few years.”

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