Ireland's austerity act beginning to wear thin

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The meek acceptance of the Irish people of austerity is about to be tested. A tidal wave of foreclosures will wreck the fragile consensus that supported a long and dogged workout of the national debt burden. That is the prediction of Morgan Kelly, an economics professor at University College Dublin.

His apocalyptic vision of social strife and mass bankruptcy is causing nerves to fray in euro zone bond markets already suffering jitters over plans for managed defaults by euro zone sovereign borrowers.

Ireland's sovereign debt yields are now reaching levels that make further government borrowing unaffordable. The yield on the 10-year Irish bond hit 8.64 per cent in afternoon trading after starting the day at 7.94 per cent.

With little prospect of economic growth, nor of inflation to erode the value of debt, Ireland will be forced to seek a European Central Bank rescue when the government's cash runs out next year. However, Professor Kelly reckons that an EU rescue loan at a rate of just 5 per cent is unaffordable for Ireland.

The big problem, he says, is the underlying rot in the Irish housing market, which is being propped up by the banks which continue to lend at unaffordably low rates. At the same time, the social stigma of losing one's home in a nation obsessed with real estate, has kept mortgage defaults at relatively low levels.

When mortgage rates begin to rise, home values will collapse as the market retreats to a tiny minority of cash buyers. Meanwhile, households under pressure will stop paying the monthly mortgage bill, adopting U.S. practices of calling the bluff of banks fearful to unleash a cascade of foreclosures.

Professor Kelly's vision sounds ominous, but it is worth remembering that the Irish people have long cultural memories of land conflict, of evictions and cottage burnings by bailiffs enforcing the rights of absentee landlords. The recent memory of poverty among many Irish families may have helped the government to impose its austerity measures. The Irish know how to do poverty -- they did it for centuries.

But the Celtic real estate boom brought home ownership to hundreds of thousands of Irish people and that brings new ideas and attitudes that will work alongside old resentments about remote and controlling creditors -- formerly absentee English landlords, now banks and bondholders.

Professor Kelly reckons the rotten mortgages will increase Irelands' bank bailout bill from €50-billion to €70-billion, a debt of some €16,000 for every man, woman, and child in the Republic. Governments in Europe's periphery have been selling austerity by pushing the idea that it is a burden everyone must share. But that idea will soon wear thin.

If the Irish homeowner stops paying his monthly mortgage bill, bond investors will panic and the managed default of Ireland will become a rapid bankruptcy.