The 'Crunch' is nearly over, but what lies in its wake?

The Euribor 3 month money is at 2.822% which means the margin on interbank money is now at 0.322% (the current base rate is 2.5%) over the base. The Credit Crunch by definition is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. One of the biggest hallmarks of the whole financial crisis was the disjointed relationship of the Euribor from the ECB.

Traditionally the Euribor (we are talking about the 3 month money generally) trailed the ECB at c. 0.1 to 0.2%, so if the ECB base rate was 4% then the Euribor was (approximately) 4.13% or something like that. In July of 2007 this all changed and margins on interbank lending shot through the roof, to such an extent that literally thousands of loans in Ireland alone turned into negative …

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What stimulus is there after a 0% rate?

There are generally two strands to monetary stimulus, firstly there are interest rates, and then there is the actual money supply. We’ll talk about both of them here and what will mean for consumers.

Interest rate drops drive money into an economy in a few different ways, obvious to most is that the cost of borrowing comes down, so if a company has to borrow to hire people they can do so, people need less to service debts which increases their disposable income and that puts more money into circulation. The other thing that happens is that bank deposits look less attractive, interest rates dropping actually cause rate compression, something we discussed here before, and that means money (especially at a 0% interest rate) will not sit on deposit and will instead move to corporate bonds which will thus be a way of extending credit to companies and they can finance projects.

In the past many would ‘fly to quality’ …

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How falling interest rates hurt banks during a liquidity crisis

The falling interest rates are heralded by consumers of Irish mortgage companies as a godsend – well, for the clients of the Irish banks who actually pass on the full rate cuts that is! However, at the same time it creates a rate compression which damages the bank and this is what we will consider in this article.

Banks have two sides to the operation roughly speaking, on one side there is the lending function which we are all aware of, mortgages, car loans, personal loans etc. on the other side is the deposit taking function which provides part of the money they lend out. There is of course the interbank market which supplements (and often surpasses) deposit funds for lending, but to keep things simple we will focus on a world where deposits roughly equal lending.

When

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ECB cuts rates to 2.5% – tracker mortgage interest rates benefit.

Tracker mortgages are a mortgage that is tied to some form of base, be it the ECB base rate or the Euribor, in residential lending it tends to be the ECB in commercial it tends to be the Euribor. Today interest rates were reduced by a further 0.75% giving a new base rate of 2.5%, which is the lowest it has been since March of 2006,the Euribor is now at 3.743% and will see the base rate drop filter through in the coming days.

Commercial loans tend to follow the Euribor, specifically the 3 month money which banks actually tend to use to finance most of their operations. The way that banks operate is to sell long term but finance short term. This is where they create their margin and its based on the yield curve, part of the problem in the last 12 months was a yield curve inversion which made lending difficult and was a …

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Best mortgage interest rates for first time buyers

The current market is heavily weighted in favour of the buyer and for that reason we have seen more first time buyers interested in finding out how much they may qualify for, albeit that they may not plan to buy any time soon, many people still seem to be holding out for the ‘market bottom’, and naturally we don’t know when that time is, will be, or was (because it could have been last week, only time will tell), it is only with hindsight that the actual bottom can ever be accurately identified.

Another reason is that there are expected rate cuts coming, the next will be delivered at the 4th of December meeting of the ECB next Thursday. Many potential buyers are thus going to wait to see what kind of drop is delivered, if Trichet indicates that another may be in the pipeline it will have a strange effect of causing the inverse of what monetary policy is intended for.

The question we are getting recently is ‘what …

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ECB announce €200 Billion injection

The ECB have just announced a €200 billion plan designed to stimulate eurozone economies, it is unlikely though that Ireland will take part in any of the plan. It was unveiled earlier today by Jose Manuel Barroso, €170 billion will come from member states and the remainder will come from the European Budget and the European Investment Bank.

Ireland has no room for further fiscal stimulus at present according to the Department of Finance, the foremost issue with Ireland is (according to Europe and our own government) is to get our spiralling deficit under control. One aspect of the stimulus is that €5 Billion will be going towards building greener cars (maybe this is the big break the AirCar has needed!).

The EU are taking these measures to avoid further downturn and to do so with coordinated policy responses. In the USA they announced an $800 billion Dollar stimulus plan. Both LIBOR and Euribor rates fell which will …

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Intersted in going broke? Should banks raise interest rates?

I had the pleasure of being on Newstalk last week with Eamon Keane and during our brief chat I had mentioned that banks are lending out money cheaper than they can buy it, this was mentioned back to me by a client and he wanted to know if it was simply a slip of the tongue, because banks of course, do not lend money at a loss.

In fact that is precisely what is happening at the moment because the 3 month Euribor – which is the rate banks generally are buying their money at- is at 4.742%. Several banks are lending at less than this price namely NIB, Halifax, Bank of Scotland, Bank of Ireland and PTsb. So how is this happening? How can any CEO let their institution lend money at a price that will cause shareholder loss?

I suppose it’s down to a few factors, firstly banks don’t HAVE to buy money at the 3 month Euribor rate, they may be operating on the 1 month money which is currently selling at 4.349%, or they may be …

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What are the best mortgage rates? Mortgage Interest Rates explained.

What are the best Irish mortgage rates? What are interest rates and where do they come from? These are all good questions and in today’s post I hope to answer some of them.

Often I find that people call me and ask ‘what’s the best rate’ and then there is silence on the other end of the phone as they await an answer. The truth is that at any given time there is a ‘best mortgage rate’ out there, but normally there are restrictions surrounding it which inhibit the ability for most borrowers to avail of them.

We have come out of eight rate hikes which began at the end of 2005, and in an upward rate market people often feel that their old loan has become expensive, in fact it’s not necessarily the case that the ‘old loan’ is exceptionally dear, its that the rate market has gone up and therefore the cost of all loans has gone up, when we talk about the greater ‘debt burden’ that’s what we are referring to, because car loans, higher purchase, leases, …

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