Economists voice concern over foreign loans

ECONOMISTS FEAR that foreign banks could pull the plug on their support for big developers in the Republic, setting in train a domino effect that will hit the rest of the economy.

Scott Rankin and Rossa White, analyst and economist respectively from Davy Stockbrokers say in a report published yesterday that the slowdown in the Irish economy will last into next year.

The pair point out that the banks have loaned €106 billion to builders and developers, which accounts for half of all business debt in the Republic.

Mr White and Mr Rankin say that for the moment, banks are willing to give their developer clients the room to make their way through the slowdown.

However, if the economy continues to slow into next year, they say there is a risk that this will test the banks’ willingness to continue this relaxed position.

“The second risk we see is a foreign bank withdrawing support from a large developer. This could create a domino effect across the market,” they say.

Mr White and Mr Rankin explain that because individual developers tend to borrow from several financial institutions at once, this means that a number of banks can be tied into one big project.

They point out that if one institution pulls the plug on one development, this will force the others to follow suit in order to protect their position, creating a domino effect that could eventually run across the entire sector.

The economists estimate that commercial property prices will fall by 20 per cent, while house prices will drop by 10 per cent this year and 7 per cent in 2009.

This will hit builders’ profitability and create a risk that some of them will breach the terms of their bank loans, that is, not repay their loans on time.

The three main Irish lenders to the housebuilding sector are monitoring some of their loans to residential property developers in the housing slowdown.

The economists are basing their case on growth slowing to 1 per cent this year coming in at 2 per cent in 2009.

However, Construction Industry Federation director, Hubert Fitzpatrick, pointed out yesterday that the Economic and Social Research Institute (ESRI) recently said the Republic’s economy will grow by about 2.9 per cent this year.

“I would attach a lot of credibility to what the ESRI says, they have always taken a conservative view,” he said.

A spokesman for the Irish Bankers’ Federation said that the organisation’s own figures show that there is good activity in the mortgage market, with a lot of new loan applications.