A large, but hidden, problem facing the European Union is the extent to which its banks are reliant on foreign capital to survive, according to a new report.
In the wake of the Greek crisis, European banks have been in a position to borrow from other nations, including the US, the UK and Germany, but they have not had the funds to do so.
The report by the UK-based think tank, the Centre for Macroeconomics, suggests that Ireland is the biggest country in the EU that is in a similar situation to Ireland.
It says the country’s banks are struggling to borrow against foreign capital.
“It is one of the biggest problems facing the EU in the 21st century,” said the report, which will be presented to the Irish Government next week.
“Ireland is now the biggest debtor in Europe.
In terms of foreign debt, it is the third largest in the eurozone.”
The report argues that Ireland has been the victim of a lack of liquidity in recent years, which has meant that banks in Ireland have been forced to use their own capital, which is generally not available outside the eurozone.
For example, in 2016, Ireland had just under €2.2 billion of foreign capital, but as of the end of 2017, it had just over €10 billion.
While Ireland is in the middle of a major recession, the report says that it is not a crisis in itself.
If the European economy is going to rebound, the Irish economy needs more capital, the authors argue.
Ireland is also facing an inflationary spiral, with the Bank of Ireland estimating that inflation will rise to 1.9 per cent this year, up from the 1.2 per cent inflation it has experienced since the beginning of the year.
Meanwhile, a lack a large, stable source of credit for banks has led to an ongoing reliance on private lending.
The report also notes that Ireland’s banks do not have the capital to lend in the form of mortgage loans, which would allow them to grow faster than other banks in the region.
“This means that the Irish banks’ ability to lend to consumers is limited,” the report concludes.
A senior adviser to the Financial Stability Board, which oversees the eurozone’s financial sector, said the government had taken steps to address the problem, but warned that the current crisis was a “long-term problem”.
“The problem is that the problem has existed for so long and the solutions have been to solve the problem with debt and interest rates rather than with a banking system,” the adviser said.
Speaking on RTÉ’s Morning Ireland, Dr David Fitzgerald said Ireland was in a unique position to take the lead in addressing the problem.
“If we can get the Irish Banks to borrow and make that lending viable, it will create more jobs in the Irish sector, and that will create the kind of growth that will benefit the Irish people,” he said.
“It will create an economy that is strong enough to attract investment and businesses.”
We are in a very different place than most other countries in Europe.
“The Government said the €5 billion bailout was part of its efforts to tackle the problem of Ireland’s financial crisis.
The Government also pledged €2 billion to help Irish banks.