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Given the difficulties in the Irish mortgage market, this paper assesses the implications for the Irish fiscal accounts due to the unique relationship between the sovereign and its main financial institutions. Macroeconomic policies, which reduce the loan impairments on the balance sheets of the guaranteed banks are likely to generate savings for the sovereign due to its capitalisation obligations.
Using a broad empirical framework, the paper examines the relationship between house prices, unemployment and mortgage arrears in an Irish context. Loan loss forecasts over the period 2012-2014 are then generated for the Irish mortgage book under two different scenarios. It is shown that macroeconomic policies, which alleviate levels of mortgage distress, relieve the solvency position of the guaranteed institutions thereby reducing the Irish State’s future capital obligations.
This impact on the sovereign’s fiscal accounts, while of particular interest in the case of Ireland, is also worthy of consideration in other countries where financial institutions are also experiencing significant loan impairment issues.
The paper can be downloaded here.