The Irish property market faces a significant increase in risk from a global economic downturn arising from the US subprime mortgage crisis, according to a leading international insurer of credit risk.
The inclusion of the Republic among Europe's riskiest property markets by Euler Hermes, a division of the Allianz insurance group, came ahead of a warning from the International Monetary Fund (IMF) that credit markets will have a "far-reaching" impact on the world economy.
Rodrigo Rato, managing director of the IMF, said yesterday that most of the impact of the global credit crunch will be felt in 2008 and the US will be hardest hit.
World economic growth should remain high next year but looks set to be below the levels of 2006 and 2007 and downside risks increase the longer financial markets remain in crisis, Mr Rato told a seminar in Madrid.
"Credit markets are correcting, but slowly, we aren't at a stage of normality," Mr Rato said, adding that most countries should be able to cope with the financial conditions.
"It has an effect on the real economy which will be felt more in 2008, with greater intensity in the United States, less in other areas," he said.
Euler Hermes singled out the Irish market along with those of Britain, the Netherlands and Spain in a report assessing the likelihood of the US crisis spreading into Europe.
While stating that a "bubble" was not likely this year in these markets, it said that each faced a higher level of risk if the rate of global economic growth slows down.
"The UK, Ireland and Spain appear clearly at risk," Euler Hermes said.
Noting that property prices have more than doubled in the Republic in the past 10 years amid a marked increase in construction activity, it said Irish prices had started to drop at a rate of 5 per cent per annum.
Mr Rato said meanwhile that he saw no quick fix for the global credit crunch triggered by defaults on US subprime home loans to borrowers with poor credit histories.
Financial institutions have cut inter-bank lending to limit exposure to US subprime home loans that were sold around the world via packages of asset-backed securities.
Central banks have injected money to compensate for the liquidity squeeze.
The IMF still sees risks to growth on the downside given the strong state of the global economy, Mr Rato said.
It was not yet clear, he said, whether the credit crisis represented a change in the economic cycle or a temporary slowdown in growth.
A few more months will be needed to access the full impact on banks, companies and governments, he added.
"A lot will have to do with the length of the crisis, the longer it lasts, the bigger impact it will have," Mr Rato said. - (Additional reporting, Reuters)
