Friday, October 30, 2009

Economics 30/10/2009: Reliance or dependency

Quick points on post-Nama recapitalisation, credit flows from ECB to Ireland and Frank Fahey encounter with an egg...

I have done some sums on demand for equity capital by Irish banks post-Nama. Assuming underlying conditions for loans purchases as outlined in Nama business plan, using 6% core equity ratio as a target (remember, this is a lower target by international standards) and assuming no further deterioration in the loans books quality post-Nama:
  • AIB will require €3.2-3.5bn in equity capital post-Nama;
  • BofI will need €2.0-2.6bn;
  • Anglo will need €4.5-5.7bn;
  • INBS/EBS & IL&P will require total of €1.1-1.2bn.
  • Total system demand for equity will be in the range of €9.7-12.4bn.
Approaching the same issue from the angle of Risk-Weighted Assets, system-wide demand for equity will be around €10.8bn post-Nama. This will extend Nama-associated rescue costs to:
  • €54bn in direct purchases;
  • €5bn in completion 'investments' with estimated further €3-5bn in future completion additional funds;
  • €1bn in legal, advisory and management costs;
  • €9.7-12.4bn in equity injections;
  • Past measures €11bn.
Net of interest costs and losses, total price tag looks now like €84-88.5bn. This, for a system that can be fully repaired through a direct equity-based recapitalisation at a cost of roughly €32bn.

Our agriculture is the heaviest subsidised in the EU (and indeed in the world). This fact has never troubled our policymakers, as if subsidies are a sign of industry viability and strength, as long as they are being paid by other countries taxpayers (as in the case of CAP).

Now, we have become the biggest ECB liquidity junkie by far. Table below from RBS research note shows the dramatic level of financial life support our economy requires.
Note that the above list of countries includes heavily crisis-impacted Spain, the Netherlands, Belgium, APIIGS (less Ireland), aggregated in the 'Other' grouping. And yet... they all have larger economies than Ireland and smaller demand for liquidity injections.

Does anyone still believe that Nama can add liquidity to our economy? Or that such an addition can improve lending conditions? Apparently, ECB-own lending operations were not able to do so to date...

And on related note, there is an interesting quote from Dr Alan Ahearne in a recent article in the Southern Star newspaper (here):

"As one economist warned last year, ‘buying the assets at inflated prices would amount to a back-door recapitalisation of the banks’. Best practice ‘is for the banks to recognise the losses on these loans up front and sell the assets at fair market value’. Whose words? Dr. Alan Ahearne – now economic advisor to Brian Lenihan and one of the chief advocates for NAMA. Go figure."

Well, not much to figure, really - call this miraculous conversion a '€100K effect' triggered by new employment...

Oh, and while we are on Nama, here is an excellent 'Public Anger at Nama' account of the latest Leviathan encounter by Peter Mathews. I wonder if Senator Boyle and Frank Fahey get the point - people are angry at the way the country is mismanaged, but they are even angrier at being pushed into Nama.

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