Wednesday, August 25, 2010

Economics 25/8/10: S&P & the horrific cost of banks bailouts

As you all know, Standard & Poor (S&P) downgraded Irish sovereign debt to AA- from AA with a negative outlook. The downgrade was mainly motivated by the fact that the cost of the Irish banking bailout has increased significantly over previous expectations. S&P now estimate the cost of recapitalising the Irish financial system at €45-50bn, up from €30-35bn.

In my view, this is still behind the news curve in terms of estimated total costs.

My projections for total losses are as follows:
  • Nama - net loss of (mid-range) €12bn, rising to €19bn in the worst case scenario (although I have not redone estimates for this scenario for some time and they reflect 55% haircut applied on Tranche 1);
  • Anglo - €33bn in mid-range case, rising to €38.6bn in the worst case scenario (another update is due once the bank reports its results in the next few weeks);
  • INBS - €6bn, no range as we have little clarity as to their balance sheets details;
  • AIB - €7bn mid-range, assuming successful disposal of M&T and BZBWK, worst case scenario €9bn;
  • BofI - €2bn.
So the total expected banks losses are €50-55.6bn in my estimates.

Importantly, S&P's negative outlook allows for the possibility that the rating could be cut
further if the Government fails to deliver on promised fiscal stabilization. This can occur either due to significant continued deterioration in underlying economic conditions or due to the failure of the Government to actually implement planned cuts, or both.

S&P's current position rates Ireland at the same level as Fitch and one notch below Moody’s, but both of these are keeping Ireland on a stable outlook.

S&P latest estimate is for Ireland net government debt / gross GDP ratio reaching 113% in 2012. Forever cheerful folks at DofF projected this ratio to be 83.9% in 2012 in their Budget 2010 figures. This shows just how much can change in 8 months time. S&P's estimate for debt implies Ireland is facing greater debt mountain than similar rated Belgium and Spain.

But here comes a tricky part. Remember that our debt is currently yielding in excess of 5.5% for 10 year notes. This implies that in 2012, we can expect to pay out 6.215% of our GDP in interest payments alone, or 7.52% of our domestic economy total income. The bill will be €10,241 million - using DofF forecasts - or 20.5% of the total current expenditure planned by the Government. All in, even by rosy projections from DofF for tax revenue, our interest bill alone will be swallowing every third euro revenue will bring in.

This puts into perspective recent ECB research that concluded that debt levels above 90-100% of GDP are, "on average, harmful for growth" and that porblems could arise at the debt levels of as low as 70% of GDP. ECB currently projects that euroarea-wide average debt levels will reach 88.5% in 2011. Does anyone believe anymore that Ireland can run 2.5-3% annual growth rate in the current conditions as projected by the IMF? Or 4.5-4.3% (2012-2013) real GDP growth as projected by DofF?


The Nit said...

Dr. Gurdgiev,
Thank you for your analysis. I seriously do not see how I can continue to pay taxes and support this pillage. I am not saying this as some sort of excuse to dodge taxes, but because I feel that it is unjust that this falls on the average joe while the bondholders get protected. I would be gone tomorrow if it were not for negative equity, but the day when the cost of walking away falls below the cost of staying seems to be getting closer.
It's not like I can vote for any party who will stop the bailouts, stop the spending and balance the budget- the political system as a whole does not seem to have the capacity to do anything that would upset the status quo, and the status quo is this case means a slow japanese-style death.
So...when politics fails and economics is ignored.....isn't maybe time for those who are still young-ish to think about moving on? Or is there still some hope?

Malbekh said...


Does your analysis include the €10b master loan from the Central Bank to Anglo Irish?

If I remember correctly it's secured against €14.5b worth of collateral loans. Assuming these are non-NAMA bound, can't we expect a higher discount on evaluation of these 'assets'. Assuming the loan is paid back in full then these loans will be wound down in the Anglo bad bank model. Is it possible that we might see the usual slight of hand where the loan is marked down as a loss for the central bank and kept off the Anglo balance sheets?

Not being a amateur let alone an expert I'm not sure on this.

Also on the Anglo loan book, it was about €75b and again if I remember only €2.2b of these loans were considered to be preforming. I'm assuming that the Anglo discounts will increase as we go through their loan book portfolio and that the remnants will be pure dross.

So a 55% discount on their non-preforming loans is reasonable yes? €75b less €2.2b = €72.8b discounted by 55% = €40b.

I just like round figures.....

Paul MacDonnell said...

@Nit /Your post is brilliant and absolutely nails it and I have no doubt you speak for many, many thousands of Irish people. In fact the only (theoretical) hope Lenihan has that the debts will be paid back are that people like you will stick around to earn money and pay the taxes. Maybe the 'country' can't default that easily but many will simply vote with their feet.

nosheep said...

Constantin, Thanks again for an accurate if despairing analysis. I do not want to hijack this thread, but I wish to test an idea:

@Paul Mac
I have been thinking for some time about 'voting with your feet' like Nit, but I actually think we should vote with our money instead. My idea is this: on a set date, everyone who can should withdraw some money from all of their accounts they have in any of the "Guarantee-6" banks. I'm playing around with 10th October 2010 (10-10-10) and withdrawing either 10, 100 or 1000 (10x10x10) Euros, whatever amount one can afford, from each account. The cash can be re-invested in An Post, or one's local Credit Union, or even oneself.

The idea is not to cause a run on the banks, but to show we the people still have some power to protest, even though we are denied an election. Most people are too busy trying to make ends meet to do anything significant, so why not use the banks to make our protest?

The purpose: to declare that we reject the fiscal policy pursed by the Government.

Any ideas welcome.

TrueEconomics said...

@nosheep I'd say it is a drastic move. I don't think we are in a structural threat to deposits scenario. At least I hope we are not. But denying the ongoing fiscal policy is a different matter. I am certainly open to any suggestions on how an action can be structured.

nosheep said...

Dr. Gurdgiev,
If I understand you correctly, I too do not perceive a threat to deposits in the "Guarantee-6" banks.

The politicians won't listen, but you and your colleagues continue to show that their fiscal approach will not work. We are going to have to pay and pay while the country drifts into financial ruin. What can we do?

Well, we the people are ignored and angry at the politicians and the banks, but we continue to give these disastrous banks our cash in the form of deposits.

My message is to use these deposits as
a protest. To have a significant portion of deposit-holders make a coordinated action of withdrawing even just 10 Euros would make these banks
(and the politicians) sit-up and take notice of what could be achieved. It's not the amount of cash withdrawn, it would be the amount of withdrawls made that would be the power behind the protest.

It may seem drastic, but so would be taking the next plane. We can no longer just sit and take it. Time for action.

ottogunsche said...


Yesterdays blog was pretty hard hitting.
What can I say about today's one?
Informative and to the point as ever, it makes for chilling reading if I am honest.
But thanks again for telling it like it is.

Yes, I would support your idea of making a peaceful protest by withdrawing amounts on 10-10-2010.
Symbolically it would send a signal to the "powers that be" about our disatisfaction with how this financial crisis is being managed.
I hope Constantin won't mind me suggesting to you that you could put the same request on
internet site.
Here is the Irish Economy link

ottogunsche said...


10-10-2010 falls on a Sunday incidentally!

nosheep said...

OK, fallen at the first hurdle :-)

Actually I am thinking that 10-10-10 would probably be too late anyway, as (some elements of) the Guarantee is due for renewal before end September. Pity, useful catchphrase.

I will take up your suggestion and move this discussion to That way the focus on this blog can remain on Constantin's excellent analyses.

The Nit said...

It seems to me that it will be the property tax that will provide the best chance to make a stance on fiscal issues. I can't imagine people being happy about being taxed on their main asset, especially if it is underwater by 10% or more.
PAYE is an automatic deduction for those on salaries, so its not as if one could effectively organize the non-payment of income tax, but this problem does not apply to property tax since it will be up to us to get assessed and file the necessary payments. This tax, if introduced in the manner in which I assume it will be, provides the best chance for fiscal resistance.

nosheep said...

@The Nit

I don't want to continue to hijack Dr. Gurdgiev's platform with a topic tangential to his analyses.

I have taken the liberty of replying to your comment on

Anonymous said...

Is it crazy to say that one should also include the costs of the promises FF made to the Green party members in return for their support on NAMA? I would say that it is certainly an additional cost to be forced to go about your business in the way that Eamon Ryan and John Gormley feel we should go about it etc.

David in Seattle said...

I feel like I'm missing something (Hogwarts style perhaps) but under what scenario would the government even say it could pay back all this money?

Today we're spending 50bn. I think the govt will claim they will cut it back to 45bn. Actually, I'll be generous (though skeptical) and say 40bn. But then you must add on 10bn to service the debt. And let's say 5bn to begin paying off the 100bn we owe in our 10 year government debt/bank liabilities etc. The current tax take is just 30bn. Unemployment will be flat.

Does the missing 25bn come from improved tax receipts (esp. from multinationals) or somewhere else - I just can't see how it's even meant to add up as Fianna Fail would describe it, nevermind using a critical eye.