19/6/16: Irish Regulators: Betrayed or Betrayers?..

As I have noted here few weeks ago, Irish Financial Regulator, Central Bank of Ireland and other relevant players had full access to information regarding all contraventions by the Irish banks prior to the Global Financial Crisis. I testified on this matter in a court case in Ireland earlier this year.

Now, belatedly, years after the events took place, Irish media is waking up to the fact that our regulatory authorities have actively participated in creating the conditions that led to the crisis and that have cost lives of people, losses of pensions, savings, homes, health, marriages and so on. And yet, as ever, these regulators and supervisors of the Irish financial system:

1. Remain outside the force of law and beyond the reach of civil lawsuits and damages awards; and
2. Continue to present themselves as competent and able enforcers of regulation capable of preventing and rectifying any future banking crises.

You can read about the latest Irish media 'discoveries' - known previously to all who bothered to look into the system functioning: http://www.breakingnews.ie/business/report-alleges-central-bank-knew-of-fraudulent-transactions-between-anglo-and-ilp-740684.html.

And should you think anything has changed, why here is the so-called 'independent' and 'reformed' Irish Regulator - the Central Bank of Ireland - being silenced by the state organization, the Department of Finance, that is supposed to have no say (except in a consulting role) on regulation of the Irish Financial Services: http://www.independent.ie/business/finance-ignored-central-banks-plea-to-regulate-vulture-funds-34812798.html. 

Please, note: the hedge funds, vulture funds, private equity firms and other shadow banking institutions today constitute a larger share of the financial services markets than traditional banks and lenders.  

Yep. Reforms, new values, vigilance, commitments... we all know they are real, meaningful and... ah, what the hell... it'll be Grand.

12/6/16: Few Thoughts on Anglo Trial Verdicts

A friend recently did me a small service by summing up my comments on twitter on the Anglo Irish Bank - Irish Life & Permanent roundabout loans verdict:

I have provided an expert testimony on the matter in April in a court case involving the Central Bank, the Department of Finance and the Attorney General of Ireland, focusing precisely on the nature of the relationship between the Irish Financial Regulation authorities and the misconduct by banks and banks boards prior to 2008 Global Financial Crisis.  Quoting from my expert opinion:

"Part 4: Regulatory enforcement effectiveness and efficiency

46. In my opinion, and based on literature referenced herein, objectives of the function of enforcement in financial regulation are best served by structuring enforcement processes and taking robust actions so as to:
1. Target first and foremost the core breaches of regulatory and supervisory regimes, starting with systemic-level breaches prior to proceeding to specific institutional or individual level infringements [Targeting];
2. Timely execute enforcement actions, both in the context of market participants’ timing and timing relevant to the efficiency and effectiveness of uncovering the actual facts of specific alleged infringements [Timely execution];
3. Prevent or at the very least reduce, monitor and address any potential conflicts of interest in enforcement-related actions [Conflict of interest minimisation];
4. Assure that enforcement actions are taken within the constraints of the regulatory regime applicable at the time of alleged committing of regulatory breaches, while following well-defined and ex ante transparent processes [Applicability and quality of regulation and enforcement];

5. Assure that regulatory enforcement actions do not contradict or duplicate other forms of enforcement and remedial measures, including legal settlements [Consistency of legal and administrative frameworks]."

In simple terms, systemic lack of imposition of meaningful sanctions on senior policy, regulatory and supervisory decision-makers active in the Irish financial services in the period prior to the Global Financial Crisis severely undermines the signalling and deterrence functions of regulatory enforcements. Convicting bankers for mis-deeds is fine, but not sanctioning regulatory and supervisory officials is not conducive to establishing any tangible credibility to the regulatory enforcement regime. Worse, it establishes a false sense of security that the system has been repaired and strengthened by convictions achieved, whilst in reality, the system remains vulnerable to exactly the same dynamics and risks of collusion between regulators and supervisors and the new financial services executives.

It is, perhaps, telling that my counterparts providing expert opinions in the case on behalf of the Central Bank, Department of Finance and the Attorney General of Ireland have based their analysis on the axiomatic assumption that no regulatory, supervisory and enforcement staff can ever be held liable for their actions or inactions in the events and processes that led to the Global Financial Crisis. No matter what they have done or refused to do. Full impunity must apply.

21/6/15: BankCheck Report into Anglo / IBRC Overcharging

So here, as promised, the full BankCheck report on Anglo/IBRC overcharging. I provide no comment. You can click on each individual frame to enlarge.

11/6/15: Full Letter Concerning IBRC Overcharging

Yesterday, I posted about Deputy peter Mathews' speech in the Dail concerning the egregious sharp practices in the Anglo Irish Bank and IBRC (link here). Today, I posted my point of view taking these practices to the macro level in relation to the remaining legacy of Anglo/IBRC (link here).

In his speech, deputy Mathews quoted from the Black & Company Solicitors' letter on behalf of Mr. John Morrissey and I quoted from the same some more in my post (linked above).

Here is the actual copy of the letter (I had to break it into segments in order to post on this platform). All sections are sequential and reproduce the letter in its entirety. You can click on each segment to enlarge.

I provide no comment beyond what has been already provided in the two posts linked above.

11/6/15: FT on IBRC Inquiry

Financial Times on IBRC Inquiry: http://www.ft.com/intl/cms/s/0/295fdf8a-0f4e-11e5-897e-00144feabdc0.html#axzz3chjkDlNH with comment from myself amongst others.

11/6/15: Anglo's Toxic Legacy: It Is Still Around Us, Today...

Here is an edited version of a note from 4Q 2014 that I provided to a non-commercial party interested in the matters of the Anglo Irish Bank that outlines my view of the sharp practices at the bank and the spillover from these practices across Irish banking, economic and political systems.

"As you know, Ireland was forced by the ECB and the EU to bail out its banks. The most egregious case involved Anglo Irish Bank - a mono-line property lender that was nationalised on January 21, 2009 and bailed out using Irish Government funding to the tune of EUR29.3 billion.

Funds for this bailout came from a combination of the Troika loans and taxpayers-owned National Pension Reserve Fund and thus, de facto, amounted to taxpayer financing of the bank.

Nationalisation of the Anglo Irish Bank, as we now know, came on foot of the bank, the auditors and regulators failing to report egregious sharp practices in the bank when it comes to the regulatory rules that date from the early 1990s through 2008 and include systemic and wilful overcharging of customers, breaches of liquidity rules, bank providing funding for its own directors on the basis of preferential treatment of public disclosures in collusion with another bank, INBS, bank engaging in misclassification of loans as deposits, and bank providing funding to its own customers for share price support schemes.

Any one of these sharp practices would have resulted in either a bank closure in a properly regulated regime, such as, for example, the U.S., and/or a complete wipeout of the equity value of the bank in the markets.

Two Examples

Take one example of one such practice. The overcharging problem at the Anglo Irish Bank continued from 1990 through 2004, with clients billed on average 0.3% concealed margin on their loans without notification of the customers charged and without disclosure to the auditors. Bankcheck review of the large number of loans revealed that 80% of these were involving overcharging. More importantly, from the point of view of the current situation, the Irish Government agencies, such as the IBRC and Nama, as well as the purchasers of distressed loans from Anglo borrowers, continue to charge the rates that include the original fraudulent mark ups, despite at least one official judgement on the matter issued by the Irish court. Taken in perspective, the overcharging - officially and on the record exposed in Irish and US courts - represents a quantum of estimated EUR1 billion of overstatement of publicly recorded and audited profits declared by Anglo through the period of 2004, and although we have no means for ascertaining the quantum of overcharging since 2004, the figure of at least around EUR2 billion total over the span of 1990-2014 is most likely a conservative estimate. This overcharging was notified to the Irish authorities repeatedly and on the record, with no action taken in response to notifications by the current Government, the Financial Regulator and/or the Central Bank.

In another sharp practice, the bank lent money to a single customer to cover margin calls on CFDs held against the bank own shares and, subsequent to the accumulated loans in excess of EUR2 billion, the bank arranged and funded a buyout facility for 10 investors (also clients of the bank) who were lent funds by the bank predominantly on unsecured basis to purchase shares underlying the said CFD positions. In simple, most basic terms, the bank used its lending book to prevent a share price collapse that could have resulted from the disclosure to the markets of the cumulated CFD positions.

Impact

In effect, thus, Irish taxpayers were compelled by the European component of the Troika, the EU and the ECB, in contravention of the IMF advice, to underwrite losses in a bank that was neither systemic to the Irish economy (it had basically no retail deposits and conducted virtually no retail business) nor operated within the confines of banking regulations and laws. On foot of the Anglo Irish Bank rescue, we were compelled to rescue an equally egregious Irish Nationwide Building Society - a counterpart to some of the sharp practices carried out in the Anglo Irish Bank.

Between 2007 and 2013, Irish Government debt rose by EUR155.8 billion - the largest jump in debt relative to GDP of any country in the euro area, including Greece. More than 22 percent of this increase is down to Anglo Irish Bank and irish Nationwide Building Society rescues. 

The damage runs deeper than that, however. If the Irish Government was allowed by the ECB to shut down Anglo Irish Bank prior to nationalisation, Irish Government debt today would have been around 93% of GDP as opposed to the current level of 112%. But this does not take into the account the potential contagion that resulted from the Anglo Irish Bank collapse to other banking institutions in the country. At the time of the September 2008 banking Guarantee, the State and its advisers have argued that not rescuing Anglo Irish Bank would have spread market panic to other Irish banks. 

This claim is, in my opinion, dubious. It could have been as likely, if not more so, that shutting down a rogue institution (or, with INBS - two rogue institutions) in a public and transparent manner could have resulted in more confidence in the systems and procedures present within Irish regulatory and supervisory regime. By opting to preserve and secure Anglo Irish Bank and INBS, Irish Government at the time sent a signal to the markets that any institution, including that with questionable business model, strategy and practices will be preserved and protected. In turn, such a signal was consistent with telling the markets that Ireland has no will to or cannot (due to the limited regulatory abilities) distinguish rogue operators from legitimate and functional ones. The effect of this could have been undermining confidence in all Irish banks, in order to protect a rogue one.

Ireland opted for a solution of shoring up and covering up the structural vulnerabilities exposed by the Anglo Irish Bank practices in the system of our regulation and supervision, as well as governance. This is neither a sustainable strategy, nor is a markets-securing strategy.

Legacy

The legacy of the Anglo Irish Bank-related debt remains with us. Currently, Irish Central Bank holds some EUR25 billion worth of long-term Government bonds issued to offset Emergency Liquidity Assistance credit line extended to the bank liquidators. Ireland is mandated by the EU and ECB to gradually sell these bonds into private markets. As we do so, the burden of this debt is befalling Irish people who will have to fund interest and principal on these bonds into perpetuity. 

There is an easy solution to this problem that ECB can enact within a minute: the bonds should be left in the Central Bank and cancelled at maturity. This implies no cost for European taxpayers and no new issuance of money by the ECB.

In ethical terms (moral hazard etc), such a move is warranted due to the sheer scale of deception and concealment of the facts of the Anglo Irish Bank operations that have been exposed to-date and are still being exposed and that were not disclosed at the time of the September 2008 Guarantee or, indeed, at the time of the 2010 Troika 'Bailout'. In other words, the argument can and should be made that both the Guarantee and the Bailout involved Irish commitments to lenders and lenders agreements that were not reflective of the full informational disclosures by the Anglo Irish Bank and the INBS.

In moral terms and economic terms, Irish people have paid a huge price for the crisis - far more than their fair share, given the fact that in rescuing Irish banks, we have underwritten a rescue of private bondholders and banks across the EU, the US. Irish people are paying for the crisis with dramatically higher rates of suicide, destroyed families, lost or endangered family homes, decimated health care system, devastated pensions, underfunded education and childcare, and an economy that in per capita GDP terms has sustained the third biggest drop across all Euro area countries. A large share of these costs is attributable to EU and ECB decision to force Irish Government to accept full losses in the Anglo Irish Bank and INBS - two rogue banking institutions that were not systemic to Ireland - which itself was predicated on incomplete information and misleading information being supplied to the Irish authorities at the time of decision making.

Furthermore, it is my opinion that the legacy of the Anglo and INBS - embodied in the continued process of disposal of the residual bonds on the insistence of the EU and ECB - is toxic to the democratic institutions of Ireland, from the point of view of the future. As long as Irish political elites are forced to deal with the legacy of the bonds disposals, there will remain an incentive for the Irish establishment to stay mute on the issues of systemic breaches in regulatory, supervisory and legal frameworks around the operations of the two rogue institutions. In return, official refusal to deal with the legacy fuels public mistrust of the core democratic institutions of the State, increasing the appeal of the extreme ideologies and political positions. 

The legacy of Anglo and INBS is so toxic that it prevents a rational, informed discovery of facts and debate of these facts as relating to the regulatory and supervisory breaches within Irish financial system. The only way we can functionally deal with this malfunctioning of the state systems is if the European authorities allow Ireland to move beyond the cost of carrying the repayments accruing from these liabilities on the State balance sheet. Only after shedding the immediate burden of having to finance their legacy can we, as a nation, move to the stage of addressing deeper, more structural problems exposed by the crisis.

Note: Details of overcharging sharp practices at Anglo Irish Bank that allegedly continued into IBRC and Nama are discussed here: http://trueeconomics.blogspot.ie/2015/06/1062015-bombshell-goes-off-on-anglo.html. Details of Mr. Morrissey letter quoted in the Dail (Irish parliament) are available here: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html. Details of the affidavit filed by Mr. Declan Ganley with Irish authorities concerning overcharging allegations are available here: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html. Details on evidence of Nama value destruction and other systemic problems are covered here: http://trueeconomics.blogspot.ie/2015/06/14615-why-read-wallaces-speech-on-nama.html.

10/6/2015: A Bombshell Goes Off on Anglo, IBRC & Nama

Here are the excerpts from the very important speech delivered today in the Dail by Deputy Peter Mathews. And I urge you – the public and professional readers of this blog – to read through the length of this.

My focus here is one core aspect of the IBRC scandal that remains largely ignored by the Government and the media and that Deputy Mathews raises. For those inclined, full official transcript is available here. In the quotes below, bold and italics are emphasising points of major importance and are added by me.

“… I want to talk about how the so-called profits of IBRC were inflated for a period starting in 1993 and travelling forward to the present date. There were two ways this was done.”

Note, the word ‘inflated’ in relation to reported profits. If such inflation indeed take place, it would imply that Anglo reported profits were fraudulent. And this covers years from the early 1990s through 2003. That is a lot of years of potential major corporate fraud – fraud that (if proven such) would involve deliberate overcharging of clients, concealment of such overcharging and reporting this overcharging on the revenue and profits side of the company accounts.

The Act

“First was the direct manipulation of interest charges and the concealment of loaded interest, which happened in the majority of cases. An extensive exercise carried out by Bank Check revealed this. … Some 494 separate DIBOR-EURIBOR rates were reconciled and found to be loaded to a degree ranging from 0.5% in the early 1990s to between 0.03% and 0.05% in 2002 and 2003. Some 80% of all the loans examined, relating to many clients, were found to have this loading.” So the [alleged] fraud was systemic, not sporadic.

The Concealment

And it was actively concealed from the clients: “The statements which clients received never showed the breakdown of the base rate and the DIBOR 3-month rate plus a margin, which had been agreed by loan agreements, plus the reserve asset cost, RAC, if and when it applied.” Does this show an intent? For one has to ask if not intent, then how could this ‘error’ or ‘omission’ be perpetuated across 80% of examined cases?

The Size

The [alleged] fraud was also on a large enough scale to makes it material. “The quantum of the loaded overcharging was in the order of 0.3%. A margin of 1.5% would comprise two elements, namely, the amount that goes to cover overheads, which is usually about 0.9% of the 1.5%, and the remainder, 0.6%, which is the profit of the bank. A loaded secret dark pool profit of 0.3% would represent one third of the overall profits, including that dark pool profit.”

The letter from Mr. Morrissey’s solicitors that Deputy Mathews cites states the following: “Bankcheck has advised Mr. Morrissey that, in total, approximately EUR1 billion has been overcharged by you, the Special Liquidators, Nama, private equity and institutional buyers of former IBRC loans, IBRC and its predecessors. This is very material sum and represents a most material proportion of the bank’s declared profits over the past 25 years. You have been made aware of this on several occasions.” Note: “you” references in the above quote joint special liquidators of IBRC. And further note Nama mentioning in the above.

Boom! Remember the case against the Anglo directors that alleges wrongdoing relating to manipulations of the company accounts by means of loans and interbank deposits? Well, that is chips compared to the juicy chunk of meat contained in the above statements: thanks to over-billing of the customers, Anglo might have been over-inflating its margin by a third! Year, after year, after year. 

And, even more importantly, this information was known and is known to the current authorities and liquidators. Who did nothing with it.

Should former shareholders, current investors in ex-IBRC debt, former borrowers from Anglo, and possibly even auditors who were not given pertinent information by the Anglo and IBRC call in the legals now, the hit will be on the state.

Deputy Mathews went on: “That means the market valuation of Anglo Irish Bank in the 14 years up to 2002 when this was going on was overstated by one third. If it had been discovered by proper auditing the market would react with a collapse, …of at least one third of the value of the bank and this would affect the shareholders, creditors and depositors. That would happen irrespective of whether there was an international credit bust and a freeze of credit.”

Systemic Failure that Continues Today

“This has been brought to the attention of the NTMA, NAMA and others but it has been ignored to date. I have the evidence here and it is shocking.” Let us stress the fact that Irish authorities were and are aware of this.

• An Irish court ruled on the matter in favour of Mr. Morrissey.
• Mr Morrissey notified this to the bank.
• Mr. Morrissey also notified this to Nama and the Department of Finance in early January 2015. It was notified to the Central Bank in late January 2015, and to the Minister for Finance in early March 2015, and subsequently again to the Central Bank in early March 2015. And the case is being ignored. Per Mr. Morrissey, he received no reply to his notifications from any official body.
• Per Mr. Morrissey letter cited by deputy Mathews today, Mr. Morrissey notified the then Chairman of IBRC, Mr. Alan Dukes of overcharging as far back as in mid-January 2013. Simultaneously, he notified of the same matter the Department of Finance, the Central Bank and the Financial Regulator. 

Mr Morrissey has been ignored since then, according to the record set forth by his solicitors.

It gets worse. Recall that the liquidation of IBRC was undertaken under the procedure that all claims against IBRC were to be notified before the end of 1Q 2015. And again, the notifications in the case of Mr. Morrissey were filed on time. We are at the end of 2Q 2015 and he received no response on these notifications. So the deadline established by the IBRC liquidation procedures has now expired. And the IBRC and by extension the State have not replied to Mr. Morrissey before the expiration of that deadline, effectively undermining the very process of liquidation they themselves set out.

Is this a collusive behaviour? In economics, such actions would be viewed as potentially collusive: all parties responsible and empowered knew, none responded, the wrong remains unaddressed.

The Legal Bits

Mr Morrissey solicitors letter cited by Deputy Mathews has this to say on the matter: “It appears numerous illegalities have been carried out by Anglo Irish Bank and its successors over these 25 years [from 1990 through today]. You, Mr. Wallace, have acknowledged under oath in the US Court proceedings the overcharging of interest by the bank. As the overcharging has continued under your watch, you are jointly and severally liable for same, together with the Minister and Department of Finance, the Central Bank of Ireland and the Financial Regulator.”

And per official behaviour in response to the evidence presented: “we most strongly object to this glib attempt to absolve yourselves from responsibility and liability both for historic and current interest overcharging, or the consequences thereof, including the sustained misstatement of the bank’s publicly released annual accounts since 1990.”

The IBRC Inquiry

Deputy Mathews spoke in the context of the upcoming IBRC inquiry. But what he said is more important than an inquiry itself. Here is why. The inquiry is supposed to provide and independent and objective view of alleged, potential, possible wrongdoing at the IBRC. Deputy Mathews statement shows that in an actual, tangible, established and courts-confirmed case of misdeeds by the Anglo and IBRC, the State is unwilling to do anything to address these misdeeds. Thus, one has to ask a simple question: what’s the point of an inquiry into alleged wrongdoings, when actual wrongdoings are not being dealt with.

Now, take a trip through theory. An inquiry can come back with two possible outcomes: One: nothing found. Two: something worng is identified. In outcome One, under the above revelations about the Anglo overcharging case, one can be pretty certain that no one will believe the inquiry findings. There is no trust in our systems, there is no trust in our processes. No matter how well the inquiry works, its findings, were they to deliver inconclusive verdict, will always be subject to mistrust. In outcome Two, nothing will happen. Just as nothing is happening in the overcharging case. The outcome will be ignored. And so the inquiry, given the context of the cases such as cited by Deputy Mathews is hardly an exercise in building trust. For all its possible merits in design and execution, it is more likely going to be an exercise in further chipping at the little trust still left in this system.

Other Players in the Penalty Box

Deputy Mathews quotes from the letter from the Black solicitors, “following the John Morrissey case: “It appears numerous illegalities have been carried out by Anglo Irish Bank and its successors over these 25 years. You, Mr. [Kieran] Wallace, have acknowledged under oath in US Court proceedings the overcharging of interest by the bank. As the overcharging has continued under your watch, you are jointly and severally liable for same, together with the Minister and Department of Finance, the Central Bank of Ireland and the Financial Regulator.””

But remember, there are other players beyond Mr. Morrissey who might want to ask few questions from the Government now that the word is getting out. As Deputy Mathews notes: “This is serious stuff. There are loans that are being operationally processed by the originators of those loans. Now those loans are owned by third parties, including hedge funds, and they are calculating interest on an unlawful basis, even though it has been brought to their attention. This is shocking.”

Yes, we have on the line now:

1.  Borrowers who were [potentially] defrauded of billions in false charges;
2.  Investors in Anglo shares who were potentially defrauded by over-valuations of the bank;
3. Investors in distressed loans purchased off Anglo-IBRC who are holding hot paper with [potential] fraud written all over it – the loans of the borrowers potentially defrauded;
4. Potentially, the auditors of Anglo/IBRC who were possibly misled by non-disclosure of overcharging;
5. And on top of all of them are the underwriters of the IBRC liquidation: taxpayers, who are facing huge bills for this.

And Another Bombshell

Deputy Mathews did not end just there. 

Here is another bombshell that exploded loud and clear in the Dail today, even through the repeated interruptions: “There is other evidence that NAMA knowingly----- allowed the information memorandum ----- -----for the Chicago Spire ----- to be negligently misleading, which has resulted in unnecessary huge losses for both the Irish people and the developer. I have the evidence for that.” That’s right – you’ve read it here. There are now allegations that Nama – not subject to the inquiry – has ‘mislead’ the markets participants to the tune of [potentially] hundreds of millions on just one, repeat, just one, asset sale.

Conclusion

These are mind-blowing revelations that expose more than just a systemic fraud [potentially] being perpetrated by a rogue bank. These are the revelations that show the current system wanting in respect of acting on the established legal case judgement in addressing the systemic [potential] fraud. And the worst bit is that even that is a tip of an iceberg, for Deputy Mathews statement about potential misrepresentation of the Chicago Spire case by Nama opens up the EUR77 billion can of worms over the Grand Canal. In this context, the current planned inquiry into 2009-2013 IBRC dealings is nothing more than a fig leaf of fake decorum on a rotten corpse of the Irish Solution to an Irish Crisis.

Still feel like the IBRC inquiry over 2009-2013 deals is going to be enough? Or should we not start systemically reviewing all post-crisis dealings and pre-crisis wrong still unaddressed by all agencies involved?

23/5/2014: An Icy Gust from the IBRC's Promo Notes Past...

So Irish Central Bank pre-sold EUR350 million worth of 'Anglo' bonds that were due to be sold under its minimum commitment to sell EUR500 million worth of bonds in 2014. Except it pre-sold them back in 2013... Here is the original Bloomberg report on the matter:  http://www.bloomberg.com/news/print/2014-05-01/irish-central-bank-said-to-mull-faster-2014-bank-aid-bond-sales.html

Why is this important?

Remember, the EUR25 billion worth of 'Anglo' Government bonds held by the Central Bank after the February 2013 'deal' or swap of Promissory Notes for bonds carries with it a commitment to sell minimum required volume of bonds annually to the market.

Here's Minister Noonan on this:

Also, remember, the bonds held on Central Bank balancesheet accrue interest payments from the Government that the Central Bank subsequently 'returns' as divided to the state (having taken its 'cost' margin out to pay for necessary things, like, new HQs building etc).

Once the bonds are sold, however, the interest is paid to their private sector holders.

It is likely that the yield on Government bonds sold was somewhere around 3%, which means that Irish taxpayers just spent EUR10.5 million in interest payments that were, put mildly, unnecessary. We were not required to sell these bonds in 2013 and could have waited until 2014 to do so.

Let's put this into proper perspective: EUR35 million was pledged by the Government this month to help resolve homelessness crisis. Laughably small amount, but still - a necessary gesture from the cash-strapped state. This could have been EUR45 million (or more) should the Central Bank not engage in bonds activism.

So why did Professor Honohan go to the markets to sell the bonds back in 2013? The reason is simple: ECB was never too happy with the 'deal' that pushed Ireland dangerously close to using Central Bank to fund the state (IBRC). Accelerating sales of bonds pro forma accelerates Central Bank exit from such an arrangement.

Alas, happy or not, ECB hardly can do anything about unwinding the 'deal' in practice without doing some serious damage to the euro system. That said, we might see Frankfurt ramping up pressure on CBI to accelerate future sales, once the banks stress tests are fully out of the way - in, say, 2015. That will once again bring to our attention the simple fact that the mess that was IBRC did not go away.

Keep in mind that the Government own estimates of the impact of the promo notes deal on government deficits over the short term was the total 'savings' of EUR2,025 million in 2014-2015. Doubling the rate of disposals from current will see this reduced by EUR30 million in two years.

More problems are ahead relating to the interest rates. The bonds are floating rate notes, with yield tied to  6 months euribor http://www.ntma.ie/news/ntma-issues-eight-new-floating-rate-treasury-bonds-in-exchange-for-promissory-notes/ reset every six months.

The problem is that whilst euribor was running at 0.372% back in February 2013, nowadays it is at 0.410% - a difference of 0.038%, which, over EUR25 billion quantum implies annual interest costs increases of some EUR95 million. Most of this is going to be rebated back to the Government via the Central Bank, but with any acceleration in the sales of bonds, this is also going to get eroded.

All in, we are already running below EUR2 billion 2014-2015 'savings' assessed on the Promo Notes deal, and counting...

19/4/2014: FT coverage of Anglo verdicts

Here's FT article covering Anglo Irish Bank trial verdicts with comments from myself, Stephen Kinsella and Michael Clifford:
http://www.ft.com/intl/cms/s/0/a778bc98-c6de-11e3-aa73-00144feabdc0.html#axzz2zKR9OVxY

26/3/2014: 13 months on, the Promo Notes deal stinger is still in...

Back in September 2013 I wrote in Sunday Times that ECB might want to consider accelerated disposal of the Government bonds held by the Central Bank post-restructuring of the IBRC Promissory Notes: http://trueeconomics.blogspot.ie/2013/10/8102013-german-voters-go-for-status-quo.html

And now, guess what... http://www.irishtimes.com/business/economy/pressure-to-offload-long-term-bonds-in-promissory-note-deal-over-ecb-unease-1.1737924#.UzJ8fqxmKCE.twitter

Per Irish Times article linked above:

"Ireland is facing pressure to offload the long-term government bonds it issued as part of last year’s promissory note deal and at a faster pace than the timetable originally outlined, amid continuing concerns from the European Central Bank about the deal.

The ECB is reviewing the controversial promissory note deal as it prepares to publish its annual report for 2013.

… A crucial aspect of the promissory note deal agreed last year after months of negotiations was the length of time the Central Bank would hold the long-term bonds that replaced the promissory notes."

I have consistently argued that promo notes restructuring represented the perfect target for debt relief for the state. One example is here: http://trueeconomics.blogspot.ie/2012/03/2132012-anglos-promo-notes-perfect.html. And I highlighted our 'deal's' sensitivity to earlier disposal of bonds here: http://trueeconomics.blogspot.ie/2013/03/2332013-sunday-times-10032013.html (see bottom of the article for box-out).

8/10/2013: German Voters Go For Status Quo... Redux: Sunday Times September 29, 2013

This is an unedited version of my Sunday Times column from September 29, 2013.


By any measure, last Sunday's German elections highlighted a resounding failure of the country electorate to connect with reality. Despite returning a number of historical outcomes, the voters reaffirmed the passive-conservative leadership mandate exercised by Angela Merkel since 2009. As the result, German policies are now likely to drift even farther away from the immediate needs of the euro area periphery, risking a renewal of the euro area crisis and a slowdown in the already less-than ambitious speed of European reforms. None of this is good news for Ireland.

The historical nature of the 2013 German elections is highlighted by the fact that Angela Merkel became the first euro area leader to be reelected as the head of state since the beginning of the Great Recession. And she has done it twice: first some 12 months into the crisis in 2009 and now 5 years from its onset. Ms. Merkel won the highest number of votes for her CDU/CSU party in 23 years. And she became the first German leader since the golden days of Konrad Adenauer back in 1961 to personally dominate the elections, instead of standing in the shadow of her party. Individually, all of these are rare events in modern German history. Taken together, they are probably unprecedented.

But herein lies the problem for all of us living outside Germany. The elections of 2013 have produced a strong mandate for doing nothing new when it comes to either the euro area or the larger Union reforms. The Chancellor re-elect retook the Bundeskanzleramt on a mandate of being a 'safe pair of hands'. The campaign her party waged focused on such important topics as charging foreign drivers for using autobahns. Instead of debating the core issues faced by the EU, and the role of Germany in this mess, voters largely engaged in navel-gazing. Satisfied with their relatively well-performing economy and receding immediate danger to the euro, they endorsed the leadership devoid of ideas, alternative views and aspirations. Not surprisingly, philosopher Jurgen Habermas declared the 2013 general election campaign a "collective failure" of the elites.

This means that the German elections left the core problems of the euro crisis unaddressed, raising the specter of renewed uncertainty about the future of the common currency area. This concern became immediately visible this week.

On Monday, ECB's Mario Draghi rushed to compensate for the policy paralysis signaled out of Germany by stating that the ECB is ready to deploy a new round of quantitative easing in the form of the third Long-Term Refinancing Operations (LTRO3). To remind you, the first two rounds of LTROs were the ECB’s ‘pre-nuclear option’ response to strategic threats to the euro area economy in late 2010-early 2011. The ‘nuclear option’ was the subsequent announcement of the stand-by quantitative easing programme, known as Outright Monetary Transactions (OMT). Mr. Draghi mentioning the prospect of renewing the LTRO scheme suggests that the ECB expects no change in euro area policies in the aftermath of last week’s elections.

Acknowledging this, Draghi also tried to push aside the pesky issue of the Greek Bailout 3.0. And in a direct reflection of the Berlin’s preferences, Draghi also downplayed the possibility of the ESM being licensed to provide financing cover for future bank failures.

Mr Draghi’s precautionary moves were timed perfectly. Following the elections, sovereign yields on all peripheral countries’ bonds rose relative to German bunds. Credit default swaps – insurance contracts underwriting sovereign bonds – also crept up. The markets are not buying the ‘return to status quo’ story as good news. This was contrasted by the domestic news which saw the German economic sentiment, as measured by the CESIfo index of economic conditions rise for the third month in a row. This marks fifteenth consecutive quarter of the CESIfo index reading above historical average. In contrast, euro area economic conditions index has been stuck below its historical average levels for eight quarters in a row through this September.

Since 2009 elections, Chancellor Merkel held back from directly leading the euro area and instead opted repeatedly to wait for an escalation of the crises before responding with un-prepared, often ad hoc and wrong-footed solutions. Best examples of this approach to leadership are the EU's failures in Cyprus and Greece. Both are directly linked to Ms. Merkel’s prevarication in the face of escalating crises. All were driven by swings in domestic public opinion, rather than by any cohesive principles.

For Ireland, this mode of leadership spells lack of progress on key issues.

Gauging German public opinion there is currently zero appetite to shift away from the pre-elections status quo in which the Irish crisis is seen as largely self-induced and peripheral to German interests. This means that Germany is likely to continue supporting Irish debt sustainability rhetorically, while opposing practical resolution of the debt overhang. This week, Ms. Merkel gave another loud endorsement to Irish Government policies during the crisis. As she did so, the Irish Government – usually not known for its skeptical pragmatism – was actively pushing the timeline for banking debts problem resolution out into the later months of 2014. My gut feeling is that we can expect this timeline to stretch beyond 2015. Instead of allowing restructuring of our banking debts, Berlin will nod approvingly to a precautionary line of credit for Ireland via set-aside stand-by facility at the ESM. This credit will be provided on current ESM funding terms, some 1 percent below the cost of IMF funding and with longer maturities. Which is the good news.

In exchange for this token gesture we will be required to strictly adhere to fiscal adjustment targets for 2015. We will be further subjected to a new multi-annual fiscal programme stretching into 2018-2020 to be supervised by the EU Commission. ECB – by proxy, the German government – will be watching from the shadows.

Meanwhile, as Mr. Draghi statement this week indicates, Germany will block ESM from having any powers in dealing with future banking crises. Our retrospective banks debt deal will then have to wait until a new funding facility, most likely administered by the ECB, comes into place. Pencil that for sometime in 2016. Pushing legacy debts incurred by the Exchequer as the result of rescuing our banks into the hands of the ECB is likely to cost us. Frankfurt can, and potentially will, demand something in return for this. One thing the ECB can ask for is accelerated sales of the Central Bank-held Government bonds (the fallout from the Promissory Notes deal done earlier this year).  The ECB already has the power to do so. It also has a direct incentive: the bonds are set against our banks borrowings from the euro system. Of course, this will mean that we will be trading one debt for another, as accelerated sales of bonds will erode the temporary fiscal ‘savings’ achieved by the Promo Notes restructuring.

But the cost of the EU/German ‘assistance’ for Ireland will most likely extend further than bonds sales acceleration and new fiscal targets setting. German political agenda is well-anchored to continued saber-rattling on the need for corporate tax harmonization across the EU. With the 2009-2011 Franco-German tax harmonisation initiative all but dead, the focus in the next two-three years will shift toward advancing the consolidated common corporate tax base (CCCTB) proposals that suit German interests more than any other form of tax coordination. Based on her record to-date, Ms. Merkel is a fan of the CCCTB as are all of her potential coalition partners and the German voters.

German elections are also promising to create less certainty as to the structural reforms in the European Union space. Last Sunday’s results produced strong votes for the anti-euro party, Alternative fuer Deutschland (AfD). The party also did well in the previously held local elections. The new Merkel-led coalition will have to show caution when facing any prospect of further harmonisation and consolidation of power in Brussels.

When it comes to structural reforms, German public prefers for euro area to focus on specific hard fiscal targets and on replicating Germany's own structural reforms of the 1990s. While such reforms can be beneficent to the euro area peripheral states, for Ireland they offer only marginal gains. German reforms of the 1990s have focused on two core policy pillars: increasing flexibility of the labour markets and decreasing the burden of the welfare state. These came at a cost of continued consolidation of German economy around larger enterprises and suppression of domestic demand and household investment.

Ireland today requires some reforms in the social welfare system. But we also need to break up our dominant market players in the domestic sectors and to increase our households’ spending and investment.

In short, in the wake of the German elections, there is preciously little that Ireland can expect in terms of the European support for our recovery. Europe, with German blessing, will most likely lend us a hand to help us out of the 'safe' boat of the Troika programme. Thereafter, swimming in the turbulent waters of the Eurozone crisis will be up to us. Let's hope Budget 2014 provides generously for flotation vests.

BOX-OUT:

Marking the fifth anniversary of the Banking Guarantee of September 2008, there are plenty of stocktaking exercises going around. Yet, for all the ‘Fail’ marks being rightly handed out to the Guarantee, all signs in the streets suggest we have learned next to nothing from our past errors. This week offers at least two such examples. Firstly, the crisis showed that a non-transparent system of monitoring and managing financial risks will result in the connected-few gaming the entire system. This week, Minister Noonan intervened in the process of winding down the IBRC, bending the rules that normally apply to company liquidations. Granting anonymity to the funders of the toxic banks comes as a priority in this country. Unintended consequence of this is that it also perpetuates the cronyist relationship between the financial services and the state – exactly the outcome we should have learned to avoid. Secondly, we know that principles-based regulations require swift, robust and unambiguous enforcement. Also this week, the Central Bank effectively shut the door on any further investigations into Anglo dealings with the regulators that could have arisen from the infamous Anglo Tapes. Five years in, there are zero prosecutions, and scores of closed investigations. To paraphrase Bon Jovi’s famous refrain: the less we learn, the more things stay the same…