13/7/2013: Reuters on Anglo Tapes & Social Awakening in Ireland

Reuters programme on Ireland awakening to the banking and economic mess. Warning: shameless self-promotion (my contributions included).

http://uk.reuters.com/article/video/idUKBRE96B0X620130712?videoId=244195065

24/6/2013: Anglo 2008 Annual Report is out. Call your broker, presto!

All going swimmingly... nothing to look at here... move on folks...

http://www.ibrc.ie/About_us/Financial_information/Archived_reports/Annual_Report_2008.pdf
H/T to @KarlWhelan

Oh, yes, do fill your boots with them shares...

A pearl:
"Following the introduction of the Government guarantee on 30 September 2008 the Bank experienced growth in retail deposits and access to other funding markets gradually improved. However, the reputational damage to the Bank resulting from a number of recent disclosures together with  adverse ratings actions have significantly weakened the Bank’s competitive funding position at a time when global markets continue to deteriorate and overall sentiment is negative."

Thus, clearly, barring some bad publicity and bad-bad-bad-n-worse Ratings Agencies intransigence, the bank would have been just fine, thank you...

And as per future, a gem:
"We are determined as part of our long term strategy to rebuild trust and confidence. A key priority of the new Board is to ensure we regain our position in the corporate, wholesale and debt capital markets and over time enhance the quality of funding, building on our diversified international platforms. ...The Bank’s ambition is to expand its retail franchise by targeting new and existing markets with competitively priced transparent products."

The Happy Times, they are coming back...

Obviously, there is no one to blame, but bad PR and bad-bad-bad-n-worse Ratings Agencies:
"I continue to be impressed by the tremendously loyal and professional staff in all areas of the Bank who deserve great credit for their dedication and commitment. Like all stakeholders, staff members across the Group have been deeply impacted and disappointed by recent events. They share the Board’s determination to restore confidence and trust in the Bank. The Board has great faith in the ability and strength of our people and they will play a critical role in ensuring the future viability of the Bank."

In other words, neither the staff, nor the Board had any idea of these bad things that have happened... it is, therefore, 'carry on across all decks' moment... But just in case you don't get this tingling sensation of excitement for the future from above, here it is in full glory:
"...a comprehensive business plan is being developed which will ensure the Bank’s long term viability.

...We will look at evolving from our existing structure to a broader more diversified business bank. The Bank’s customer service ethos and ability to provide effective and efficient service will help us meet the needs of sole traders, SMEs and larger businesses.

The Board is resolute in its determination to ensure that the Bank emerges from its current situation as a strong and viable institution and one that stakeholders feel proud of."

QED.

NB: Judging by objectives set out above, the Board and the senior management of the bank have by now failed in achieving the goals set out by themselves for themselves back in 2008-2009. Anyone to be held responsible?.. other than bad PR and bad-bad-bad-n-worse Ratings Agencies?..

NB2: Karl's reaction - and I am in agreement with him on it:

23/6/2013: Sindo & Indo: "'Bondholders are f***ing us up the arse' – Anglo"

With slow drip of a freshly leaking faucet, we are getting more and more granularity on the events surrounding Anglo collapse and the events leading up to the Guarantee. Here's the latest instalment:
http://www.independent.ie/irish-news/bondholders-are-fing-us-up-the-arse-anglo-29365626.html

It is impossible to assume that this information, in pretty much the same words, was not conveyed to the Taoiseach and the Minister for Finance before the issuance of the Guarantee. Which, of confirmed, would imply wilful act on their behalf in securing the payouts to the bondholders against all information available.

It is also virtually impossible to imagine, given this information, that the IL&P did not know well in advance of the fated 'deposits'-'loans' swap of late September 2008 that its funding arrangements with Anglo were high risk and not exactly kosher. Which implies that the Irish Fin Reg also knew the same. If the Fin Reg did not know this, its lack of awareness would signify an absolute level of incompetence that would be staggering even by the pretty high bars for incompetence set during Bertie Era.

In short, the two material bits in the article linked above are... well... staggering in their importance.

Updated: more on the same from 
http://www.independent.ie/business/irish/inside-anglo-the-secret-recordings-29366837.html 
now down on tapes and making the case for accusing Anglo senior staff of knowingly manipulating the bank relationship with the CBofI/FinReg!


So while Bondholders were 'f***ing up Anglo', Anglo was f***ing up the entire financial system of Ireland with Ireland's financial system cheerful approval. The only ones who got f***ed up in the end were... Irish taxpayers. Happy times!


Updated: ZeroHedge on the same: http://www.zerohedge.com/news/2013-06-24/anglo-irish-picked-bailout-number-out-my-arse-force-shared-taxpayer-sacrifice

And Anglo 2008 accounts have been released: http://trueeconomics.blogspot.ie/2013/06/2462013-anglo-2008-annual-report-is-out.html

15/6/2013: Weekend reading links: Part 2

The second part of my Weekend Reading links on Art and Science and No-Economics (see the first part here: http://trueeconomics.blogspot.ie/2013/06/1462013-weekend-reading-links-part-1.html)

Let's start with this:

http://vida.fundaciontelefonica.com/project/may-the-horse-live-in-me/
It's not a horse meets artist or vice versa, but an artist 'becomes' a horse. Literally, physiologically. Amazing stuff, although MrsG thought it is taking performance art a bit too far.


Next up - amazing show of new work by one of my favourite artists of all times: Gerhard Richter
http://www.mariangoodman.com/exhibitions/2012-09-12_gerhard-richter/%20and%20related
Couple of images:

The migration of Richter's work toward more linear, form-focused, less figurative work over recent years has been in tune with what is happening around the world of abstract art today. I love it, but the 'old' Richter (second image above from 2005: http://www.mariangoodman.com/exhibitions/2009-11-07_gerhard-richter/) is much more dynamic and still more appealing to my aged self. From that vantage point, an even more brilliant show of works by the artist is here: http://www.ludorff.com/en/exhibition/gerhard_richter_abstrakte_bilder/works . Art Basel 2013 has more vintage Richters too.


http://www.mariangoodman.com/artists/ has some very interesting artists I knew far less about. Great example is Julie Mehretu: http://www.mariangoodman.com/exhibitions/2013-05-11_julie-mehretu/#/images/7/

Reminds me of one of my old favourites: a merger of abstraction by Cy Thombly (http://www.cytwombly.info/) and mathematical / architectural precision of Alberto Giacometti: http://www.fondation-giacometti.fr/en/art/16/discover-giacometti/ scroll down to Encounters, Portraits and Fifty Years of Prints sections for the likes of

Wyeth cross over too… for some reason… maybe geometry or Giacometti-esque reference to line?

Lastly for the arts: cool images from the Arctic spying outpost: http://www.wired.com/rawfile/2013/06/charles-stankievech-northernmost-settlement/

On science: a quick link to the Science Gallery - brilliant place, brilliant coffee, brilliant crowd: http://sciencegallery.com/

On a personal note: I came across this wonderful set of radio spots recorded for Mount Juliet. Followers of mine would know I was recently privileged to cast a fly (more like nymphs and wet flies) at the estate and can attest to the superb quality of water there. The spots are lovely and worth listening to: http://www.mountjuliet.ie/radio-adverts/

My favourite is The Ghillie one. I did not use ghillie's services on my day on the Nore, preferring the 'risk' of reading the river on my own, but I had wonderful help and conversation with the staff member who helped me with the waders and dry room and fishing room. Superb. And superb doesn't even begin to describe the late-very-late breakfast I got on my return from 5am-noon fishing.

Loved it. And here's one of my friends from the Nore who is still happily swimming in his pool…

Update: I rarely update the Weekend Reading Links posts after they are out, but here are more interesting links, this time on science.


A convoluted title of this paper: "Action video game playing is associated with improved visual sensitivity, but not alterations in visual sensory memory" should not be a deterrent from reading its very interesting findings. Basically, games players (for electronic games that is) tend to be able to see more in the faster-paced and more complex scenes than non-gamers. However, what they see they don't remember all too well after the fact. I am not even sure they comprehend what they see any deeper either, but that a different topic all together. http://link.springer.com/article/10.3758%2Fs13414-013-0472-7


Further evidence that Anglo Irish Bank was lending well beyond the constraints of our planet was found by Nasa: http://arstechnica.com/science/2013/06/nasa-finds-unprecedented-black-hole-cluster-near-andromedas-central-bulge/ In brief, the Andromeda's core is about as concentrated with black holes as Dublin docklands: http://www.independent.ie/business/irish/nama-behind-70pc-of-the-vacant-docklands-sites-29346104.html

24/6/2012: IBRC 'repayment' of €1.14 billion

New wave of outrage: IBRC is about to repay €1,142 million worth of unguaranteed senior bonds this coming week.

Here's a link to the note by Brian Lucey (TCD) and a link to namawinelake post on same.

My view is simple: The repayment is madness - the country is bust & is being propped up by IMF, EU, bilateral and ECB loans. IBRC is a bust non-bank (it retains banking license, but has no meaningful banking activities and is not likely to acquire any of these at any time in the future). IBRC has 'assets' and liabilities (ex-deposits). Hence, IBRC should default on all debts, transfer underlying assets to creditors based on their seniority and close the shop. The bondholders should get no more and no less than the assets of the company. As ELA is super-senior lending secured against specific asset (Promo Notes), quasi-governmental debt (Promos) should remain within CBofI and no private bondholder should have a claim against them.

Of course, the above process would not involve the €1.14 billion worth of bonds to be repaid this week, as these are unsecured (no claim vis-a-vis assets) unguaranteed (not even a theoretical claim against the State) liabilities. And no moral / ethical impact (these are bonds held primarily by speculative  institutional investors). These should just burn to some cheer from the crowds to boot!

20/1/2012: Non-News from a Road to the Second Bailout

This story in the Irish Times yesterday clearly requires a comment. So here it goes.

Here's the best time-line and explanation as to Minister Noonan's 'efforts' to secure 'savings' on the Promissory Notes.

Now, consider the following from the Irish Times today:

"We think there’s a less expensive way of doing [restructuring of the Promissory Notes] by financial engineering, and we’re not talking about private-sector involvement or restructuring,” said Mr Noonan in Berlin "...it is about pointing out to the troika that there are difficulties and that it could be less expensive – and everyone still gets their money.”


"A senior German official said Berlin could envisage extra programme funding being used for the Irish banking sector not currently earmarked for this purpose."

The above might mean many things:

1. Ireland still has some funds due under the original 'bailout' that were earmarked for banking measures, but were not yet used in the last recapitalizations round in July 2011. This will not in itself constitute any new measures materially impacting Ireland's Government debt projections. It will not constitute a second bailout (as the funds are already earmarked under the first bailout), but by reducing funding available for fiscal and other banking requirements it will increase the probability of such a bailout in the future.
2. Ireland can be allowed to borrow more from the EFSF/ESM, swapping the Notes for marginally cheaper funding. This too will not constitute any material impact on Ireland's Government debt projections. But it will constitue a second bailout.

Neither option involves any possibility for 'private sector involvement' and at any rate, Minister Noonan's reference to PSI is a red herring - there can be no PSI in relation to the Promissory Notes as these do not involve private investors or lenders at all.

However, both (1) and (2) have material impact in terms of Ireland requiring a second bailout - both increase materially the probability of such an eventuality.

Lastly, there is a catch. The problem of capital adequacy, highlighted by Minister Noonan, means that 'financial engineering' can only involve temporary relief in terms of payments timing, not material relief in terms of NPV of the debt assumed by the state under the Promissory Notes. We will be allowed to borrow more time. At a cost of longer loans, and more repayments in the end. Which, of course, does nothing to achieve sustainability of the 'solution' from the point of view of us, taxpayers, who Minister Noonan expects to pay for all of this. But it probably does give him a chance of holding a 'triumphant' pressie announcing some sort of a 'deal'.

So in the nutshell, the Irish Times story is... errr... a non-story. A sort of traditional Spin that comes out of the Government every time they are caught... errr... fantacising the reality. As NamaWineLake put is so excellently:
"...it has been four months since Minister Noonan’s meeting with the ECB and others in Wroclaw where he, to use his own words “had a ball to kick around” and has proposals. It is two months since Enda Kenny discussed the matter with Angela Merkel. It is more than two months since Minister Noonan said that “technical discussions” were ongoing. And yet the Troika yesterday downplayed any progress in the matter saying that Minister Noonan had merely “requested discussions”."


Or maybe, just speculating here, Minister Noonan is bringing up the Promissory Notes once again this week because next week we are about to repay another tranche of Anglo bonds? Last month, around the time of the repayment, there was much-a-do-about-nothing going on in referencing the very same Promissory Notes?

However, there is, in the end, something openly honest about Minister Noonan's windy trip down the 'Imagine the Superhero, ya Villain' lane.

"[Minister Noonan] said he hoped that the ECB would extend its programme of low-interest loans beyond next month to improve euro zone bank liquidity in the hope it would stimulate the market in longer-term sovereign debt papers."

Point 1: LTRO-2 was already announced, so Minister Noonan is either uninformed, or pretends to be uninformed to posit himself as a a heroic 'rescuer' proposing a real 'solution'.

Point 2: Minister Noonan clearly shows that his sole concern is how to raise more debt for Ireland. Not how to balance the books (in which case he shouldn't need banks to pawn their assets as ECB to buy Government bonds with this fake cash), or reform the economy (in which case growth would resume and the State shall not require the said scheme, again) and not with restoring functional banking system to health (since functional healthy banking system lends to the real economy, not to Minister Noonan).

At last, truth revealed?

20/1/2012: Deputy Peter Mathews v Minister Noonan

Here are some extracts from an excellent contribution by Peter Mathews TD (FG) from yesterday's topical debates in the Dail (full record available here). This was comprehensively overlooked in the media reporting which focused solely on the non-event (save for Vincent Browne's questions) of the Torika 'approving' Ireland's 'progress'. My comments in italics.


Deputy Peter Mathews: 
      Next Wednesday, 25 January, is the due date for the redemption of a bond issued originally by Anglo Irish Bank Corporation, now the Irish Bank Resolution Corporation. 
      We are at an important financial crossroads in the history of our country. Anglo Irish Bank has been insolvent and supported by financial engineering, promissory notes and the emergency liquidity assistance of the European Central Bank and funds from our Central Bank.  The debt that lies embedded in what was Anglo Irish Bank was not created by the citizens of this country.  It has been meted out onto their backs by a mixture of incompetence and mismeasurement over a certain period under the past Administration.
      We are at a moral crossroads.  We should bring to the attention of the creditors holding the bond the facts that the bank is insolvent and that, in effect, it is not a case of our not wanting to pay but of our not being able to do so...

      Consider the debt of €1.25 billion.  The attention of the creditors will be in sharp focus because the banking system, the Irish-owned banks, are in debt to the ECB and our Central Bank at a level of approximately €150 billion.  It is the forbearance and tolerance of citizens that keeps the financial edifice and engineering of the eurozone and the greater financial system of the developed world in place.  We have been doing considerable work, facing enormous challenges.  Through the great work of the Minister for Finance, Deputy Noonan, and the Taoiseach, we are bearing the load of trying to bring about a fiscal adjustment in line with the troika agreement signed in November 2010.  All that work is important and must be done but the legacy debt is outside the responsibility of the people of this State.

      One and a quarter billion euro is almost half the budget [measures] introduced in December.  It is eight times the sum that will be raised from the household charge and twice that which will be raised by the VAT increase.  The debt crisis in Ireland and other countries cannot be solved by adding more debt...  Loading more debt on this country to pay legacy debt is like suggesting a drink problem can be solved by another whisky.

Minister for Finance (Deputy Michael Noonan): 

      I thank Deputy Mathews for raising this very important issue.  The repayment of the bond in question is an obligation of the bank and will be repaid by the bank.  It is important to be clear that it is the bank and not the Exchequer which will meet this obligation. [Need anyone point the following to the Minister, that the 'bank' has no own assets or capital over and above that which has been committed to it by the State and that the Promissory Notes are being financed by the Exchequer?]

      The Government has committed to ensuring that there is no forced or coerced involvement by the private sector burden sharing on Irish senior bank paper or Irish sovereign debt without the agreement of the ECB.  This commitment has been agreed with our external partners and is the basis on which Ireland's future financing strategy is built.  While the cost to the Irish taxpayer has been and will remain significant, the Government clearly recognises the need to work as part of the eurozone in order to ensure a return to the funding markets in the future.  The only EU state where private sector involvement will apply is Greece.

      The following was agreed by all 27 member states at the euro summit last October:

      15. As far as our general approach to private sector involvement in the euro area is concerned, we reiterate our decision taken on 21 July 2011 that Greece requires an exceptional and unique solution.

      16. All other euro area Member States solemnly reaffirm their inflexible determination to honor fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms.  The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole.

      This was agreed by the Heads of State and Government at their meeting in October, and Ireland was included in the 27 states that agreed to it. [Minister Noonan fails to note here that it was on insistence of his own Taoiseach that article 15 does not include Irish banking sector resolution-related debts. And he deflects the arguments made by Deputy Mathews on feasibility of repaying these debts.]

      It is not correct to state that only taxpayers have borne the burden of rescuing the Irish banks.  Holders of equity in the banks have been effectively wiped out in burden sharing while holders of subordinated debt have incurred a €15.5 billion share of the burden to date, including €5.6 billion since this Government took office less than a year ago. [Again, Minister Noonan is dis-ingenious in his comments. Equity holders and bond holders are contractually in line for these losses. Taxpayers are not. In effect, Minister suggests that there is some sort of equivalence between treating harshly contracted parties to an undertaking and treating harshly an innocent by-stander. There is no such equivalence.]

      To impose burden sharing on senior bondholders, or to postpone the repayment of this bond at this point in time, is not in Ireland's best interest.  What is in the Irish people's best interest is that we regain our financial independence and that we place ourselves in a position to re-enter the financial markets at the earliest possible date...  We do not need to scupper our recovery, scupper the goodwill generated or alienate our partners by taking unilateral action which in the medium to long term will prove wholly counterproductive. [This is an outright conjecture by the Minister that is unfounded in fact. It is not in the interest of the Irish people to simply regain access to financial markets. It is only of such interest if we can regain it at a lower cost than alternative funding provided. Furthermore, his statement assumes that not repaying Anglo bondholders will cause the detrimental impact on 'goodwill' and the 'financial markets'. This remains to be tested and proven.]

      If we were to postpone or suspend payments to creditors of IBRC, this would have a significant impact on both the bank and, ultimately, the State. The senior debt, unsecured as it is, is an obligation of the bank. If the bank does not meet such an obligation, it would lead to a default and, following that, most likely insolvency. Insolvency would result in a very significant increase in the cost to the State to resolve the IBRC. [What cost? The Minister scaremongers the public, but cannot name a single tangible expected cost. Why is the interest of the bank aligned with the interest of the State, Minister?] ... Further, the financial market's view of Ireland as a place to do business or invest would be seriously undermined. [Is Minister Noonan seriously suggesting that Ireland's reputation as a place to do business or invest dependent so critically on a bust bank with worst history of speculative decision-making ability to repay its insolvent borrowings? Would IDA confirm they are directly referencing Irish taxpayers willingness to cover private sector losses in any undertaking, no matter how risky, as some sort of the 'investment promotion' positive for Ireland? Can Minister Noonan confirm that he has done the analysis of the effects that bonds repayments by Anglo, and the resultant increases in the sovereign debt have on sustainability of our Government's reputation in the bond markets? Does he not know/ understand that any investor looking at his statements will immediately price into their valuation of Government bonds the possibility that the Irish Government can at will, out of the blue simply hike its own debt pile in the future to suit some other risky private sector fiasco? What does that risk alone do to our 'reputation'?]

Deputy Peter Mathews: 

      While I will not get into a long debate, Greece will be the beneficiary of at least a 60% write-down of its debt obligations. The Greeks got the attention of their creditors by going out in the streets and having riots and by people being killed. We have knuckled down to correcting a fiscal imbalance and, at the same time, we have stayed silent. We have been straitjacketed by the legacy debt. Our loan losses in the banking system were €100 billion. While I know the shareholders and some of the subordinated bondholders suffered, the remaining losses were in the banks without being declared. The ECB stepped in to redeem bondholders to date, which was a mistake. We are compounding the mistake by going along the same route now.

      We have got to be honest about it and open up the discussion. We are not defaulting; we are opening a discussion. I made the point that we cannot pay. I use the word "we" euphemistically or collectively in regard to the bank and the State. We cannot pay because of the guarantee that extends over the bank. It is a case of us lifting the telephone and asking, "Can we have your attention, please?"  We cannot pay and we want to open a discussion and explain to exactly how the creditor liabilities of our banking system remain, and how they should be written down. There is further writing down to do. We have a €60 billion to €75 billion of write-down to organise and negotiate.

      To use an analogy, we have a steeplechase race with about four miles to go.  We have big jumps ahead.  Normally, a steeplechase horse will start with about 12 stone on its back.  Ireland's legacy debt of private debt, non-financial corporate debt and national debt when it peaks out at €120 billion is the equivalent of 24 stone on the back.  It is not a possible race to run.

Deputy Michael Noonan: 

      I do not disagree with Deputy Mathews' analysis.  However, we are in a situation which we inherited from our predecessors, who entered into solemn and legally enforceable commitments in respect of Anglo Irish Bank, as it was then.  Of course, Deputy Mathews is correct that we should do everything possible to reduce the debt burden on the taxpayers of Ireland and to enhance Ireland's capacity to repay its debts.  We are working on that and making some progress. [So that's it, folks. The Last Refuge of the Scoundrel = the arguments the Minister puts forward for expropriating personal property and income through higher taxation and reduced services for which we paid and continue to pay is: We are where we are. This alone should be very re-assuring to the future investors here.]

02/11/2011: A DofF note on Anglo Bonds Repayments

Here's the bull***t that passes for 'advisory analysis' for politicians - the copy of the note sent out to Government TDs from a specific party based on the Department of Finance information. I am publishing it here without any specific comments - judge for yourselves reading it - my only general comment is that it is uses a number of deceitful tricks, false juxtapositions and selective omissions to present the case for repaying unsecured unguaranteed bondholders in Anglo Irish Bank / IBRC.

(You can click on the pages to enlarge the text. I am publishing it without an explicit HT so as not reveal my source).

24/09/2011: Anglo Bonds and National Accounts

Note: corrected figures below (hat tip to @ReynoldsJulia via twitter).

Per Nama Wine Lake blog - an unparalleled true public service site on Irish debacle called Nama and many matters economic and financial, Irish Government (err... aka ex-Anglo Irish Bank, aka Irish Bank Resolution Corporation*) is on track to repay USD $1bn (€725m) unsecured unguaranteed senior Anglo bond on 2nd November 2011.

The gutless, completely irrational absurdity of this action being apparent to pretty much anyone around the world obviously needs no backing by numbers, but in the spirit of our times, let's provide some illustrations.

According to the latest QNA, in current market prices terms, Irish GNP grew in H1 2011 by a whooping grand total 0f €307 mln from €64,337 mln in H1 2010 to €65,012 mln in H1 2011, when measured in real terms. This means that Anglo bondholders payout forthcoming in November will be equivalent of erasing 28 months and 10 days worth of our economic growth.

According to the CSO data on national earnings, released on September 8, 2011, Ireland's current average earnings across the economy stand at €687.24 per week, implying annualized average earnings of €35,736.48. Irish tax calculator from Delloite provides net after-tax (& USC) income on such earnings of €28,287.39 per annum. This means that Anglo bond payout in November is equivalent to employment cost of 25,630 individuals.

According to CSO's latest QNHS data, in April-June 2011 there were 304,500 unemployed individuals in Ireland. This means the jobs that Anglo bond payout could cover are equivalent to 8.42% of the current unemployment pool.


I am not suggesting for a minute that we should simply use the money to 'create' government jobs - anyone who reads this blog or my articles in the press etc would know I have no time for Government-sponsored jobs 'creation'. But, folks, the above numbers are startling. We are about to p***ss into the proverbial wind the amount of money that is enough to cover our entire economy's growth over 2 years, 4 months and 10 days! For what? To underwrite 'credibility' of the institution that is a so completely and comprehensively insolvent?

* Note 1 that Anglo still calls itself Anglo (until October 14th) and still insists it is a bank as the web page http://www.angloirishbank.ie/ states clearly [emphasis mine] that: "As a Nationalised Bank since January 2009, the key objective of Anglo Irish Bank’s Board and new senior management team is to run the Bank in the public interest... The Bank continues to provide business lending, treasury and private banking services to our range of customers across all our locations."

Note 2:
The above, of course, assumes that €725mln exposure is hedged against currency fluctuations. If not, as Nama Wine Lake points out, the exposure rises to ca €740mln. The above figures therefore change to:

• GNP growth equivalent of 2 years, 4 months and 28 days
• Number of average earnings jobs of 26,160, plus one part-time job
• 8.59% of currently unemployed
  

10/08/2011: Bank of Ireland Interim Results H1 2011

Bank of Ireland interim results are out today, confirming, broadly speaking several assertions I've made before. You can skip to the end of the note to read my conclusions, unless you want to see specifics.

The numbers and some comments:

• Operating profit before impairments down from €479mln to €163mln. Profits before tax rose to €556mln compared to €116mln a year ago. Please remember that PCAR tests assumed strong operating profit performance for the bank through 2013. BofI net loss was €507mln reduced by the one-off gains of €143mln. While it is impossible to say from these short-run results if PCAR numbers are impacted, if deterioration in underlying profit takes place, ceteris paribus, recapitalization numbers will change.
• Impairment charges fell from €1,082mln to €842mln - which is good news. The decline is 22.2% - significant, but on a smaller base of assets and contrasted with 72% drop off in operating profit.
• Residential mortgages impairments shot straight up from €142mln to €159mln against a relatively healthier mortgages book that BofI holds. This 11% rise overall conceals a massive 30% increase in Irish residential mortgages impairments in 12 months. Again - predicted by some analysts before, but not factored fully into either PCAR tests or banking policies at large. Despite claims by Richie Boucher that these are in line with bank expectations, the bank expects mortgages arrears to peak in mid-2012. This is unlikely in my view, as even PCAR tests do not expect the peak to happen until 2016-2017. In addition, the bank view ignores the risk of amplified defaults should the Government bring in robust personal bankruptcy reform. The PCAR indirectly accounted for this, but in a very ad hoc way.
  
• So mortgages arrears in Ireland are now running at 4.55% for owner-occupiers and 7.84% for buy-to-let mortgages, with 3,900 mortgage 'modified' in the period and 5,000 more in process of 'modifications'.
• Past-due loans stood at €5.743 billion in H1 2011 down from €5.892 billion in H2 2010. However, impaired loans rose from €10.982 billion in H2 2010 to €12.311 billion in H1 2011. So overall, past-due and impaired loans accounted for 16% of the loan book (at €18,054 million) in H1 2011 against 14% of the book (€16,874 million) in H2 2010. (see table below)

• Total volumes of mortgages held by the bank is now €58 billion down from €60 billion in H1 2010. However residential mortgages held in Ireland remain static at €28 billion, so there appears to be no deleveraging amongst Irish households despite some writedowns of mortgages in the year to date.
• SME and corporate loans volumes dropped from €31 billion a year ago to €28 billion in H1 2011.
• Property and construction loans declined €1 billion to €23 billion of which €19 billion is investment loans (down €1 billion) and the balance (unchanged yoy) is land.
• So far, as the result of deleveraging, bank assets book became more geared toward residential mortgages (52% as opposed to 51% a year ago), less geared toward SME and corporate sector (25% today as opposed to 26% a year ago) and unchanged across Property and Construction (20%), but slightly down on consumer loans (3%). In other words, the bank is now 72% vested into property markets against 71% in H1 2010.
  
• With only 1/2 Bank of Ireland's assets sourced in Ireland, impairments were reduced by 22% by its operations abroad, which contributed to almost 50% reduction in its underlying pretax loss. This suggests that as the bank continues to sell overseas assets, its longer term exposure to Ireland will expand, implying that the positive impact of the disposed assets on the bottom line will be reduced as.
• Table below breaks down impaired loans and provisions, showing - as the core result that overall impaired loans as % of all loans assets is are now at 11%, against 9.2% at the end of December 2010.
• Coverage ratios are generally determined by the nature of the loan assets and the extent and quality of underlying collateral held against the loan. Across the bank, impairment provisions as a percentage of impaired loans declined from 45% in H2 2010 to 44% at H1 2011. The coverage ratio on Residential mortgages increased from 67% to 72% over the period. However, Residential mortgages that are ‘90 days past due’, where no loss is expected to be incurred, are not included in ‘impaired loans’ in the table below. This represents added risk due to potential inaccuracies in valuations on underlying collateral and/or value of the assets. If all Residential mortgages that are ‘90 days past due’ were included in ‘impaired loans’, the coverage ratio for Residential mortgages would be 29% at
  30 June 2011, unchanged from 31 December 2010. Which, means that risk offset cushion carried by the bank would not have increased since December 2010. In H1 2011, the Non-property SME and corporate loans coverage ratio has increased to 42% from 40% on H2 2010. The coverage ratio on the Property and construction loans was 38% at 30 June 2011 down from 42% at 31 December 2010 primarily due to an increase in Investment property loans which are ‘90 days past due’ that are "currently being renegotiated but where a loss is not anticipated".
  
  

• Per bank own statement: ‘Challenged’ loans include ‘impaired loans’, together with elements of ‘past due but not impaired’, ‘lower quality but not past due nor impaired’ and loans at the lower end of ‘acceptable quality’ which are subject to increased credit scrutiny.
• Table below highlights the volumes of challenged loans.
• Pre-impairment total volume of loans stood at €111.902bn of which €24.464bn were challenged - a rate of 21.9%. In H2 2010 the same numbers were €119.432bn, €23.787bn or 19.9%. In other words, they really do know how to lend in BofI, don't they? Every euro in five is now under stress according to their own metrics.
  

• Per bank statement, deposits remain largely unchanged at the bank at €65 billion (through end of June), same as at the end of December 2010.
  
• This is offset by the fact that parts of its UK deposits book has grown over this period of time, implying contraction in deposits in Ireland. The bank statement shows Irish customer deposits at €34 billion in H1 2011, down from €35 billion in H1 2010. The UK deposits overall remained static at €21 billion (due to stronger Euro against sterling, with sterling deposits up from 18bn to 19bn year on year).
• With ECB/CBofI funding BofI to the tune of €29 billion, the above figures imply that the bank in effect depends on monetary authorities for more funds than its entire Irish customers deposits base, which really means that it is hardly a fully functional retail bank, but rather a sort of a hybrid dependent on the good will of Euro area subsidy.
  
• Loans to deposits ratio fell to 164% - massively shy of 122.5% the Regulator identified as the target for 2011-2013 adjustments. Which means that the scale of disposals will have to be large. This in turn implies higher downside risk from disposal of performing assets (selection bias working against the bank balance sheet in the future). The bank needs to sell some €10 billion worth of loans and work off €20 billion more by the end of 2013 to comply with PCAR target to reduce its dependence on ECB funding.
  
• Reliance on the Central Bank funding is down €1 billion to €29 billion - and that is in the period when the Irish Government put €3 billion of deposits into BofI.
  
• The Gov (NTMA) deposits amount to €3 billion and were counted as ordinary deposits on the Capital markets book, in which case, of course, the outflow of the real Irish deposits from the bank was pretty big. BofI provides an explanation for these numbers on page 2o of its report, stating: "Capital Markets deposits amounted to €9.7 billion at 30 June 2011 as compared with €9.2 billion at 31 December 2010. The net increase of €0.5 billion reflects the receipt of €3 billion deposits from the National Treasury Management Agency (which were repaid following the 2011 Capital Raise in late July 2011) partly offset by loss of deposits as a result of the disposal of BOISS whose customers had placed deposits of €1 billion with the Group at 31 December 2010 and an outflow of other Capital Markets deposits of €1.5 billion during the six months ended 30 June 2011."
  
• Hence, excluding Government deposits, the bank deposit book stood at €62 billion. Factoring out Gov (NTMA) deposits into the loans/deposits ratio implies the ratio rising to 172% from 164%.
  
• Wholesale funding declined €9 billion to €61 billion with some improved maturity (€3 billion of decline came from funding >1 year to maturity, against €6 billion of decline in funding with <1 year in maturity). The bank raised €2.9 billion in term loans in 2 months through July 2011 - a stark contrast to the rest of the IRL6 zombies.

• Net interest margin - the difference between average lending rates and funding costs - fell from 1.41% in H1 2010 to 1.33% in H1 2011 as funding costs rose internationally and as Irish households' ability to pay deteriorated further. Net interest income was down 14% as costs of deposits rose.
  
• In addition, the cost of the government guarantee of Bank of Ireland's liabilities rose 58% from H1 2010 to €239mln in H1 2011.
  
• By division, underlying operating profit before impairment charges fell in all divisions.
• Cost income ratio shot up from 61% a year ago to 83% in H1 2011.
• It's worth noting the costs base at the bank: Operating expenses were €431mln for H1 2011, a decrease of €36mln compared to H1 2010. Average staff numbers (full time equivalents) = 5,519 for H1 2011 were 101 lower on H1 2010. The staff numbers, therefore, are really out of line with decreasing business levels

• Bank Core tier 1, and total capital ratios were 9.5% and 11.0% respectively, against 31 December 2010 Core tier 1, and total capital ratios of 9.7%, and 11.0%. Were €3.8 billion (net) equity capital raising completed at 30 June 2011, the Group’s Core tier 1 ratio would have been 14.8%. Note that, much unreported: "A Contingent capital note with a nominal value of €1.0 billion and which qualifies as Tier 2 capital was issued to the State in July 2011." This comes with maturity of 5 years. The note has a coupon of 10%, which can be increased to 18% if the State wish to sell the note. If the Core tier 1 capital of the Group’s falls below 8.25%, the note automatically converts to ordinary stock at the conversion price of the volume-weighted average price of the ordinary stock over the 30 days prior to conversion, subject to a minimum conversion price of €0.05 per unit.

Summary:

• Overall, BofI confirmed with today's results that it is the only bank that we can feasibly rescue out of the entire IRL6 institutions, as impairments in BofI decline is contrasted with ca 30% rise in impairments at the AIB over the same H1 2011.
• However, severe headwinds remain on mortgages side and provisioning, funding and costs.
• The figures for impairments and 'challenged' loans show that the bank faces elevated risks on at least 22% of its loans.
• The figures on funding side show that the bank is still far from being a functional self-funding entity.
• The figures on deposits side show that it continues to lose business despite shrinking its margins to attract depositors.
• The figures on staffing and costs side show that the bank management has no executable strategy to bring under control its operating costs.
• The figures on lending side show the the bank is amplifying its exposure to property rather than reducing it, in effect becoming less diversified and higher risk.
• The figures on deleveraging side show that the bank risk profile can be severely adversely impacted by the CBofI-mandated disposals of assets.
  

And that's folks, is the best bank we've got of all IRL6!

Economics 21/12/10: BofI & Irish derivatives warning from the IMF

How wonderful is the world of international banks linkages? And especially, how wonderful it can get when regulators are so soundly asleep at the wheel, a firecracker from the IMF can be shoved in their faces and popped, and the snoring still went on.

A 2007 working paper from the IMF, republished earlier this year in an IMF journal, has warned Irish regulators that (referring to the data through 2005):

“BofI had launched a new venture with a leading Spanish bank, La Caixa to provide extra mortgage options for Irish people buying property in Spain, which included equity release from existing BofI mortgages” (IMF WP/07/44: External Linkages and Contagion Risk in Irish Banks, by Elena Duggar and Srobona Mitra).

Now, think of those La Caixa/BofI borrowers leveraging levels. But here’s the bit that relates directly to securitisation threats I hypothesize about in the previous post (here): on page 8 of the report, IMF folks state: “Irish banks could be indirectly exposed to property markets by selling risk protection (buying of covered bonds, credit default swaps, and mortgage backed securities) to other banks which are exposed to foreign property markets. From anecdotal evidence, some small IFSC banks, exposed to international property markets, are selling CDS to other domestic-oriented banks, making the latter indirectly exposed to these property markets even though their loan books are not.”

Of course, the Irish banks were also selling protection to the SPVs they were managing as well. And now, lets jump to IMF’s conclusions:

“Some tentative policy lessons could be drawn from the results of this exercise. The Central Bank and Financial Services Authority of Ireland (CBFSAI) may want to stress test specific categories of exposures of Irish banks to both the U.S. and the U.K. Even though linkages with the U.S. do not come out strongly from aggregate consolidated balance sheet exposures, there might be derivatives or other off-balance sheet exposures that the bank supervisors may need to be vigilant of. The Irish authorities may need to collect more information about types and counterparties of derivative positions and risk transfers through structured products of Irish banks, as the use of these is likely to grow rapidly in the future. This would especially be necessary if Irish banks are buying CRT products from foreign banks (that is selling risk protection) that are in turn exposed to property markets or other loan products in the U.S. or the U.K., thus exposing the Irish banks to these markets even though there is no direct loan exposure.”

Sounds like a warning against Irish banks exposures to lending against the US-based property? Oh, no – not at all. In fact recall a basic stylized fact of mortgages finance – in the long run (equilibrium) long term yields on Government debt and long term mortgage rates converge. Which means that if an Irish bank was underwriting an interest rate swap for the US SPV that purchased Irish bank’s securitised loans, then Irish bank was taking a position in providing insurance into the US interest rates environment.

The article – based on 2005 data – couldn’t have imagined what followed in 2007 and 2008. But, needless to say - judging by their staunch silence on the issue of derivatives and securitisation - our regulators didn't bother with the IMF warnings back then... and still are not bothered by them...


Update: It is worth noting that today the EU Commission approved measures for AIB, Anglo and INBS (details here) that include "a guarantee covering certain off-balance sheet transactions" - a code name for things like securitisations and derivatives...

Economics 21/12/10: Derivatives hole?

Updated (end of post)

The following post is attempting to put some numbers behind a highly uncertain, opaque and completely under-reported side of the Irish banks operations - the side relating to securitisations and derivatives exposures. My numbers below are pure estimates and their objective is to at least start raising the questions as to the depth of our (taxpayers) exposure to this murky world of banks' securitised assets.

Before we begin, I must also relay my thanks to Brian Lucey and 3 anonymous experts for providing advice and comments on the earlier draft and to LorcanRK who was involved in trying to scope the problem earlier.


Years ago, before our sick puppies (banks) became sick, in the golden days when the Anglopup, AIBickey, permo, INBiSquit, EBSsie and BofIpooch were still wagging their happy tails around the streets of Dublin, securitisation was all the rage.

The basic idea behind this transaction runs innocuously enough as follows: a bank holds a bunch of loans, say mortgages. These yield an annual revenue stream, but hold up capital, restricting new lending. To help unlock this capital, a bank can package these loans together and sell them to an SPV which will issue a paper security against these loans that entitles the owner to a share of the total package of loans as they yield returns over time. An SPV, of course, doesn’t manage the mortgages but leaves them in the custody of the bank which acts as a manager/custodian, responsible for collecting the moneys due and paying out to the SPV.

Now, for a bit relevant to us: an agreement between the SPV and the custodian has two key covenants:

1. loans are held by the custodian in trust, so that the custodian is obliged, upon either the termination of the management contract or should other covenants be breached, to deliver the actual loans/mortgages to the SPV owner;
2. ability of the custodian/manager to hold on to the loans is subject to a minimum credit rating, usually - investment grade.
   

The first point means that should an SPV ask an Irish bank for its loans (due to a breach in its covenants), the banks must deliver these loans.

The second point means that if the covenants are breached, by, say for the sake of argument, Irish banks rating sinking to junk, the banks can be found in a breach of covenants and face:

• a margin call – according to my sources, of up to a whooping 20% face value of the securitized loans in some cases; and/or
• a call on the actual loans to be transferred to a different manager/custodian nominated by the SPV

Every securitized contract runs alongside it a derivative security designed to protect against the risk exposures relating to the loans.

These derivatives can be

• symmetric – covering both sides of the potential exposure – e.g. interest rates swaps going both ways or
  
• asymmetric or uni-directional, covering only one side of the risk exposure (e.g. an interest rate swap insuring against a future rise in the interest rates).
  

The derivatives can be written by an independent entity or by the bank, but for the reasons of good risk management (maturity mismatch risk and direct exposure to underwriter risk) these derivatives should really be underwritten by the third parties, not the custodians.

Now, let’s go back to the history. Earlier this year, I wrote about our ‘national derivatives accounts’:

• AIB held the total derivative exposure to the notional value of €261bn in 2008 which fell to €197bn in 2009 (here)
• BOI held €360.5bn (here) in 2009
• Anglo held some €268.3bn worth of notional value derivatives in 2008 (here), falling to €184.5bn in 2010 (here)
  

The above is very close to the gross notional exposure amounts of €640 billion (for two banks ex-Anglo) reported in 2008 by the employee of the Financial Regulator - Grellan O'Kelly (here).

So now, suppose that the notional value reflects symmetric hedges, and even there, let's assume that directionality is such that benign risk is weighted by twice the weight assigned to maximum loss-linked risk, so that the underlying value of these derivatives is around 1/3rd of the €742.3 billion of notional value, or €245 billion.

Here is the beefy problem. Since these derivatives are written against real loans contracts, what happens if the covenants of the SPVs behind them are breached?

Let’s talk some hypotheticals (since we have no actual clarity on these):

• Scenario 1: Irish Government debt sinks to junk, which automatically means banks debt sinks to junk (while I was writing this, the latest Moody’s downgrade pushed it even deeper...). There’s a margin call on derivatives of say ½ of 20% mentioned above, or 10%. Oops – Irish banks are in a hole for up to 24.5bn off the starting line (10% of the 245bn above)
• Scenario 2: Instead of a call on the derivatives, SPV breaks management agreement with an Irish bank and asks for its loans to be moved out of the bank. Wouldn't be a problem, unless: what if the bank, in the mean time, has leveraged the same loans it held in custody for the SPV at the ECB (or CBofI or both) discount window? Well, should the SPVs insist, the Irish banks will be forced to buy their collateral out of ECB and CB of Ireland to the amount that the banks borrowed against such collateral.

Things are starting to smell rotten… But do not be afraid, those in charge who still have some brains left spotted the dodgy stuff. To our chagrin, however, the smart ones are in Frankfurt, not in Dublin. Back in August 2008, the ECB has pulled the plug on taking Irish banks-securitised loans as collateral. Miraculously, in the end of 2008, CBofI lent Anglo €10.5bn against some mysterious collateral that, several of my sources argued, was previously rejected by the ECB.

Why would the ECB decline to take securitised packages as collateral, while taking the loans? Surely this signals something is amiss with the vehicle of securitisation as carried out by the Irish banks?

Two things can be dodgy with the securitized packages in general:

1. Underlying derivatives, and/or
2. Security over the loans/assets that are securitized.
   

I am not going to speculate what it is – time will tell. Instead, let’s run through some scenarios on potential losses due to the above positions.

Assumptions:

• Assume that the above gross notional amounts of derivatives are 2/3 covering one side of exposure (e.g. expected increases in interest rates, for interest rate swaps) and 1/3 covering less expected opposite direction risk. This means that of the total values of derivatives written by the 3 banks, these derivatives were covering a collateralised pool of loans/assets equal to 1/3 of the gross notional derivatives.
• Now, some of collateralised assets were held by the banks themselves, but we do not know how much. So let’s assume that 25% and 50% are reasonable amounts for these shares, implying that banks sold on some 50% to 75% of the securitised assets
• Next suppose that the banks have written down these securitised assets by 20% (a gross overestimate, but let’s allow it to be conservative) and that the ECB has applied the usual 15% haircut in lending against the above writedowns
• Table below shows the estimates of potential losses

So the downside from the derivatives exposure and securitization can range between €12.25bn and €50.8bn.

Pretty wide.

Let’s take a look at the underlying assumptions. Running through the ‘What if covenants are breached?’ scenarios, one has to remember that many of the securitized loans borrowed against are related to more stable, longer-term mortgages. Since default rates across mortgages are lower it is highly unlikely that SPVs wouldn’t want to claim them out of the hands of the insolvent banks. This means that the 10% margin call on all loans scenario is highly unlikely to materialize. More likely – either the margin calls will be larger, or full call backs will be triggered. Which suggests that the range above more realistically should be expected around €17.15bn and €25.7bn.

Also, recall that Irish banks weren’t really at the races in speculating on financial instruments, preferring instead to speculate on property. This means that my assumption of 50% unidirectional net derivatives relating to property securitization is pretty conservative.

And remember that none of this has been factored by either the IMF or anyone else into the expected losses across the Irish banks. It hasn’t been incorporated into my earlier estimates of

• €67-70 billion total losses on NAMA, recognized losses and post-2010 commercial and investment books’ losses, and
• €9-11 billion total losses on mortgages post-2010, plus
• the lower €17bn figure as an estimate for the derivatives and securitization-related losses.
  

The total expected loss across the entire banking sector, net of recoveries might be as high as €93-98 billion. Or it might go as high as €107bn. And at this point, folks, even an old hawk like myself starts to feel scared.


Note: these are potential estimates. Given that we have been given no clarity as to the depth of securitisations, or the derivative instruments underlying it, nor do we have any idea as to what the banks have been doing with custodial-managed loans that relate to securitised products, one can only guesstimate - or speculate - as to the true extent of losses. I tried my best to be very, very conservative in the above, with my upper limit of factored estimate of €25.7bn in losses being below the average of the most benign scenario (€12.25bn) and the worst case scenario (€50.8bn). I was also very conservative in my assumptions. Note also that in the end, €17-25bn range of losses used in final estimate of the total cost of banks bailouts corresponds to just 2.29-3.37% of the notional value of all derivatives held in 2009 by the three banks.


Update: things are hardly trivial when it comes to potential securitisation-linked derivatives exposure. Back in 2007, the IMF has warned Irish regulators that:

“BoI has transferred the bulk of its domestic residential mortgage assets to a designated mortgage credit institution, which has a banking license to issue mortgage covered securities.—these are used both for hedging interest risk and for generating additional funding. Almost 60 percent of these securities were held by other Euro Area members, while 25 percent was held in USD by other countries. (IMF WP/07/44: External Linkages and Contagion Risk in Irish Banks, by Elena Duggar and Srobona Mitra - here)

Did IMF say 'the bulk'? So as of 2006-2007, the bulk of mortgages were out to securitisation in a 'conservatively' run BofI?

Economics 6/11/10: Two charts - IRL & Spain

Two interesting charts on 5 year bonds for Ireland and Spain, courtesy of CMA:
What's clear from these charts is the extent of inter-links between banks and sovereign credit default swaps. In Spain at least three core banks - La Caixa, BBVA and Banco Santander act as relative diversifiers away from the sovereign risk since late October. In Ireland - all of the banks carry higher risk than sovereign. Another interesting feature is a significant counter-move in the Anglo CDS since late September. This, undoubtedly underpinned by the large-scale bonds redemption undertaken by Anglo at the end of September. Thirdly, an interesting feature of the Irish data is that CDS contracts on Anglo, IL&P and AIB are now trading at virtually identical implied probability of default.

Lastly, Irish sovereign debt is now trading at probability of default higher than that of the Spanish banks!

Economics 2/10/10: Brian Lucey's comment on Minister Lenihan's statement

In rare occasions, I re-print here some comments made available to me by other economists and analysts. This is the full text of Professor Brian Lucey's comment in yesterday's Irish Examiner (not available on the newspaper website):

"THE Government yesterday engaged in a series of interventions, announcements, and actions which in my opinion have brought the prospect of an intervention from the IMF or the European Union significantly closer.

The major announcements were threefold: the announcement of the losses of Anglo, the bombshell in relation to Allied Irish Banks, and the startling admission that the Government was voluntarily withdrawing from international markets. Let us examine all three of these.

In relation to Anglo Irish Bank, we finally begin to see clarity and reality from the Government; for the first time in two and a half years estimates begin to overlap. The worst-case scenario that the Government has put forward is that Anglo will lose €35 billion. This is the average estimate. We must take this government figure with a very large pinch of salt. The Government over the last two years has given us at least four “final” figures for the total cost of Anglo. God be with the days when it was only €4.8bn. It remains highly likely in my view and in the view of independent analysis external and internal to the country, that the Anglo losses could stretch towards €40bn.

That is an eye-watering amount of money, equivalent to nine months’ total government expenditure. While this on its own is bearable, what is unbearable, and should not be borne, is that once again bondholders take precedence over citizens.

The only rationale for having such an extensive guarantee in 2008 was that over the period of time the banks would be cleaned of their bad loans, the banks would be cleaned of their bad management, and the bondholders would be dealt with. Subordinated bondholders should get nothing, senior debt holders should have been faced with a stark choice; either take an offer of perhaps 30 cent on the euro or take their chances on the market place. A debt-for-equity swap should also have been considered.

On all three of these issues the Government has failed. We are told that instead of NAMA taking loans in excess of €5 million, it will only take loans in excess of €20m; this leaves a large amount of impaired and toxic loans on the balance sheet of the banks. It is these very toxic loans that imperilled the banks in the first place and which will make it next to impossible for the banks to engage in any meaningful credit creation.

As if Anglo were not enough, we are also told that AIB will require an additional €3bn. The state will end up with 70%+ ownership of AIB; this will rise as AIB will find it difficult to raise the required funds from the markets or from asset disposals and will consequently have to ask the taxpayer to invest further. The ludicrous situation is that the taxpayer will be taking ownership of a much weaker bank than had this been done two years ago. AIB has sold the jewel in its crown, the Polish operation, and is actively selling its US and British operations. We will own a bank which has sold off its profit-making arms and will be left with a carcass.

Finally, it appears, in so far as one can glean from the gnomic and somewhat confused utterances of Eamon Ryan, that the Government were told that the National Treasury Management Agency (NTMA) did not feel they could raise funds in the markets. The Government has therefore locked itself out of the markets until early 2011. Presumably, the hope is that by 2011 a miraculous change in Irish and world economic conditions will have occurred.

What remains absolutely unclear is what plans, if any, the Government has for a situation where in 2011 the NTMA finds it either impossible to raise funds or finds that those funds are prohibitively expensive. There are in excess of 5bn of Irish government bonds maturing in 2011, these will have to be rolled over or repaid. What if we cannot raise these funds?

In that case the Irish Government will have to raise funds from the International Monetary Fund or from European funds, and this of course ignores the tens of billions of debt which the banks have to roll over on a regular basis. In my view we have moved closer to the end game of losing national economic sovereignty.

Brian Lucey is associate professor in finance at Trinity College Dublin. "

Irish Examiner 1/10/2010

Economics 2/10/10: EU Commission official view of Minister Lenihan's plans

Much debate has been thrown around about the EU Commission position on the latest Government announcements concerning banks recapitalizations. Here is the fact (linked here) - note comments and emphasis are mine:

Full quote: MEMO/10/465, Brussels, 30 September 2010 "Statement by Competition Commissioner Almunia on Irish banks"

"European Competition Commissioner Joaquin Almunia welcomes the comprehensive statement issued by the Irish Finance Minister on banking. Commissioner Almunia said:

"I welcome the statement on banking which brings clarity with regard to the remaining transfer of assets to NAMA and the capital needs of some banks and building societies. [Note there is no finality assertion here on the estimates]. Regarding NAMA, the announced changes to the way it manages loans are in line with the Commission's approval of the NAMA scheme.

"Concerning Anglo-Irish Bank, from a competition point of view, it is clear that the foreseen restructuring and resolution of the bank addresses competition distortions created by the large amounts of aid at stake. Once the Commission receives the details of the plan, it will proceed rapidly towards taking a final decision. [The gombeens haven't yet supplied the Anglo Plan to the Commission, despite the claims made today on RTE Radio by Minister Hanafin to the contrary]

"I also welcome the announcement that subordinated debt holders will make a significant contribution towards meeting the costs of Anglo. This is in line with the Commission's principles on burden sharing since it both addresses moral hazard and limits the amount of aid, with benefits to the taxpayers. [So Commission operates under the direct assumption that subbies will be soaked. And that this will correspond to the spirit of the European common markets.]

"I note that Allied Irish Bank will need to receive further capital in the form of State aid, which will have to be notified to the Commission for approval. I will of course follow this process very closely. I have no doubt that, as in all previous cases, the collaboration between the Irish authorities and the European Commission will be satisfactory. [No blanket endorsement of new AIB capital injections]

"I note positively that Bank of Ireland will be able to continue the restructuring process without further recourse to State resources. The Commission in July 2010 approved the aid and the restructuring plan of Bank of Ireland, and is monitoring its implementation."

"With regard to building societies INBS and EBS, the Commission remains in close contact with the Irish authorities. For INBS, the Commission will await the notification of the additional capital as well as the details on the institution's future, and will assess them thoroughly and swiftly. For EBS, the Commission is in the process of finalising its initial assessment of the restructuring plan submitted end May 2010. "

So let's recap Commission's official opinion:

• Anglo subs must be haircut;
• No Anglo plan delivered to the Commission;
• No Anglo recapitalization additions endorsed;
• No AIB recapitalizations (announced by Minister Lenihan) are endorsed
• No INBS and EBS measures endorsed
  

Economics 28/9/10: Anglo's bondholders must go

Reuters say Ireland should abandon the Anglo seniors

(emphasis mine)

"The Irish government will reveal the full horror of the cost of rescuing Anglo Irish on Sept. 30. It has already signaled bad news for the 2.5 billion euros of subordinated debt, but it is desperately trying to draw the line and support the 14.1 billion euros of senior debt.

"It's cosseting the bondholders because it fears further damage to its own creditworthiness if it walks away. But if the Anglo bill is as big as outsiders fear, its support will have the opposite effect. Even as the Irish prime minister talked on Sept. 28 of a "manageable plan," the spread on Irish sovereign debt widened to a record 475 basis points.

"The last official estimate of the rescue bill, 25 billion euros, looks hopelessly optimistic. Ratings agency S&P estimates it at 35 billion euros, while BarCap says 48 billion for the sector, or over a quarter of Ireland's 163 billion euro GDP. [My own estimate of 38.6bn on the upper side is now patently below external consensus, despite being branded 'outrageous' and 'outlandish' by several insiders in the past]

"The Sept. 30 statement is expected to contain a best estimate and a worst case. If the best estimate is near S&P's figure, further downgrades of Ireland's sovereign debt are likely. However, if the government were to abandon the senior bondholders, the saving -- equivalent to a tenth of Ireland's GDP -- would give the state the chance to work its way out of its economic hole."

Here we have: S&P, RBS, Barclays, Reuters, WSJ, FT, Sunday Times (Irish edition - hat tip to F.F.) and all genuinely independent analysts are now saying - shave the seniors, burn the subordinates. Government still resisting. For how long can it afford demolishing our own economy to prolong the inevitable?