3/9/2014: R.I.P. That Seismic Game-Changer...

Remember June 29, 2012? No? But you do remember this:

"Speaking as he left the European Council building, Mr Kenny described the new deal as a seismic shift in EU policy, and said it would allow Ireland to re-engineer its overall debt level, which would reduce the burden on Irish taxpayers. "What was deemed to be unachievable has now become a reality and that principle has been established, decided and agreed upon by the council and heads of government," he said."

Following in Mr Kenny's footsteps, then Tanaiste Eamon Gilmore : "described last night’s deal as a "major game changer" for Ireland that will ease its path back to financial markets. "When the details are worked out between July and the end of the year, it will have a real impact on our debt level and will greatly improve our ability to get back into the market and not to need a second bailout," he told RTE’s Morning Ireland."

And so the saga of the 'Deal' promised by the 'For Jobs, For Growth' EU 'Partners' to struggling Ireland is now no longer needed... http://mobile.bloomberg.com/news/2014-09-03/noonan-says-esm-deal-on-bank-debt-no-longer-as-attractive.html Some 796 days after the seismic game changer rolled into town, the idea is all but abandoned to focus instead on 'early repayment of the IMF loans' or in other words, another not-restructuring of government debts.

Yes, the latter will save us some significant dosh and should be pursued. No, abandoning the former means abandoning a hope of still saving more cash, as ESM valuations mechanism is neither determined nor precludes payment of current market consideration/valuation. And no, Minister Noonan still has no solution in sight to the problem of EUR24 billion worth of Government bonds sitting in the Central Bank that will continue burning an ever widening hole in our finances as we proceed to sell them.

The seismic game changers of Europe, the come and go and jobs and growth remain the objective of the economy thrown onto the rocks, in part, with the help of Brussels and Frankfurt...

19/12/2012: IMF on Irish Banks Zombies

Continuing with reading IMF latest report on Ireland, here's another bit. This time about Irish banks. Now, recall that in recent months and days we heard about Bank of Ireland and AIB meeting their lending targets, the latest data on mortgages printed a little rise in the number of them outstanding etc. The Government has been running around telling anyone willing to listen (not many, admittedly) that banks are 'repaired' and 'well-capitalized'. Here's IMF take on the comedy (emphasis is mine):

"Bank lending has remained weak. Lending flows have fallen to new lows, with gross mortgage loans to households down 10.3 percent y/y in the first three quarters of 2012 and new SME loan drawdowns (excluding financial intermediation and property-related) down 20.7 percent y/y in first half. Interest rates on SME loans (proxied by loan agreements below €1 million) remain well above euro area average levels."

Few charts:

So as the economy is starving for credit, irish banks - heavily subsidized by ELA and ECB funding (see below) are gouging SMEs for every last bit they can squeeze. Jobs creation in this environment? You gotta be kidding!

While the banks have deleveraged somewhat out of ELA and ECB (per below):

1. Their dependence on these sources is still extraordinarily high.
2. Taken in conjunction with lack of lending to the SMEs, the above suggests that what Ireland needs is not just an EU buyout of banks debts carried by the Exchequer, but also a special funding provision arrangement, which can allow Irish banks to retain high ELA/ECB exposures for at least 5-10 years, to allow economy some breathing room to pay these down. 
3. While banks deleveraged, households - despite significant savings and higher than Euro area average returns on savings - are nowhere near deleveraging curve, with debt/income ratios falling so far only  to the levels of mid-2009 (we are not even at pre-crisis levels!)

But IMF has more on Irish banks: "Domestic banks have high and rising impaired assets and remain unprofitable, which is eroding their currently strong capital buffers. Gross non-performing loans have risen to 23 percent of PCAR banks gross loans at end September, up from 17 percent a year ago, with 50 percent provisioning coverage." So: to summarize the above:

• Gross loans declined from  €247.2bn to €229.6bn  Q3 2011-2012
• Loan loss provisions rose from €19.5bn to €26.5bn (cover rising from 7.89% to 11.54%
• Gross NPLs (Non-Performing Loans)  meanwhile rose from €42.1bn (17% of Gross Loans) to €53.0bn (23.1% of Gross Loans), so te loans provisions amounted to 46.3% of NPLs in 2011 and now account for 50% of NPLs.
• However, Net NPLs to net equity ratio has risen dramatically from 68.6% to 109.3%. In other words, equity cushion is being depleted once again, especially as continued accumulation of NPLs coincided with drawdowns of net equity from €32.9bn to €24.2bn.

More form the IMF: "For the first three quarters of 2012, these banks reported a €0.8 billion pre provision loss excluding non-recurrent items (-0.3 percent of average assets) and, under their restructuring plans, they are not expected to break-even until 2014. Although these banks remain well capitalized, with Core Tier 1 ratios of 15.5 percent of risk-weighted assets and 7.5 percent of total assets, these buffers are expected to decline as loans are worked out and will be further eroded if operational losses persist."

What the hell does this mean, you might ask? Oh, why, let IMF speak. Here's the list of core risks faced by Ireland:

"This gradual recovery faces impediments that pose significant risks. Net exports, still the sole engine of growth, are naturally sensitive to any further weakening in trading partner activity. A sustained recovery that generates sufficient job creation also requires a revival of domestic demand, which faces a range of hurdles that create substantial uncertainty around prospects beyond the near-term:

• Financial reform benefits. In the wake of an exceptionally deep financial crisis, with impacts across the system, financial sector reform challenges remain substantial, and there is uncertainty around the timing and magnitude of the benefits of financial sector reforms for reviving banks‘ profitability and capacity to lend to households and SMEs. 
• Debt overhangs. Government debt is set to peak at some 122 percent of GDP, household debt is 209 percent of disposable income, and many SMEs are burdened by property-related loans. These debts drag on growth through private deleveraging, reduced access to credit at higher cost, and concerns about future tax burdens.
• Bank-sovereign loop. These debt stocks are compounded by still large contingent liabilities from the banking system in a scenario where weak growth reduces asset values and heightens loan losses. As a result, the challenges for sovereign and banks in accessing market funding are interlocked, magnifying the growth uncertainties.
• Fiscal drag. Fiscal consolidation will continue to be significant in coming years, with the growth impact depending on the composition of measures and also on external economic conditions and progress in easing credit constraints."

Do note that the banks play a role in all, I mean all, of the above risks. And the risks are correlated:

"Leaning against such developments with additional fiscal consolidation may help slow down the rise in the debt ratio, but would further reduce growth and raise unemployment and increase risks of hysteresis. Moreover, the resulting higher loan losses would generate new capital needs once banks‘ buffers are exhausted, which could raise debt ratios in the medium term, heightening the challenges to
recovery. Such setbacks in Ireland would exacerbate the broader euro zone crisis..."

And now to 'Boom!' factor: The "risks around medium-term growth prospects are a key source of
fragility in Ireland‘s debt sustainability, in part because prolonged low growth could result in
new capital needs in the financial sector."

In other words, were we to so see fiscally-induced and debt-overhang enabled structurally lower growth (at current rates), the debt crisis can lead to a new capital call from the banks on the Government. In this light, all the Government talk about 'improved' banking operations are, frankly put, tripe.

19/12/2012: IMF gets angry...

So IMF released 8th review of Ireland's programme (link) and just as I speculated here two days ago, the Fund is loading the bases with stronger and stronger language on dithering EU's failure to deal with irish Government debt overhang arising from the banking sector measures.

Quoting from the IMF report, emphasis is mine:

"Ireland’s remaining vulnerabilities imply that prospects for durable market access depend importantly on the delivery of European commitments. Market conditions for Irish sovereign debt are much improved following the  announcements of the ESM direct bank recapitalization instrument and of OMT. But the feasibility of retroactive application of the ESM instrument for Ireland remains unclear as do the conditions for OMT qualification.

Given Ireland‘s high public and private debt levels and uncertain growth prospects, inadequate or delayed delivery on these commitments poses a significant risk that recently started market access could be curtailed, potentially hindering an exit from official financing at end 2013."

The fund, in essence, is now on the record saying that Irish exit from the programme is at risk from only EU failure to act (assuming that irish authorities continue with current path):


"Management of the risks to market access, and hence to meeting the exceptional access criteria, depends on continued strong program performance and also on delivery of euro area commitments."

I agree with the Fund. Ireland has done enough under the programme to move us toward exiting the funding arrangements (whether that is desired or not, is a different question). However, EU institutions (namely ECB and - via absence of support for Ireland - EU Commission) have first forced Ireland into the current insolvency, and then proceeded to stonewall us in the search for workable solutions.