10/6/2013: Fitch on Irish Banks

Both Fitch and S&P have in the recent past questioned the model of Irish banking sector crisis resolution on the foot of the apparent link between the banks balance sheets and the exchequer.

Today, Fitch issued another report on Irish banking sector, titled "Peer Review: Irish Banks"

The report claims that Irish banks' current ratings "are constrained by the significant risks that remain in the Irish banking system. However, support remains an important rating driver and Fitch considers that the Irish authorities' propensity to support the 'pillar' banks, Bank of Ireland (BOI) and Allied Irish Banks, p.l.c. (AIB) remains undiminished, despite the withdrawal of the Irish Bank Eligible Liabilities Guarantee (ELG) in March 2013."

Crucially, "Fitch believes that the pillar banks' performance will continue to track within the stress case scenario of the 2011 Prudential Capital Assessment Reviews (PCAR), however these tests were framed on a Basel II basis. Since then capital expectations of market participants have increased. The 2014 PCAR may revise the stress assumptions and requirements to align more closely with Basel III." The kicker is that the banks will need new capital ('might need' another state injection as opposed to 'will need' capital).

"As Irish banks' capital ratios continue to be eroded and a return to profitability only appears feasible in the longer term, the banks may need to raise additional capital before they can contemplate a future independent of state support", Denzil De Bie, a Director in Fitch's Financial Institutions Group told Reuters.

The old kicker is that assets and capital held by the Irish banks remain weak, "with high NPLs and impairment charges, especially against commercial real estate and residential mortgage loans. Although the rate of deterioration slowed at BOI and AIB in 2012, Fitch believes impairment charges could increase during 2013 and 2014, with arrears reaching a peak in 2014, as the banks accelerate the resolution of mortgage arrears in line with new targets set by the Central Bank of Ireland in March 2013."

"Asset quality is weak in the Irish banks, with NPL ratios of 16%-40% in the Fitch-rated
institutions at end-2012. The banks also report a significant portion of their loan book to be past
due but not impaired."

Peaking of mortgages arrears per PCAR2011 starts in 2014 and goes on in 2016-2017.

"Underlying pre-provision operating profitability is structurally very weak because of the long-term, very low-yielding mortgage loans in their books. Until rates rise, Fitch considers that a return to sustainability will only be possible as the various restructuring and cost control plans of the banks begin to yield results. Fitch expects a return to operating profitability to be delayed until at least 2015 because of the continued erosion of earnings from high but reducing impairment charges."

Now, recall that per PCAR2011, Irish banks were supposed to fund their full losses out of operating profits starting with 2015. So far, Fitch is not saying there is excess (above PCAR2011 stress test assumptions) level of stress in the system, but Fitch does seem to point to the already recognised two pressure points:
- continued deterioration on the assets quality side, and
- Basel III.

And the banks are still dependent (and will remain for some time to come) on state/central bank supports: "with loan/deposit ratios still at a high 130%-230% in the Fitch-rated banks at end-2012, wholesale, government and European Central Bank funding still forms an important, albeit reducing, component of the Irish banks‟ funding bases." Why? Because deleveraging is by far not complete:

On banks doing their bit to get credit flowing to the economy:

And per stabilisation of deposits:

10/6/2013: Did UK Taxpayers 'Rescue' Ireland?..

An interesting story today in The Times. Here's a report on it from The Telegraph (http://www.telegraph.co.uk/finance/business-news-markets-live/10109577/Business-news-and-markets-live.html go to 7:10am post). Emphasis is mine:


"The Times is leading with the story that Britain has given a back-door bailout worth around £10 billion to the Republic of Ireland in an arrangement that was never explicitly approved by Parliament. The money has been pumped into Ulster Bank, a subsidiary of the state-owned Royal Bank of Scotland which was rescued by a public cash injection of £45 billion five years ago."

What's the gist? "New figures show that Ulster Bank, which operates predominantly in the Republic despite its name, has accounted for approximately one in every four pounds of losses at RBS since 2008... Almost one pound in every four injected into the two state-backed banks by the Government has gone directly into the Irish economy, the two lenders' subsidiary accounts show."

How so, may I ask? "Between 2009 and 2011, RBS made "capital contributions" totalling €9.13bn (£7.6bn) to its Dublin-headquartered subsidiary Ulster Bank Ireland. Over the same period, Lloyds transferred £6.41bn to its Irish operation, Bank of Scotland (Ireland), before dissolving the business.
The total – £14bn – amounts to more than a fifth of the £65bn UK taxpayers injected into RBS and Lloyds in 2008 and 2009, and is expected to rise further. Analysts estimate that RBS transferred another £2bn last year."

How so, I ask again?

You see, in reality, there was no £10 billion bailout from the UK to the Republic of Ireland and the money injected into Ulster Bank did not go 'directly into the Irish economy'. What did happen is that a bunch of bondhodlers and interbank lenders to the Ulster Bank were made whole on the liabilities which the Ulster Bank would not have repaid, were the UK taxpayers not pumping money into it. Truth is, the UK taxpayers, like Irish taxpayers, were made subsidies to the international banking funding scheme. Not to the Irish economy or to the Republic of Ireland.

The UK taxpayers did lend money to the Irish Government under the Troika+ 'rescue' deal and we shall say thank you to them for this much, especially since these loans were made on terms that matched fully multilateral loans. But the Republic of Ireland and its economy have nothing to say on the UK taxpayers being wrongfully made pay ever cent on the euro of the Ulster and BOSI borrowings.

Full stop.

27/10/2012: UBS on Irish banking debt restructuring

UBS' European Weekly Economic Focus is dealing in detail with the prospects of Ireland getting a deal out of the EU Summits promises to break the links between the banks liabilities and sovereign liabilities. Comments are mine.

"Taking the June 29th statement at face value, there is a strong case for supporting Ireland by breaking the link between the government and the financial system." 

[I wholeheartedly agree - the case can be made across a number of points: (1) Ireland de facto underwritten the euro system in the early stage of the crisis; (2) the cost of (1) to Irish taxpayers is unprecedented in modern history; (3) Irish banking fallout is partially based on absolutely mis-shaped monetary policy pursued by the ECB; (4) Ireland is the only country in the euro periphery, in my view, that has potential to organically grow out of the current Great Recession, assuming the country gets a significant (€40-45 billion) writedown on the banks debts; and more]

"There are two potential routes for euro zone support to the Irish state. The direct route involves the ESM acquiring all or a part of the government’s stake in the banks, thereby assuming responsibility of the Irish lenders and absolving that liability of the Irish state. The alternative, less generous, approach is a relief on the promissory note/ELA commitments by the ECB."

[I disagree - the impact from both of these measures taken individually will be minor. What is needed is a combination of the two measures, with ELA commitments writedown of at least €30 billion. The reason for this is simple: the ESM will not be able to take on IBRC liabilities even in theory as IBRC is not a functional bank. Hence, route 1 outlined by UBS can amount to ca €5-6 billion in maximum potential recovery to the Irish state. Route 2 take by itself alone will simply see marginal relief on the net present value of promo notes liabilities, something close to €3 billion yield. Hence, even combined, such measures are unlikely to generate more than €10 billion, or roughly 1/8th of the assumed current and future liabilities.]

"In our view, there is very little chance that the ESM will acquire a stake in Irish lenders any time soon, for the simple reason that a direct ESM intervention requires the establishment of a euro area bank regulator and that would take a long time, in our view." [I agree. And worse, not only ESM has to be fully established, it also has to be fully operational and, potentially, have a track record of sorts before it can be used to underwrite banking sector directly.]

"What’s more, Ireland will need to remain a programme country for longer. Depending on the potential scale of the intervention, the first argument is likely more important that the second, but either way this route is not likely to be available for a long time." [I fully agree and this is the reason why I argued earlier this week that the Irish Government push to 'exit' the programme is rushed and unwise.]

"How about a recapitalisation via the sovereign? To start with, this approach does not help sever the link between the sovereign and the banks, one key driver for euro area intervention. More importantly though, it is not clear to us that Ireland will qualify for that sort of intervention even if it tried, for the simple reason that ESM funds can only be provided to limit ‘the contagion of financial stress’. The financial sector in Ireland is no longer a threat to the rest of the euro area and, as such, it would not qualify for ESM intervention. 

[I spoke about this factor for a number of years now. As long as Ireland continued replacing private liabilities to bondholders and inter-bank funding sources with sovereign obligations, it continued to dilute its own power in the bargaining game. I warned years ago that once we complete this process, we will be left alone. No tramp cards in our hands. Fully exposed to carrying the weight of banking debts on taxpayers shoulders. This Government and the previous one have failed to listen. Now, its a payback time.]

"The only way around this is if the ESM facility is made available retrospectively, but that is unlikely if the statement from the Dutch, Finnish and the German finance ministers where they rejected ESM assistance for ‘legacy assets’ is true." 

[At the time of June 29th summit I wrote about the cumulative potential exposures that such retrospectively can yield. It was clear then, as it is clear now, that ESM will not be able to absorb all potential calls on such a measure. Hence, Fin Mins statement breaking retrospectively clause is fully rational and expected.]

The rest of the note is based on a superb and must-read analysis by Karl Whelan of the promo notes.

In summary - and this is my view - Irish policymakers have carelessly forced the country into a corner: we worked hard to assure some stabilization in fiscal space, which in turn undermined our ability to get meaningful relief. Congratulations to our policy makers who seemingly traded the interests of the longer term debt crisis resolution for friendly pats on the back from Europe.

16/9/2012: Who pays for the Banks Guarantee? Irish Mortgage Holders

Another interesting snippet from the IMF report on Ireland's performance:

"The already low net interest margin fell by 40 basis points in Q1, to 0.8 percent of average assets. Though funding costs fell by 35 percent from Q4 2011 reflecting the actions of a leading bank to lower deposit rates, this was not enough to compensate for weakening interest income due to higher loan impairments and the drag from low yielding tracker mortgages. The ELG fee remained high, at 110 basis points in Q1, absorbing some 40 percent of the net interest margin (up from 28 percent in Q4 2011)."

What does this mean?
1) Banks are suffering from lower margins due to declines in ECB rate having an adverse impact on their tracker mortgages book. They compensate by soaking savers (deposit rates down) and ARMs (adjustable rate mortgages are up).
2) Instead of allowing banks more funds to cover mortgages losses, the (1) above - soaking of savers and ARMs - goes primarily to fund Mr Noonan and the State (via ELG fees paid by the banks for the Guarantee cover to the Exchequer).

Great. As a holder of an adjustable rate mortgage, I get taxed by Mr Noonan once on household charge (soon to be replaced by a property tax) and  via ELG. Well done, 'low tax Government'. Of course, I am also being used to subsidize tracker mortgages, including buy-to-lets.

2/3/2012: Lending to Irish SMEs - a pipe dream that keeps piping

A quick thought. RTE reports on CBofI data from the standard banks lending surveys (I can't be bothered to dig through the pile of ECB data files on this right now, so let's take what they have (link here), even though it ain't much.

"Central Bank economists say that the lending conditions imposed by the banks are significantly tougher in terms of collateral requirements, interest rate charges, the size of loans available and the rejection rates. Central Bank Governor Patrick Honahan has said that the authorities have provided unlimited liquidity to the banks at very low interest rates and noted the importance of the SME sector for the economy as the main engine of job creation. ...the Irish Bankers Federation has insisted that banks are lending to SMEs contrary to new central bank research."

So here's a memo to the CBofI front desk:

You (CBofI) spent last 4 years

1. Actively and even preventatively protecting Irish majority-Zombie Banks and larger Investment Firms via regulatory and funding channels, stifling competition and restricting new entries; 
2. You, CBofI, have been incessantly talking about ensuring that the 'banks' are lending into the real economy;
3. You, CBofI, have allegedly 'adequately' recapitalized Zombie Banks for 2011-2013 period under PCARs with so much taxpayers dosh, the country is crocking under the weight of debts;
4. You, CBofI, have actively campaigned to reduce the scope of systemic insolvency resolution, thus, along with (3) above exacerbating investment funds shortages in the country by making sure the 'Banks' capture people's savings into perpetual mortgages & debts repayment scheme;
5. You, CBofI, are running the largest (per supervised institution) sized staff of all NCBs in the euro area and are still hiring new 'talents';
6. You, CBofI, have failed to put in place anything in terms of reforming the banking sector here, other than more protectionism, duopoly, risk de-diversification via geographically targeted deleveraging;
7. You, CBofI, have retained all the staff that was present during the systemic capture of the financial regulation in this country by the very same banks you are now protecting... 

So here's an unpleasant monetary arithmetic the Irish-style:

∑(i=1...7)= Whinging about Toughest Lending Conditions for SMEs in Europe 

What did you guys expect to come out of the above? Healthy, competitive, functional banking and investment sector? Really? I wouldn't call THAT a rational expectation.

PS: I am aware that we have many SMEs in trouble, unable to repay existent debts. But we also have loads of new companies - start-ups and existent enterprises - that can't even get trade finance against clean balance sheets.

20/2/2012: Irish Banks - Zombies Running the Town - Sunday Times 19/02/2012

This is an unedited version of my article for Sunday Times 19/02/2011.

This week’s announcement by the Government that the Irish banks will be issuing loans to small and medium sized enterprises (the SMEs) under the cover of a sovereign guarantee has raised some eyebrows.

Throughout the persistent lobbying to underwrite credit supply to the struggling SMEs, it was generally resisted by the majority of economists and analysts, who argued that the Irish state is in no financial or fiscal position to provide such a measure. Having backed banks’ debts via the original 2008 State guarantee and emergency loans from the Central Bank of Ireland by the letter of comfort, the Irish state had also underwritten the risks associated with the commercial real estate development and investment assets through Nama. In addition, via rent supplements and mortgage interest supports, the government is propping up a small share of other banks assets and the rental markets.

Now, it’s the SMEs turn.

Per Central Bank’s own stress tests, estimated worst-case scenario defaults on all assets in the core Guaranteed banking institutions are expected to run at around 14.6%. SMEs loans had the worst-case scenario default rate estimate of 19%. We can argue as to the validity of the above estimates, but much of the international evidence on lending risks suggest that SMEs loans are some of the riskiest assets a bank can have. Add to this that we are in the depth of the gravest recession faced by any euro area country to-date, including Greece and you get the picture. Without state backing, there will be no lending to smaller firms. With the state guarantee, there will be none, still.

Subsidizing risker loans in the banks that are scrambling to deleverage their balancesheets, struggling with negative margins on their tracker mortgages and facing continued massive losses on loans might be a politically expedients short-term thing to do. Financially, it is hard to see how the Irish banking system crippled by the crisis and facing bleak ‘recovery’ prospects in years ahead can sustain any new lending to the SMEs.

Eleven months after the stress tests and seven months after the recapitalization by the taxpayers, Irish banking sector remains as dysfunctional in terms of its operations and strategies as ever.

Top level data on Government Guaranteed banks, provided by the Central Bank of Ireland, shows that in 2011, loans to Irish residents have fallen by €63.25 billion on 19% with €30.3 billion of this decline coming from the non-financial private sector – corporate, SME and household – loans. Loans to non-residents are down €40.9 billion or 29%.

Over the same period of time, deposits from Irish residents contracted €42.5 billion or 18%, with Irish private sector deposits down €11.2 billion or 10% on 2010. Non-resident deposits have shrunk 35% or €36.1 billion at the end of 2011 compared to the end of 2010.

The Government spokespeople are keen on pushing forward an argument that in recent months the numbers are starting to show stabilization. Alas, loans to Irish residents outstanding on the books of the guaranteed banks are down 7% for the last three months of 2011 compared to the third quarter of the same year. All of this deterioration is accounted for by losses in private sector loans which have fallen €21.7 billion or 12% in Q4 2011 compared to Q3 2011. Deposits from Irish residents are up €2.04 billion or 1% over the same period, due to inter-banks deposits rising €2.3 billion, while private sector deposits are down €384 million.

The ‘best capitalized banks in Europe’ – as our Government describes them – are not getting any healthier when it comes to core financial system performance parameters. Instead, they are simply getting worse at a slower pace.

The outlook is bleaker yet when one considers top-level risk metrics for the domestic banking sector. On the books of the Covered Banks, domestic private non-financial sector deposits are currently one and a half times greater than all foreign deposits combined. On the other side of the balancesheet, ratio of assets issued against domestic residents to assets issued against foreign residents now stands at 159% - the highest since December 2004. Again, this means that banks balancesheets are becoming more, not less, dependent on domestic deposits and assets, which in turn means more, not less risk concentration.

This absurdity passes for the State banking sector reforms strategy that force Irish banks to unload often better performing and more financially sound overseas investments in a misguided desire to pigeonhole our Pillar Banks into becoming sub-regional players in the internal domestic economy. In time, this will act to reduce banks ability to raise external funding and, thus, their future lending capacity.

Aptly, the latest trends clearly suggest increasing concentration and lower competition in the sector across Ireland. While ECB only reports a direct measure of market concentration (or monopolization) for the banking sector through 2010, the trends from 1997 reveal several disturbing facts about our domestic banking. Firstly, contrary to the popular perspective, competition in Irish banking did not increase during the bubble years. Herfindahl Index – the measure of the degree of market concentration – for banking sector in Ireland remained static at 0.05 in 1999-2001, rising to 0.06 in 2002-2006, and to 0.09 in 2009-2010. Secondly, back in 2010, our banking services had lower degree of competition than Austria, Germany, Spain, France, UK, Italy, Luxembourg, and Sweden. On average, during the crisis, market concentration across the EU banking sector rose by 8% according to the ECB data. In Ireland, this increase was 29% - the fastest in the euro area. Lastly, the data above does not reflect rapid unwinding of foreign banks operations in Ireland during 2011, or the emerging duopoly structure of the two Pillar banks.

Meanwhile, the banks continue to nurse yet-to-be recognized losses on household, SMEs and corporate loans as recent revision of the personal bankruptcy code induced massive uncertainty on risk pricing for mortgages at risk of default. In addition, Nama constantly changing plans to offer delayed repayment loans and mortgages protection, destabilizing banks risk assessments relating to existent and new mortgages, property-related and secured loans. The promissory notes structure itself pushes the IBRC to postpone as much as possible the winding up process.

To summarize, evidence suggests that seven months after the Exchequer completed a €62.9 billion recapitalization of the Irish banks, our banking system is yet to see the light at the end of the proverbial tunnel. Far from being ready to lend into the real economy, Irish banks continue to shrink their balancesheets and struggle to raise deposits. Their funding profile remains coupled with the ECB and Central Bank of Ireland repo operations – a situation that has improved slightly in the last couple of months, but is likely to deteriorate once again as ECB launches second round of the long term refinancing operations at the end of this month. In short, our banking is still overshadowed by the zombie AIB, IL&P, and IBRC.

Let’s hope Bank of Ireland, reporting next week, provides a ray of hope. Otherwise, the latest Government guarantees scheme can become a risky pipe dream – good for some short-term PR, irrelevant to the long-term health of the private sector and damaging to the Exchequer risk profile.

CHART

Source: Central Bank of Ireland

Box-out:

This week, Minister Richard Bruton, T.D. has made a rather strange claim. Speaking to RTÉ's News, Mr Bruton said that last year's jobs budget had created 6,000 jobs in the hotel and restaurant sector. Alas, per CSO’s Quarterly National Household Survey, the official source of data on sectoral employment levels in Ireland, seasonally adjusted employment in the Accommodation and food service activities sector stood at 119,100 in Q3 2009, falling to 118,200 in Q3 2010 and to 109,700 in Q3 2011. While jobs losses in 12 months through Q3 2011 – the latest for which data is available – were incurred prior to June 2011 when the VAT cuts and PRSI reductions Minister Bruton was referring to were enacted. But even if we were to look at seasonally adjusted quarterly changes in hotel and restaurant sector employment levels, the gains in Q3 2011 were a modest 1,400 not 6,000 claimed by the Minister. In reality, any assessment of the Jobs Programme announced back in May 2010 will require much more data than just one quarter so far reported by the CSO. That, plus a more careful reading of the data by those briefing the Minister.

31/10/2011: IRL5 banks - no signs of real improvements in September

Few posts back I looked at the latest data for Irish banking system stability from the CBofI. Here, I complete my analysis by focusing on 5 covered institutions or IRL 5 (previously known as IRL 6 before the merger of Anglo & INBS into IBRC).

Here's the data:

• Borrowing from the euro system by IRL5 has risen from €68,430mln in August to €70,340mln in September. Year on year, this is still down 4.73% or €3,489mln, but at that rate of unwinding IRL6 liabilities to euro system will take, oh, some 20 years (!)... Mom, the increase in borrowing from the euro system was €1,910mln or more than 50% of the reductions achieved yoy.
• Deposits from Irish residents in IRL6 were up from €192,431mln in August to €193,929mln in September, prompting cheers from the Irish Times and Department of Finance, among others. Mom rise of 0.78% or €1,498mln contrasts a 22.22% decline yoy in very same deposits or €55,393mln loss. In other words, to get us back to September 2010 levels (not exactly healthy ones) at current rate of mom increase would take 37 months. In the last three months, on average, deposits were down €26,337mln compared to 3 months through June 2011 (-12.05%).
• The mystery of rising deposits is explained easily by looking at their composition: Monetary and financial institutions (aka other banks) have seen their deposits in IRL5 rising €1,298mln in September (+1.47%) mom, although these deposits are down €32,308mln or -26.53% yoy. This explains 87% of the entire increase in the overall deposits.
• In addition, General government deposits also rose €333mln in September (+16.28%) mom, explaining the remainder of the rise in overall deposits, heralded by our Green Jerseys as 'signs of improvement/stabilization' in Irish banks.
• In contrast to the above two sub-categories, private sector deposits in Irish banks (IRL 5) have shrunk in September by €133mln (-0.13%) mom and are down 18.12% (-€22,589mln) yoy. September marked 5th consecutive month of declines in private sector deposits, which have shrunk by €6,135mln since April 2011.

As mentioned above, borrowings from the euro system have gone up in September. In contrast, as shown in the chart below, total borrowing from the ECB & CBofI have declined slightly in September to €123,596mln from €124,379mln in August (a mom drop of 0.63%). Year on year, the borrowings are still up massive €28,572mln or 30.7%. Over the last 3 months (July-September), average borrowings from the euro system and CBofI declined 1.39% or €1,748mln compared to 3 months from April through June.

Loans to irish residents have contracted once again in September, reaching €294,224mln against August levels of €294,503. The declines were accounted by drops in loans to MFIs and increases in loans to the General Government (+€58mln) and Private Sector (+€95mln). hardly anything spectacular.

Now to the last bit - recall that the comprehensive reforms of the Irish banking sector envision deleveraging Irish banks to loans-deposits ratio of 125.5%. These targets were set in PCARs at the end of March 2011. back in march 2011, LTD ratios stood at 143.25% for all of the IRL6/IRL5 and 173.71% for private sector LTD ratio only. Since then, if anything was going up to the CBofI / Government plans, we should have seen at least some reductions in LTDs.

As chart above illustrates:

• Overall LTD ratio for IRL5 at the end of September 2011 stood at 151.72% - below August reading of 153.04%, but well ahead of March 2011 reading of 143.25% and certainly much ahead of the target of 125.5%.
• For private sector loans and deposits, LTD ratio was 174.61% in September - ahead of 174.29% in August and still above 173.71% back in March.

And the summary is: there's no real stabilization or improvement I can spot in the above for IRL5.

10/08/2011: Was US markets panic behind Irish banks shares crash?

I've just crunched through some interesting data on VIX and Irish Financials index IFIN and there are some interesting results.

To remind you - VIX is in effect a market-based metric of risk in the US markets.

The main premise advanced by the proponents of the argument that US financial crisis drove Irish financial crisis is that panics in the US have caused irrationally pessimistic revaluations of the Irish financial equities and thus led to the collapse of the banks shares in H2 2007- H2 2009.

To assess this, I divided daily data from VIX and IFIN into three periods. Pre-crisis period covers data from January 2000 through July 2007. Financial crisis period covers data from August 2007 through December 2009, while Sovereign crisis period runs from January 2010 through today.

Given the nature of data, VIX data for intraday spreads is only available since September 2003.

Table below summarizes core stats on the data:
Several features worth highlighting in the above:

• IFIN data shows declining positive skew over the evolution of the crises, while VIX shows growing positive skew. This suggests that rising US risk aversion (VIX) was becoming structural over time as crises progressed from financials to sovereigns, while Irish financials were moving from positively skewed distribution in the pre-crisis period (positive non-risk premium to Irish financials) to progressively smaller positive skew in the crises periods. This is not consistent with the risk spillover from the US to Ireland story.
• Intraday variation in Irish financials remains smaller than in VIX, but shows qualitatively similar dynamics to VIX. However, increase in intraday variation during the crises is much stronger in the Irish financials than in VIX, which again suggests that risk pricing in the US markets had little to do with Irish financials risk-pricing. Notice that intraday spreads are highly non-normal in their distribution with third and fourth moments off the charts.
  
• 1-month dynamic correlations between VIX and IFIN remained negative across all periods (implying that rising US risk was associated with falling IFIN valuations), but relatively weak (at maximum mode of 0.35 on average). median correlations show a bit more dynamism during the crisis, rising from -0.41 in pre-crisis period to -0.51 during the Financial crisis period and declining to -0.45 in Sovereign crisis period. However, these are not dramatic either. In fact, positive skewness was reinforced during the Financial crisis period, while negative kurtosis declined in absolute value.

Chart above summarises the entire series of data, showing historically relatively weak, but negative (as expected) correlation between the values of Irish financial shares and the risk levels in the US markets.

Chart below breaks this down into three periods:
What's interesting in the above chart is that:

1. Correlation remains negative but explanatory power significantly declines in the period of Financial Crisis (so the picture is the opposite of the claim that the US 'panic' spilled over into Irish markets), while the slope remains relatively stable.
2. More interestingly, the relationship completely disappears since the onset of the Sovereign crisis. basically, once the IFIN hit 4,000 levels, there is no longer any meaningful connection between Irish financial shares prices and risk attitudes or perceptions in the US markets. Guess what - that magic number was reached around 29/09/2008.

Chart below plots 1mo dynamic correlations between VIX and IFIN
While correlations tend to stay, on average, in the negative territory, as the table above shows, they are not significantly large. In fact, overall during the Financial crisis period there were 318 instances of the correlation equal to or exceeding (in mode) 0.5 - or 51% of the time. In pre-crisis period this number was 42% and during the Sovereign crisis so far - 45%. But there is a slight problem in interpreting this 51% as the spillover effect from the US. During the Financial crisis period, pre-Lehman collapse, higher correlations took place 58% of the time, while post-Lehman collapse they took place 45% of the time. So overall, it appears that US risk attitudes (aka 'panics') were more related to adverse movements in IFIN before the Big Panic took place than during and after the Big Lehman's Panic set on.

Interestingly, there is also no evidence that changes/volatility in the US attitudes to risk had any significant serious impact (adverse or not) on volatlity Irish financial shares valuations, as shown in the chart below:
In no period in our data is there a strong relationship between changes (volatility) in US risk attitudes and the Irish financial shares valuations volatility.

A note of caution - these are simple tests. The data shows a number of problems that require serious econometric modeling, but overall, so far, there is no strong evidence to support the proposition that Irish banks shares or financial shares have been significantly and systematically adversely impacted by the US 'panic' or by 'Lehman collapse'. Our banks problems seem to be largely... our banks own problems...

29/05/11: Who's to be blamed?

Here's an interesting chart based on ECB data for lending rates charged on various types of loans:
What does this hart tell us? Several interesting things:

1. In so far as the euro area retail rates are linked to the ECB rates, it appears that the lenders were factoring in a positive risk premium on Irish companies for large loans and small loans alike 9as reflected by the positive premia on corporate lending of both types). throughout the 2003-2010 period, Irish companies borrowings were priced at a risk premium relative to the Euro area average.
   
2. This premium has declined (bizarrely) for larger loans (as the risk of borrowers rose during the crisis, the premium fell) and it rose for smaller loans (presumably the SME effect - with SMEs being more risky as borrowers in the crisis).
3. On the net, it is hard to make an iron-clad case that ECB was driving over-lending to Irish corporates, as these corporates did face a risk premium on their borrowings.
4. Where things really break down is in the housing mortgages lending. Here, there was and remains a deep discount on Euro area average when it comes to Irish lenders rates. Only during 2010 did this discount briefly turned to a premium. The trend is still on an increasing discount, which would be consistent with a lenders' perception that Irish house purchasers are lower risk than Euro area average. Which, of course , is a farce.
5. So the net result is that it is hard to make a real direct case that the ECB reckless interest rates policy was the sole or the main driver of Irish over-lending. Instead, the evidence suggests that it was our own lenders' (banks) enthusiasm for underpricing risk in housing finance that was at pay consistently before the crisis onset and since then.
   

13/02/2011: IMF's statement on Iceland

I twitted about the latest conclusions from the IMF on the state of Icelandic economy post-banks collapse. Here are the exact details of the IMF statement and the statement itself. Emphasis and comments in brackets are mine:

"Financial sector restructuring is moving forward [in contrast, one may add to Ireland's]. Savings banks and non-bank financial institutions are being recapitalized [in Ireland's case, recapitalizations of the banks have been predominantly wiped-out by the continued writedowns, so net increases in actual capital have been negligible], and the supervisory framework is being strengthened by amendments that will be enacted in the coming months [no serious far-reaching amendments have been introduced in Ireland since the beginning of the crisis and the marginal ones that were are yet to be enacted].

"Moreover, recent agreements to restructure the debts of households and small enterprises will help put households, corporations and banks on a more secure financial footing, which is essential for a sustainable recovery [this stands in contrast with what has been happening in Ireland. In addition this directly and indisputably puts the blame for the policy errors in the Irish case onto our Government and EU shoulders, for it is clear that within the EU/IMF deal framework, the IMF was basing its policy proposals on their experience in Iceland].

“Policy discussions focused on the strategy to liberalize capital controls, fiscal and monetary policies, and financial sector reforms [none of these issues are even on our agenda].

Here is the actual press release from the IMF

Economics 23/11/10: How much will Government need to borrow in 2011

So we topped the European chart again today:
And a quick one for the start of the day tomorrow:

Let's do some arithmetic again:
Leni's Proposition 2: Through 2011 IRL Gov will need

• €18bn in deficit financing +
  
• €30-40bn in deposits shoring +
  
• €15bn in banks capital (note - some this can be spread over couple of years)+
  
• Banks losses cover of, say, another €10bn =
  
• Grand Total of 73-83bn.
  

Check: is that right, Leni? No answer so far... oh, well... we did the sums, as he asked.

Economics 31/8/10: IL&P reporting

The ‘healthiest of the sick’, IL&P reports its numbers today. Here are the headlines:

• Operating loss is €10mln in H1 2010, down from a loss of €51mln H1 2009 – causes – lack of further deterioration on 2009 figures on the bank side and serious gains on the life insurance side.
• Operating profits on the life side are €92mln (up from €84mln in H1 2009)
• Bank operating loss of €131mln – equivalent to that in H1 2009. Its clear that 'healthy' IL&P is bleeding heavily on ptsb side.
• Ptsb is one of the largest mortgages lenders in the country, so their mortgages book should be – on average – performing above other banks. Here are some data: arrears > 90 days to the end of June 2010 in Irish residential mortgage book increased to 5.2% of the portfolio (H12009 figure was 3.9% so there was a significant jump). Non-performing mortgages are at 6.9% of the total loan book, up on 4.9% at the end of H2 2009. 32% of arrears cases are related to 100% mortgages – a predictable result as (a) 100% interest-only mortgages are of more recent vintage, hence written against younger families with higher probability of unemployment, and (b) these types of mortgages are more likely to involve purchases of buy-to-rent properties .
• Bad debt provisions are at €150mln compared with €189mln in H1 2009, highlighting the fact that more realistic provisioning earlier in cycle usually helps to underpin the book better than the AIB-style denials. Overall provisions balance is up €141mln to €618m.
• Margins are down to 0.81% (2009 full year margin was a poor 0.83%) despite hikes in the mortgage rates.
  
• As IL&P needs to raise ca €1.3-1.8bn more in bonds (good luck to them trying), higher cost of borrowing is going to further depress margins. So expect even more mortgage rates hikes from IL&P in months ahead. The bank has currently a €8 billion reliance on the ECB, unchanged. Hefty for a minnow.
• Bank’s loan to deposit ratio was down to 240% from 246% - far, far away from the prudential banking model that would imply LTDs of 95-100%.

Economics 29/09/2009: Nama Trust Full Costs

Full balance sheet for either a 'nationalization option' or my Nama Trust idea is here, now with bonds figures (courtesy of Peter Mathews):