20/6/15: Keep Faith in Ireland's Energy Regulator

So remember the promise of CER-driven regulatory pricing of energy in Ireland? It went something like: we set high tariffs to encourage competition which will lower prices in the long run.

The problem is: the long run never arrives, while prices remain set sky high, effectively extracting cash out households to sustain huge pay perks in the energy sector and massive white elephant investment schemes by dominant players in the markets.

Want evidence - take Eurostat data (http://ec.europa.eu/eurostat/documents/2995521/6849826/8-27052015-AP-EN.pdf/):

Our 'independent' regulation model means that state-owned quasi-monopolies are fleecing consumers at the rate of pricing that is the highest in the EU. Lower incidence of energy-linked taxes and levies results in total end price to consumer being the third highest in the EU. But in terms of what producers collect - it is the highest. Say 'cheers' next time you pass by the surreal 'charging' stations that ESB erected around Dublin for imaginary electric cars. They are paid for by you and me. Say 'thanks' next time you hear that ESB average salaries are in excess of EUR80K/pa - they too are paid by you and me.

That is some achievement of our 'independent' regulator. The same one who is now regulating Irish Water that promises, again in the proverbial long run, to deliver better services at better cost.

Have faith and keep paying!

19/6/2015: Two charts plotting long term GDP crises and cumulative growth

One hell of a neat chart plotting cases of largest GDP drops in history (since 1950) by country and period:

via @FT, h/t @ReutersJamie 

Note Russia, Ukraine, Georgia and rest of the former USSR.

Now, using IMF database, and referencing the first year when there is sufficient consistent level of data covered in the database (1993), here is a chart plotting 50 lowest growth states in the global economy in terms of cumulative real GDP increases between 1993 and 2014:

Have fun with this.

19/6/2015: Greek ELA and ECB... What's the Rationale?

The price of getting Greece ejected or pushed out of the euro has now risen once again as ECB added to the ELA provided to Greek banks amidst a bank run that is sapping as much as EUR800mln per day.

In basic terms, ECB is allowing lending via Eurosystem to Greek banks to fund withdrawals of deposits. Once deposits are monetised and shifted out of Greek banks, Eurosystem holds a liability, Greek depositors hold an asset and the latter cannot be seized to cover the former. ECB was very unhappy with doing the same for Ireland at the height of the crisis, resulting in a huge shift of ELA debt onto taxpayers' shoulders via Anglo ELA conversion into Government bonds.

But ECB continues to increase Greek ELA. Why? We do not know, but we can speculate. Specifically there can be only three reasons the ECB is doing this:

Reason 1: increase the cost of letting Greece go. If Greece crashes out of the euro zone, the ELA liabilities will have to be covered out of Eurosystem funds, implying - in theory - a hit on member-states central banks. In theory, I stress this bit, this means higher ELA, greater incentives to keep member states negotiating with intransigent Greece. Why am I stressing the 'in theory' bet? Because in the end, even if Greece does crash out of the euro area, ELA liabilities can be easily written off by the ECB or monetized (electronically) without any cost to the member states.

Reason 2: keep Greece within the euro area as long as possible, thus allowing the member states to hammer out some sort of an agreement. In theory, this implies that the ECB is buying time by giving cash to Greek depositors so they can run, in hope that they continue to run at a 'reasonable' rate (at, say, less than EUR2 billion per day or so). In practice, however, this is a very short-term position.

Reason 3: ECB is monetizing Greek run on the banks in hope that Greece does crash out of the euro. Here's how the scheme might work: increasing ELA for Greece weakens Greek banks and, simultaneously, strengthens the incentives for Greece to exit the euro once deposits left in the system become negligible and the economy is fully cashed-in. On such an exit, Greek residents will be holding physical euros that cannot be expropriated by the Eurosystem, and thus Greece can launch drachma at highly devalued exchange rate, while relying on a buffer of cash in euros held within the economy.

I am not going to speculate which reason holds, but I will note that all three are pretty dire.

Take your bets, ladies and gentlemen.

17/6/2015: Mr. John Flynn’s Letter to the Banking Inquiry

Here is a letter by Mr. John Flynn informing the Banking Inquiry Chairman, Ciaran Lynch, T.D. about the issue of overcharging at the Anglo Irish Bank, subsequent extent of the problem in legacy-resolution institutions and detailing the substance of the developments in the U.S. court case relating to Anglo overcharging:

Note: I was informed by Mr. Flynn that he received no substantive reply to his communications to the Banking Inquiry.

Note: You can follow the topic of overcharging and other sharp practices and questionable strategies deployed in the post-banking crisis resolution process in Ireland here:

1. Deputy Peter Mathews June 2015 speech on the issue of overcharging by Anglo, its legacy and issues relating to Nama was covered here: http://trueeconomics.blogspot.ie/2015/06/1062015-bombshell-goes-off-on-anglo.html
2. My summary view of the Anglo’s sharp practices toxic legacy: http://trueeconomics.blogspot.ie/2015/06/11615-anglos-toxic-legacy-it-is-still.html
3. Mr. Declan Ganley’s Affidavit from 2013 concerning overcharging: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html
4. Deputy Mick Wallace’s speech in June 2015 delivered in the Dail on the subject of Nama and Anglo legacy with my introduction of the concept of value destruction: http://trueeconomics.blogspot.ie/2015/06/14615-why-read-wallaces-speech-on-nama.html 
5. Mr. John Morrissey’s legal letter on overcharging: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html 
6. Nama value destruction contextualised in a sample of 10 deals concluded by the agency: http://trueeconomics.blogspot.ie/2015/06/17615-10-cases-worth-asking-nama-about.html
7. Mr. John Flynn’s letter to the members of the Dail covering Irish and U.S. evidence on overcharging: http://trueeconomics.blogspot.ie/2015/06/17615-mr-john-flynn-letter-to-tds-on.html 

18/6/15: Russian Central Bank Targets Rebuilding of Foreign Reserves

Recently, speaking at a banking conference in St Petersburg, Elvira Nabiullina, head of the Central Bank of Russia outlined the CBR position on foreign exchange reserves. Nabiullina note that Russian reserves are large - sufficient to cover almost 11 months of imports. However, Nabiullina's 'comfort zone' target for the reserves to cover 2-3 years of "substantial capital outflows", implying she would like to see Russian reserves rising back to USD500 billion mark. Nabiullina is now targeting purchases of forex over the next few years to drive up reserves and to that objective she has been buying on average USD200mln worth of forex per day since mid-May.

In line with forex reserves rebuilding objective, Nabiullina cautioned about markets expectations of further large scale cuts to interest rates as the CBR is trying to balance out inflation targeting (requiring tighter monetary policy), investment supports (requiring looser policy) and accumulation of reserves (implying looser policy).

Per Nabiullina: "Attempts to reduce the interest rates too fast or even acquire certain assets may simply lead to stronger inflation, to an outflow of capital or to dollarisation of the economy, and that would slow down the economic growth, other than promote it."

In its latest outlook, CBR forecast unemployment reaching 6.5% this year from the current rate of 5.6%, before falling to 5.6-5.8% by 2018. GDP is expected to shrink 3.2% in 2015, returning to trend growth of 1.7-2.4% around 2017-2018. Inflation is expected to hit 11% at the end of 2015 with rather optimistic outlook for a decline to "less than 7%" by June 2016, and "close to the target level" of 4% in 2017.

Net capital outflows are expected to decline from USD90 billion in 2015 to USD55-65 billion in 2018. "We are expecting the financial sanctions against Russia to remain in place. Payments on foreign debts during this period will constitute the bulk of the capital outflow. It will gradually reduce from $90 billion to about $55-65 billion during 2015-2018, depending on the scenario," according to Nabiullina.

Russian International Reserves reached USD360.6 billion at the end of last week, up on USD356 billion low registered in April 2015. Still, the reserves are down USD117.7 billion y/y (-24.6%) and down USD132.73 billion (-26.9%) on pre-sanctions period.

18/6/15: Tripling Permissions... and Where's That Construction Boom?

CSO released Planning Permissions figures for Q1 2015 with the following summary:

Which certainly conveys a sense of a veritable boom going on in the construction sector future activity pipeline. Yes, tripling of the apartments permissions and doubling of total dwelling permissions.

But here are the numbers in their more sober presentation. Please, mind - these are numbers from CSO itself.

• Total number of planning permissions granted in Ireland in 1Q 2015 stood at 3,895. which is 11.2% higher than in 4Q 2014, but only up 1.62% y/y. In 1Q 2014, the same rose 17.04% which is much faster than in 1Q 2015. So the boom is getting less boomier.
• Current level of planning permissions granted is 77.5% lower than at the peak while at absolute minimum of the crisis it was 81.1% lower. In other words, we are not that far from the crisis trough.
• Current level of planning permissions granted is 10.27% below the absolute minimum achieved in 1975-1999 period.
• The record busting quarter of 1Q 2015 is actually 13.76% below the quarterly average between 1Q 2011 and today.
• Dwellings saw planning permissions granted rise to 1,065 in 1Q 2015 which is 21.3% ahead of 4Q 2014 (remember - seasonal variation not accounted for). 1Q 2015 number is 19.5% ahead of 1Q 2014, so there is nice growth here y/y.
• Still, 1Q 2015 reading for dwellings permissions granted was 85.9% lower than pre-crisis peak, 26.9% lower than 1975-1999 period lowest recorded number and is 35.4% lower than the quarterly average for the period from 1Q 2011 through 1Q 2015.
• In Sq. Footage terms: total volume of planning permissions granted in 1Q 2015 came in at 952,000 sq.m. which is 28% ahead of 1Q 2014, but 85.8% below pre-crisis peak. Things are getting healthier here, but still off very low levels.

You can judge the trends for yourself in the following charts:

Boom here?

Or boom here?

Or maybe a boom here?

Ah, at last, a boom here?

Oh dear... gotta be next time...

17/6/15: Mr. John Flynn Letter to TDs on Anglo/IBRC/Nama Overcharging

Here are the direct exerts from the correspondence sent by Mr. John Flynn to a number of TDs in relation to the Banking Inquiry on December 22, 2014. Italics in bold are mine (for emphasis). 

“I am attaching various information …which results from BankCheck …report into overcharging at Anglo Irish Bank.  Following a three year (and ongoing) investigation, I am attaching its interim report of May 2014.  

The overcharging identified continues to fall on borrowers to this day through Anglo Irish Bank legacy loans inherited by IBRC, NAMA and the various Private Equity funds that have acquired them, because both methods of overcharging that were discovered continue to rack up excess interest.”

Note: this is aserious allegation that echoes other claims submitted on the subject. The reason is simple: investment funds acquired distressed and other loans priced based on current interest yield (at least in part). If the current yield incorporated overchraging, and this was not disclosed to the buyers of the assets, then the sale of these instruments can be of questionable validity and can be potentially contested by the buyers of these assets. Likewise, any parties that continue overcharging while holding the loans can also be subject to legal action and incur costs of such practice. Beyond continued overcharging, the legacy of this sharp practice by the Anglo is also contained in those cases where a new (legitimate) interest rate applies on past interest charges incurred under the TIBOR. The can of worms gets bigger and bigger with every day the situtation remains unresolved.

“As admitted when questioned by us in the IBRC Chapter 15 Bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware, on October 8th 2013, the IBRC Special Liquidators stated that IBRC “did realise that it had an overcharging issue”. The IBRC purportedly set up a steering committee, chaired by Mr Mike Aynsley to deal with that issue. Reports were prepared and finalised by the end of 2010. The said reports were then forwarded to the board of IBRC, the Regulator and the Central Bank for their review and comment in order to, “make sure that everybody was comfortable in the work that was undertaken, and trying to get to the bottom of the cost of funds issue, which they (sic) contractual rate of interest that was being charged was different than the actual rate of interest being charged.” That report and the report of the Special Liquidator which examined the the IBRC report has never been published and their contents are unknown to the public.”

So what we have here is the allegation that:

1) IBRC knows and recognises the problem;

2) IBRC – alongside others – have notified the problem to the authorities;

3) No action has been taken by anyone; and

4) No action has been taken identify other injured parties and to inform the public.

Draw your own conclusions what these points, taken together, amount to.

There is more when it comes to the overcharging allegations: “The attached BankCheck report mainly addresses the matter of manually altered systemic LIBOR/DIBOR/EURIBOR manipulation from 1990 to 2004 and not the 360/365 systematic computer generated overcharging from 2002 to date, whereby the bank overcharged its customers with an extra 5 days interest per annum - as held by Ms. Justice Finlay Geoghegan in her Judgment of October 2014 in Anglo Irish Bank v John Morrissey (Record No. 2011/1548). The reason for the limitation of the BankCheck investigation is that while the 360/365 "scam" could possibly be explained away as "a computer error”  the daily random manipulation of the LIBOR rate could not.  The Report is currently being updated, as further information has been made available to us since May 2014.”

This raises the second point of overcharging – on top of the original. Not only Anglo imposed false charges on its customers, it also altered the base (the duration) over which the interest accrued. By switching from 360 days contracted arrangement to 365 days basis for calculation of interest charges, while retaining the rate, Anglo de facto, it has been found, charged an extra 5-days/per annum premium on the loans. Explaining this as a computer error is a bit generous, but even if we allow for such, there is a pesky issue of compensation for an error and culpability. After all, remember an actual computer systems error in the case of the Ulster Bank for which the bank was fined heavily and paid out compensation to its clients?

Here is an interesting bit: per Mr. John Flynn, “I have not included back up data (including fallacious daily LIBOR term sheets published from within Anglo Irish Bank) with this initial email as it is voluminous, but it is available …. if you wish to pursue the matter further.”

According to Mr. Flynn, neither the banking inquiry, nor anyone else contacted in the Dail, have requested the evidence. Worse, with exception of standardised replies from two TDs, there has been no engagement with the author of the statement and the holder of the evidence.

Please note, the allegations contained in the quotes below are those of the author of the letter, and I am simply providing these clearly separate from my comments on these.

You can follow the topic of overcharging and other sharp practices and questionable strategies deployed in the post-banking crisis resolution process in Ireland here:

1) Deputy Peter Mathews June 2015 speech on the issue of overcharging by Anglo, its legacy and issues relating to Nama was covered here: http://trueeconomics.blogspot.ie/2015/06/1062015-bombshell-goes-off-on-anglo.html

2) My summary view of the Anglo’s sharp practices toxic legacy: http://trueeconomics.blogspot.ie/2015/06/11615-anglos-toxic-legacy-it-is-still.html

3) Mr. Declan Ganley’s Affidavit from 2013 concerning overcharging: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html

4) Deputy Mick Wallace’s speech in June 2015 delivered in the Dail on the subject of Nama and Anglo legacy with my introduction of the concept of value destruction: http://trueeconomics.blogspot.ie/2015/06/14615-why-read-wallaces-speech-on-nama.html 

5) John Morrissey’s legal letter on overcharging: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html 

6) Nama value destruction contextualised in a sample of 10 deals concluded by the agency: http://trueeconomics.blogspot.ie/2015/06/17615-10-cases-worth-asking-nama-about.html 

17/6/15: Brian Lenihan: The Documentary

RTE documentary about Brian Lenihan http://www.rte.ie/player/ie/show/10432424/.

A person who, in my opinion, has left a very complex, important legacy and, in many ways, deserves more positive credit for his work, courage and determination than some of us sometimes give him. History, as always, will be a better judge. And I believe, it will judge him highly.

17/6/15: 10 Cases Worth Asking Nama About...

So we are having an inquiry into IBRC on foot of an allegation that the 'bank' sold Siteserv asset at a loss to the taxpayers of some EUR10 million or so compared to another bid. Or you might want to hike that loss to EUR15 million if you consider a simple fact that EUR5 million gifted to the Siteserv shareholders in this deal was at best bizarre, at worst negligent.

Then again, we are not having an inquiry (yet) into the ways in which Nama has been trading.

May be we should. For one, there are questions worth asking in the context of economic value destruction concept outlined in this post: http://trueeconomics.blogspot.ie/2015/06/14615-why-read-wallaces-speech-on-nama.html

Why? Because there are some, shall we say, slightly exotic things that might be happening over there.

Define: value destruction as an action or a strategy for managing assets that results in asset value realisation at sale that is below the alternative value that can be obtained by adopting different approach to managing the asset. Now, take some public domain information:

1) In late January 2014 Nama sold project Holly portfolio of Irish non-performing loans to Lone Star Funds for "around €220m and reflecting a circa 41% discount" on par value of the loans. "The nominally-valued €373m Project Holly is comprised of 28 commercial property investment and development loans all lent to Sean Reilly’s McGarrell Reilly Group, secured by around 40 assets," as reported in CostarFinance (http://costarfinance.com/2014/01/23/lone-star-wins-namas-project-holly-loan-sale-paying-around-e220m/). In March 2015 Lone Star Funds sold Project Holly portfolio to US fund Starwood Properties for €350 million. http://costarfinance.com/2015/03/12/starwoods-mortgage-reit-acquires-lone-stars-dublin-office-pool-in-e350m-debut-equity-investment/. Which means the vultures got a return of 59% over 13 months or cool annualised rate of return of 53.5%. That is doubling your money every 16 months. The portfolio included already developed and operating properties, so Lone Star did not add any value to them to make this sort of a return - it simply put up funds in early 2014 to cover the purchase and the sat on the assets for just a year before flipping them. Thus, Nama lost taxpayers a cool EUR130 million and it also wasted EUR130 million of Sean Reilly’s asset. Question is - any inquiry into this transaction by Nama forthcoming? Question two is: did Sean Reilly incur a claim from Nama due to this loss?

2) Property at One Warrington Place, Dublin 2 was sold by Nama to the US fund Northwood Investors for €27 million on 25th of April, 2012. Based on reports in the media, Nama provided 'staple finance' on the deal, whereby it took an unknown percentage of the final price paid as a deposit from the buyer, and allowed the buyer to repay the remainder of funds over some period of time. In July 2014, the building was sold for €42 million to Irish Life http://www.d2private.com/portfolio/one-warrington-place-dublin-2/. This implies an annualised rate of return of 27.2% doubling your money every 31 months. Zero value was added to the building by Northwood as it was fully leased. Given this was a staple finance deal, Northwood most likely had to put down not much more than a few million for taking charge of the asset. Again, we have no idea how the original developer was treated with respect to this loss that Nama crystallised, but we do know that taxpayers got shortchanged on some EUR15 million. As an aside, here is Namawinelake description of the 'financing' side of this deal: "the Northwood deal was NAMA’s first vendor finance deal, whereby NAMA, accepted part of the purchase price by way of a loan. The interest on the loan would have been around 3%, and repayable within five years. The property was yielding 7.25%, based on a €27m purchase price." So Nama 'gifted' Northwood a guaranteed 4.25% uplift via staple financing arrangement on the amount covered by deferred payment - a margin that could have remained taxpayers'. Reports had it, Northwood only put EUR8 million down on its EUR27 purchase.

3) The Forum Building, IFSC, Dublin 1 was sold by Nama for €28 million to Atlas Capital Group (https://namawinelake.wordpress.com/2012/12/30/nama-sells-dublin-office-block-for-e28m-with-eye-watering-10-yield/) in late December 2012. Subsequently, it was flipped for €37.8 million to Hibernia REIT (http://www.irishtimes.com/business/commercial-property/hibernia-reit-acquires-forum-building-in-ifsc-for-37-8m-1.1904874) in late August 2014. There was no value added to the building as it is fully let to Depfa Bank on an annual rent of €40 per square feet on lease which expires in 2029. So over 20 months, the return on this purely speculative holding totalled 89% with annualised rate of return of 46.5% or doubling of your money in roughly 18 months. Taxpayers lost EUR9.8 million.

4) Per Irish Independent report: "The site, at 1-6 Sir John Rogerson's Quay in Dublin's Docklands was sold by NAMA to Australia-based student accommodation firm Urbanest for €7.5m in June 2013. Property investment company Hibernia Reit then paid €17.75m for the same site in August this year - a 136pc increase." http://www.independent.ie/business/irish/nama-site-was-sold-for-double-the-price-after-barely-a-year-30680193.html The set of transactions involving the site is quite bizarre. Urbanest bought the site with a plan to develop student accommodation. It failed to secure planning permission for that and sold the site with no new value added to it for "close to EUR10 million" to "a consortium of private investors" February 2014. Four months later, with no value added to it, the site was resold once again to Hibernia Reit for €17.75m. Adding insult to the injury, the site "has planning permission for 102,000 sq ft of offices, about 5,000 sq ft of retail, two live & work units and one residential unit along with 34 parking spaces. The planning permission expires in 2018". Which means large share of the site value is already attached to it (planning permissions attached to sites carry a large share of the value of the site). At least Urbanest were trying to add more value to the site, but - here's additional farce - it couldn't. Taxpayers lost EUR10 million.

5) Dock Mills, Grand Canal Dock, Dublin 2 was sold in 2013 by Nama to the developer Chris Jones for €1.3 million. Spent €1.4 million converting to offices and then sold on for €13 million to Google in January 2014 (http://www.irishtimes.com/business/commercial-property/google-buys-former-warehouse-at-grand-canal-dock-1.2081392). At least Jones added some value to the building, raising his original investment a return of 381 percent in one year. Taxpayers loss (remember, Nama employs 'the best specialists in property markets' available in Ireland, who, in theory, should have been able to do what Jones did many times over) EUR12 million.

6) There is a big issue with Nama operations as the example of the Battersea Station in London exemplifies. Nama held a loan attached to Battersea that is 'acquired' for roughly EUR480mln. Nama sold the loan in a fire sale in June 2012 for EUR600mln, making, officially a 'profit'. The loan recovered 100% of the value. However, Battersea is expected to generate EUR9-10 billion in profit for the buyers, led by SP Setia. The site is 40-acre sized South Bank of the Thames location with a planning permission for 8.5 million sq.f. of development attached to it. At the time of sale, there were plans afoot for the Tube new northern line extension and a pedestrian bridge linking Battersea with the northern part of London. In other words, the key value points related to EUR9-10 billion in expected profit have already been in place. The sale by Nama represents a clear case of opportunity cost being generated to expedite sales of non-Irish properties under the pressure from the Troika for Nama to generate early disposals. It is also a sign of just how poor Nama development opportunity foresight is. In a joint venture as a passive participant, Nama could have expected to get around 20 percent  share of the profit. Assuming net profit of around EUR5-6 billion, that means an opportunity cost of early disposal of some EUR1.0-1.2 billion. There was virtually no cost for Nama to carry the loans into longer term development. Even if Nama were to hold off on selling the site for another 12-24 months, the likely foregone return on the site would have been some EUR120-150 million. (http://www.independent.ie/irish-news/nama-lost-a-fortune-on-power-station-sale-29950832.html)

Update: in response to some queries about Batttersea Station sale, here are couple of links: http://www.costar.co.uk/en/assets/news/2012/July/EPF-SP-Setia-and-Sime-Darby-complete-400m-Battersea-Power-Station-buy/ and http://www.irishtimes.com/business/commercial-property/nama-lloyds-to-seek-buyer-for-battersea-power-station-1.10783. Contrary to the arguments presented to me by some readers, Nama was in the driving seat of the process, at least Nama is the one that ended up facing the risk of defending the sale: https://namawinelake.wordpress.com/2012/05/01/treasury-holdings-sues-nama-for-hundreds-of-millions/. 

7) Nama sale of the Chicago Spire was a massive miss. Chicago Spire is a large development project located in the U.S. city of Chicago, on 2.53 acre site located immediately north of the Chicago River and bisected by the Lake Shore Drive. The site is zoned as a planned development with present zoning allowing for FAR of 25:1, which means the site can sustain 2.75 million sq.ft. of improvements. Nama-held liabilities associated with the Chicago Spire totalling US$93 million, including rolled up interest. Liabilities to the contractors added some USD22 million but were not held by Nama. CBRE estimated in January 2014 the value of the Chicago Spire site and associated assets at US$327 million at the upper envelope of valuations and with lower applied density at the lower envelope of US$255 million. Nama refused to fund further development of the project or to allow such funding to be raised by the developer in the markets. Nama sold USD93 million (EUR68.4 million) of its loans at close to 40 cents on the dollar, for USD37.2 million (EUR27.4 million). Many turns and twists in this saga aside, the loss to taxpayers on this transaction by Nama can be computed, at lower end, as the loss on the fact that the original developer had a connected party willing to bid some USD110 million on the project and that CBRE's lower end estimate is at USD255 million. Which means a conservative loss of some USD70-USD185 million. This disregards the fact that the Spire had pre-sold a large share of properties to be developed, and Nama actions on the Spire forced these pre-sales to be cancelled.

8) There is an issue of Nama interest rate hedging, which was costing the agency, at around 2012-2014, some 1% of the interest-paying bonds, or roughly EUR200 million per annum. Not exactly cheap pennies when one considers that the rates have been declining, not rising. Here's a living example: in 2013 Annual Report, Nama shows that it made gross profit of EUR6 million on its underwriting the IBRC. But Nama hedging of the interest vis-à-vis IBRC cost the agency EUR8 million. Net result - a loss of interest of EUR2 million. Nama also rung in administrative expenses relating to IBRC of some EUR6 million in 2013, which means total net loss for Nama from its dealings with IBRC stood at EUR8 million in that year. Total cost of dealing with IBRC for Nama was, therefore, greater than the total cost charged by IBRC liquidators.

9) In CAG report looking at Nama operations over 2010-2012, the agency was shown to be net yield of 5% on its holdings of rented properties. Net of funding cost, the yield was around 4% pa. At the same time, Nama was aggressively disposing of rented properties. The only way that strategy made sense was if Nama expected declining capital values in the markets where it was selling properties: U.S., UK and (smaller segment) Ireland. Nama was, during that time, of a view that property prices will rise in all three markets, directly contradicting the logic for accelerated disposal. Namawinelake provided an example of "the madness of NAMA’s strategy to dispose of rent-producing properties. Take a €100m commercial property which is generating €5m per annum. NAMA’s cost of funding is 1% or €1m. So,NAMA is generating a profit of €4m. In addition, the likelihood is that the value of the underly-ing property is increasing. Commercial prices are up 7.7% in the UK in the 12 months to April 2014, commercial prices in Ireland are up 14.1% in the four quarters to Q1,2014. So, by selling the property at the start of 2013, NAMA will have foregone €4m in profit in 2013, [and] the benefit of the capital appreciation of €7.7-14.1m." Chop change this ain't: hold a rent-yielding asset for an extra year, get a return of EUR11.7-18.1 million on each EUR100 million, net of all costs. Speculation aside, actual numbers: Nama's interest income was down 20% in 2013, but Nama's non-disposal income (primarily income from rents) was down €400m or 33% in 2013, having declined b EUR300 million annually in 2010-2012. That's cool EUR1 billion foregone in just 3 years in rental income alone, and capital gains lost of some 21% - estimating very conservatively.

10) Small, but visible, Booterstown Marsh site was sold by Nama for EUR400K and resold less than two years after that for over EUR1 million.

You can follow the topic of overcharging and other sharp practices and questionable strategies deployed in the post-banking crisis resolution process in Ireland here:

1. Deputy Peter Mathews June 2015 speech on the issue of overcharging by Anglo, its legacy and issues relating to Nama was covered here: http://trueeconomics.blogspot.ie/2015/06/1062015-bombshell-goes-off-on-anglo.html
2. My summary view of the Anglo’s sharp practices toxic legacy: http://trueeconomics.blogspot.ie/2015/06/11615-anglos-toxic-legacy-it-is-still.html
3. Mr. Declan Ganley’s Affidavit from 2013 concerning overcharging: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html
4. Deputy Mick Wallace’s speech in June 2015 delivered in the Dail on the subject of Nama and Anglo legacy with my introduction of the concept of value destruction: http://trueeconomics.blogspot.ie/2015/06/14615-why-read-wallaces-speech-on-nama.html 
5. John Morrissey’s legal letter on overcharging: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html 

17/6/15: European Policy Uncertainty: May 2015

The latest reading for the European Policy Uncertainty Index (measuring economic policy uncertainty as reflected in the media sources) has continued to trend within the range of the crisis period averages in April-May 2015. This range has been now sustained since September 2014 when the index reversed local decline to below-average levels over the sub-period of March 2014 - August 2014.

Over time, we continue to trend within the post-crisis regime associated with above-historical average levels of policy uncertainty. The trend toward uncertainty decline in the post-crisis period has now slowed down and showing signs of potential reversal despite the media overwhelmingly tending toward a positive news reporting selection bias.

16/6/15: Indigenous Sectors and Exports: Ireland's Conundrum

In response to my comment on Irish exports of goods data through April, one analyst suggested that things are not as bleak, citing expansion of industrial production in Traditional sectors as a sign of real economy improvements (as opposed to accounting economy of our MNCs-led tax optimisation exports).

No doubt, the comment is correct. Things are not so bleak as Traditional sectors shrinking. In fact, they have been growing and with them, there has been some growth in indigenous exports too.

Here is the latest quarterly data on industrial production separating Modern sectors (MNCs-dominated) and Traditional sectors (which also include a large segment of MNCs, for example in food and beverages).

Yes, Traditional sectors have expanded. Which is good news. But they expanded at a rate of 20.4% over 12 quarters, while tax optimising Modern sectors expanded at a rate of 78.6% over 8 quarters. Good news is not too great, it turns out.

But what about more recent data? I prefer quarterly series for they provide a bit less short run volatility. But as you might ask, here are comparatives:

• In Q1 2015, Modern Sectors output by volume rose 39.4% y/y while Traditional Sectors output rose 10.1% y/y. That's almost 4 times slower rate of growth for the Traditional Sectors.
• In April 2015, Modern Sectors output rose more reasonable 7% y/y (and shrunk 1.1% m/m), while Traditional Sectors output rose 11.3% y/y (and grew 4.7% m/m). That made April 2015 the first month since December 2014 that this happened.
• But what exactly did happen in April to drive Traditional Sectors output up faster than Modern Sectors output? Modern sector includes the following industrial sectors: NACE 20.00 - 21.20 Chemicals and pharmaceuticals: up only 7% in April y/y,  NACE 26.00 - 27.90 Computer, electronic, optical and electrical equipment was up 44.8% in April y/y; NACE 18.20 Reproduction of recorded media up 34.8% y/y in April y/y; and NACE 32.50 Medical and dental instruments and supplies which goes into "Machinery and equipment, not elsewhere classified" reporting line - up 54.8% y/y. So I am slightly puzzled how did Modern Sector manage to post 7% growth when all components of the sector are growing at 7% or higher. The answer is, of course, in the CSO not fully reporting exact components of what is included in the Modern Sectors. 
• On Traditional Sectors side, the biggest gaining sub-sector was "Other Food Products" at 13.2% y/y. Which means that the fastest growing Traditional sub-sector was growing slower than all but one Modern Sector sub-sectors. 

Let's set aside monthly figures, and focus on less volatile quarterly production to recap: in 1Q 2015: there is some growth in the Traditional sectors, but that growth is vastly below the 'miracle' growth recorded in Modern sectors...

16/6/15: Sinn on ECJ's OMT Ruling

Hans Werner Sinn on ECJ ruling concerning OMT:

Not always to agree with, but he's got a point there... Which makes for an interesting debate: is a promise / threat of an action equivalent to an action? In markets - which are based on expectations, as much as physical changes - this just might be so. In which case ECJ shows little ability to understand the market, even if it has great ability to understand the law.