Archive for June, 2011

Figures released by the Central Bank of Ireland (CBI) this morning for the month of May 2011 show that the flight of private sector deposits from domestic Irish banks, which had reversed in April 2011 for the first time since October 2010, has resumed. The flight has resumed at a modest pace. Deposits in the six state-guaranteed financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS) were down just €753m from €108,235m to €107,482m; though such deposits are still up €1bn from the low of €106,309m in March 2011. The banking authorities might take some small comfort from the fact that the pace of private sector withdrawals from the covered banks has slowed considerably from the €3-4bn monthly declines that we were seeing earlier this year and late last year.

However the picture generally is still pretty dismal. All deposits (including Private Sector, Govt, Monetary Financial Institutions, and non-Irish resident) at the covered banks are down €26bn in the month to €285bn, the largest monthly drop since last November 2010 and are now down €130bn on a year ago.

It is noteworthy that the Government has €21.2bn on deposit with the covered banks. The NTMA refuses to disclose if it is paid interest on these deposits.

These deposits are presumably the bailout funds earmarked for the bank recapitalization in July 2011. We are paying the IMF/EU 5.8% on this funding which amounts to nearly €4m per day and which is arguably being totally wasted.

Looking at the total Irish banking system there is one curiosity in the May figures – private sector deposits in Irish-based banks that don’t service the Irish economy (those in the IFSC) increased by nearly €8bn.

The CBI and ECB continue to provide substitute funding for Irish banks which replaces this flight of deposits and Irish banks continue to provide extensive State-backed guarantees on deposits.

So, looking at the deposit figures produced by the CBI. First up is the consolidated picture for all banks operating inIreland including those based in the IFSC which do not service the domestic economy.

Next up are the 20 banks which do service the domestic economy and include local subsidiaries of foreign banks like Danske, KBC and Rabobank. There is a list of all banks operating in Ireland here together with a note of the 20 that service the domestic economy.

And lastly the six State-guaranteed financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS)

(1) Monetary Financial Institutions (MFIs) refers to credit institutions, as defined in Community Law, money market funds, and other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs, and, for their own account (at least in economic terms), to grant credits and/or to make investments in securities. Since January 2009, credit institutions include Credit Unions as regulated by the Registrar of Credit Unions. Under ESA 95, the Eurosystem (including the Central Bank ofIreland) and other non-euro area national central banks are included in the MFI institutional sector. In the tables presented here, however, central banks are not included in the loans and deposits series with respect to MFI counterparties.

(2) NR Euro are Non-Resident European depositors

(3) NR Row are Non-Resident Rest of World depositors (ie outsideEurope)

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This morning the Irish Central Statistics Office (CSO) has released its preliminary analysis of the five-year census that was undertaken on 10th April, 2011. In the so-called inter-censal years, we rely on estimates from the CSO and the Economic Social Research Institute, so the actual census results are eagerly awaited. Here are the highlights

(1) The population in April 2011 was 4,581,269 which is considerably up from the inter-censal estimate of 4,470,000 for April 2010. It is also 8.1% from the last census in 2006. The reason : world-beating birth rates, very low mortality rates and strong inward migration for 2006-2008 partly offset by subsequent outward migration.

(2) For interest and this is not in the census results today : add in the estimated 1,789,000 souls in Northern Ireland and the island of Ireland now has a population of 6,370,269 which compares with an all-time high of 8,175,000 in 1841 just before The Famine and 6,552,000 in 1851 and 5,798,000 in 1861 and an all-time low of 4,228,000 in 1926. Contrast that with the population ofEngland,ScotlandandWaleswhich was 18,500,000 in 1841 and is over 60m today.

(3) There are 2,004,175 dwellings in the State, up from 1,769,613 in 2006. That’s an impressive increase of 13.3% or 234,562 dwellings.

(4) Vacant dwellings which were estimated at 300-350,000 last year are actually 294,202 which is slightly below estimates. Unfortunately we do not have information at this stage about holiday homes, which will feature in the full census reports in 2012. So it is not possible to determine the level of overhang of vacant property inIreland. Overhang is the amount of vacant property excluding holiday homes and what is termed the normal vacancy rate, and is taken to indicate the particular problem thatIreland now experiences as a result of the construction boom in the early/mid 2000s. The overhang was estimated at over 100,000 dwellings last year. Most of the overhang is not in ghost estates where only 33,000 completed or near-completed dwellings are vacant.

(5) The vacancy rate, the percentage of dwellings not occupied, actually dropped from 15% to 14.7%. That might raise eye-brows. Population increased by 8.1% in the period from 2006, whereas dwellings increased by 13.3%. So a decrease in the vacancy rate means there are fewer people on average living in each dwelling. In 2006 there were 2.82 people living in each occupied dwelling, in 2011 that had dropped to 2.68.

(Click to enlarge)

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The Nationwide Building Society has this morning published its UK House Price data for June 2011. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £168,205 (compared with GBP £167,208 in May 2011 and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 9.6% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of June 2011 being GBP £168,205 (or €183,005  at GBP 1 = EUR 1.1108) is 1.6% below the €185,993 implied by applying the CSO May 2011 index to the PTSB/ESRI peak Irish prices.

With the latest release from Nationwide, UK house prices have risen by 3.34% since 30th November, 2009, the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index is now at 885 (because only an estimated 20% of NAMA property in the UK is residential and only 29% of NAMA’s property overall is in the UK) meaning that average prices of NAMA property must increase by a weighted average of 13.0% for NAMA to breakeven on a gross basis.

The short-term outlook for UKresidential remains bumpy. Interest rates may need to rise to contain inflation that is beginning to take hold –  4.4% in February 2011, 4% in March 2011, 4.5% in April 2011  and 4.5% in May 2011 – all on an annual basis. The UK target is 2% so the base rate which has been at 0.5% since February, 2009 may need be raised. The UK March 2011 Budget estimated growth in GDP of 1.7% and 2.5% in 2011 and 2012 and inflation of 4-5% this year falling to 2.5% in 2012.  Net debt will be 60% of GDP this year rising to 71% in 2012. Scary for the UK but paradise compared to the 100%+ in Ireland. The UK is also struggling with a deficit that was 11% last year (compared with 12% in basket-caseIreland) but there are swingeing cuts to public services in prospect to bring the deficit down to 4% by 2014/5. What all of this means for property prices is uncertain of course but the betting is that prices will come under modest pressure and may fall by less than 5% in 2011 – the Office for Budgetary Responsibility was saying 2.7% late last year but finances have deteriorated since then. TheUK has plenty of micro-markets and the betting would be thatLondon and the south-East will fare better than the North of England and elsewhere,Northern Ireland in particular.

This morning also sees the publication of the Q2, 2011 Nationwide’s quarterly series which provides a little more information on regional variations.

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It looks as if Greece is going to avert a crisis for now by agreeing in its parliament the austerity and privatisation programme agreed with the EU and IMF. And the Greek vote tomorrow should be sufficient to release the next €12bn tranche of the first bailout so that Greece can, for now at least, avoid default. In his interview on RTE Radio’s This Week programme on Sunday last, the Irish Minister for Finance, Michael Noonan said that he expected Greece would indeed approve the austerity plan but seemed unconvinced that the plan would actually be implemented. But it will be September 2011 when the next review mission from the IMF/EU descends on Athens to examine progress, so the present fudge provides some breathing space to prepare better and in particular make plans to assist Spain.

As for the remainder of the present Greek phase, a second bailout will be required and it seems that private bondholders might contribute to the second bailout by agreeing to roll-over some of the debt that is maturing in the next 12 months; the so-called French model would allow bondholders to “cash out” a portion of the par value of their bond, and re-invest part of the remainder in a 30-year Greek bond and the rest in an EU bond. The full details seem not to be available but what is important is the claim that some French banks will agree to it, and apparently it is French banks that are most exposed to Greek sovereign debt. But even if the private bond initiative were not to work, the betting on here is that the EU would stump up 100% of the second bailout, such seems to be the resolve to avoid a Greek default.

How Greece will cope with 160% debt:GDP and what happens in September 2011 remains to be seen but for now at least the crisis appears to have receded. So ouzos, cognacs and schnapps all round then? Apparently not inIreland.

On Monday last on the under-rated Vincent Browne show, the veteran broadcaster was going through the regular preview of the next day’s newspapers and then from 30:00 into the programme he said “and we start with the Irish Times and it leads with “Government cautious on initiative to help Greece avert default” turmoil drives notional Irish borrowing costs to a new record and the Government has given a cautious welcome to a French initiative to help Greece avert default by extending some of its debts for as long as 30 years. The plan unveiled by President Nicolas Sarkozy is supported by French banks who have the greatest exposure to Greek sovereign debt. I am surprised that the Government is cautious [ly welcome] about this because I understood that that was going to be the way that we were going to get out of our difficulties here ourselves and ah, that doesn’t come from a junior source.”

There had been a perception in Ireland that should Greece seek a managed default now which would have impacted upon European banks then Ireland might have sought parity of treatment and be given approval to haircut bonds owing by Irish banks. Remember Ireland has practically no bank exposure to Greece and is understood to have a perhaps €200m of public/private sector exposure plus €375m which we lent to Greece last year as our contribution to the first Greek bailout; so a Greek default would have a minimal direct impact on Ireland. But a Greek default agreed to by our partners in Europe might have brought €16bn of unguaranteed senior bonds into play for Ireland, bonds which are presently being repaid at par despite the fact that upto €70bn of public funds are being shovelled into the banks.

So Greece’s success (for now) might result in Irish tragedy. I wonder who the non-junior source, to which Vincent Browne referred, was. And I wonder do we have a Plan B?

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The Central Bank of Ireland (CBI) initiatives to improve transparency in Irish banking continue with the publication of new quarterly statistics on consumer lending and deposits at Irish banks (that includes the so-called covered institutions or state-guaranteed banks, AIB, Anglo, Bank of Ireland, EBS, INBS and Irish Life and Permanent and also the local branches of foreign banks and also credit unions but excluding the Post Office).

The new statistics exclude most lending to businesses, and we can see for the first time how households are engaging with the banking sector. The

(1) In March 2011, there were €87bn of deposits in Irish banks. Now while that is down from the peak of €95bn in March 2009, it is still €13bn more than in March 2007. Remember that these figures are for all Irish banks and they don’t indicate the scale of transfers from the state-guaranteed banks to local subsidiaries of foreign banks. Incidentally it is not clear why there was a 16% increase in deposits between Q4,2008 and Q1,2009 and a query has been submitted to the CBI.

(2) The late Brian Lenihan commented last year that deposits in Irish banks were sticky becauseIreland is an island and he seems to have had a point. Deposits are down by 6% or €5bn in the last 12 months. Now that is a significant outflow but with €87bn remaining, it hasn’t quite been the run sometimes reported. Again though, we don’t a split of how deposits have fared between state-guaranteed banks and local subsidiaries of foreign banks.

(3) With just over 1.5m households in Ireland, the average deposit per household is €60,000. Of course there will be skewing and many households may have no deposits. On the other hand those with millions of euros may have moved their deposits to what they perceive to be safer havens. So when Minister Noonan last week called for us to open our wallets to go shopping, he mightn’t have been as insensitive as he was widely perceived to be.

(4) Those €87bn of deposits might become very attractive to a government which is running out of options with closing the deficit; with the ruling out of income tax increases or cuts to social welfare and presumably our corporate tax arrangements will remain as they are, the government will have to raise €3.6bn-plus next year through cuts to the public sector and what we might term stealth taxes (property, water, community). And with the precedent of imposing a levy established with the pension levy to fund the Jobs Initiative and with a further wealth tax to be introduced (the property tax), then sizing up deposits for a contribution might become feasible as well as attractive, through presumably the ease with which deposits can be moved would be an obstacle to such a tax.

(5) €85bn of the €99bn of outstanding mortgage lending is floating rate, not fixed. So Irish mortgage holders are particularly vulnerable to ECB and banks’ own changes to interest rates. This is likely to be an issue as the ECB is expected to continue to increase interest rates over the next two years. The chart below shows the history of ECB interest rates, and although we have gotten used to low interest rates since the financial crisis in 2008, the main European economies are growing with inflation ticking up so we might find ourselves at the receiving end of unwelcome interest rate rises. According to The Economist magazine “mortgages in southern Europe andIreland are typically variable-rate, whereas fixed-rate housing finance prevails inGermany andFrance” Less than 2% of Irish mortgage lending has a rate that is fixed for more than five years.

(6) Buy-to-let comprises 25% of total outstanding mortgage lending and 90% of it is floating rate.Holidayhomes comprises 1% of total outstanding mortgage lending and over 90% is floating rate.

(7) In March 2008, there was €125bn of total mortgages outstanding. That had shrunk to €99bn in March 2011, with an €8bn reduction in one quarter, Q4 2010 accounting for one third of this decline. It is not clear why there was such an apparent repayment of mortgage debt in that quarter and the matter has been queried with the CBI. Remember also that new mortgage lending has practically ground to a halt with just €577m being advanced in new loans in Q1,2011.

In addition to new quarterly statistics on private household borrowing and deposits, the CBI yesterday also introduced new quarterly statistics for Irish businesses showing borrowing and deposits. Of note:

(8) The outflow of deposits from Irish companies from Irish banks has been far more pronounced than with private households. In the past year alone, deposits have dropped by 18% (from €93bn to €76bn) and business deposits are now back at December 2004 levels.The pace of decline hasn’t eased.

(9) Business lending is down 30% in the past year from €144bn to €100bn; that excludes so-called “financial intermediation” lending like NAMA and is probably a more representative measure of lending in the economy. However there was actually a small increase in net lending in the first quarter of 2011, the first increase since just before the financial crisis blew up in September 2008.

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The cost of Minister Noonan’s inaction on Anglo Irish Bank (“Anglo”) and Irish Nationwide Building Society (INBS) is highlighted today as Anglo repays a €12m senior unsecured unguaranteed bond at par, that is without any haircut or discount. The bonds (ISIN ref: XS0306086157, SEDOL ref: B1ZBPV0) were issued in June 2007 – Sinn Fein finance spokesperson Pearse Doherty yesterday described the bonds as “unguaranteed unsecured” and there is no reason to doubt him. Historical prices appear to be unavailable at the Irish Stock Exchange this morning, but last month Anglo redeemed senior bonds which yielded 30% annualized returns to investors who had bought last December 2010. Our recently announced Jobs Initiative costs €470m per annum, so in a single transaction today we are spending more than the proceeds of one week’s raid on private pensions.

Anglo of course is in receipt of €29.3bn of state-aid, and we are unlikely to see much if any of that back. Indeed the Anglo stress tests published at the end of last month were inconclusive as to whether additional capital, on top of the €29.3bn, would be required – the stress tests merely claimed that the loan loss projections at Anglo that were produced last year were still valid. Anglo no longer has customer deposits which were sold to AIB in February 2011. Anglo is no longer advancing new loans, though there is apparently some lending going on in respect of legacy loans eg Anglo might have an existing loan agreement which compels it to lend additional tranches; however it is understood this additional lending is not significant. And of course Anglo is steadily being merged with that other zombie, INBS. Signs above branches which are closing are being removed. By the end of this year INBS is expected to have merged with Anglo and the merged entity will merely be running-off existing loans over the coming years.

Minister Noonan made some bold announcements Stateside exactly a fortnight ago that he had a plan to burn the remaining €3.5bn of senior unguaranteed unsecured bondholder debt at Anglo and INBS, institutions he referred to as “warehouses” – “it’s no longer a bank. Anglo is now merged with Irish Nationwide. It’s a warehouse for impaired assets. Its deposit base has been moved out into the pillar banks. And it doesn’t work as a bank anymore. You can’t put your money on deposit in Anglo Irish. You can’t get a loan from Anglo Irish. So the only thing that gives it the name of a bank is because it has a banking license. It needs the banking license to access the monies from the Central Bank. So I said that as far as I am concerned, this is not a real bank. This is a warehouse, and we need your [ECB] assistance in dealing with the senior bond holders because we don’t think the Irish taxpayer should have to redeem what has become speculative investment.”

Subsequent to the Minister’s brave announcement, the ECB responded in the language of extortion and the subject now seems to have died, at least until the autumn. Why the autumn? Because Anglo has a particularly big bond repayable in November 2011 according to Minister Noonan (I think he’s referring to the €700m repayable on 2nd November 2011 with bond ISIN ref: XS0273602622).

Meanwhile today, €12m goes from our pockets to Anglo’s account to senior unguaranteed bondholders in a bank without deposits, which doesn’t lend and which wouldn’t exist without €29.3bn of our money, to investors who may be seeing 30% annualized returns on their investment. The reason we are allowing this to happen is because what Central Bank of Irelandgovernor Patrick Honohan refers to as the Calculations mean it is wiser to pay than not to pay.

There are lists of all bonds in the state-guaranteed banks sorted by maturity date here.

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I despair for the future of our society which we know is going to financially suffer in the next four years as the government tries to eliminate the budget deficit – simplistically, the difference between what the government takes in tax and what it pays out for the public sector and welfare. We know that gross wages will remain under pressure with low inflation, high unemployment and anaemic economic growth, at least for the next two years. We also know that there are cuts and additional taxes, €3.6bn in 2012 alone which will need be detailed in  Budget 2011 in December this year. What is despairing is that there doesn’t appear to be any centralised effort in bringing down the existing cost of living so we face the prospect of having lower take-home pay in the years to come but the same or higher living costs.

This is confirmed in the Eurostat report issued today which examines price levels across the EU and in selected other countries. It shows price levels by reference to the EU average which it sets at 100. The table below shows the results,Ireland’s average prices –highlighted in red – are shown as 118 which means that on average, our prices are 18% above the EU norm. And if you look at what I suggest are comparative countries which exclude high-tax/large-public sector Nordic countries, very high income countries and recent Central Eastern European joiners, we are still at the top of the league. Our prices are 13% (118/104) aboveGermany and 18% higher than in theUK for example.

Of course price levels by themselves don’t illustrate standard of living. You need to compare price levels with income which in Irelandhas been at elevated levels in the 2000s in particular. Last week Eurostat released GDP figures for the EU and we are still in the top three countries for per capita GDP in Europe. Subsequent to that release, the veteran journalist Vincent Browne wrote to Eurostat and asked for the GNP figures, which are arguably more relevant to Ireland as so much of our GDP relates to the activity of foreign companies, which when you extract out profits that these companies repatriate, gives a more representative view of the amount of money in the economy. The figures provided to Vincent as reported in the Sunday Business Post showed Ireland’s GNP to be 102.7 being just 2.7% above the EU average, but the Netherlands was 134, Germany at 120, the UK at 115.5 and France at 108.7. Our GNP income has declined dramatically in recent years – as recently as 2007, our GNP was apparently at 127.

So what appears to be happening in Irelandis our income has contracted substantially but prices have remained high. And yet in Irelandwe have a plethora of competition agencies which to my mind are there to ensure products and services are delivered at competitive prices. There is, what I have found to be, the practically-useless National Consumer Agency (who have another two days to start rolling out a mortgage comparison product on the itsyourmoney.ie website; at least that what the EU Competition Commission mandated in February this year). Then we have the National Competitive Council who produced a report last week which included a focus on property cost but ignored the huge price differences between here and Northern Ireland. And then we have the Competition Authority, which was in the headlines recently for its dawn-raid on the Irish Farmers Association’s premises in an investigation into the milk industry. We even have a private-sector Consumers Association. And yet for all of that, prices inIreland are some 18% above the EU average while income is just 2.7% above the EU average.

Now might be a good time for a top-down review of competition. After all, if wages are going to be further hit in the next few years, we might actually have an opportunity to soften or eliminate the effects, if we can get our prices down. Many costs in the State will be a function of wages, so unless wages come down, prices can’t come down. That is why we need a strong competition czar because the circle has to be broken so that prices and wages can come down together. There is also an issue with legacy debt, but that’s an issue for another day.

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You might recall from your secondary school days, Pythagoras’ theorem on right angled triangles that the square of the hypotenuse (the longest side) is equal to the sum of the squares on the other two sides. So a^2 + b^2 = c^2 where a and b are the two smaller sides and c is the hypotenuse. Is it all coming back? And then in the seventeenth century, a bored Frenchman suggested that a^n+b^n=c^n could never be true if n>2. Legend has it that the Frenchman, Perre de Fermat wrote the proof of his theorem in the side margins of a book but alas, it got lost. And so for 350 years, mathematicians tried to prove Fermat’s theorem, which was to have been his last theorem as he died soon after he developed it. The quest to prove the theorem ended in the 1980s when the geeks finally cracked it. All for what you might ask. Well, it gives us an introduction for examining some maths which is very relevant to us inIrelandtoday – Patrick Honohan’s Calculations (“the Calculations”), and it’s particularly relevant as we are all now geeks in the wilderness trying desperately to understood the Calculations .

The Calculations are those referred to by Patrick Honohan, governor of the Central Bank of Ireland (CBI) in March 2011 on the occasion of the publication of the AIB/Bank of Ireland/Irish Life and Permanent stress tests and banking restructuring. On the night of the announcements, the Governor was interviewed by veteran journalist Vincent Browne and the interview is still available here. Vincent repeatedly homed in on the commitment to repay senior bondholders which the CBI had shown as follows in April (following a correction to figures first shown in March 2011)

And what do the Calculations look like? Probably

A < B

Where A is the total cost of repaying bondholders in Irish banks and B is the total cost of not repaying the bondholders. Simple so far, but alas A and B are merely the top level costs and need to be broken down further – much, much further. The cost of repaying the bondholders A, is probably the easier to calculate – after all, we know the figures and the interest rate on the borrowings we need to repay the bondholders.

Now at this point, you might be tempted to introduce other costs such as the damage to Irish society from repaying the debt, the increased class sizes, the reduced healthy life expectancy, the fear and fact of crime for examples; and perhaps also the impact of the decision on the psyche of Irish society. After all, if what is perceived as a grossly unfair course of action is imposed on society, there will be damage to trust, respect and the integrity of society. How do you measure these?  Well, thankfully you wouldn’t have to concern yourself with such considerations to understand the Calculations because Governor Honohan stated that his calculations ended when he arrived at the total “fiscal account”. So if A was €70bn and B was €80bn then the Governor didn’t explore the consequences further. Presumably he would have concluded that because A is €10bn less than B, then the social damage will be less than if we pursue B. There is logic to that approach. Please think about it, it’s not the Governor saying these considerations are not important, it’s him saying that these considerations will flow from the financial calculation of the net fiscal position. So I might offer you a salary of €100k and a 10% shareholding in the company or a total salary of €200k. Your calculation is how much the shareholding is worth – you’re not considering what you can buy with the money or how it will improve your life, at this stage you’re just comparing the financial (or “fiscal accounts”, in the Governor’s terms) position. Fair enough.

But what about the cost of not repaying the bondholders? Now this would appear to be quite a complex calculation and although not at all privy to the Calculations, I would expect a mixture of costs and probabilities; probabilities because there are so many unknowns which depend on assessments of legal, political, reputational, economic, financial system and other issues. The calculation would probably take account of the following

(a) Legal issues. As we are seeing today with the withdrawal of a subordinated debt offer in the UK by Bank of Ireland, on the eve of the hearing in London’s High Court where a group of bondholders was challenging Bank of Ireland, we are seeing that there is legal uncertainty with adopting certain courses of action. We might be able to control matters inIreland, for example through the draconian provisions of the December 2010-enacted Credit Institutions (Stabilisation) Act, and even here there can be constitutional challenges. Overseas, the setting aside of contracts, regardless of the emergency that gives rise to the intereference, might be met with hostility in foreign courts.

(b) State’s finances and banks’ finances : Irish banks are in receipt of €156bn of central bank funding at the end of May 2011. Most, €102.3bn came directly from the ECB where the interest rate charged is understood to be its main rate of 1.25%. In addition, the CBI lent €53.7bn, under the auspices of the ECB, at  3% reportedly. Although Bank of Ireland was able to issue a €750m State-guaranteed bond last October 2010 at 5.9%, the feeling is that today the market would demand 10%-plus if it would lend at all. And as the State owns most of the banking system, there would be a substantial annual cost if the ECB were to withdraw its funding. The Governor referred to the State’s finances as well in his interview, and he was perhaps referring to possible difficulty in returning to the markets.

(c) Spill-over on other banking markets and the consequences for our relationship with the rest ofEurope. The Governor was presumably referring to the perceived fact that it is mostly French, German and British banks that hold senior debt and that should our banks default on those debts, then other banks would suffer losses, and those banks in turn might default on their own bonds, and you might have a damaging domino effect and possibly banks that were borderline surviving going under which might lead to a spiralling banking crisis. Who knows, Irish banks themselves may be exposed to losses from their holdings of bonds. As for our “relationship withEurope”, how would you place a value on that?

(d) If the ECB were to withdraw funding then our banks would fail, and putting aside the contagion effects of our bank failures throughout Europe, inIrelandour banking system would be jeopardised. And given that there was no alternative funding available, it is likely we would need exit the euro. Which would lead to inflation as whatever new currency we introduced would devalue against the euro, so imports would increase in price. Savings would suffer again as a result of inflation. There might be social and political unrest as people lose money, experience inflation and possibly increased unemployment. Foreign investment would suffer as companies would no longer viewIrelandas stable, that there would be foreign exchange risk by locating here, and consequently Foreign Direct Investment would decline and that would impact jobs, taxes and investment generally.

(e) “Known unknowns”. There might have been all sorts of other considerations not accounted for above. There might also have been allowance for “unknown unknowns”

(f) Probabilities. What probability was attached to the ECB withdrawing its funding from Irish banks if there was default on senior bondholder debt? 100%, 50%? What probabilities were attached to legal opinion.

So why can’t we see the Calculations?

Presumably they might expose sensitive political and economic considerations. A 100% probability of the ECB withdrawing funding in retaliation at our burning of senior bondholders might be considered sensitive, especially considering the fact that we are at pains to deny the ECB ever threatened us. Attaching probability to legal opinion might also be sensitive. Arguably however, these concerns are irrelevant in a democracy. And any decision that entails such significant financial outlay should be presented openly so that society can understand the reasoning behind decisions. Adopting the Men-in-Black (“A person is smart. People are stupid”) or A-Few-Good-Men (“The truth. You can’t handle the truth”) mentalities is not acceptable when so much (of our) money is at stake.Irelandis not a dictatorship or oligarchy or technocracy – it’s a republican democracy. That should be respected, and if it is not it should be demanded.

Another argument that might be advanced regarding the concealment from the public of the Calculations is that the people who prepared the Calculations were expert and therefore there is no need to share the Calculations with the general public. Governor Honohan is held in very high personal and professional opinion on here. Remember that alongside the president,  he’s about the only public servant that volunteered, without prompting, a 20% reduction in salary last year. At a time when the role of CBI governor is so demanding and all-consuming, that was a major act of sacrifice and stands to the credit of the man personally. And professionally, he took over in September 2009 after most of the damage had been done to Irish banking and hasn’t shied away from confronting difficulties; he enjoys professional respect for his application and intellect. But for all that, the stress tests in March 2011 were not accurate in light of later revelations such as NAMA losses, and you could argue Governor Honohan should have validated the testing more. He repeatedly got the recapitalisation needed at the banks wrong, in the sense that later estimates tended to balloon. He believed we would need no more than €10bn of the €35bn-bank-earmarked element of the bailout whereas the actual requirement appears to be double that (and we are still to confront the credit unions and INBS and Anglo – these latter two have not gone away and the recent stress tests left unanswered the quantum of additional capital required). Against the above, you could say that the economy has continued to deteriorate as have property prices and the international financial situation has not been kind. But still, Governor Honohan and his experts are far from infallible. And let’s not forget that EBS miscalculated its €2.5bn of bonds by €1bn in March 2011 which resulted in an embarrassing correction by the CBI.

So when can we see the Calculations? Must a society that will, regardless of the equation, suffer painful adjustment, spend 350 years having a stab at why in 2011, Ireland decided that repaying senior bondholder debt was a better course of action than not repaying it?

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On yesterday’s RTE Radio 1 This Week programme, the Minister for Finance, Michael Noonan appeared to claim credit for this new government, which only came to power on 9th March, in respect of the ongoing burning of subordinated bondholders that is expected to contribute €4bn to the €24bn of additional capital identified during the March 2011 stress tests. The Minister told RTE presenter, Dr Gavin Jennings:

“On the bondholders when the debate started there was no way whatsoever when Richard Bruton was arguing the case as FG finance spokesman, that bondholders should share the burden. No-one inEuropewould agree that even the junior bondholders, the subordinated bondholders would share the burden. And yet, that has been allowed now and as I say in the last three weeks alone, that has been worth almost €4bn to the Irish taxpayer in the negotiations we are doing with AIB and Bank of Ireland.”

The Minister said that “that [the burning of subordinated bondholders] had been allowed now” which implies that it wasn’t allowed before now, and that somehow he had wrung some concession from the Europe in this regard. But examining the history of subordinated bondholders wouldn’t support that implication at all. Since September 2008 when the blanket guarantee was introduced plenty of subordinated bonds have been redeemed with discounts by the covered banks (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS). For example in 2009 Anglo redeemed “€1,805m of Tier 1, €307m of Upper Tier 2 and €388m of Lower Tier 2 securities [which] were bought back at prices of 27%, 37% and 55% of par respectively”. In other words Anglo bought back €2,571m of subordinated debt for €819m, paying the subordinated bondholders an average of 32c in the euro. In November 2010, Anglo launched a buyback programme that triggered a credit event. And in December 2010, Bank of Ireland exchanged unguaranteed subordinated bonds for guaranteed bonds at 46-57.5c in the euro. And before the Minister came to office in March, Irish Nationwide had already embarked on a 20c in the euro burning. And lastly, in his outstanding legal battle with Aurelius Capital Management which is a company owning AIB subordinated bonds, the Minister appears to be relying on the provisions of the Credit Institutions (Stabilisation) Act which was enacted in December 2010.

So is it right that the Minister would seemingly claim €4bn credit for himself and his efforts? In terms of the continuing bank bailout, it is going dreadfully and it is difficult to point to any successes. The stress tests and restructuring in March 2011 were put in train by FF/the Greens and even they were working at the behest of the IMF and EU/ECB. The new government has failed to get a cut on the bailout interest rate, failed to burn senior bondholders including those at Anglo and INBS (a month ago Anglo repaid €200m of senior unguaranteed bondholder debt 100%) and failed to get a medium-term facility from the ECB so that our banks rely on funding week-to-week from the ECB which might be withdrawn at any time (the present non-standard liquidity is formally due to stop in September 2011 but the betting is it will be extended for another 3-6 months). When this government rings up a success in dealing with the banks, it will be trumpeted on here. In the meantime it is unedifying to see credit claimed where it is not due.

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Niall Mellon, the property developer behind Knockrabo Developments and the Niall J Mellon group was a guest on RTE Radio 1 yesterday on the Sunday edition of the Marian Finucane show. The show is available online here and Niall’s contribution kicks in at around 40 minutes and lasts just over 30 minutes. The interview gave an interesting counterpoint to the interview the previous day with the NAMA chairman, Frank Daly. Niall himself (pictured here in 2008) is reportedly one of the Top 20 developers in NAMA, and there has been no news about whether or not the 44-year old developer has agreed a business plan with NAMA. In addition to property development, the soft-spoken developer is probably best-known for his housing charity work in South Africa. I came away from listening to the interview thinking Niall is either a modern day saint or one of the cutest hoors you might ever come across. Here are the interview highlights:

In terms of his dealings with NAMA, Niall claims that he was upfront with the agency from day one and offered to sell his two family homes, both of which were “unencumbered” and to give the proceeds to NAMA. It’s not clear what “unencumbered” meant, it certainly meant that the properties were not subject to mortgages according to Niall; it is not clear if they were subject to personal guarantees or if they were personal assets which NAMA could confiscate in lieu of debts personally owing. It was also not clear if Niall’s wife, Nicola had any involvement with the sales or the proceeds. One of the properties, an estate in Kilkenny called Coolmore, which has been on the market at €3.75m for over six months, was sold subject to a binding contract last week according to Niall and should complete in the next two weeks. A house in Mount Merrion in Dublin on 5/6 acres was another home that was offered to NAMA. (UPDATE: 30th June, 2011. The Irish Independent reports that Coolmore fetched approximately €3.25m and that the home in Mount Merrion, called Cedarmount, is presently being painted and may be rented by NAMA. There is a third property in Dublin,  formerly owned by the British embassy, Marlay Grange House in Rathfarnham which has been destroyed in an uninsured fire)

Niall said that he was not one of those developers who had sought €200k from NAMA and that he wasn’t receiving any salary from NAMA – it was a matter of “personal pride” said Niall. When asked about how he was affording “his groceries”, his reply was that he had started other businesses in London, Europe and Africa with €1 (one euro). He also praised the fact that NAMA’s chairman, Frank Daly has moved on in some of his thinking and realised that NAMA is just part of the solution; what he meant by this was although it mightn’t “be proper to some people”, there will be some element of profit-sharing with developers. NAMA, said Niall, will need the best incentivised people on the other side of the table, try to leave something on both sides of the table, and engage developers and get them working as hard as they can. Which makes a lot of sense, but sooner or later NAMA will need reveal the types and quantum of incentives on offer. Previous reporting on here suggested that the incentives might be quite lucrative.

Asked why developers have not been speaking to the media about NAMA, Niall responded that developers might be too busy responding to NAMA’s 50,000 questions, a reference to the burden and bureaucracy of complying with NAMA’s business plan requirements.

In terms of solutions to our present economic woes, Niall’s solutions were predictably property related, we might offer tax allowances of €20k a year for people in negative equity (€4bn a year in total for the 200,000 loans reportedly in negative equity and with an exchequer hit of €1.6bn at 40%). He also thinks there should be a home loan lending agency with funding for €10bn of annual lending.

As for the saintly credentials, Niall explained that 10 years ago when he was 35, he was “informed by a friend” that he was on track to becoming a billionaire by the time he was 45 and it was then that Niall decided that money was not his god and he started a house-building charity in South Africa.

One snippet that was quite interesting and might have led to the pricking-up of ears at NAMA was the claim that in 2007 when he was developing the Meridian Quay building in Swansea – the “tallest building” in Wales, pictured here – he instructed his agents not to sell to Irish people because he  felt they would not be able to complete 18 months later, and that Niall felt a down-turn was on the cards. (UPDATE: 30th June, 2011. The Irish Independent reports that “In the last 12 months, he has sold 50 apartments …[bringing to] 241 the sales in the 291-unit development..the remaining units ranging between £150,000 and £500,000″ and indeed one apartment has reportedly sold for GBP 1m.)

So there you have Niall; a developer in NAMA who praises Frank Daly. Who foregoes demands for a €200,000-a-year salary but sees the merit in NAMA’s incentives. Who thinks that tax incentives and additional property lending is what the economy needs. Who offered NAMA two “unencumbered” family homes. And a man who has a decade-long history at the helm of a major charity. An interesting man, certainly.

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