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Archive for July, 2011

I must say that for me, some of the shine on Wikileaks has worn off in the past two months. The online disseminator of confidential information, most associated with controversial Australian Julian Assange, has been in the headlines constantly in the past two years, though it was founded way back in 2006. The bane of the US establishment, it has published colossal libraries of secret correspondence, photographs and video footage which have shed unprecedented light into the activity of the US in Afghanistan, Iraq and the Guantanamo Bay detention facility. The Wikileaks organisation has also released diverse information on subjects which have included super injunctions in theUK, Scientology, corruption inKenya, membership lists of the British National Party and activities ofIceland’s Kaupthing bank. And although governments and institutions have reacted with hostility towards the Wikileaks organisation, in the main the general public has welcomed the insights and the leverage Wikileaks brings against powerful governments and corporations.

So why the negativity towards Wikileaks? In Ireland’s case, Wikileaks partnered up with the Irish Independent in May and early June 2011 to publish details of secret USembassy cables (that is, written messages generated by US embassies around the world). Wikileaks has had the 250,000-odd cables since November 2010, over six months ago. Yet it is only in May 2011 that we get to see the USembassy in Ireland’s cables. And even then through the filter of one hallowed newspaper. By the way, the Irish Independent is keen to emphasise that there is no reward element in its dealings with Wikileaks. But why can’t we see the cables directly ourselves and why the delay in making the cables themselves available in full online? Since the Independent first reported the cables in May and early June, I have been keeping an eye on the wikileaks.org website expecting to see the cables uploaded. Weeks went by and journalists contacted from here expected Wikileaks to make the cables available days or a short number of weeks after the Independent had first dibs on the material. And the days and weeks passed without any information being uploaded onto the wikileaks.org website. Wikileaks doesn’t respond to requests for information, or maybe just requests for information from modest blogs such as this one. And then last week, the 22nd July according to the date-stamp on the Wikileaks website, cables reported in the Independent on 2nd June were finally made available – seven weeks later. Unfortunately though, it seems that only a subset of the cables reported has in fact been made available for now.

The report in the Independent on 2nd June, 2011 which dealt with NAMA refers to at least five discrete NAMA-related messages from theUS embassy inIreland. It is not clear how many cables these messages are spread across but the Independent does refer to “other cables”. The cables published online last week by Wikileaks include only one that refers to NAMA.  And  that one cable excludes much of the information reported by the Independent. So there are other NAMA-related cables, it’s just that Wikileaks has not published them yet.

The NAMA-related cable that was published states “On April 7 [2009], Econoff spoke with Kevin Cardiff (protect), Second Secretary General at the Department of Finance, who said that the pricing of assets should be finished within three months. Cardiff said he will need about 30 more staff members, who will come in on a contract basis, to set up NAMA and value the banks’ assets.  He hinted that, given the work he and his colleagues have already done, the assets will be discounted by around 50 percent.  He also said that, while this program is modeled on the Resolution Trust Corporation that was put in place following the savings and loan collapse in theU.S. in the late 1980s, NAMA “will be in no hurry to dispose of the assets.” Cardiff said that they could and would hold the assets for “a decade or more if it took that long to get the right price.”

On 2nd June, 2011, the Irish Independent published an article which drew on references to NAMA in the secret US cables. The Independent claims that the Department of Finance hinted that the losses on loans might be 50% – that is true according to the cable. But the Independent goes on to claim that the official line was that losses would be 30%. That’s not true in the sense that the first NAMA business plan projected loans at a value of €77bn would be acquired by the agency, that the loans would be worth €47bn, that is 39% less than the face value. Of course by September 2009, NAMA was also proposing to pay a Long Term Economic Value (LTEV) premium of €7bn bringing the consideration payable by NAMA up to €54bn which is indeed a 30% discount on the €77bn face value.

It is worth noting that property prices were dropping like stones in Ireland and to a lesser extent the UKin 2009. So if the estimate was of 50% losses in April 2009, then six months later they might have been expected to have been closer to 60%. And John Mulcahy, then managing director of Jones Lang LaSalle in Ireland but appointed to NAMA in February 2010 (but on secondment from Jones Lang LaSalle to the NTMA in the role of Interim Head of Portfolio Management since June 2009), should have known about price falls more than most – his own company’s commercial property index fell from 787 at the end of Q1,2009 to 682 at the end of Q3, 2009, a 13.4% drop. During the same period, the key residential property index at the time, the ESRI/PTSB national index fell from 113.2 to 104.5, a decline of 8%.

So even setting aside the complication of the LTEV premium, when the NAMA business plan was being presented to the Oireachtas in September 2009, there is a suggestion that the Department of Finance had knowledge that the figures were misleading, and that the losses implied in the banks were underestimated. “So what?” you might say, there was still a need to correctly value these doubtful land and development loans because our banks could not be trusted by providers of funding when they had such toxic loans on their balance sheets. So regardless of whether the losses were 30% or 50% or 60% there was still a need for a NAMA-type process. Whilst that is probably true, remember that September 2009 was 14 months before we needed to go cap in hand to the IMF/EU/ECB and a year before the deposit run on our banks started in August 2010. If our Dail had known the scale of the losses in September 2009, then might there have been the time to act on bank losses without needing a bailout?

It seems that at the very least the Department of Finance has questions to answer, both about the knowledge in its possession, its disclosure to the democratic organs of our State and whether a better course might have been charted in 2009 when the scale of losses was apparently known. Kevin Cardiff is now the Secretary General of the Department of Finance – his appointment in February 2010 and abbreviated CV is here – and he seems to be a very unlucky individual. He was present on the night of the bank guarantee when he was still the Second Secretary General (the Secretary General was then David Doyle). He sat alongside Brian Cowen and the late Brian Lenihan at the announcement of the IMF/EU bailout in November 2010 and he has been at the civil service helm of the Department of Finance during a period when some pretty awful mistakes have been made. The last reporting of his salary I have seen suggests his annual salary is €228,466 a year.

It should be said that the term used in the US cable – “hinted” – is not conclusive but it was considered by the US  embassy in Dublin as sufficiently credible to include in a cable.

All of the Wikileaks cables relating to the USembassy in Dublin– or rather all the cables that have so far been published – are available from Wikileaks here. (the Wikileaks website appears to be down at present – Sunday evening 31st July 2011)

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Budget 2012

This entry is probably as welcome as advertisements in August for Christmas 2011, but yesterday the Department of Finance published a document  (EDIT: a searchable, copyable version of the document has been made available by the politicalworld.org website here) which sets out in more specific terms what this Government intends doing in Budget 2012 which is now a mere four months away. The document published by the Department was a revised agreement with the EU and IMF, and makes forthcoming commitments more specific.

There is to be an “adjustment” in 2012 which will cut government spending and increase taxation. As we all know by now we have a large deficit to close, so that this country can stand on its own two feet without relying on lenders and the general commitment is to cut the deficit in the next four years. In addition to the closing the deficit and achieving a balanced budget, the Government has accepted responsibility for losses in part of our banking sector and has committed to repaying bondholders in certain banks. The 2012 adjustment is required for those two reasons – balancing the budget and dealing with our banks.

The total adjustment for 2012 is “at least €3.6bn”. On 6th July, Minister for Finance Michael Noonan indicated that an adjustment of €4bn might be needed. There has been some debate about whether some part of the €800-1,200m saving in bailout interest resulting from the July 21st EuroZone summit might be used to cushion the adjustment required, but the response from Minister Noonan has been in the negative and that an adjustment of “at least €3.6bn” is still required.

So what do we know today that we didn’t know last week? We know that the adjustment is to comprise €1.5bn of new tax and €2.1bn of reduced Government expenditure. For political fans this seems to represent a victory for FG (and indeed FF) policy over Labour’s – Labour wanted a greater amount of the adjustment to come from tax. The general economic argument is that when cutting a deficit, cuts are preferable to taxes.

So where is the Government going to get €1.5bn of new tax? We know from this week’s announcement on the so-called household charge that €160m is to be raised by levying €100 on each household in the land, with some limited concessions. And the rest will come from

(1) lowering personal income tax bands

(2) lowering credits

(3) a reduction in private pension tax reliefs (at present pension contributions in general reduce taxable income, meaning contributions can save upto 41% tax that would be otherwise payable)

(4) a reduction in general tax expenditures (or allowances). What could be up for grabs here? Perhaps extending or increasing VAT, increased excise duties on alcohol or cigarettes.

(5) a reform of capitals gains and acquisitions tax. We’re not generating much capital gains tax at present because there is reduced economic activity and many assets have lost, rather than gained, value.

(6) an increase in the carbon tax, so dearer petrol, diesel, heating oil and natural gas.

So the above relates to taxation (which includes levies, customs and excise duties, household charges). The larger part of the “adjustment” is to come from savings to the social welfare budget, the public sector and capital programmes. What benefits and payments will be targeted (see here for current rates of payment)? We don’t yet know but Minister for Social Protection, Joan Burton has signalled rent allowances and payments by the Government to utility companies would be examined. An Taoiseach, Enda Kenny said on the 100-day anniversary of the formation of the present Government that social welfare would not be cut – RTE reported “speaking later on RTÉ’s Six-One News, Mr Kenny said that the Government had decided to make a commitment not to increase tax or cut social welfare to allow people to plan their lives.” It is difficult to see from here how that commitment can be kept.

Then there is a commitment to cut public sector numbers and also to cut public sector pensions. This despite a commitment reported by the Irish Times “There are to be no further pay cuts for existing public servants and no further compulsory redundancies in any government department or agency” So voluntary redundancy and what seems to be a cut to the pension arrangements of new joiners. It is difficult to see how either will contribute significantly to the €2.1bn target.

And lastly there are to be cuts to capital expenditure. So roads, schools, hospitals and infrastructure generally.

We have had three austerity budgets so far, and there is a feeling that the “low-lying fruit” have been picked – apologies to anyone who feels that imposing a universal social charge and income levies, not to mention other cuts and charges, is “low-lying fruit”. The forthcoming adjustment will take place against a background of increasing interest rates and elevated unemployment -14.2% presently but expected to stabilise or fall slightly this year. The latest economic forecast from the Central Bank of Ireland, published yesterday, was for the economy to grow modestly this year by 0.8%, its forecast for 2011 of 2.1% is down from the Government’s own 2.5%.  So the forthcoming budget is expected to eat into living standards more so than previously and I think that is what is meant by no longer being able to pick “low lying fruit”. The Central Bank came out yesterday and called for an early indication from the Government as to where cuts and taxes will fall, so that people can have some degree of confidence in planning their economic lives. That seems like good advice because from this perspective, despite the information published yesterday, it is unclear as to how the Government is to achieve the mandated adjustment for 2012.

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Figures released by the Central Bank of Ireland (CBI) this morning for the month of June 2011 show that the flight of private sector deposits from domestic Irish banks continued in the month of June, though at a lesser rate than during the more tumultuous months of the past year. In total terms for all Irish banks – the six State-guaranteed banks, the local branches of foreign banks and banks in the IFSC which don’t service the Irish economy – deposits fell by 1.5% or €9bn from €601bn to €592bn.

The CBI produces a mountain of figures each month – the focus on here is the total of private sector deposits in the six State-guaranteed banks, based on the belief that ifIrelandis to recover and develop a sustainable banking system, then companies and households will need to have the income and confidence to place deposits in Irish banks. In June 2011, private sector deposits in the State-guaranteed banks dropped by 3.6% from €107.5bn to €103.5bn. That’s the biggest monthly drop since last November 2010 when the IMF/EU bailout was agreed, and the second biggest monthly drop since September 2008 when the financial crisis blew up. Not good.

The CBI now produces monthly figures on savings and loans which analyses deposits in considerable detail – see here for the list of Excel spreadsheets available. Household deposits in all Irish banks (including foreign banks and credit unions) increased very slightly in the month from €92.133bn to €92.215bn. The overall loss of deposits inIreland has been generated by companies.

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 in Ireland 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 of Ireland) 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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The Nationwide Building Society has this morning published its UK House Price data for July 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 £168,731 (compared with GBP £168,205 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 9.3% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of July 2011 being GBP £168,731 (or €187,981  at GBP 1 = EUR 1.141) is 3.2% above the €182,142 implied by applying the CSO June 2011 index to the PTSB/ESRI peak prices.

With the latest release from Nationwide, UK house prices have risen by 3.67% 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 856 (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 16.8% for NAMA to breakeven on a gross basis.

The short-term outlook for UK residential, like the UK economy as a whole, remains bumpy. Interest rates may need to rise to contain inflation that is beginning to take hold –  4.5% in April 2011  and 4.5% in May 2011 and 4.2% in June 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, though disappointing figures for Q2,2011 growth released last week of just 0.2% may bring downward pressure on these estimates. The outlook for inflation is 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. The UK has plenty of micro-markets and the betting would be that London and the south-East will fare better than the North of England and elsewhere, Northern Ireland in particular.

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This is a short entry about yesterday’s property auction in Letterkenny held by the Easy Let property company (thanks to commenter “Patrick” for drawing attention to it). The auction was of 40-odd properties, catalogue here. According to Patrick, and indeed the Donegal Daily, only one property was sold during the auction. The Donegal Daily reports the auctioneer’s claims that deposits were taken on an additional three properties on the day, so perhaps the title above should refer to four properties sold in total, though in my own experience there can be some murkiness in post-auction sales.

The auction appeared to be similar in nature to the GMAC auction in Cork last month where just two properties out of 65-odd sold on the day. A quick review of the catalogue on here last week seemed to indicate reserve prices appeared ambitious in the present market. The houses seemed to be a mix of investment, holiday- and owner-occupier homes. TheCork auction was billed as a “low price” auction, the Donegal one as a “prime value” auction. In neitherCork or Donegal did the property sales appear distressed, to my eye at least.

Allsop/Space seem to be carving out a monopoly in the Irish auction landscape with well-marketed and publicised auctions, with high levels of transparency both before and during the auction. They have also pioneered the use of maximum reserves so buyers know in advance the reserve (or the maximum reserve) on any property. The next Allsop/Space auction is scheduled for 23rd September 2011, again in the Shelbourne Hotel in Dublin, with the catalogue available here from 21st August, 2011.

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Take a step back from today’s announcement of NAMA’s final results for 2010 which revealed a €1.1bn loss in its first full year’s operation. Okay, we have gotten used to billion-euro-plus losses with our banks – in fact Anglo Irish Bank’s loss for 2010 was €17bn, which made the top 15 global corporate losses in history; but in the league table of Irish corporate results, a €1bn loss is exceptional.

NAMA was created with a clean slate in December 2009 and it acquired loans using stringent valuation and due diligence standards. Perhaps it should be surprising, even shocking, therefore that the agency has racked up such a large loss in its first year of operation. Indeed were it not for NAMA’s accounting treatment of part of the consideration it pays the banks – the subordinated bonds which will only be honoured if NAMA makes a profit – then NAMA might have been forced into a position today of asking the Government for further capital of at least €1bn.

It is an astounding loss.

It mostly arises from the fact that NAMA chose the 30th November, 2009 as its “valuation date” which means that the underlying property securing the loans acquired by NAMA, was valued by reference to values pertaining at that date. And in Ireland, the country where most of the property securing NAMA’s loans is located, both commercial and residential markets have tanked since November 2009. And not just in 2010 – there is some evidence to suggest that subsequent to the NAMA year end, the decline has accelerated; for example the 5.7% decline in commercial property prices in quarter two of 2011 was the biggest quarterly decline since NAMA was created, and the property industry is saying that commercial property will decline a further 20-30% if expected changes are made in the Autumn to abolish Upward Only Rent Review leases. Of the €1.1bn losses reported today, €1.485bn comes from revaluing loans at the end of 2010 and as bad as those figures are, the 2011 losses might be considerably worse and the betting on here is that NAMA will indeed need additional capital from the State at the end of 2011 to cover what is likely to then be a substantial negative capital position.

Normally if a new company had recorded such unanticipated losses – and when I say “unanticipated”, I mean absent from the NAMA business plans or statements made prior to and during the creation of NAMA – the whole board would be given their marching orders. What’s different here? Arguably two things:

(1) NAMA accepted constraints on the way in which it valued the loans it was acquiring, and did not apparently seek changes to those constraints, even when it became clear that the Irish property market was slipping from the frying pan to the fire. NAMA didn’t seek to change its valuation date from 30th November 2009, something called for frequently on here . Former Minister for Finance, the late Brian Lenihan famously said in June 2010 that changes to property prices had a “broadly neutral” effect on NAMA’s finances. Governor of the Central Bank of Ireland, Patrick Honohan, said late last year he “wasn’t excited” at the decline in values when quizzed by Vincent Browne.

(2) If NAMA had imposed deeper discounts on the loans it acquired, then the banks, which we mostly own, would have needed additional capital. But it wasn’t all swings and roundabouts, because Bank of Ireland is relatively healthy so there might well have been room for Bank of Ireland to absorb more losses. Bank of Ireland comprises about one seventh of NAMA’s loans, and you could argue that that bank’s existing shareholders are walking away with a substantial gift from the Irish taxpayer.

So can you blame the NAMA board for what is a disgraceful loss? Difficult to say. If the agency was focussed on maximising its profit, it should at the very least have alerted the Minister for Finance to the fall in property values and made the Minister aware of the impact of not changing its valuation date. There is evidence that NAMA viewed the decline in Irish property values as incidental to rises to other markets, which seems to indicate that NAMA had not gotten a handle on its portfolio. NAMA wrote to the Minister for Finance in May 2010 drawing his attention to the effect of abolishing Upward Only Rent Review leases on the value of the NAMA portfolio, so you would have expected a similar letter on the effect of continuing to value by reference to 30th November, 2009. As for the decline in property values themselves, NAMA has been partly unlucky, though it is understood that NAMA’s Head of Portfolio Management, John Mulcahy was instrumental in Minister Lenihan believing we were close to the bottom of the cycle in terms of property prices.

NAMA is keen to emphasise that the loss reported today is a paper loss and that over the remaining nine year lifespan of the agency, there is scope to recoup that loss. That is true, though the short term outlook for Irish property markets does look challenging. The projection on here in the short term is that NAMA will continue to rack up losses for the next 1-2 years but will then start to see a rise in the value of the underlying property. The question then will be whether the annual rise in property prices is greater than the substantial costs of managing the loans. On that last point, estimates in theUKthat it costs 5% of the value of a distressed loan each year just to manage the loan might mean that NAMA needs revisit its budgets.

Finally on the issue of losses, whilst NAMA stresses the losses reported are paper losses (which is true), if NAMA had revalued the underlying property at the end of 2010 and assumed all loans would default so that all NAMA was left with was the underlying property, then the loan impairment loss reported today would be substantially more than €1.485bn, the estimate on here is €2-3bn; the reason the losses aren’t as bad as that is because NAMA does not have to assume there is 100% default.

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The much-anticipated list of properties controlled by NAMA which have been subjected to enforcement action, has just now been published and is available here .

You should note that the properties might not necessarily be for sale and also that the entire property shown at an address might not be subject to enforcement. The website addresses of the receivers are provided, and presumably it is the receivers you might contact in the first instance with queries or expressions of interest.

The properties, around 500 in all, include houses, offices, development land, agricultural land, hotels, pubs, industrial buildings and shops in Ireland, Northern Ireland and Great Britain.

I can’t immediately see Derek Quinlan’s art collection, so I guess the list isn’t complete, but it is certainly an impressive start to NAMA providing transparency in its disposal process.

UPDATE: 30th July, 2011. NAMA is adamant the list is correct as at the 6th July, 2011. In other words, the agency has NOT omitted properties in other countries nor has property been omitted for any foreclosed developer. The property shown is real estate property and NAMA doesn’t have plans at present to produce details of non-real estate property which it controls – those seeking details of fine wine or art collections, not to mention planes, helicopters and yachts will not find them in NAMA’s list. A query has been submitted to NAMA as to the logistics of the monthly update, and this post will be updated with any response. Updates will be reported here, and you can subscribe to this blog by clicking on the option to the right of this entry. I get the impression that NAMA is monitoring the experiences of potential bidders in dealing with receivers so your comments are helpful to all concerned.

UPDATE: 1st August, 2011. Gavin Sheridan at thestory.ie has both mapped the properties shown in the document produced by NAMA and also extracted the properties into a spreadsheet which can be searched and manipulated. Whilst NAMA may in future make their monthly publication of enforced properties available in a more flexible format, Gavin has done the work of converting the first month’s enforcement list. Both the mapping of the NAMA properties and the spreadsheet are available here.

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