“The European Council has asked the Eurogroup to discuss the details of the agreement at its 9th July meeting. This meeting will begin the detailed discussions and negotiations. While the details, structures and arrangements have yet to be finalised the policy statement provides a basis for a Euro-Area solution to what is essentially a Euro-Area problem. This will be one of our key priorities between now and the end of year with the initial formal steps, at a European level, taking place at the Eurogroup meeting on 9th July” Minister for Finance Michael Noonan speaking in Dail last week
Later today in Brussels, the EuroZone’s finance ministers will meet to start thrashing out what was agreed at the “game changing” EU summit a fortnight ago. In Ireland, we’re still scratching our heads to better understand that that summit means for the bank debt which is presently being shouldered by the Irish state.
According to Ann Cahill at the Irish Examiner today, Minister for Finance Michael Noonans and his officials will be seeking a 40% reduction inIreland’s national debt at the 2-day EuroZone finance ministers’ gathering inBrussels. That’s 40% in absolute terms –Ireland’s debt:GDP in 2013 will be 120%, of which 40% might be ascribed to the bank bailout and 80% to our original debt in 2007 and the deficits racked up since.
Apparently there are two prongs of attack – the first is to seek a change to the terms of the promissory notes used to recapitalise some of the banks, and the second prong is to get some relief on the €34bn-odd of cash already shovelled into the banks.
To help you understand what is going on, a glossary of terms has been produced below.
Bank debt: Ireland is projected to have a national debt of over €190bn in 2013, which represents 121% of our 2013 projected GDP and over 150% of our actual GNP in 2011. These are horrendous debt levels, though they are in the same ballpark as Italy, Greece and soon, Portugal. So far we have sunk €64bn into the banks, though we have received €3bn in bank guarantee fees. You will hear a lot about the €64bn though and it is analysed here, (you’ll need add €1.3bn to that analysis which is only of €62.8bn because two weeks ago we gave more money to Irish Life)
Bank stakes: We, the people, own much of the Irish banking sector. We own 100% of the Irish Bank Resolution Corporation – “IBRC”, the zombie bank which holds what remains of Anglo Irish Bank and Irish Nationwide Building Society. We have sunk €34bn overall into both. Last year, the Anglo CEO Mike Aynsley and the chairman Alan Dukes made encouraging noises about getting some of this money back, perhaps €3-4bn. We own 99% of Irish Life and Permanent and have sunk €4bn into it. What is this worth today? Difficult to say. We own 99.8% of AIB and EBS, which merged last year to provide one of the two so-called pillar banks. We own 15% of Bank of Ireland. A few weeks ago, the National Pension Reserve Fund claimed our stakes in AIB/EBS and BofI were worth €9.4bn.
Bondholders: We’ve paid back most of the bondholders at Anglo and Irish Nationwide. There’s only about €160m left of senior unsecured unguaranteed bonds at IBRC which you might expected to have been the most vulnerable to a “burning”. We still have billions outstanding at AIB and Bank of Ireland.
ESM: The European Stability Mechanism, the new fund that comes into effect today.Ireland will contribute 1.5% of its capital,Germany will contribute 27%. Initially the ESM will have €80bn of capital –Ireland’s contribution is €1.27bn – which will allow it to borrow up to €500bn from the bond markets at cheap rates, and that €500bn can be loaned to EuroZone countries which are in difficulty.
Knecht Ruprecht: Literally “Knight Rupert” or Sir Rupert, a German fairytale character. At Little Christmas, he visits children who’ve been bad during the year and beats them up.
NAMA: We found out last week that NAMA paid €5.6bn of state aid to the banks when it acquired €74bn of loans for which it paid €32bn. This state aid represents the premium over market values that NAMA paid for the loans. The hope is that NAMA can manage its assets and that the domestic property market will recover so that by 2020 when NAMA is scheduled to be wound up, it will have broken even. However, NAMA is presently sitting on a loss, and property inIreland had declined by 20-30% since NAMA valued the loans and the immediate outlook is challenging. Meanwhile NAMA is running up costs of €700m per annum between its own operating costs, professional fees including the cost of receivers and lawyers and the interest on its NAMA bonds. The Irish state has guaranteed the NAMA bonds, so if NAMA hasn’t made a profit or broken even by 2020, then it is the State that will pick up the loss. Theoretically the loss can be levied on IBRC, AIB/EBS and Bank of Ireland in the proportions of the original loan values, but we own IBRC, we own 99.8% of AIB/EBS and we own 15% of Bank of Ireland, and Bank of Ireland accounted for less than 10% of NAMA’s acquired loans anyway. If we are looking for a bank-debt deal, it might be time to start talking about NAMA.
Promissory Note: IOUs which we used to bailout Anglo and INBS. The ECB insisted that the IOUs would carry a rate of interest which means that we’re not just paying the €31bn of IOUs, but, under the present promissory note conditions, another €14bn of interest (see below). We’re paying the interest to IBRC which we 100% own so the interest isn’t truly important. But where we get the funds to pay the €31bn IS truly important, because that is real cash and its interest rate is also truly important because it will be paid to a third party which we don’t own.
Re-engineer: See spoofery
Santa Claus: A fairytale character outside Ireland, but perceived as a real-life character here. Presently he is believed to be the most likely source for the debt relief and debt write-down promised by An Taoiseach Enda Kenny after the EU summit 10 days ago. Some think that Santa Claus is in fact the ESM or the Germans, but as the Knecht Ruprecht character above illustrates, our European partners are more believers in austerity and discipline rather than give-aways.
Scope of the ESM: The ESM was originally intended to provide bailouts to EuroZone countries in distress in return for those countries taking corrective action, and of course repaying the ESM. Following the EU summit just over a week ago, there now seems to be a proposal that the ESM will invest directly in bank stakes and will also buy the debt of distressed countries on an ad-hoc basis without any agreement by those countries to implement an adjustment programme. That expansion in scope of the ESM is disputed and this morning, the influential Eurointelligence website said “Reuters quotes an unnamed official as saying that there was a misconception about the notion of equity injections: states remain the ultimate guarantors; if this is correct, the European Council would have misrepresented one of its main conclusions two weeks ago“
Spoofery: The diversionary spoofing about “re-engineering” and “technical papers” by the Government is akin to the unscrupulous mechanic taking advantage of the stereotypical busty blonde. “What’s wrong with the car?”, “It’s technical, it’s the whatchamacallit leading to the widgerdoo. Complicated, luv”
Technical paper: See spoofery. And if you needed any more proof, read this.
Upside: If the ESM does refundIreland for some of the bailout to the banks and NAMA, but in return takes control over our stakes in the banks and NAMA, thenIreland needs to ensure that it benefits from any future appreciation in value of those stakes. We are in the midst of a crisis and the value of our stakes may presently be at their lowest, but the crisis will eventually pass, andIreland needs to ensure that any upswing in value is shared.