Archive for August 21st, 2010

With Bloomberg-approved speculation today that the discount on Anglo’s tranche 2 may be above 60%, with highly-regarded Central Bank governor Patrick Hononhan stating “Anglo may impose a NET [my emphasis] cost to the Government of about €22-€25 billion” with an apparent consequence on our 10-year borrowing costs ending the week 3.12% more than the equivalent German costs, with little domestic cross-party political oversight on the Anglo bail-out and with the EU only granting approval to “temporarily” capitalize Anglo to the tune of €24.5bn pending an examination of Anglo’s restructuring plans, all amidst a general chorus of angry criticism from independent economists and commentators, what can be done to resolve the differing opinions as to the best solution to the Anglo nightmare? This is all relevant to NAMA as NAMA, we are told, is key to the final bail-out bill for Anglo.

Firstly it should be said that there is a range of opinions on the resolution of the problems with Anglo. The Economist this week had an article which highlighted the high cost of Ireland’s solution to its banking crisis but went on to conclude that the Irish solution in the long term was better than either the UK’s or Germany’s. External organizations like the EU, OECD and IMF have given approval to the Irish solution though it should be stressed that giving approval is not the same as giving unqualified support (and there have been suggestions that these organizations may have been more supportive of other solutions if they have been put forward).

It seems incredible that in recent times there has not been a coming together of the architects and proponents of the Irish solution with opponents and critics so that the basic facts and bases for projections surrounding the crisis can be debated and agreed if not the philosophy and solution itself. How is it that Patrick Honohan can say that Anglo’s losses on its entire loan book will be 40% whereas Peter Mathews can say with unbounded confidence that they are 50%+ and Constantin Gurdgiev can say nearly 55% (and that 10%-15% difference represents €3-10bn of additional cost to the State for Anglo alone). Earlier this week, a question was posed on here as to why after the NAMA Act, the Long Term Economic Value regulation, the EU Decision approving NAMA which followed a modification to NAMA’s valuation methodology and the practical experience of transferring nearly 40% of the loans, why after all of this can we not get a decent prediction as to the “upper limit”  of our exposure (I emphasise “upper limit” because Minister for Finance, Brian Lenihan, assured us in March 2010 that €22.3bn was the “upper limit” of the cost of bailing out Anglo).

As to the Žižek trilemma, well Patrick Honohan’s support of the bail-out of Anglo puts me in mind of Slovenian philosopher Slavoj Žižek’s (pronounced zhee-zheck) attempt at explaining personal survival in communism. The trilemma was that you could only survive and prosper under a communist regime if you had two of the three qualities shown – personal honesty, sincere support of the regime or intelligence. So you could be honest and supportive, but that would mean you weren’t very smart. You could be smart and supportive but that would mean you weren’t honest or you could be honest and bright but that you mean you weren’t supportive.

Patrick Honohan is undeniably smart and he is supportive of the bank bail-outs but is he being honest? Constantin Gurdgiev and Peter Mathews are placing the cost of bailing Anglo out at over €30bn, at least €5bn above Patrick Honohan’s upper limit. The difference between Patrick and the others appears to be in the judgement of bad debt levels in Anglo’s loan book which is illustrated below with the gross value of Anglo’s loans before impairment provision shown in the first column of figures and the Honohan, Matthews, Gurdgiev pronouncements on loan losses shown in the next three columns. The losses directly relate to the amount we will need inject into Anglo. So why can’t these three sit down and exchange the bases for their projections – with so much experience of the loan books and with NAMA valuations and transfers nearing 40% of the original total of €80bn, why is it that there is still such discrepancy between credible experts.


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