As I write this entry this morning, the yield on Irish 10-year bonds is showing as 6.66% and indeed the devil may be lurking in the detailed workings which support the estimates published this morning. At this point there are a few concerns:
1. Anglo’s remaining €19bn of NAMA loans (at face value) are to be transferred to NAMA by the end of October 2010. We are still waiting for a NAMA reaction to this morning’s announcement by the Minister for Finance, Brian Lenihan and joint statement from the Central Bank Governor Patrick Honohan and Financial Regulator Matthew Elderfield but it seems that the third tranche has been abandoned – that’s the one that was expected to transfer by “the end of September 2010”. Including Tranche 3, Anglo was going to transfer €20.6bn of loans (€9.25bn T1, €6.75bn T2 and €3.6bn in T3) so the implication is that NAMA can undertake due diligence and value some €15bn of Anglo loans in the next 30 days – and Anglo is the bank with poorer loan and security documentation. Frankly it doesn’t appear realistic. But will any subsequent revision to the values materially affect the position? Difficult to say though the EU may reject the valuations outright as not being to the standard approved in the application for EU approval and the relevant EU Decision.
2. Whilst Patrick Honohan has attempted to spread the responsibility for today’s estimates far and wide – “relying on advice from NAMA”, the NTMA, Anglo management, “third party analysis”, ultimately this is a Patrick Honohan production. And to a large extent he has an impossible task in predicting future losses. As anticipated in an entry on here last weekend he has adopted the approach taken by the EU in stress testing its main banks over the summer by adopting a base case and adverse scenario. The application of these two scenarios to the NAMA loans is reasonably straightforward – the remaining €19bn of NAMA-bound loans at Anglo are expected to suffer a 67% haircut and in the adverse scenario a 70% haircut, though the difference of 3% is NAMA’s estimate of the margin of error in the 67%. However the non-NAMA loan loss estimates are to a large extent shrouded in mystery – coming from a mysterious and unidentified independent third party (I’m guessing it wasn’t Peter Mathews!), Anglo management (they’re the people who produced a laughable restructuring plan for the EU in November 2009 and who also predicted total Anglo losses at €10-13bn in March 2010) and the “CEBS base case loss rates”. Will anyone accept these sources as sufficiently credible to accept today’s announcements as final?
3. Whilst today’s announcements cursorily dealt with Anglo’s loans, what about assumptions on derivative losses, bondholders burnings, NAMA bond discounts, NAMA subordinated debt discounts and other potential areas of profit or loss.
4. With respect to INBS, omitted from any of the announcements is the estimated haircut or discount on future NAMA bound loans and there is little detail to support the €5.4bn that is going into INBS (€2.7bn in May and €2.7bn imminently). However €5.4bn is within the ranges previously openly discussed by commentators as the probable level of capital needed by INBS.
5. Allied Irish Banks PLC (AIB) was famously required to come up with €7.4bn of capital by the end of 2010 and in order to achieve that target, AIB was to sell its Polish operation (Bank Zachodni), its US operation with regional lender M&T Bank Corporation and its UK operations. The Polish sale has been achieved subject to shareholder approval but there seems to be delay with the remaining two disposals, particularly the UK operation which as recently as August was predicted to be sold in September 2010. Any shortfall in the €7.4bn capital was to prompt either a public issue by AIB or a further State injection. We learn today that the Central Bank estimate that AIB needs a further €3bn of capital (€10.4bn in total but that will reduce by €2.5bn if the Polish transaction is approved). So the State could be on the line for up to €7.9bn of additional capital if the US and UK sales are delayed or fail and AIB does not seek a public issue. An additional issue with AIB is whilst the haircut now being adopted by the Central Bank for future AIB tranches (60%) is high compared to the weighted average on Tranches 1 and 2 (48.5%). However there is no suggestion that non-NAMA loans have been subjected to any realistic assessment of likely losses and remember that AIB has an estimated €48bn of non-NAMA commercial lending of which about a third relates to property. So could AIB’s losses be far from final?
6. Bank of Ireland: A couple of days ago on here we looked at the Bank of Ireland loans to McDaid Developments (Ireland) Limited – GBP £42m of loans that are reported to be exposed to 85% losses. Although Bank of Ireland has been top of the class in Tranches 1 and 2 with the lowest haircuts (36.2% weighted average) and the statements this morning apparently confirmed that BoI was alright for capital even with a 42% discount, is 42% enough? Also, like the other banks, BoI seems to have been less than realistic in reporting its non-NAMA losses. So is capital requirement of BoI at the already invested €3.5bn final?
7. The Educational Building Society (EBS): This is a tiddly building society and its loan book is dominated by relatively good performing residential mortgages. Its weighted average haircut in Tranches 1 and 2 was 37.9%. Apparently the estimates today used a “final” EBS haircut of 60% and that no further capital is required (beyond the near €900m already announced presumably). Whilst EBS might not be final (and concerns have been recently raised here about its provisions), because it didn’t extensively lend on commercial or development property, its losses will be limited. So although it might be back for further capital, it is likely to be in the €ms.
So the purpose of today’s announcements was to bring finality and certainty to the cost of the financial crisis. In absolute terms, it most certainly doesn’t do that. But is the information published sufficient to address the concerns of lenders to Ireland? The yield on 10-year bonds is 6.6% so the announcements have not immediately had the desired effect. My guess is that the announcements don’t go far enough and there is unlikely to be any significant fall in lending costs and that indeed they may rise once the horror of the estimated final NAMA haircuts sink in.
NAMA Wine Lake 
[…] that happens in the future which, word has it, can be tricky to predict. Jagdip has an as-always excellent discussion of the various loose ends here. I think the point that AIB and BoI’s non-NAMA loan books have not […]
[…] Originally Posted by nicht besonders The 3 contributors to VB last night, McW, Somerville and Mathews, all said that the figures announced today would be wrong, and were another attempt to bluff the markets, and the markets won't fall for it. Mathews did his own calculations, said Anglo alone will cost 42billion, and the total cost is gonna be 65.5billion, so there's a big gap with the "final figures" released today and his guess, and I have no reason to trust FF and the way they are presenting these estimates. Why today […]
You are quite right. These figures are not final and the porkies are still being issued with respect to the full extent of the AIB losses. They are of such magnitude that our bond rates will hit over 7% as they are exposed. Bank of Ireland is “pretending and extending” in the hope that their future profits, as the only Irish bank still lending (not a lot, but a little), will enable them to trade through. INBS is so toxic that like Chernobyl – nobody wants to go there.
It’s not over yet, unfortunately.
The fact is that we are in a debt spiral and cannot continue to pay 7% interest on our bonds for a prolonged period. The government’s policies mean that we will continue to deflate. Therefore, we cannot achieve the growth that we need to take us out of the debt spiral. A vicious circle. So, IMHO, we are better to default now and get it over with.
BTW, if I buy some Anglo subordinated bonds at a huge discount, can I use the legal principle of “set-off” against my Anglo debts at the bonds’ face value? …. Just a thought!
wstt:
the notion that only growth can save us is absolutely right. for some reason it is not as intuitive to everyone at first. All the focus is on the moving on bad debt from one place to another and adding time as another variable. It’s like not seeing the forest for the trees. But no matter how we dissect and look at Ireland’s problem:
growth is the only way out.
So why isn’t that so obvious to everyone?
….well the only way out bar pressing the big red button that says IMF.
Today’s announcements do not bring absolute finality because they take no account of the rising storm of mortgage defaults due to the increasing negative equity, rising interest rates, lower employment, higher taxes, lower eanings etc.
A true story from SF – from which Ireland could learn.
Three years ago a neighbors husband left her with a kid and a mortgage she could not really afford. For two years she payed. She had no savings or entertainment budget, no life just one huge bill every month. Eventually she went to the bank for help. They arranged a short sale. She stopped paying, moved out and rented at less than the cost of her mortgage. The property declined in value. It was sold at 2003 prices, after an initial offer at 2002 prices. It was now 2009. California is a no recourse state. The loss, as far as she is concerned , is written off. Her credit took a hit, but it was not fatal to her ability to rent a new home and have a life. The new buyer renovated using local suppliers and himself became a customer of the bank. The alternative would have been a bankrupt parent and a foreclosed property.
I met her last week.
She looked 10 years younger, and has 10 grand in savings, (actually for the first time ever).
I know that her kid, the bank and local property owners are glad she pressed the big red button and asked for help.
I know the kids of Ireland would be happy if Ireland asked for help. But it is apparently easier to slash their education and pay the mother of all negative equity mortgages, than to say “help”.
Peoples veins stick out on their forehead when you mention “sovereignty” but nobody bats an eyelid when you say “poverty”.
Odd to see a piece in the Irish Times online today Thursday 7th October about Brian Lenihan reaffirming his bondholder stance, when my mole in the Central Bank has told me that the Anglo senior bondholder debt was paid last week and that Anglo now owes no senior debt.
This means is that the German, French and UK banks have been bailed out so that the Irish plague does not spread. The Irish taxpayers” debt is now written in stone and owed to the ECB. Why doesn’t Lenny just come clean and ‘fess up to the fact that it has already happened?
I have heard a very similar rumour and have asked a press contact if true.
Since anglo’s bondholders have now been revealed in Guido Fawkes’ blog and mentioned in the FT last Fri, and covered in detail on the forums, why oh why hasn’t any mainstream media outlet in Ireland picked up on the story?? Have been mailing and ringing media outlets to no avail.
There was something minor in last Sunday’s Business Post about the other part of Guido’s revelations – the overcharging
http://www.sbpost.ie/news/ireland/blogger-makes-claim-about-anglo-overcharging-52310.html
I don’t know the answer. Possibly because the information is commercially confidential and Anglo may take legal action because its bondholders have been revealed.
Thanks for that.
Still have no response from the media on the bondholders being identified.
Would ave thought that someone could at least report on the fact that the FT mentioned it.
[…] debt. namawinelake: I have heard a very similar rumour and have asked a press contact if true. Why today Then another poster commented on the Pin last week (October 20): […]