Archive for November, 2010

It is over a year since Bernard McNamara’s Donatex Limited initiated legal action against the Dublin Docklands Development Authority (DDDA) over aspects of the purchase and development of the Irish Glass Bottle site in Ringsend in Dublin but it seems that at last the case is edging towards a hearing.

Yesterday, according to the Irish Times, the Commercial Court set out further directions for dealing with the application which is ultimately seeking to invalidate the joint venture agreement between Donatex and the DDDA in November 2006 and ultimately to extricate Donatex from past and additional financial commitments in respect of the site which cost €412m when it was purchased by a consortium of Donatex, the DDDA and a Derek Quinlan vehicle, Mempal Limited. We get some flavour of the hubris in the DDDA in 2006 with staff there allegedly seeing the €412m purchase of the controversial site as expanding the influence of the DDDA and enhancing/securing their own personal positions and careers.

There are many observers that feel there is a can of worms to be opened and examined in respect of the DDDA’s involvement in the site and indeed the decisions made by the former freeholder, the Dublin Port Company and the former leaseholder South Wharf PLC. Bernard has already suffered from his involvement with the site, having obtained €62.5m of mezzanine finance for the purchase of the site which he now allegedly owes the investors. The DDDA makes reference to the present legal case in its last annual report but concludes it will overcome – “one of the Authority’s joint venture partners in Becbay Limited (Bernard McNamara/Donatex Limited) which owns the Irish Glass Bottle site, has initiated legal proceedings against the Authority. The Authority believes it will successfully defend this case.” It seems that it will be 2011 before the case gets a full hearing.

There is several detailed entries on the history and recent background of the controversial Glass Bottle site here and here and here.

UPDATE: 1st December, 2010. Donal Buckley in today’s Independent has a mischievous piece in which he considers the finances of RTE decamping from its prestigious address off the Ailesbury Road and move a couple of kms north to the vacant “waterfront” (do you mean “former landfill dump” Donal?) Irish Glass Bottle site. According to Donal RTE’s 31-acre campus in Donnybrook might fetch €3-5m/acre today and RTE could buy the IGB site for €50m (the December 2008 and 2009 valuation of the site by the DDDA) and use the €100m “profit” to offset the estimated €350m cost of upgrading RTE’s facilities. Of course there are many sites throughout the State that might be able to accommodate a 21st century RTE campus – how about Cork, Galway or Limerick (isn’t Dell’s former site available). If the BBC in the UK can relocate much of its operations from London to Manchester, might our own be able to do the same? A mischievous piece to be sure.

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Somewhere in one of the secondary school poetry books is a couple of poems by Robert Frost – “Stopping by woods on a snowy evening” and “The Road not taken”. Other than an anthology by Seamus Heaney, the only other poetry book I paid money for as an adult was a Robert Frost collection and I must say that the editor of our school books probably picked out the best two examples of the man’s life work. But another simpler poem by Mr Frost was about the rose and from recollection it goes

“A rose is a rose
And has always been a rose
But the theory now goes
That the apple’s a rose
And the pear, and the plum
I suppose
The dear only knows
What next will be a rose,
And then, you
You are a rose
But then again, you have always
Been a Rose”

The poem was apparently about some botanical debate about whether apples, pears and plum plants were part of the rose family. I think the poem was simply called “A rose” but a better title might have been that phrase from Romeo and Juliet “a rose by any other name” and I am reminded of it this morning as yesterday’s news that Anglo Irish Bank Corporation (Anglo) is to change its name within weeks, pass its deposit book which was worth €33bn in June 2010 (or indeed sell? why not, after all if Anglo is paying depositors from 1.5% and given the cost and difficulties in accessing money market funding, the deposits might have some value) and will rebrand its €38bn residual loan book under a different name which according to Anglo Chairman, Alan Dukes speaking on RTE radio this morning, will be run down over a period of years. It seems from Irish Times reporting that Anglo’s loanbook will “conceivably” be combined with INBS’s loanbook and that there is to be a v4.0 restructuring plan (v1.0 in November 2009 was rejected out of hand by the EC, v2.0 in May 2010 was rejected in early September 2010 despite Brian Lenihan making personal entreaties to Competition Commissioner Joaquin Almunia in Brussels and v3.0 was reportedly submitted to the EC “the last week of October 2010” – let’s hope v4.0 is a charmer!). The media seemed obsessed yesterday with the change of name as if taking a sledgehammer to the signs on the bank building will obliterate the toxicity of the loans and derivatives that will remain in the rebranded bank (€38bn alone from Anglo).

Despite the flurry of activity with Anglo in the last couple of days, that bank did not feature in the awkwardly-worded release from the Central Bank on Sunday night which accompanied the announcement of the bailout. The press release dealt with Allied Irish Banks (AIB), Bank of Ireland (BoI), EBS and Irish Life and Permanent (ILP – parent to Permanent TSB) and announced a further €10bn injection into these four financial institutions – €8bn in capital injections and a further €2bn in “early measures to support deleveraging” – a total of €10bn. The wider bailout announcement made clear that another €25bn would be available as a contingency.

Of the €8bn in capital injections, €5.265bn is to go to AIB, €2.199bn to BoI, €0.438bn to EBS and €0.098bn to ILP which will lead to all four institutions having a Core Tier 1 capital cover of 12.5-14.0%. AIB, BoI and EBS have another three months to 28th February, 2011 and ILP has six months to 31st May, 2011, to put the additional capital in place. At this stage it is not clear to what extent the State will need make up to €8bn available and to what extent the capital can be raised privately through a rights issue or disposal of assets. There was no indication which banks would be the beneficiaries of the €2bn in “deleveraging support”

The announcement from the Central Bank was dreadful in that there was little information or rationale for the details in the announcement which also announced that AIB and BoI would now transfer €0-20bn land and development loan exposures to NAMA, a volteface on the decision announced on 30th September, 2010 to allow those two banks to keep €5-20m exposures because it was more “effective and efficient”. Why is AIB’s Core Tier 1 capital to go to 14%? How safe are credit unions in the State which are to be subjected to stricter rules in 2011 – “A significant strengthening of the regulation and stability of the credit union sector will be carried out by end-2011.” And in the interview with Governor of the Central Bank on RTE yesterday, of course no-one asked for a rationale though it seems that Patrick himself wasn’t in favour of the capital injections. Bizarre and confused and doesn’t inspire confidence.

And speaking of inspiring confidence, it seems that after the Prudential Capital Assessment Review announced in March 2010 and updated in September 2010, there is to be another PCAR undertaken by 31st March 2011 and this time there will be a review of loan provisions by (a) the Central Bank and (b) an “independent third party”– you’d have to ask if that is to be the same unidentified “independent consultants” which informed the predicted loss levels on 30th September, 2010. It was disappointing in the extreme to hear the Financial Regulator, Matthew Elderfield, last week outline future examination of non-NAMA loans at the banks at a “granular level” – why the blazes has this not happened already? NAMA uncovered atrocious lending practices and documentation on a loan-by-loan basis, why has this regime of independently verifying non-NAMA loans not already taken place? The Irish Times today reports that an “independent assessment of the new financial regulator will also take place to ensure that international best practice is being followed”.

The immediate reaction of the stock market to the announcement on Sunday night was very positive – shares in the three State-guaranteed banks not in 100% State-ownership recorded major gains yesterday with Allied Irish Banks up €0.02 (6%) to €0.362, Bank of Ireland up €0.05 (17%) to €0.31 and Irish Life and Permanent up €0.30 (58%) at €0.81. The markets seem to have formed the view that ILP will be able to raise its own capital by May 2011 without recourse to the State which might have brought that institution into majority State control.

So where does the announcement on Sunday leave the six State-guaranteed banks?

(1) AIB – still 18.6% State-owned today and likely to be 100% nationalised
(2) BoI – still 36.5% State-owned today and if the €2.199bn is to come from the State, the State will own over 70% of BoI. If the €214m preference share dividend due by BoI to the NPRF in February 2011 is paid in ordinary shares then the State share will increase to nearly 80%
(3) EBS – presently 100% owned by the State but offered for sale with two final bidders (a) ILP and (b) Cardinal Consortium with rumblings that ILP may have to drop out
(4) INBS – 100% state owned, deposits likely to move to new bank in association with Anglo, loans to be run down over time
(5) Anglo – 100% state owned, deposits likely to move to new bank in association with INBS, loans to be run down over time

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EU approves NAMA Tranche 2 valuations

Whilst the folk down at Treasury Building steady themselves after yesterday’s announcements which will see their remit expanded by nearly 25% with Allied Irish Banks and Bank of Ireland €0-20m loans, there is at least some welcome good news from the European Commission which has today approved the valuations of NAMA’s second tranche of loans which was finally absorbed by the agency in August 2010. The EU said:

“The European Commission has authorised, under EU state aid rules, the transfer of the second tranche of assets to the Irish National Asset Management Agency (NAMA). The Commission found this transfer to be in line with the approved scheme (see IP/10/198) and with its guidance on the treatment of impaired assets (see IP/09/322). In particular, the transfer satisfies predefined transparency and disclosure requirements, the assets fulfil the criteria for participation in the scheme and their valuation complies with the requirements of the Commission’s guidance and results in adequate burden sharing. The Commission also continues to rely on the commitments of the Irish authorities related to the exercise of certain specific rights conferred to NAMA so as to avoid undue distortions of competition. The Commission therefore concluded that the transfer of the second tranche of assets to NAMA represents an appropriate means of remedying a serious disturbance in the Irish economy and as such is compatible with Article 107(3)(b) of the EU Treaty.”

No news on the remaining tranches which were to be subjected to estimated valuations pending detailed valuations to be completed by March 2011.

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NAMA and the bailout

At the end of September 2010, there was a significant change to NAMA’s operation when our Minister for Finance, Brian Lenihan, decided to (a) accelerate the transfer of the remaining tranches to NAMA at the short term expense of not undertaking due diligence and granular valuation and (b) in respect of Allied Irish Banks and Bank of Ireland only, to increase the threshold of NAMA loan eligibility from €5m to €20m (bizarrely Anglo which was the priority was to remain at €5m and INBS and EBS were to remain without any minimum threshold).

The announcements didn’t make much sense because even with an accelerated transfer, there would not have been certainty or finality because the EU had to approve the valuations and also NAMA intended carrying out post-acquisition valuations which would see a reckoning with any under/over payment. Anglo by the way was to have completed its transfers by 31st October, 2010. Although NAMA has not made any public statement on the transfers my information is that most of Anglo’s loans have been acquired though there remains outstanding the post-acquisition valuation.

With respect to the increase in the thresholds for AIB and BoI, this didn’t make any sense either. The priority was to give certainty to Anglo’s finances yet Anglo’s threshold remained at €5m. The Minister justified the decision by claiming that the personnel in AIB and BoI were better able to manage these €5-20m exposures than NAMA – “this change will ensure that NAMA can operate to the highest level of efficiency and effectiveness in the management of its loan portfolio and allow for the completion of all NAMA transfers by end-year.” Again that didn’t make much sense because NAMA was supposed to have had the necessary expertise and impartiality to maximise the value of the loans.

But 60 days later, there is a volteface as it has been decided that NAMA should not only absorb AIB and BoI’s €5-20m exposures but should absorb the €0-5m exposures as well! The Minister didn’t make the announcement yesterday, the Financial Regulator did, though no justification is offered. I would guess that the IMF saw that the only reason for making the decision on 30th September 2010 was to avoid BoI and AIB crystallising major losses on these €5-20m NAMA loans which might trigger a need for further capital and in all likelihood push both AIB and BoI into State ownership. Capita, the controversial outsourcing company that is NAMA’s “master loan service provider” saw its workload (payload) drop from 1,400 borrowers to 700 borrowers in one fell swoop on 30th September – yesterday’s announcement restores its workload and presumably adds to it with the sub-€5m exposures at AIB/BoI. NAMA on the other hand will have an extra 650 business plans to review and manage for the €5-20m exposures and God knows how many for the sub-€5m exposures. Laura Noonan at the Independent claims that NAMA will now be absorbing an additional €17bn of loans at par value (that is €91bn instead of €74bn – €6.6bn of €5-20m exposures and €10bn of sub-€5m exposures, no mention is made of the quantum of sub-€5m borrowers). And will these new loans mean that NAMA misses its February 2011 deadline for all transfers. And of course NAMA will need an extra estimated €7-9bn to acquire those €16.6bn of AIB/BoI €0-20m exposures. At least that shouldn’t be a problem because the EU has signed off on the NAMA project needing upto €54bn to acquire these loans and even with these extra loans NAMA is likely to spend less than €40bn.

However NAMA’s challenge with securing the €5bn of development funding sanctioned by the NAMA Act remains. There was no announcement yesterday as to how this might be funded. Emmet Oliver penned a piece for the Independent last week which left it unclear if NAMA had successfully tapped the market for €2.5bn of short term funding but confirmed that NAMA at the very least faced a challenge in securing the additional €2.5bn of longer term funding. As I understand it, although NAMA designed the architecture for a short term commercial paper programme at the start of September, NAMA did not in fact see it funded. And as I understand it NAMA is still in a pickle as how to fund major projects eg Treasury’s Battersea Power Station project, Liam Carroll’s unfinished Anglo HQ, the DDDA’s development of the Glass Bottle site. Was this issue addressed in the undisclosed agreement with the ECB yesterday?

Also left hanging yesterday was what will happen with Anglo’s sub-€5m land and development exposures. Why does it make sense to transfer AIB and BoI’s €0-5m exposures but leave Anglo’s? There is some reference in the Ministerial announcement yesterday to yet another restructuring plan for Anglo and INBS “the restructuring of Anglo Irish Bank and Irish Nationwide Building Society will be swiftly completed and submitted for EU State aid approval”.

The IMF are known to have been keen for NAMA to start disposals sooner rather than later and with €10bn of €0-5m loans being acquired, it is hard to see how there will not be a glut of property on offer in 2011.

My view is that the changes above were rushed and not considered which doesn’t augur well for NAMA. What major change will be imposed on the organization next week? How will NAMA manage with a vastly increased (and varied) portfolio? Will NAMA secure development funding which is key to its raison d’etre? It seems that for the time being NAMA is a sideshow.

UPDATE: 2nd December, 2010.Following the publication of the Memorandum of Understanding and associated documents by the Department of Finance, we can now see the formal framework for the expansion of NAMA’s scope as reported last weekend. Although there is some ambiguity, it appears that the expansion in scope only relates to Allied Irish Banks (AIB) and Bank of Ireland (BoI) loans. In the original scope of NAMA, all land and development loans at EBS and Irish Nationwide Building Society (INBS) were to be absorbed regardless of value. The original scope however had a minimum threshold of €5m for AIB, Anglo and BoI. On 30th September, 2010, the Minister for Finance bizarrely altered the scope by increasing the threshold for AIB and BoI only from €5m to €20m. And now the scope has been altered again so that all land and development loans at AIB and BoI are to be transferred to NAMA, and that includes the €0-5m exposures that weren’t even in the scope a year ago when NAMA was conceived. Although article 10 of the Memorandum of Understanding says all land and development loans are to be transferred it seems that elsewhere in the agreement, this is clarified to mean AIB and BoI loans only. Bizarrely it seems Anglo is to keep its €0-5m land and development loans. Go figure!

Here are the relevant extracts from the documents:

It seems that NAMA’s scope will therefore expand to include some €90bn of land and development and associated lending at par value for which it will pay some €35-40bn (my estimates). The number of loans will increase from 11,000 from 1,500 borrowers to 21,000 from an unknown number of borrowers. NAMA has 100-odd employees though NAMA will receive some support from the banks and from its Master Loan Service Provider, Capita. Concerns have been raised in many quarters that NAMA is underresourced to deal with the loans it is acquiring.

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When the blanket bank guarantee was implemented (planned, legislation drafted, debated and voted upon in the Dail) in 2008, it might have taken a couple of years to collectively realise that we’d been kicked up the arse but yesterday’s announcements won’t need that long. The banking collapse in 2008 is set to cost us an officially derived maximum of €87bn, our neighbours in Europe are charging us 6.75% (possibly plus) for financial assistance, we must cede our freedom to manoeuvre by offering up our pension/cash reserves, we need extra funding beyond that announced to help us roll over/redeem existing debt, senior bank debt will not burden-share AND WHERE IS THE TEXT OF THE AGREEMENT WITH THE ECB?

The announcements came thick and fast yesterday, there was the news conference in Dublin with Taoiseach Brian Cowen and Secretary General at the Department of Finance Kevin Cardiff, there was another news conference in Dublin with the IMF, and yet another one in Brussels with the EU/ECB, the IMF published a statement on its website, the ECB published a briefer statement on its website, there was a press release from Bank of Ireland regarding its new €2.2bn of additional capital requirement, the Financial Regulator in Ireland published a joint statement welcoming the agreement and setting out new capital and liquidity requirements (the most informative statement of the evening). Minister for Finance Brian Lenihan took to the airwaves. A flurry of activity and announcements that made the snow blizzards here on Saturday night seem sedate. But despite the media onslaught from so many different organisations and even if Brian Cowen had disrobed and performed Von Rothbart’s finale in Swan Lake in the nip atop the desk of his news conference it wouldn’t have misdirected us from the following:

(1) The announcements were about the banks. The State funding of the banks is now set to increase from the €46-52bn announced on 30th September, 2010  (see below) to €56-62bn “immediately” with another €25bn in “contingency”. The bottom line is that funding the bank collapse is to cost up to €87bn, a sum that independent economists have declared to be the likely zone of costs when we finally get to the bottom of our banks’ loanbooks. Of course it is claimed that some of these funds might be recouped and some are contingency and may not be needed, that we are “overcapitalising” and “showing the firepower” ranged behind Irish banks. With respect to the final losses in the banks, I will frankly admit that I have only a vague notion and instinct as to what they will be. Like everyone else I observe that NAMA has levied discounts far greater than was expected and remembering they are valuing by reference to November 2009, I conclude that the non-NAMA loans are likely to suffer losses far in excess of those presently accounted for by the banks. Like everyone else I observe the way in which the 11% collapse in GDP is affecting businesses and households. In respect of mortgage debt I observed the experience of the State of Nevada which shares many similar characteristics with Ireland (the weather isn’t one of them! housing bubble, negative equity, unemployment, recourse mortgages were though) and I fear that mortgage default will balloon. I also observe that the Financial Regulator has yet to conduct a “granular review” of non-NAMA loans and that banks are still using the fantasy discretionary accounting of IFRS 9. Like many of you, I listened in horror yesterday as Pat Rabitte suggested the prospect of further major losses on bank derivatives in his interview on RTE’s “This Week”. So my gut instinct is that if the IMF is setting aside a further €35bn for the banks with €10bn “needed” immediately and €25bn of contingency, then my gut instinct is that it will all be needed and that the State funding costs of the banks will go from a maximum of €52bn at the end of September 2010 to €87bn. I dearly hope I am wrong.

(2) We are being charged 6.75% (possibly plus) by our friends in the EU for access to funds. There was an homogenous form of wording used in the press conferences, that the interest rate was convoluted and that it would take a considerable amount of time to explain. At the very least why could the Taoiseach not have told the nation “The range of interest rates being charged by our partners in the EU is xx% to yy%, dependant on zzz”. Yes by reference to 9% 10-year money today, 6.75% is cheaper but hardly much cheaper than the 7.1% 3-year money. In terms of deriving 6.75%, this comes from the following statements:

(a) The IMF will provide 1/3rd of any external bailout at a maximum interest rate of 4%.
(b) The EU will provide 2/3rd of any external bailout
(c) The “blended average” rate if all external bailout assistance is drawn down is 5.83% (note the 3 in the second decimal place).
The EU rates must be 6.75% because 1/3rd of 4% plus 2/3rds of 6.75% equal 5.83%. I say 6.75%+ because the IMF bailout costs start from just over 3% – see the IMF press release.

(3) The National Pension Reserve Fund (NPRF) is to be effectively wiped out to fund the banks. By that I mean that the fund had a value of €25bn-odd at the end of September 2010. Of this, c€7bn was already invested in BoI/AIB/ A further €3.7bn was committed for AIB. And yesterday’s announcement says “this action, along with early measures to support deleveraging set out below will result in an immediate injection of €10bn of fresh capital into the banking system, above and beyond that already committed [my emphasis]”. I therefore understand the announcements to mean the NPRF of €25bn will have €1-3bn left when this exercise is carried out and that is to be used for infrastructure/capital spending. In addition we need pony up €5bn from our €20bn-odd cash reserve. The State is throwing its freedom to manoeuvre, its “full funding to the middle of next year” (and beyond) away to secure funding for the banks. That is a very risky gambit involving our main strategic asset.

(4) WHAT AGREEMENT HAS BEEN REACHED WITH THE ECB? The ECB had signalled its withdrawal of emergency liquidity assistance funding in January 2011. What about the €90-100bn of such funding to the six State-guaranteed Irish banks at 29th October 2010? Will the ECB be providing the financing for rolling over some €12bn of maturing sovereign debt (bonds and treasury bills) in 2011? Will our banks be required to buy sovereign bonds?  Will the interest rate on emergency funding to our banks (or whatever replaces that funding programme) be more than 1.5%? What effect will interest rate changes have on our domestic lending market? Will new Irish mortgages (and existing standard variable rate mortgages) cost 8% even when the main ECB rate is 1%?

(5) The bondholders. I must say I am getting a little annoyed by this term. Because having painstakingly examined the balance sheets of the six State-guaranteed institutions (you can see their latest and indeed their historical accounts here), I see that lending to our banks by others takes many forms – you would think from the analysis in the media that it was limited to subordinated and senior bonds but it’s not – it includes medium term notes (MTNs), certificates of deposit, commercial paper. When we’re talking about “bondholders” why are we excluding the other lenders? Senior bondholders account for some €33bn of debt – what about the other €80bn of (non central bank) lending plus the €13bn of subordinated bondholders? Europe says “no!” to applying a haircut to the senior bondholders. The Taoiseach practically guarantees that haircuts for subordinated bondholders at Anglo and INBS will be applied more generally which I take to mean AIB and BoI specifically.

So what to make of it all? The IMF’s Ajai Ckopra tells us this morning that we got a good deal compared with the existing costs of bonds. Ajai also praises the Irish negotiating team (John Corrigan and Patrick Honohan were credited yesterday but Eamon Ryan says that the Department of Finance and Matthew Elderfield also played a role). The government commends the deal. The Opposition is aghast at the loss of the pension reserve and the protection of “bondholders”. Olli “don’t mention the 60% debt:GDP limit in the Stability and Growth Pact. I’m not listening. Lalalalala” Rehn commends it as he sees it as providing wider stability in the eurozone. In Ireland the only stakeholders that seem capable of organising protest are the unions and although they criticise in general terms the austerity elements of the four year plan, the plan itself was sufficiently vague as to public sector reforms that it didn’t directly lance the unions’ interests so I’m not sure there will be further protests.

I have sympathy for our negotiators. Putting aside the fact that the terms of the deal with the ECB have not been disclosed, it seems though that we have paid a high price by not getting to haircut the lenders to our banks, a 6.75%+ interest rate from our European neighbours and the loss of a strategic asset up front. In return we continue to have a functioning banking system which is far from optimal and I doubt if the €35bn of additional funding would result in a “wall of cash”. If banking losses are ultimately in the €80-90bn zone then we will need default or at least restructure if we are to have a society that any of us would recognise as acceptable. Would a restructure at this point have weakened or collapsed the banking system? The scaremongers might claim that but I’m not so sure. What I do know is that if we decide we want to restructure in 12 months time we won’t have a strategic reserve and will be truly dependent on others that won’t have our national interests at heart.

What now? The agreements (and I hope this include agreement with the ECB) are to be set out in a Memorandum of Understanding which will hopefully be published and debated. The Opposition doesn’t seem to be confident that it will get a vote on the matter and is seeing the Budget 2011 vote next week as possibly the opportunity to reject the agreement. Constitutionally some Germans are seeking to have this latest bailout set aside (by amending their previous case which is yet to be disposed of and which related to Greece). Could there be a constitutional challenge here? Given that the banks are potentially getting €87bn of State money I think there is an arguable case that the government does not have a mandate to enter into this agreement without oversight, debate and voting in the Oireachtas. And I understand that a challenge is being mooted. If unions make use of their economists, they might arrive at the conclusion that a default or restructuring is inevitable that might lead to savage cuts for its members and that may bring more protest or indeed a general strike at this point when we at least have a strategic reserve.

Bottom line for me though – this wasn’t a negotiation for bluffing our way with threats of default or withdrawal from the euro, it was a negotiation where we needed to honestly address the scale of losses in the banking system and conclude that we need a partial default on debt – to that extent it was less about poker and more about chess.

UPDATE: 30th November, 2010. RTE report that the proposed deal will be debated in the Dail today though it is unclear if there will be a vote.  The Irish Times raises the prospect of a constitutional challenge to the agreement on the basis that it is an international agreement and according to Article 29.5.2 of the Constitution accordingly requires a referendum.

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This post will be updated as more details are released from Brussels

(1) €85bn bailout – €50bn for the day to day running of the country. €35bn for the banks. €10bn immediately and €25bn as a contingency for the banks. Headline external bailout – €67.5bn because €17.5bn coming from Irish resources (€12.5bn from NPRF and €5bn from cash reserves).

(2) Of the €35bn for the banks, €12.5bn is to come from the NPRF. The NPRF has a value of ~€24.5bn of which ~€7bn is already invested in BoI/AIB preference shares.  Announcement today will leave c€5bn in NPRF if contingency is drawn down.

(3) €3.44bn is coming from the UK at xx% for xx years, €393m from Denmark and €598m from Sweden.

(4) €10bn to be “invested” “immediately” in the banks – this was really about the banks.

(5) Statement from Central Bank of Ireland expected shortly regarding recapitalisation of the banks – €10bn immediately. AIB expected to be 100% nationalised. Speculation that both BoI and ILP will be in majority State control.

(6) “Blended” interest rate of 5.83% combined – RTE citing “government sources”, Four year plan assumption was 6%

(7) We have been given an extra year to meet 3% deficit:GDP – RTE.

(8) Average length of loans 7.5 years

(9) €67.5bn external assistance – €22.5bn from IMF and €45bn from EU including UK, Denmark, Sweden

(10) What about ECB funding – €90/100bn in the six State-guaranteed banks at 29 Oct 2010?

(11) “Best available deal for Ireland” – An Taoiseach

(12) Senior bondholders unaffected

(13) “wider application” of subordinated bondholder haircutting – that implies BoI and AIB.

(14) 118% debt:GDP in 2013  if €25bn bank contingency needed

(15) We potentially return to 1992 level of tax being used to service debt in “worst” situation

(16) “We’re out of bond markets for 2011 at any rate”

(17) Default would be a huge problem to euro banking system. Lehmans default had consequences far afield. We are a responsible country that has benefitted greatly from the reserves of the ECB.

(18) John Corrigan at the NTMA and governor Patrick Honohan key to negotiating deal (no mention of Matthew Elderfield).

(19) Jiggery pokery with banks – Regulator to tells banks cap requirements – banks to decide how to fund.

(20) Professor Constantin Gurdgiev – Yet another announcement on banks’ recap (same old same old) – bank recap at least €67bn (€32bn already plus €35bn into the facility). Still believes banks will be undercapitalised because of future mortgage losses. Believes default or restructuring will be required.

(21) ECB order banks to “deleverage” to replace emergency liquidity. Banks must therefore raise deposit rates therefore higher mortgage and lending rates in Ireland.

(22) Michael Noonan: EU have won the pool, Ireland has played a poor game here.

(23) Helpful if proposals are owned by Irish society – European Commission

(24) Ajai Chopra – Irish authorities have been proactive in finding solutions to fiscal/banking problems

(25) IMF statement available at imf.org. Maximum interest rate charged on IMF funds is 4%. If the “blended rate” is 5.83% then that means the EU is charging 6.75% (IMF is providing 22.5bn of 67.5bn external bailout – 1/3 of 4% plus 2/3 of 6.75% equals blended rate of 5.83%). What was so difficult about explaining that Mr Cowen, would only have taken 30 seconds and wouldn’t have delayed the news conference.


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Remember that we are fully funded into the middle of next year and indeed should we choose to liquidate the National Pension Reserve Fund we will be funded into 2012 and should we sell off a few State assets, like the electricity and gas utility companies, the bus and rail transport companies or the airport or port authorities (y’know the companies that were privatized in the UK in the 1980s) then we could surely get to 2013 by which time our deficit:GDP should be 5% with strong evidence of a commitment to fiscal stability. And wouldn’t that convince the most skeptical investor to buy our bonds and treasury bills?


To repeat for the umpteenth time, the problem is not with funding our day to day spending which we accept must be brought to an equilibrium with our State income (and frankly if there was a political commitment to rebase our living costs – food, transport, communication, energy, public sector – there wouldn’t be the same fear or concern that we saw manifested in the demonstrations on the streets of Dublin yesterday). Although it’s a challenge to rebalance our fiscal position, the problem is not running our country. It’s the banks.


The latest dirty bomb to be wheeled out was at lunchtime today on our weekly current affairs radio programme, RTE’s “This Week”, when Labour party stalwart Pat Rabitte suggested that (a) banks might be nursing undisclosed multi €10s of billion derivative losses (b) the National Pension Reserve Fund might in some way be underwriting these losses and (c) these derivative losses help explain the flight of deposits and the ECB’s reluctance to lend to Irish banks. At this stage his suspicions are unsubstantiated and the government spokesperson, John Curran on the same radio programme said he “didn’t believe” the suspicions were founded. Part of me hopes Pat Rabitte is wrong but my gut instinct is that we will need default anyway and if these unsubstantiated suspicions prove correct then it might hasten that event and not prolong the expensive uncertainty and pain.


But the point is this: our nation of 4.5m souls with a GDP of €160bn (and possibly a more representative GNP of €125bn) is about to accept a bailout expected to be €85bn (€18,888 per capita), shouldn’t there be extensive debate and oversight and societal ownership of the debt? If we are effectively funded to 2013 (see above), surely a few extra weeks at this stage wouldn’t hurt our national interests? The Greeks accepted a €110bn bailout (€9,738 per capita) only after debate in their parliament on 6th/7th May 2010 and a vote in favour of 171-121. Eleven days later Greece was due to redeem €8.5bn of bonds and if the deal was not approved then Greece would have been in default. In other words Greece had a gun to its head but they still had debates and a vote – it was democracy.


We don’t have a gun to our heads if what Minister for Finance, Brian Lenihan, tells us is correct – we are “fully funded to the middle of next year” (and as I say with the NPRF and unexceptional privatizations that could be extended to 2013). What is making the nation sick to the pit of its stomach is the suspicion that the banks are hiding further horrendous losses.


“I never look a gift horse in the mouth, but I am not averse to looking an organization in the motive” (Fred Allen, American comedian)

Word coming through here is that the terms of the bailout are far more specific and detailed that might have previously been imagined when broad targets were discussed but the detailed workings were assumed to have remained within our national discretion. The deal will contain more than a bailout sum, a repayment period and an interest rate. The deal may challenge our 12.5% corporation tax rate. Funding with repayment in seven years plus may be sold with a 6.7% interest rate.

Minister Lenihan acting for the government of Ireland might sign any agreement. But what mandate does he have and what oversight will the agreement have?

I did contact politicians on this matter and a senior Fine Gael politician said that they were equally concerned that the nation’s fate was being sealed behind closed doors without political oversight.

When Ireland signed up to the European Financial Stability Fund in May this year and which saw us soon afterwards committed to providing €1.3bn in aid to Greece (at a 5.2% interest rate mind), we didn’t have protests on the streets nor legal challenges – indeed the reaction was muted and this was at a time when a bailout prospect for ourselves was nowhere on the horizon. The legislation to give effect to Ireland’s involvement in the EFSF is the European Financial Stability Facility Act 2010 which was ultimately voted into law by our Dail in July 2010 and there was broad political support for participation in the scheme. So far Ireland has lent €375m to Greece and spent €293k on the administration of the EFSF Special Purpose Vehicle.

In Germany however there was outrage at the Greek bailout. There was talk of forcing Greece to sell off its islands and indeed there was a challenge to the bailout under Germany’s constitution. The challenge has yet to be heard.

Unlike some other countries in Europe (notably the UK), Ireland, like Germany, has a constitution. And I must say that I have found myself reading it recently for the first time in many years. What I was searching for was principles which governed the freedom of our elected government to spend our money. It seems clear to me that the Constitution intended major spending decisions to be debated in the Oireachtas and subject to political oversight.

The four year plan (dubbed the “National Recovery Plan” by its authors) which was published last week was debated in the Dail but not subjected to a vote. But its detailed implementation in annual budgets will be debated and voted upon so arguably there will be the oversight anticipated in our Constitution for our fiscal plans.


Two years ago with the bank guarantee legislation (which was also debated and voted upon in the Oireachtas) we vested great powers in the government to pay for the cost of any bank bailout. And it is presumably by reference to this legislation that the government would claim today that it has already received a mandate to incur any costs necessary in saving the banking system – certainly in discharging any costs set out in the legislation. And when this legislation was put in place, it was clear that the maximum amount of the liabilities could be in excess of €400bn but I don’t think anyone who voted for that legislation had a notion that the costs could be anything close to the sums now being discussed (€46-52bn the official government estimate of the bailout funding).

So if the government today signs a deal which will see €10s of billions more poured into the banks then can they claim they have a mandate under the Credit Institutions (Financial Support) Scheme 2008 and Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 ? Surely that must be unconstitutional if the belief of the deputies that voted on the legislation was that the scheme would never need be called upon to the extent it is now. In Germany, it is a ragtag collective that includes an actor, an academic, the grandson of Konrad Adenauer and apparently 50 unnamed parties that is challenging the bailout in Germany’s specialist constitutional court. Might there be a constitutional challenge here?

And finally, it is being rumoured that part of the deal will see a restructuring of the Irish banking sector.

Let’s review the State’s current and imminent ownership of financial institutions:

We now own 100% of the Educational Building Society (EBS) and Irish Nationwide Building Society (INBS) and Anglo Irish Bank Corporation (Anglo)

We own 18.6% of Allied Irish Banks (AIB) which is likely to grow to 100% when the Financial Regulator-mandated €6.6bn is injected imminently by the State,

We own 36.5% of Bank of Ireland (BoI) which would have grown to 52% if the bank was forced to pay the dividend on State-owned preference shares next February 2011 in ordinary shares (lucky for the bank, the Commercial Court approved its application to tap the share premium account to pay dividends). However the speculation that BoI will need another €3.2bn of capital now to absorb losses and met the Financial Regulator’s “overcapitalisation” target of capital being 12% of lending would bring our ownership to 81% (1.9bn of the 5.3bn existing shares plus €3.2bn divided by Friday’s closing price of €0.26)

That leaves Irish Life and Permanent which had a market capitalisation of €140m at close of business on Friday, a financial institution with €80bn of assets, €78bn of liabilities and €2bn of capital – the betting is that the “overcapitalisation” rules which require the bancasseur to raise an additional €120m will become State-owned.

Given the exit of BNP Paribas from the Post Bank joint venture earlier this year, that means our post office as a “financial institution” will once again be 100% State-owned. Credit unions are owned by their members but it is no secret that they are nursing significant under-accounted losses and the betting is that if they were subjected to a NAMA-type examination and valuation of their loans then they too would be insolvent depending on State-aid.

Will the restructuring see the formation of a new financial institution? The Permanent Anglo-Irish Allied to Education for Life Bank (nationwide, incorporating An Post and credit unions)

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For a country where Latin disappeared from the practical curriculum in the 1970s, it is surprising that during this crisis that one Latin expression keeps appearing across all sections of society – “Cui bono” or who benefits? It is understandable that the nation should pose this question because much of the cost of the crisis, which is ultimately being borne by the citizenry has been determined behind doors closed to the Freedom of Information legislation and where monumental decisions have had scant political oversight and have turned out to have been based on inaccurate information. Being a small country where tribal associations still count, there is always the suspicion that decisions are taken to benefit one group or other – and if you examine government policy in the 2000s you will see that it benefited property developers in a striking way and it is accepted as fact that these developers made hefty contributions to the main political party.

And on the eve of yet another monumental deed – the agreement of terms of a bailout from the IMF and various EU funds – it is natural for that question to be posed again.

Of course we have yet to see the terms of any bailout package but the following headings will be of interest:

(1) How much will come from the IMF (€250bn 2010 European bailout fund where our large European neighbours control 25% of the votes and with €30bn committed to Greece) and how much from the European Financial Stability Fund (EFSF – €440bn fund supported by 16 eurozone members with €80bn already committed to Greece) and the European Financial Stability Mechanism (EFSM – €60bn fund supported by all EU members including UK, Sweden, Denmark).
(2) The fiscal conditionality – changes to the way the country operates its taxation and public spending – that will appear in any deal is unlikely to surprise us as we’re already committed to returning our deficit:GDP to 3% by 2014 and there is widespread public support for that objective even if the means by which it will be achieved can be modified.
(3) The interest rate to be charged. This is exercising the nation already. There was speculation yesterday (since denied by “sources close to the negotiations”) that the rate proposed will average 6.7%. There are concerns that the rate charged will be in excess of that charged to Greece in May this year when they hammered out a deal with the EFSF and IMF. Here are the rates presently being discussed:
(a) 5.2%, the consolidated rate charged to Greece which is required to repay funds within three years. Ireland’s funding may be required for far longer (nine years is being mentioned and the longer the term the higher the rate because of the increased risk of default)
(b) 4.5% is the rate expected from any IMF bailout element. Interestingly at the start of the week it wasn’t clear if the IMF would in fact be providing any funding, though it seems accepted that they will now.
(c) 6-7.2%, credibly calculated estimates on the irisheconomy.ie blog

(4) The above elements are important and interesting but I would guess that perhaps the most important element of any deal will be a copperfastened clarification and commitment with respect to the State guarantee for the banks.

Cui bono?
Like the use of the Latin expression “cui bono?”, as a nation we have become used to casually referring to hitherto exotic “bondholders”. These are taken to be investors in/lenders to Irish banks particularly during our construction and property boom in the mid 2000s. Despite some apparently brave attempts at Guido Fawkes to unmask some of them, there is no public comprehensive list of these lenders/investors. The suspicion is that many of them are “foreign” but the government (which practically owns all of the banks) counters that with the notion that substantial sums were lend/invested by “Irish” pension funds and credit unions. So what’s the truth?

Firstly I would suggest we need replace the term “bondholders”. As far as I can see there is still around €126bn of lending to the six State-guaranteed banks and if you examine the financial statements (all available under the new banks TAB by the way) you will see that some of the lending is through bonds, more through Medium Term Notes (MTNs), some Certificates of Deposit, some Commercial Paper. All of it is lending/investing but only some of it is literally bonds. In addition to this €126bn of private sector lending to the banks, there is also ECB and Irish Central bank lending which is now reportedly around €120bn, with €90-100bn from the ECB and the remainder from the Central Bank of Ireland. And the last main source of funds to the banks is depositors – commercial entities and retail (people’s normal savings) depositors worth some €198bn. If an Irish bank (except for the Post Office where savings were 100% guaranteed without restriction) had gotten into difficulties before September 2008 then only the retail depositors would have been saved and even then only up to €20,000 per person.

So beyond the traditionally protected retail depositors there appear to be €126bn of mostly anonymous lenders/investors plus €90-100bn from the ECB.

A “friend in need” or a nation whose banks have USD $42bn of investment/borrowings from British lenders and where British-owned banks have substantial additional lending exposure
You might have formed an impression of British Chancellor George Gideon Osborne that the only time in his life when he had hitherto considered Ireland was if the Waterford crystal in the Bullingdon Club was chipped but George is indeed one of our own with roots in Tipperary and Waterford.  And it would have been heart-warming if his kind words about Ireland, “a friend in need”, during the week completely reflected the motivation for offering a reported €8bn in loans to the State. Alas it’s not a fairy-tale world and the likelihood is that George’s charity is founded on the cold reality of British exposures to Irish banks and to a lesser degree the separate exposure of British banks (RBS through its Ulster Bank brand and Bank of Scotland through its Halifax brand) to the Irish economy. According to the BBC interpreting the Bank for International Settlements some ” foreign lenders still have $170bn (£107bn) invested in Irish banks. Of this total, $46bn has come from German banks, $42bn from British banks, $25bn from US banks, and $21bn from French banks.” In addition there is nearly €50bn lent by Ulster Bank and Bank of Scotland/Halifax to Irish mortgage holders, businesses and of course property developers. As we would say here George, it is clear you have some skin in the game – that didn’t stop the British media from examining the distraction of trade links and dusting off Tory reliables Bill Cash and John Redwood for predictable rants in support of Fortress Britain.

The UK is one of three countries thus far to have proposed bilateral loans to the State (the other two being Denmark, home of Danske Bank whose Irish subsidiary National Irish Bank has €10bn of loans to homes and businesses here and Sweden whose interest in advancing a €1bn loan to the State is not immediately obvious but then again we just don’t know the identities of the holders of €126bn lending/investment in our banks). Both Denmark and Sweden have made reference to “reform” in Ireland as a condition of the lending but that seems to over-egg current negotiations where Ireland is plainly accepting the need to return its deficit to the Stability and Growth Pact mandated 3% by 2014. By “reform” could they mean placing their existing lending to the State on a more secure State-guaranteed sovereign footing?

Our one-legged friend Olli
Before the summer of 2010, very few Irish people had heard of Olli Rehn, the quiet-spoken European Commissioner for Economic and Monetary Affairs. Olli of course paid a high profile whistle-stop visit to these shores just two weeks ago when he met many of the stakeholders in resolving our fiscal crisis. It seems that his visit also paved the way for IMF and EU intervention. Olli is a very concerned man these days – he is concerned that the local bush fire in Ireland’s finances doesn’t set alight a forest fire around the Mediterranean and elsewhere. Olli is also very concerned that Ireland’s deficit:GDP has gotten so far out of line with the Stability and Growth Pact (SGP) which requires euro members to maintain any deficit at 3% or less of GDP. But what doesn’t appear to concern Olli is that the other leg to the SGP is the debt:GDP rule which requires euro members not to run up national debts that exceed 60% of GDP. And there is good reason for this second rule – nations that do run up high debts may enter a debt trap whereby the debt is never paid and interest payments substantially reduce quality of life and ultimately threaten stability of the state and increase the risk of default. But not once (and I have checked) has Olli expressed his concerns about Ireland’s burgeoning borrowing which even according to official government estimates will peak at 102% of GDP (other estimates put it at 150%). Why the silence Olli? Surely you’re not more concerned at German banks being forced to accept some losses on their lending to/investment in Irish banks?

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Consider the following facts:

(1) In 2009 Anglo redeemed “certain subordinated liabilities” namely “€1,805m of Tier 1, €307m of Upper Tier 2 and €388m of Lower Tier 2 securities 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. Anglo didn’t provide a description of the bonds redeemed so we don’t know if they were due or if Anglo redeemed the bonds before their redemption date. (Note 7 on page 42 of the 2009 Annual Report)

(2) In September 2010 (just two months ago), Anglo redeemed €7.9bn of senior bondholder debt at par value – that is, without any discount or haircut. (Note 26 on page 56 of the 2010 Interim Report)

(3) Anglo is now offering junior bondholders redemption of their bonds at 20c in the euro (that is, an 80% haircut or discount) (Report in the Independent at the end of October 2010)

It has taken the intervention of the IMF and to a lesser extent the EU to determine what we have known for some time – that the country is effectively bankrupt having assumed the burden of bank losses. And now it seems that we are on the threshold of doing what had originally been regarded as taboo and unmentionable, then became ambiguous with talks of “amicable discussions” but is now emerging as a fully formed position: Ireland can’t remain solvent if it has to honour the debts of certain banks operating here and we must therefore “burden share” the colossal losses in our banks or else the country will need default on its debt (sovereign or quasi-sovereign bank-guarantee related).

The Irish Times is reporting that the IMF, together with the EU (and presumably the ECB), is examining how senior bondholders can share the burden of losses in our banks. It seems that we might have solid proposals within the next 72 hours.

What seems tragic and lamentable is that over the past 26 months – since the State gave that blanket guarantee to the banks – we have been allowing the banks to redeem bonds either at par value (ie without any discount) or at discounts which appear ludicrous today (eg Anglo paying 31c in the euro last year when Anglo’s new-ish Chief Financial Officer seems confident we can pay 20c in the euro today – though there are others who protest that the subordinated bondholders should be paid 0c in the euro). There has also been a programme of replacing bonds issued pre-September 2008 with new State-backed bonds.

I show an extract below of the balance sheets for the six State guaranteed institutions (Irish Life and Permanent is not participating in NAMA because it claims not to have any eligible NAMA loans – the other five institutions are participating in NAMA). I show the liabilities section of their balance sheets as close to the September 2008 blanket guarantee as the institutions reporting allows and also the latest formal reporting. The line you should be looking at is “Debt Securities in issue” which roughly approximates to senior bondholders and “Subordinated liabilities and other capital instruments” which roughly approximates to junior or subordinated bondholders. A consolidated liabilities section of the balance sheet is also shown in which there appear to be some €114bn of senior bondholders and €13bn of junior bondholders. It should be said that although we refer to these creditors as “bondholders”, in truth they hold a variety of debt instruments.

Consolidated (six State-guaranteed banks)

Allied Irish Banks


Bank of Ireland


Irish Life and Permanent


From the above you will see that although we have redeemed a substantial amount of debt there is still a substantial amount outstanding. If the IMF in particular want the State to remain solvent then a substantial part of this debt will need to be written off or discounted. Meantime I hope there will be better oversight of what debts the State is paying off – the €7.9bn redemption of Anglo’s bondholders in September 2010 at par value was the subject of some rumour but in truth Anglo signalled it was going to execute the redemptions in its June 2010 accounts published at the end of August 2010.

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Buried away on page 34 of the Four Year Plan (the so-called “National Recovery Plan”) published yesterday was a commitment which should freeze the hearts of those whose livelihoods depend on a recovery in the commercial property sector. As part of the government’s drive to return competitiveness to certain parts of the economy, it has identified rent costs in both the private and public sector as a drag on competitiveness and has developed some specific action points to address the perceived imbalances:

(1) The proposals of the Working Group on Transparency in Commercial Rent Reviews will be implemented.
(2) The Office of Public Works will lead a coordinated effort to reduce office rents by up to 15% and review the efficiency of property arrangements across the public sector.

Although we are some two months away from the publication of the Q4 commercial price indices for the State, it was striking that although both the SCS/IPD and JLL indices showed modest capital declines in Q3, 2010 (2.6% and 1.1%), both recorded nearly 5% quarterly declines in rents (that’s close to 20% annualized) in a country that before last March 2010 had rental agreements with upward-only rent reviews, whose terms continue in effect even though new leases won’t have them. These rental trends are also a cause for deep concern for any recovery in the commercial sector because those 7-9% advertised yields quickly become 4.2-5.4% yields after a couple of years of 20% rent declines even if capital prices remain constant.

Yesterday DTZ identified Ireland as yet again the outlier facing problems, with the publication of its periodical Debt Funding Gap report. It defines the debt funding gap as “the difference between the existing debt balance as it matures over time and the debt available to replace it.” In other words those investors who bought Irish commercial property with short term lending will face difficulty when they need roll over their loans. And as we saw in the recent Paddy McKillen case, it is not unusual for Irish investors to use short term funding as a key tool for managing the financing of their property assets.

And today, the Independent reports that the IMF is putting pressure on NAMA to start disposing of property. DTZ said yesterday that it expected NAMA to start “orderly disposals in 2011”. I’m not sure that those responsible for making disposal decisions have grasped the fact that we are slowly but surely losing decision-making discretion in this area, and despite the rational and meritorious decisions to a framework strategy which foresees different recovery in different markets and disposes of assets accordingly, it seems that pressure will be brought to dispose in a more generalized way. The IMF is now just repeating its advice in the last routine country mission in June 2010 but I think there will be far more urgency and precision in their entreaties today. Of course one of NAMA’s board members, Steven Seelig, is a former Mission Chief at the IMF and indeed had some previous IMF involvement with Ireland – he may become a key bridge between the needs of NAMA and the IMF now.

So the prospect of increased supply from NAMA, declining rents and the scarcity of funding all point towards a continuing decline in prices which are now some 60% off peak. Though quality buildings in prime locations may suffer less, the scale of the challenges facing the sector are such that no project is immune – there are rumours that the sale of the Liffey Valley Shopping Centre may have stalled. How many more transactions face being placed on ice until there is greater visibility on prices in the sector?

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