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Archive for November 22nd, 2010

I must admit to being frustrated yesterday by our Minister for Finance’s clumsy handling of the key question of the quantum of any bailout. Plainly some unknowns remain and negotiations need to be concluded but the Minister could surely have done better than denying that it would be a “three-figure sum”, by which he meant €100bn (surely that’s a 12-figure sum – €100,000,000,000) and then saying during the same RTE interview with Richard Crowley that it wasn’t going to be “€60-70bn”. Sources in Europe seem to have been more forthright and last night David Buick of BGC Partners in an interview on BBC News 24 said at one point that he thought it would be in the region of €80bn and a few moments later stated with what seemed like confidence that it would be €85bn. Just a few moments later in Dublin, the two Brians commenced their press conference during which Brian Lenihan was asked how much would be required and his response was that “we could work it out” and he repeated that the funding requirements of the State were €19bn per annum. This entry tries to produce some workings.

(1) NAMA – €5bn. NAMA appears to have been frozen out debt markets and although it has been putting in place programmes to access State-guaranteed debt of up to €5bn as allowed by the NAMA Act, it has not executed the programmes. The betting must be that NAMA’s €5bn will be provided by the bailout.

(2) Deficit funding for 2011-2014 will be €43.25bn, being €16bn in 2011, €12bn in 2012, €9.75bn in 2013 and €5.5bn in 2014. This is from the NTMA in November 2010 after the Department of Finance announced the €15bn fiscal adjustment upto 2014 and the €6bn adjustment in 2011.

(3) Promissory Note funding for the banks. Although the Department of Finance claimed this would be €3.1bn per annum from 2011 onwards, the truth is that it may be frontloaded. €31bn may be needed immediately.

(4) Repayment of national debt debt (bonds, treasury bills). The workings of the NTMA above don’t appear accurate and in particular seem to exclude the repayment of treasury bills. Elsewhere on the NTMA website they show a graph of redemptions which indicate the following up to and including 2014 (total of €38bn)

(a) €12bn in 2011

(b) €6bn in 2012

(c) €7bn in 2013

(d) €13bn in 2014

(5) Replacement of ECB emergency liquidity assistance. The ECB has already signalled that it intends to cease its emergency assistance programme. As we know at the end of October 2010, the six State guaranteed banks had borrowed €90-100bn from the ECB. This may have increased in the past three weeks. But if the ECB is withdrawing the assistance and no-one else is lending then presumably the State will need pony up this funding. So that would be €90bn ++

So by working it out myself like Brian Lenihan suggested, I come to €207bn approximately for the period up to the end of 2014 (perhaps I should be looking at a shorter period?). Of course we have some €10bn of funding already (the “fully funded to the middle of next year” funds) and we have €14bn or so available from the National Pension Reserve Fund (€25bn less commitments to AIB/BoI). The promissory notes may not need immediate upfront funding. On the other hand we will have substantial interest payments on borrowings not previously accounted for. And of course there may be further nasties lurking in the banks and it seems that the substitute ECB funding will be considerably more than €90bn. But regardless I can’t see how the bailout can be less than a 12-figure sum and likely to be in the €200bn zone. So Brian, are my workings wrong?

UPDATE: 22nd November, 2010. Video of the press conference last night in which Minister Lenihan said we could work it out ourselves is now available – in the clip below the relevant question and answer is from 5.25 and the transcript is “You asked another question, a breakdown of the two I can’t give you that [a ratio breakdown – how much of the bailout is for the banks and how much is for the country] but you can work it out for yourselves because you know what the gap in terms of public expenditure is at present – it’s €19bn this year for example. So clearly as with the banks, so with the State itself the arrangement will be designed to show the firepower available to Ireland”

UPDATE: 23rd November, 2010. Minister of State at the Department of Health and Children (one of 15 ministers outside the cabinet which itself has 14 ministers plus the Taoiseach) John Moloney was on the under-rated Vincent Browne show last night when the following exchange took place (from about the 37th minute)

From 37:00 minutes on –

MINISTER JOHN MOLONEY: Let’s take the worst scenario that it might transpire, of course it’s a huge concern a huge worry as we go forward .The clear implication of all of this is that unless we secure support from the ECB, the alternative is worse

VINCENT BROWNE: Do you ever think in your head, in your mind “how could we have screwed it up so badly that we have forfeited the future of this society for years and years and years to come” You ‘re going to leave a debt of the order of €150-160bn?

JM: I wouldn’t make light of that at all, nor would I play politics with it, of course it’s down to poor regulation-

VB: Sorry it’s going to be €200bn

JM: In fact it will even be in excess of that, if it’s drawn down of course but I’m thinking of the worst possible scenario. Of course there’s huge implications. The reality has been and we’ve acknowledged this.

Our national debt today is €90bn according to the NTMA. If the bailout is say, €90bn, then how do we get to a national debt of “in excess of ” €200bn? I think the answer must be that part of the bailout will be earmarked and certain whilst the rest will be contingent. Contingent on what? The ECB not withdrawing emergency liquidity assistance totally as planned in January 2011, the ability of Ireland to return to the debt markets over the course of the next three years, the promissory notes that the State is using to capitalise the banks not being called in in the short term. But there you have it, a Minister of State conceding that the national debt may be in excess of €200bn and given the likely exit from power of this present government by the end of January 2010, I think the betting would have to be that the bailout now in prospect is €100bn+ at least.

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Well it seems that we are to seek a facility, rumoured to be €80-90bn at an interest rate to be determined but likely to be 4-6%. However the statements yesterday by the Taoiseach, Minister for Finance, ECB, IMF and EU leave many questions unanswered and as the next increment in this unfolding tale is sought out, this entry seeks to stand back and ask some fundamental questions about what is happening to the State right now.

(1) Which organisation is providing the bailout? As of right now as far as I can see the IMF is not involved in the financing but is involved in agreeing the “conditionality” – what the Irish State must do in return for the bailout. The statement on the IMF website by its managing director, Dominic Strauss-Kahn last night states “At the request of the Irish authorities, the IMF stands ready to join this effort, including through a multi-year loan. An IMF team, currently in Ireland for technical talks, will now begin to hold swift discussions on an economic program with the Irish authorities, the European Commission, and the European Central Bank.” The statement by the ECB last night was “the European Union and euro-area financial support, together with the IMF financing, will be provided under strong policy conditionality, on the basis of a programme negotiated with the Irish authorities by the Commission and the IMF, in liaison with the ECB” However Dan O’Brien in today’s Irish Times is claiming “No IMF money would be involved and two EU countries which are not in the euro area – Britain and Sweden – might “possibly” chip in”. The Taoiseach’s statement last night included “The Government today agreed to request financial support from the European Union and the Euro Area Members States. The IMF will also be requested to assist in the provision of support.” and “EU and euro-area financial support will be provided under a strong policy programme which will be negotiated with the Irish authorities by the Commission and the IMF, in liaison with the ECB”. The IMF is providing some €30bn of the €110bn earmarked for Greece. The IMF has committed €250bn of the €750bn European rescue fund (€440bn coming from the EFSF (euro states) and €60bn coming from the EFSM (all EU states including the UK)). So is the IMF providing funding or not? If it’s not then why is it involved in program discussions? Has Ireland ceded sovereignty to the IMF in return for no funding? Although the European giants, Germany, France, Britain, Italy, Holland and Belgium control over 20% of the IMF’s voting, their power is even greater in the ECB and EU.

(2) What are the final losses at the State guaranteed banks? Yes of course we can’t know for certain because it will depend upon the future performance of  the economy and in particular the performance of the property sector. But it seems that the losses in the banks are to Ireland what official statistics were to Greece – unreliable and dangerous. The IMF got to the bottom of Greek economic statistics – will they get to the bottom of the losses in Irish banks?

(3) What is the maximum State funding requirement for State guaranteed banks? In September 2010, this was put at €46-52bn by our Minister for Finance. Since then it has become obvious that the banks are depending on central bank intervention (ECB and the Central Bank of Ireland) in order to keep their doors open. How much will be needed to fund the banks by the Irish State? Apparently there is to be yet another stress test – remember this is after (a) our €340,000 a year Financial Regulator’s Prudential Capital Assessment Review in March 2010 updated in September 2010 and (b) the European stress tests of Allied Irish Banks (AIB) and Bank of Ireland.

(4) At some point the cost of our financial crisis moves from “manageable” to “unmanageable”. You would expect that at the “unmanageable” stage there would be some default on debt. What is the quantification of “unmanageable” – €10,000 per man/woman/child (€45bn) or €60,000 per man/woman/child (€270bn).

(5) How much of any facility is certain to be drawn down and how much is contingent. What are the risks that estimates are lowballed. By the way thanks to Irish economist and Trinity College professor for yesterday emphasising this word – to remind you “lowballing” is a sales technique whereby the seller opens with a low sales price but subsequently raises it – psychologically the buyer forms an attachment at the opening low price and resists withdrawing from the transaction when the price is increased.

(6) What rates of interest will apply to the facilities? Given that our banks have been borrowing at 1.5% for emergency liquidity assistance from the ECB, shouldn’t any funding that is primarily for our banks be closer to 1.5% than the 4-6% presently being rumoured. I found it distinctly disingenuous yesterday that when asked about the quantum of any bailout, Minister Lenihan answered and said that “we could work it out – there was a €19bn” State funding requirement and then we need fund the banks. Well this is what the NTMA thinks we need to fund the State – €16bn in 2011, €12bn in 2012, €9.75bn in 2013 and €5.5bn in 2014. This NTMA estimate was produced after the Department of Finance unveiled the €15bn fiscal adjustment by 2014, the €6bn adjustment in 2011 and the promissory note profiling. So it’s nowhere near €19bn per annum to fund the State so if the fund is indeed €85bn then why are we not paying 1.5%?

(7) What is the true level of debt of our banks with regard to foreign banks? How much of this is junior bond debt? How much is senior bond debt? Of course we welcome the offer of a loan from our neighbours in the UK. But last weekthe BBC citing the Bank for International Settlements said that today 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.” The kindness of strangers is one thing – giving someone who has a credit card debt a mortgage so that they can pay back the credit card debt but also be required to provide a charge on their property, is another thing. And our banking debts are fundamentally not the debts of the Irish State.

(8) To any of the fourteen cabinet ministers that along with the Taoiseach voted on the decision to make the request yesterday and that will presumably vote on any bailout package – in what way were they qualified to make the decision, did they obtain external advice, what alternatives did they consider, to what extent do they consider they understand the implications of what they supported? It’s not unusual to have teachers and barristers come into politics and that is our democracy. But these are monumental decisions in the history and story of the Irish State – they need coolheaded deliberation, debate, sound intelligence, consideration of alternatives, expert advice.

(9) How will any funding package agreement be accepted and owned by Ireland’s citizenry. The Constitution anticipates that all major spending decisions by the government will be debated and voted upon in the Dail. The debate on the banking guarantee was notoriously curtailed and looking back now, recklessly ill-informed. What oversight will there be by the Opposition in particular?

(10) Will the ECB continue to fund our banks? Why did the ECB apparently resist further funding of our banks? Why is the ECB apparently abandoning its role as lender of last resort to euro-area banks? Whilst the straitjacket of a common currency more suited to the needs of the French and German economies is a disadvantage of the euro, a stonking big central bank in Frankfurt with over €1tn of reserves is supposed to be an advantage. Why must we suffer the euro disadvantages but be deprived of its advantages?

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