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Archive for November 27th, 2010

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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