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Archive for November 28th, 2010

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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