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Archive for December 15th, 2010

With deputies attending the debate and vote on the IMF/EU bailout agreement this afternoon unashamedly telling the media that they don’t know or understand the details, it is hardly surprising to learn that the true aim of the bailout, rescuing the banks, has now gotten underway without great fanfare or oversight.

The Irish Times reports this morning that the State has injected a further €525m into EBS. This is in addition to the €100m in cash injected in the building society in May 2010 and the €250m injected via a promissory note in June 2010 (Ciara O’Brien gets the two mixed up in her Irish Times article).

What this means is that the €875m that was flagged as the additional capital requirement in the Financial Regulator’s PCAR in March 2010 has now 100% been provided by the State whereas previously there had been a suggestion that a third party, perhaps one of the two remaining bidders for EBS (Irish Life and Permanent and the Cardinal Consortium) might stump up some of the requirement. The €875m was provided as follows (a) €100m in cash in May 2010 (b) €250m in promissory notes in June 2010 and (c) €525m in cash in December 2010. The PLAR published by the Financial Regulator on 28th November, 2010 signalled that EBS would need raise a further €438m by 28th February 2011 (that’s on top of the €875m) and the betting would be that the State will need pony up that also. And where did the €525m just now injected in EBS come from? That would seem to be from either the NTMA cash balance (the “fully funded until the middle of next year” money) or from the NPRF (whose €17bn unencumbered funds might have been made available for running the State but instead are being shoveled into the banks).

The €875m that has been shoveled into EBS so far (and the additional €438m that will be burned there by the end of February 2011 – shoveling and burning imply some sort of constructive locomotion but alas it’s merely loco as the money is unlikely to be even partially recovered) are as nothing though compared with Allied Irish Banks (AIB) which will require a further c€3.7bn in the next two weeks to meet the PCAR (Sept 2010 version) and will need an additional c€5.3bn by the end of February 2011 to bring the overall State investment in AIB to €12.745bn approx (€3.78bn already invested in preference shares and share acquisition costs, €3.7bn in the next two weeks and €5.265bn by the end of February 2011 and that’s on top of €3.4bn generated by AIB through disposing of its Polish Bank Zachodni and US M&T stakes). The €3.7bn in the next two weeks is also likely to come from the NTMA strategic reserve or the NPRF.

I think it is noteworthy that EBS has been provided with its 31st December 2010 PCAR requirement two weeks early whereas AIB which is in the wars with its bonus controversy will seemingly wait until the fuss has died down before it is gifted its €3.7bn.

Bank of Ireland appears to be okay for the next two weeks though my strong view is that NAMA’s absorption of the sub €20m exposures will create a further, thus-far undeclared, hole in BoI’s capital. NAMA, BoI, the Financial Regulator and the Department of Finance seem to be working on the basis that the remaining tranche for BoI would attract a 42% (40% in one ministerial statement) haircut. Confidential messages received here indicate that there will be some horror stories that will be uncovered by NAMA and that there is no genuine reason for BoI’s smaller exposures to have a lesser haircut than AIB’s (which according to the September 2010 estimates, the latest available, is to be 60%).

Irish Life also appears okay for the time being and has exceptionally been given until May 2010 to find €243m of capital and the betting is that it can do this without recourse to the State.

And that leaves the two lead-zombies in our financial landscape – Anglo and Irish Nationwide Building Society (INBS). The bailout cost for INBS went from €2.7bn in April 2010 to €3.2bn in August 2010 to €5.4bn in September 2010. The €5.4bn is on the basis that NAMA applies a 70% discount to INBS’s last tranche and that there are no additional unprovisioned losses on the remaining €2.6bn of non-NAMA loans (the last recorded provision on these was €0.2bn). You would hope that at this stage there is limited further downside with INBS but (a) their non-NAMA loan provisions look low and (b) as with the other banks there is concern over undiscovered losses with derivatives.
And so to the chief-zombie, Anglo. My understanding is that NAMA has transferred practically all of Anglo’s NAMA loans though NAMA has not issued a statement on the matter (it found the time to issue a lengthy reply to the CIF-comissioned hatchet job on the agency but not the time to report on a transfer that was flagged as urgent at the end of September 2010). Paddy McKillen’s estimated €900m of lending is still with Anglo pending the outcome of the appeal which is starts today in Dublin’s Supreme Court, but my understanding is practically everything else has been absorbed. So is NAMA able to confirm the final (estimated, pending full due diligence by the end of March 2011) discount? Is it 67% (I understand it is) or as high as the worst case scenario of 70%? And how is Anglo getting on with its €38bn of non-NAMA loans? Has the outlook improved on these (mostly commercial property non-land and development, half located in Ireland and one third in the UK and remainder in the US) loans?

And remember that Anglo and INBS have thus far been mostly funded with promissory notes (IOUs signed by the Minister for Finance and deemed good enough for Core Tier 1 capital by our Financial Regulator). These IOUs need to be converted to real money and a long-held concern on here was that there would be frontloading of the conversion to cash, not a convenient 1/10th per annum for the next 10 years. So what will the shoveling profile be for the promissory notes?

The great concern with the present shoveling is that it is depleting real money from the NTMA (the “fully funded to the middle of next year” reserve) and the NPRF. And should the actual cost of rescuing the banks increase and we need an additional bailout, we may find that we have sacrificed our strategic reserves and will be left effectively seeking funding from a “beggars can’t be choosers” position or a messy default.

Above: estimate of bailout costs on 30th September, 2010. Modified by PLAR statement by the Financial regulator on 28th November, 2010 which outlined a further €10bn injection into the banks (€2bn to absorb losses and €8bn for additional capital).

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