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Archive for April 29th, 2011

Figures released by the Central Bank of Ireland (CBI) this morning for the month of March 2011 show that the flight of deposits from Irish banks shows no sign of slowing down. From an Irish perspective, possibly the most significant figure to watch is the total of private sector deposits in the six State-guaranteed financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS). The total which represents businesses and households fell to €106.3bn in March 2011 from €108.6bn in February 2011 and is now down €23bn from a year ago, €11bn since the IMF/EU bailout in November 2010 and €2.3bn down over the course of just one month. The CBI and ECB continue to provide substitute funding for Irish banks which replaces this flight of deposits and Irish banks continue to provide extensive State-backed guarantees on deposits. It remains to be seen if the pace of decline in deposits slowed after the bank restructuring announcements made after close of business on 31st March, 2011 – Minister Noonan indicated the early signs were encouraging but since then our sovereign bond yields have sky-rocketed again.

So, looking at the deposit figures produced by the CBI. First up is the consolidated picture for all banks operating in Ireland including those based in the IFSC which do not service the domestic economy.

Next up are the 20 banks which do service the domestic economy and include local subsidiaries of foreign banks like Danske, KBC and Rabobank. There is a list of all banks operating in Ireland here together with a note of the 20 that service the domestic economy.

And lastly the six State-guaranteed financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS)

(1) Monetary Financial Institutions (MFIs) refers to credit institutions, as defined in Community Law, money market funds, and other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs, and, for their own account (at least in economic terms), to grant credits and/or to make investments in securities. Since January 2009, credit institutions include Credit Unions as regulated by the Registrar of Credit Unions. Under ESA 95, the Eurosystem (including the Central Bank ofIreland) and other non-euro area national central banks are included in the MFI institutional sector. In the tables presented here, however, central banks are not included in the loans and deposits series with respect to MFI counterparties.

(2) NR Euro are Non-Resident European depositors

(3) NR Row are Non-Resident Rest of World depositors (ie outsideEurope)

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Take a look at the recent history of the financial performance of the Discretionary Fund in our National Pension Reserve Fund (NPRF), taken from the 2009 Annual Report

The Discretionary Fund is to be distinguished from Directed Investments which are investments the NPRF is directed to make by the Minister for Finance and have particularly applied to recent investments in the banks.

Add in the 11.1% return in 2010 on the Discretionary Fund and we have a simple total return of 45.9% over 10 years or a simple average of 4.59%. Hardly spectacular but we are assured by the NPRF that it has outperformed the average of private Irish pension funds during that period.

So a simple average return of 4.59% per annum. Yet this morning, the return on our 3-year sovereign bond is 12.4%. Sovereign bonds are one means by whichIreland borrows money so that it can fund the annual budget deficit (the difference between what the government takes in tax less what it spends, mostly on the public sector and social security). There has never been a suggestion, not even by Sinn Fein who possibly take the most contrarian view on bonds, that we should default in any way on our sovereign debt. That being the case, you might have thought that whatever funds we have left in the NPRF might be more productively used in buying our 3-year bonds (I have chosen three years because it is medium term debt – longer and shorter term funding is generally yielding returns in the same ballpark). After all, we would see a guaranteed return which was some 200% more than the simple average return achieved by the NPRF in the past 10 years.

The Irish Independent today reports thatGreece has been doing exactly as suggested above – buying back its own bonds, to the tune of €2.3bn since the start of this year. The Independent goes on to report “last night, National Treasury Management Agency sources said thatIreland had not made any such purchases this year.” It is unclear, to an extent, how much cash the National Treasury Management Agency (NTMA, responsible for managingIreland’s debt and associated functions, including the oversight of the NPRF) has to play with at present. Our Minister for Finance, Michael Noonan seems to be performing the dance of the seven veils with recapitalizing the banks, which our stress tests last month showed would require €24bn. Possibly the Minister sees delaying the injection of the €24bn as one of the few remaining aces in Ireland’s hand as the country seeks to renegotiate the interest rate and terms of the bailout funding. However it would seem that we have a few billion euros available, at the very least.

So at the current rates, should the NTMA be buying Irish bonds? If not, at what rate does the purchase of Irish bonds become irresistible? 15%? 20%?

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The rationale for the decision by NAMA to appoint accountancy firm Grant Thornton as receivers to companies controlled by NAMA Top 20 developers, Ray and Danny Grehan, is slowly becoming apparent. Yesterday the Irish Independent claimed that NAMA had tried to install a non-executive chairman to Glenkerrin as a condition for the continued co-operation from the agency. And today the Irish Times reveals the identity of NAMA’s man – Harry Slowey (pictured here). The reporting suggests the Grehans were not happy with the appointment though it seems the matter did not get as far as to be discussed by the Glenkerrin board, Glenkerrin being the flagship company owned by the twoGalway developers.

Harry is a fellow of the Instituteof Chartered Accountants in Ireland. He is currently the chairman of Barnados charity in Ireland. He was a director of Bank of  Scotland (Ireland) for 13 years until he stepped down in 2006. He has held “senior positions” in the Guinness Peat group and KPMG. He is currently a director of Dublin-based financial services company, FinanceOne. He is a non-executive director of the Thornsett Group, the Irish owned property development group, which in 2006 had schemes in development valued at €400m inIreland, theUK and Belgium.

The NAMA tactic of forcing developers to employ a NAMA-selected individual slipped below the radar on here. In January 2011, the Irish Times reported that NAMA might seek a role in approving the appointment of staff at developers’ companies, but that seems to be weaker than its present position of apparently forcing the appointment of a specific individual.

Presumably at the root of the NAMA tactic is the desire to ensure that NAMA’s financial interests are protected. In the Grehan case, it seems that in addition to the reported €650m currently owing by the brothers, there was a request for additional funding by the Grehans from NAMA to complete an extension to the Crowne Plaza Hotel in Shoreditch in east London. So NAMA has a very clear interest in ensuring the Grehans delivered on whatever plan was agreed.

NAMA’s reported choice of the role of “non-executive chairman” for their appointment seems puzzling as chairmen are typically removed from all but the most significant decisions of the company. Why didn’t NAMA seek appointment to the Finance Department or an executive directorship? Also puzzling is how NAMA justifies the appointment of any individual unless there has been some competition for the role.  And as there was no advertisement for the role on the NAMA website, how can NAMA ensure it has secured the best person for the role?

UPDATE: 29th April, 2011. A NAMA spokesperson has stated that the appointment of Harry Slowey as chairman was in fact agreed by the Glenkerrin group, which is at odds with the reporting in this morning’s Irish Times. It is also worth pointing out that FinanceOne where Harry is presently a director has an existing relationship with NAMA. According to NAMA’s tenders, the agency appointed Finance One (sic) Limited to provide services in connection with the review of developers’ business plans. This is confirmed on the FinanceOne website which says “FinanceOne Ltd has been appointed to a panel for the provision of Advisory Services in connection with the review and evaluation of Borrowers’ Business Plans to the National Asset Management Agency (NAMA).”

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