Archive for May, 2011

The IMF and EU teams on the ground in Athens are expected to conclude their work by tomorrow, according to the Greek finance minister. “We are concluding the negotiations and I hope they will be finished … by Wednesday,” Finance Minister George Papaconstantinou told Antenna TV. It is still expected that it will be next Monday 6th June, 2011 that the troika give their verdict.

Nationally, protests continued inAthensand some cities on Monday, though on a smaller scale than Sunday’s. The protests take the form of gatherings often co-ordinated over social networking websites and there seems to be a jumble of issues publicized by protesters. Once the precise austerity measures and privatization proposals are placed before parliament in early June, you can expect protests to intensify.

On the EU national political front, central European minnow Slovakia put its oar in when its prime minister Iveta Radicova yesterday called for Greece’s €327bn of debt to be restructured, and Belgium’s finance minister promptly shot the proposal down. An axis of hard-love is developing involving Germany-Finland-Holland, with national ministers all calling on Greece to get on with implementing the plan or risk not getting the next tranche – “if it does not, Holland, Germany and Finland will follow the IMF should it decide not to give more money to Greece” said the Dutch finance minister on Saturday last.

The ECB continues to ensure that no board or governing council member, past or present, remains silent on Greece– the current post-holders are all listed here and it is difficult to pick one out that has kept his or her own counsel in recent weeks. Outgoing ECB executive board member, the Austrian economist Gertrude Tumpel-Gugerell re-iterated what is emerging as the strong ECB view that there can be no deviation from the EU/IMF bailout and there can certainly be no restructuring or reprofiling. When asked whether or not the ECB might soften its approach towardsAthens, the firm reply from Ms Tumpel-Gugerell was “that is not the case”

You might be interested in Harvard professor of economics, Martin Feldstein’s contribution on the Greece crisis and suggests a “temporary leave of absence” for Greece from the euro, and interestingly he suggests the Maastricht Treaty allows such a move. He points out that Greece has the largest trade deficit in the EuroZone and that Greece suffers from chronic competitiveness problems. For those contemplating a permanent exit byGreece from the euro, it’s a novel proposal.

Some details today of the new austerity measures being considered by Greece. Schoolbooks will have to be returned by schoolchildren at the end of each year so that they can be used by the following year’s intake and this will save a portion of the €80m per annum that the Greek government spends in providing schoolbooks. Greece like Ireland has different VAT rates and there are proposals to move certain products from the low (13%) rate to the higher (23%) rate. This includes heating oil and natural gas. There’s to be a 1% solidarity levy applied to all public sector salaries and a similar levy in the private sector to be borne by employer and employee. There is now a proposal that any budget overspend by any government department would require that department to come back to parliament which would permit an over-spend only if the money could be found through savings in another government department; the proposal is aimed at the notoriously uncontrolled government departments to impose better financial control on overall government spending. The Opposition led by conservative, Antonis Samaras is not only opposed to tax rises, he wants corporation tax reduced from 24% to 15%. And he citedIreland as evidence of the benefits of low taxation. I wonder what our French friends might make of that proposal…


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Figures released by the Central Bank of Ireland (CBI) this morning for the month of April 2011 show that the flight of domestic private sector deposits from Irish banks reversed in April 2011. Deposits in the six state-guaranteed financial institutions were up nearly €2bn to €108bn, the first month-on-month increase since October 2010. This will be particularly welcomed because the April 2011 deposit figures are the first to show the aftermath of the stress test and bank restructuring announcements on 31st March, 2011. Although the two other metrics advanced by Minister Noonan at the start of April 2011 to demonstrate the positive reaction to the banking announcements, the 10-year bond yield and the two pillar bank share prices, both show deteriorations; in the case of the 10-year bond, it had closed at a record mid-point of 10.22% on 31st March, 2011 and although that interest rate declined by a full percentage point in the following week, the mid-point as I write this is 11.03%; in the case of AIB’s share price it closed at a record low of €0.19 at the end of March 2011 and is at €0.18 this morning and BoI closed at €0.22 in March 2011 and is now at €0.17 this morning.

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 rose to €108.2bn in April 2011 from €106.3bn in March 2011 and €108.6bn in February 2011 and is now down €21bn from a year ago, €9bn since the IMF/EU bailout in November 2010 but is up €2bn 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.

Overall deposits were up in all three of the following category of banks but if you strip out the NTMA’s deposit of liquidated NPRF funds and IMF/EU bailout funds, the overall deposit figures are slightly down.

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 outside Europe)

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There’s a curiosity on page 97 of the Central Bank of Ireland Annual Report published yesterday. The Governor, Patrick Honohan’s salary is shown as €276,324 whilst the Financial Regulator who reports to the Governor was apparently paid €348,462 and in addition was paid €75,299 for relocation, rent and other expenses. Now why would you pay an underling €150,000 more than the boss? Presumably the CBI might say that it has to pay a competitive salary to attract the best talent. There is a slightly contemptuous stance towards the Financial Regulator on here because it seems difficult to see where the world-class talent is having an effect. But having got “the best” inIreland, what have we to show for it in 2010?

Well at least we still have a banking system. But is that the best that can be said for the activity of the CBI? Let’s examine the results by reference to what the CBI says it is supposed to do

(1) Stability of the financial system; the Bank didn’t do very well at all in an absolute sense. Deposits flew out the doors of Irish banks, the six state-guaranteed ones in particular, this despite the extensive Government guarantee, higher interest rates for depositors, at least two stress tests (one domestic, one European), the commitment to overcapitalise the banks and a 17% increase in staff at the CBI many of whom supervise banks. The financial system was less stable at the end of 2010 than at the start by reference to deposits and capital needs to cushion elevated losses. It is hard to find any metric by which the system was stronger at year end. Competition contracted with the exit of Bank of Scotland (Ireland) and itsHalifaxunit. And moving into 2011, we seem destined to have two pillar banks with the effective disappearance of EBS, Permanent TSB (it seems), Anglo and INBS.

Of course the CBI might point to the elevated sovereign risks that intensified in 2011 withGreece, thenIrelandseeking IMF bailouts. The bank might justifiably point to the higher than expected losses on property lending which were only exacerbated during the year as the property markets continued to dive inIreland. But let’s call a spade a spade here; the stress test in March 2010 was risible in its failure to capture the extent of loan losses and the CBI seeking to offload the responsibility for that under-calculation on others is reprehensible. The CBI should not have added its imprimatur to stress tests unless it was satisfied with the basic data, and banks getting information wrong or NAMA underestimating its haircuts are no excuses for the CBI not sampling the information upon which the stress test was based. The European stress tests in July 2010 were equally risible with AIB seeking a multi billion bailout just three months later, and the CBI should again bear a degree of responsibility for this stupidity.

Of course it is arguable that even if the earlier stress tests identified the final extent of the capital needs then that wouldn’t have altered any action because the sum would be injected by the government regardless. That misses the point that in a democracy, decision-making and prioritisation of scarce resources need accurate information, and if we did know in March 2010 that the banks would need some €70bn of injections, the State might have made different decisions about guarantees. It most certainly would have been better prepared for any bailout negotiations.

At the end of 2010 Irish domiciled banks were dependent on €132bn of funding from the ECB and a further €51.1bn from the CBI. That funding is short term and is provided against collateral, the value of which the ECB may alter at any time. Central bank funding was up 80% during 2010 and as a result the Irish state is now dependent on an outside organisation ruled by a 6-man executive board and a governing council of the 17 governors of national cental banks. And as we have seen in recent weeks, that ECB can threaten to withdraw funding or change the collateral rules. This must be the most serious loss of control which cannot be acceptable in the medium or long term.

Could it have been a worse year for the CBI? Yes, we mightn’t have had a functioning banking system at the end of the year but it’s a pretty poor show when a central bank would need point to the continuing bare existence of a banking system to justify its performance.

Going forward it seems that the CBI doesn’t appear to appreciate the potential value of having one of the most poked and tested banking systems in the world. We all know that there is a slow-burn unravelling of problems with German banks,Britainis far from out of the woods and anyway has quantitatively eased itself to higher, safer ground. God alone knows the extent of the issues inSpain’s banks. And yet here inIreland, we have a small banking system, stress tested three times in the past year, with daily and weekly reporting to the ECB and IMF, in-your-face supervision by a much bolstered CBI, new boards of management in many cases and more stringent corporate governance. Add to that the fact that our deposit rates are higher than the euro norm, we are overcapitalising our banks and we still provide relatively generous state guarantees and you would have to wonder at a CBI that couldn’t capitalise on all of that. I can’t seeIrelandovertakingSwitzerlandas the destination of choice for global banking, but surely our reputation should be better than it is.

(2) Regulation of financial institutions. 2010 wasn’t a bad year for consumer scandals in Irish financial institutions compared to previous years.There was the AIB ATM mini-scandal in May 2011 when it turned out that if you attempted a withdrawal at an AIB ATM and didn’t collect your cash so that the cash was mechanically taken back into the ATM, AIB was still charging you. AIB refunded some €8.7m to customers. It is difficult to say whether or not the much bolstered Financial Regulation function contributed to a better environment as there doesn’t appear to be any metrics by which you could judge performance. The CBI did publish a new code for mortgage arrears during the year which reinforced forbearance measures. Although the intentions were no doubt honourable, it is hard not to conclude however that the CBI is just delaying the inevitable and giving succour to the pussy-footing in government over the reform of personal bankruptcy arrangements. A review of credit unions started during the year.

One area where it seems that the Financial Regulator has been weak has been where mortgages are being restructured, and banks have demanded borrowers surrender valuable tracker mortgages as a condition of getting any assistance. It is still not clear how widespread this scandal has been.

(3) The efficient operation of payment and settlement systems. Well the all-important ATMs worked and CHAPS and SWIFT seemed okay and the mechanics of providing liquidity including emergency liquidity seemed to work fine. Perhaps it is mean-spirited, but the presumption would be that these would all operate efficiently.

(4) The provision of analysis and comment to support national economic development. This is a difficult objective to judge. The CBI got the initial stress test spectacularly wrong. The CBI issued some new information including an overview of bond-holdings in state-guaranteed banks. But having provided the basic totals, the CBI didn’t issue any other detail to assist a debate that rapidly descended into a broad consensus of burning bondholders without any meaningful understanding of the consequences. New information was produced on mortgage arrears and repossessions which show the former ballooning but the latter being artificially contained. There were enhancements to the bread-and-butter monthly and quarterly statistics.

So it hardly seems a world-class performance in 2010 by reference to results. It could have been worse had it not been for the efforts of the CBI but the bottom line is that our financial system is less stable than it was the previous year. Finally it should be highlighted that Governor Honohan volunteered a 20% reduction in his own salary which equates to about €60,000; that sacrifice deserves more attention.

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Well it’s the very last day of May 2011 and despite rumours that they would have been published sooner, the governor of the Central Bank of Ireland, Patrick Honohan confirmed yesterday with the launch of the Bank’s annual report that the stress test results would at last be published today. Minister Noonan had previously said that he didn’t expect anything “untoward” to arise with the stress tests. Governor Honohan repeated those sentiments yesterday. To date Anglo has received €29.3bn of public funds, mostly via promissory notes and Irish Nationwide Building Society (INBS) has received €5.4bn, again mostly in promissory notes. BlackRock is again central to these latest stress tests, with the hope being that the independentUS asset manager giant will lend the results the credibility that has been lacking in the past. The previous stress testing results for AIB, Bank of Ireland, EBS and Irish Life and Permanent were published on 31st March,, 2011 and identified an need for an additional €24bn of capital, some of which might be secured by banks convincing certain subordinated bondholders to accept a haircut or a debt-for-equity sway. The IMF/EU bailout last November 2010 earmarked a maximum of €35bn for additional capital injections to the banks.

There will be coverage here later when the stress test results are unveiled.

UPDATE (1): 31st May, 2011. RTE is reporting that the stress tests show pre-existing estimates for capital requirements were adequate, that is €29.3bn for Anglo and €5.4bn for INBS. The CBI has not yet issued any general release setting out the results in detail. Expected shortly.

UPDATE (2): 31st May, 2011. The Central Bank has now published its report on Anglo and INBS. As far as Anglo was concerned the latest stress test was not as comprehensive as applied to the other financial institutions in March 2011. That was because the IMF, EU and ECB agreed to waive the requirement for a comprehensive review and because PwC had undertaken what was considered to be a complete review for the Department of Finance, and that review was “current”. The so-called addendum to the March 2011 stress tests – called the Addendum to the Financial Measures Programme report – is here.

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Probably, yes. Not to cover any new expense or hidden cost lurking in Irish banks, it should be stressed; simply to fund debt that is maturing, and possibly to replace short term emergency lending from central banks. This entry examines the issue.

Minister Leo Varadkar’s words reported in yesterday’s (Irish) Sunday Times (not available online without subscription but extensively re-reported here) caused a bit of a storm in Irish political and media circles but not elsewhere. The markets today show an easing in the interest rates demanded on Irish bonds whereas the bonds for Spain, Greece and especially Portugal have increased. It is difficult to tease asunder the various strands that influence the market but the betting is that Minister Varadkar’s words had no influence whatsoever on our bonds. The reason? Markets have already assumed that Ireland will not be able to return to the bond markets in 2012 when, according to the EU, we would need to start funding debt that was maturing; remember that Ireland has some €90bn of bonds issued to the private sector, that’s how we had been financing our deficits and to a smaller extent the bank bailout, until the IMF/EU deal was negotiated last November 2010. And this €90bn of bonds will have to be repaid to lenders over the coming months and years. The “maturity profile” is shown by the NTMA here. In short it shows €7bn maturing in each of the years 2012 and 2013 and €13bn in 2014.

So these bondholders will want their money back. How will we give it to them? In the normal course of events, we would just issue new bonds on the market and use the funds from the new borrowers to repay the old ones. There’s nothing sinister about that at all, that’s how we’ve always tended to fund maturing debt. The problem is that the market is presently demanding a rate of interest which is prohibitive. Our two-year, five-year and 10-year bonds are all trading with interest rates above 10% at present. Might those rates reduce as we continue to deliver on our IMF/EU commitments? Yes, possibly though it should be remembered that we are not exactly complying with the bank recapitalisation commitments. So Ireland could conceivably be back in the markets next year. So you’re left with opinions, and the opinion on here is that interest rates will not have reduced to the sub-6% level by the end of next year because of a challenging environment in Ireland and the possibility that Greece, Spain and other countries might be stealing the show and undermining confidence across Europe.

It should be said that Minister Varadkar’s words have been clarified by his spokesman to RTE this morning where it was stressed the Minister was talking about public-private partnerships and was musing on a hypothetical answer to a hypothetical question. And the Minister for Finance, Michael Noonan has come out in very strong terms to deny that Ireland will need any additional funding and thatIreland will be able to return to the bond markets in 2012. It has also been pointed out that some part of the “saving” in the €35bn contingency for the banks earmarked in the EU/IMF bailout may be applied to rolling over maturing debt – remember the present estimates are for a maximum of €24bn to go into the banks leaving €11bn of the contingency that might be applied to rolling over maturing debt. All I can do here is offer the view that this is a load of codswallop, and most indications are that there will be an intensification of the euro debt crisis before normalisation can return. It should be stressed that it is not at all definite that we won’t be able to return to the bond markets next year; in this life few things are definite.

Of course rolling over maturing debt is but one issue. Irelandtoday is completely reliant on emergency and extraordinary liquidity measures by the ECB and Central Bank of Irelandto keep our banks open. At the end of April, 2011 funding from these two sources (essentially one source since the CBI operates under the auspices of the ECB) totalled €160bn. (some of this is non-Irish banks and some is already covered by the existing bailout, this entry will not examine the detail of the composition). And that has been the case for more than two years during which non-standard liquidity has never totalled less than €60bn. It says something about Ireland that this has been tolerated to the extent it has; I put it down to the fact that we are not a military nation and don’t grasp the concept of strategic risk, particularly something as complex as bank funding. Regardless, on any measure, it is reckless for any nation to depend on a foreign entity for the survival of its financial system, particularly an entity that can threaten to withdraw liquidity at the drop of a hat as happened in the case of Greece in recent weeks. There have been rumours about the degree of pressure exerted by the ECB in Ireland last November 2010 when the bailout was being negotiated, and looking at the open hostility and threats towards Greece today, perhaps we should have more sympathy for our own negotiators last year.

The problem with the ECB today is that it seems akin to the Lord Almighty and what it giveth with the left hand, it can just as easily taketh back with the right hand. It is unclear if the ECB is a lender of last resort that is under a contractual obligation to provide liquidity to Irish banks, but even if it is, the ECB seems to have powers to set the eligibility of bank collateral that are so wide that it could engineer a development that would see Irish banks’ collateral rendered worthless even if there was an enforceable lender of last resort obligation. All of this seems a world away from when we had the old punt as our own currency and a Central Bank of Ireland answerable toIreland.

Plainly Ireland needs a medium term ECB facility or something else which will replace the emergency liquidity funding in Irish banks today. This appears to be the position of the Irish government and the CBI. It is certainly the position of the IMF. And yet the ECB and presumably national EU governments seem set against this proposal. It should be clarified that although a replacement medium term facility might be a headline additional bailout, it would be secured on assets which we are assured are valuable, and therefore the additional bailout to make up a medium term facility would be 100% backed by assets.

So, do we need an additional bailout? Yes, probably but that’s an opinion. How much? €10-20bn for maturing debt and in excess of €100bn to replace short term emergency liquidity with a medium term facility. How long will we need it for? Until sovereign and bank lending markets normalise, probably 3-5 years. Will it lead to new austerity measures? Not in itself, because it is merely replacing one funding source with another. The short term funding from the ECB at present is at 1.25% so if the rate on its substitute were to be higher, there may be consequences for bank profitability.

You might be interested in previous entries on this subject:

NTMA introduces new “Barney the Dinosaur” debt instrument

EU confirms that Ireland will need return to the bond markets next year

How much of a bailout will we need? – “You can work it out yourselves” says Minister for Finance, Brian Lenihan. Here are my workings.

UPDATE: 1st June, 2011. The London Irish Business Society hosted an event last night at which a senior director of  Standard and Poor’s is reported to have said that there is “definitely a good probability”  that Ireland can return to the bond markets next year (2012). This claim would tend to gainsay Leo Varadkar’s apparent statements.

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The IMF and EU teams remain on the ground inAthensas they work through their assessment of compliance byGreecewith the bailout agreement and the prospects of success for the new austerity and privatisation measures. They are due to report on 6th June, 2011 – day 13 of GreekWatch

Yesterday Tanaiste Eamon Gilmore unconvincingly told RTE radio that the EU didn’t have a contingency plan for a Greek default. Today there are rumours – unfounded rumours according to some – that the EU has indeed been working on a contingency plan and that next Monday 6th June, it will be debated and agreed by the 17 EuroZone finance ministers. It’s quite a specific claim. Mind you so was the claim about the Rapture last week. Regardless of whether or not it is true, it is incredible that the EU does not have contingency plans for an event which the markets believe to be likely. There were other rumours in the FT that plans are being drawn up for EU officials to take over responsibility for Greek domestic responsibilities like tax collection.

Greek news source, Capital.gr reports that there is to be a meeting of Olli Rehn’s EU commission tomorrow to try to flesh out the detail of any additional financing package (aimed at addressing the obvious problems thatGreece now faces in not being able to meaningfully return to the open market for funding for some years to come). The idea of an additional financing package or additional bailout seems to be accepted as a given, see the casual reference to it by the ECB below.

Meantime, the non-political, non-union protests grow and on Sunday some estimates were of 100,000 protesters inAthens alone (others were around 30,000 gathered in Syntagma Square in front of the Greek parliament). Greek politicians have remained schtumm over the weekend and the official line is that the austerity and privatisation plans will be presented to parliament for ratification in early June.

Today’s FT publishes an interview from last Friday with ECB board member Lorenzo Bini Smaghi in which he pours cold water over the idea of a Greek restructuring or exit from the euro. Lorenzo is of course the Italian economist who is on the six-member ECB executive board which together with the ECB governing council (17 members who are the governors of the EuroZone national central banks) makes the key decisions for the ECB. Lorenzo is always good for a few controversial words as we know only too well in Ireland; the interview is well worth reading in full, not just for the quotation used in the title of today’s GreekWatch entry. Lorenzo does not dispute that the ECB holds €45bn of Greek government debt with a further €32bn in Portugese and Irish bonds – the ECB would take the first 8% of any default, after that it would be passed onto national central banks. Personally this one had me rolling around laughing “the task of other countries is to make sure that they are solvent – that was the contract of the Stability and Growth Pact. If any country breach rules, the others should force them back to the rules with sanctions and so forth.” Where was that thinking whenIreland’s debt was being stoked up to 120% of GDP (twice the Stability and Growth Pact maximum) so that bondholders could be repaid? Lastly Lorenzo practically confirms that a new bailout will be needed forGreece to fund maturing debt in 2012-2013, €60-70bn in total of which one half would come from the EU/IMF and the remainder by private lenders (eg Greek banks) agreeing to a roll-over.

Today we take a closer look at the privatisation of TrainOSE (akin to the train operations of our own CIE) which the Greek government owns 100%. It had previously touted the idea of selling 49% of the company but retaining majority ownership. Apparently there is no private sector interest in such an arrangement and the government is now toying with selling 100%. There will be some issues with the sale. At present, the company is loss-making, partly because it’s inefficient, partly because public transport is dirt-cheap inGreece. Any new owner will reform the company (that is, make large numbers of its 1800 employees redundant) and raise ticket prices (you can currently travel from Athens to Thessoloniki, 515kms for €15). The company made a €0.25bn loss in 2009. How much would a privatisation fetch? Difficult to say, the company has been mentioned in the context of a basket of companies that might raise €2.5bn though presumably any new operator will need extensive freedom to set prices and reform operations.

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Sunday seems to be a day of rest for politicians and central bankers; so, little to report from these sources today. On the other hand, Sunday is features day for many newspapers and magazines and there is no shortage of comment on the developing Greek problem.

First up, the IMF emailed a statement to Reuters on Sunday in which it dismissed reports that it, the IMF, had already concluded thatGreece had missed targets, a consequence of which might be the refusal to provide the next tranche of bailout funding. No said the IMF in its statement, “our discussions with the authorities continue, are making good progress and are expected to conclude soon”

The ECB continues to display the communication co-ordination of a sack of drowning kittens, with ECB chief economist Jurgen Stark sticking it up to the Greeks in the German weekly Die Welt Am Sonntag in which he says that Greece is not a hole without a bottom but that it needs to enact reforms so as to reduce its debt by 20%. No Teutonic sympathy forthcoming there.

National politicians and the EU seem to be taking the day off, though Tanaiste Eamon Gilmore seemed to be saying on RTE radio today that the EU didn’t have a contingency plan for a Greek default; an incredible suggestion from a politician who should recognise the value of credibility in these times. InGreeceitself there are continuing demonstrations which are not political or affiliated to unionists. The Greek deputy prime minister recognises the potential of these protests but so far they are marked by their rejection of austerity and privatisations, and the title above is quoting the deputy prime minister challenging protesters to articulate a positive alternative. It seems a fair challenge.

As for the Sundays, the German Der Spiegel is keenly following the Greek crisis, not least because German banks have an estimated €25bn of Greek debt (out of a total of €327bn) and the ECB, to which German is a main contributor, has a further exposure of €87.1bn to Greek banks.

Thanks to commenter Who Shot the Tiger, we get an insight into US thinking from the Wall Street Journal who advocate a swift restructuring of Greek debt. Easy for outsiders to advocate writing off €163bn of debt though, especially when the fallout is likely to be borne by the Greeks and Europeans.

The US’s businessinsider.com features a well-written piece by John Maudlin which argues from the safe distance of the US, that Greece cannot sustain its debt and needs to default, and likens the denial demonstrated by some towards the Greek situation to the Jews denying the emergence of the Nazi nightmare in the 1930s. The Godwin’s law followers (or as I call them, the Lord Voldemort he-who-shall-not-be-named children) mightn’t appreciate the analogy and of course there is no certainty in the Greek situation; nonetheless it’s an interesting attempt at a comparison.

As it’s Day 5 of 13 of the GreekWatch series (day 13 is 5th June when the IMF/EU/ECB troika is due to judge Greek compliance with the bailout), this might be a good juncture to examine any lessons forIreland

(1) There are major divisions between the IMF, ECB, European Commission, EU national governments, the Greek government and opposition, economists on the sidelines. It is striking to hear Nicolas Sarkozy calling for private bondholders to roll-over their debt whilst the ECB is seemingly adamant that the bailout agreement be implemented without the smallest of deviations. The ECB has shown itself to be an organisation  without discipline, threatening a unilateral withdrawal of funding one moment, mollifying concerns the next. Interesting that Patrick Honohan, our own governor is one of the few national central bank governors not to offer his two cents in the past week.  Divisions can be exploited and an appreciation of the relative positions ofIreland’s creditors might assist our negotiations, which frankly appear to have hit a brick wall.

(2) The Greeks obtained a 1%+ reduction in their bailout interest rate with what now seems like a vague promise of additional measures in the areas of austerity and privatisation. RememberGreecewas supposed to have signed up to a €50bn privatisation commitment. But take a look at what Greece has done – it owns 20% of the national telecoms company, OTE (comparable to our own Eircom) and it was apparently committing to selling that 20% stake, then it changed its mind and decided to sell 10% and then it changed its mind again and decided to sell an “option” to buy a 10% stake at a future date. IfGreececan get a 1%+ reduction in its interest rate on the back of “commitments” like that, thenIrelandmust be a pretty poor negotiator to come away with nothing. Or perhaps we need perfect the art of the empty promise.

(3) Whilst the EU is increasingly talking tough, the betting is still thatGreecewill get its next tranche and possibly an additional bailout without firm action in return. Weakness on the part of creditors at this juncture should be keenly studied byIreland.

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Again, it seems that the IMF and EU review mission teams are diligently and quietly working away on the ground in Athens whilst all hell is breaking loose everywhere else.

First up, the European Commission seems to be getting exasperated at the lack of meaningful progress by politicians in Greece. “Time is running out” said our Finnish friend, the Commissioner for Economic and Monetary Affairs, Olli Rehn. What Olli was hoping for yesterday, was consensus amongst the main Greek political parties to the latest round of austerity measures and privatisation programme. Despite a three-hour (or five-hour, depending on your sources) extraordinary meeting of the heads of the main political parties in Athens yesterday, under the auspices of the Greek president, no consensus was forthcoming; indeed from this perspective, political relations in Greece seem to be fracturing with recriminations getting  personal. What the EU wants is consensus to a road map of austerity and privatisation measures, it doesn’t want unpopular commitments unravelling a few months down the road as politicians jockey for advantage. Greece had its last elections in 2009 and the next ones are not due until 2013. The ruling PASOK party has 160 seats in a 300-seat parliament and it has additional allies in other parties but still the concern lingers that the €110bn bailout deal which was agreed in May 2010 may founder amidst political manoeuvres. If the EU was looking to early elections to provide a mandate for the bailout, then those hopes were dashed when the incumbent prime minister ruled out early elections after yesterday’s marathon meeting.

Next up, the IMF and their acting managing director, John Lipsky repeated the IMF’s mantra yesterday that restructuring is not foreseen as long as Greece adheres to the bailout terms. What we all want to know is whether or not the IMF will withhold its €3.3bn contribution to the next €12bn tranche draw-down by Greece from the €110bn bailout in June 2011, and if the IMF is demanding that the EU provide assurances to fund the remainder of Greece’s maturing debt in 2011 and possibly 2012. And we’re unlikely to get any comment from the IMF on this question before 6th June 2011 when the review mission in Athens is due to conclude its work.

There was a new voice adding shading to the debate yesterday when French president, Nicolas Sarkozy spoke in favour of bondholders sharing in the solution of Greek’s present woes. What he was calling for seems akin to the Vienna Initiative in 2009 where bondholders agreed to roll-over maturing debt. He specifically wasn’t talking about unilateral burning of bondholders. The national government perspective was backed up by Michael Meister, the CDU (Angela Merkel’s lot) finance policy spokesman who said Greece’s creditors may accept an extension of bond maturities if the Greek government adopts a more aggressive approach to cutting debt. With 10-year bonds trading at 55c in the euro and signs of growing turmoil in Greece, it’s hard to see bondholders being understanding.

The ECB has been silent on Greece in the past 24 hours.

So on Day 4 of GreekWatch what is the likely prognosis for the Greek patient?

(1) Greek politicians impose the austerity and privatization plans agreed with its creditors. This will certainly be attempted in early June in parliament but it seems messy without consensus. And unionists and protesters seem to be chomping on the bit to hit the streets during the hot summer months.

(2) Greek’s bondholding creditors agree to roll-over debt that matures in 2011 and possibly 2012. Seems unlikely given the likelihood of Greek default and Greece’s slow progress with complying with the bailout agreement

(3) The EU either picks up the entire tab for the next tranche or provides an assurance to fund the roll-over of Greek debt because the IMF won’t risk more funding and the immediate consequences of default will disproportionately affectEurope. This is messy because it may require an additional bailout (€60bn according to some estimates on top of the existing €110bn) and will require national parliament approval in Germany, Holland and Finland who all seem increasingly hostile towards Greece.

(4) Greece doesn’t get the next tranche at all and defaults which would probably lead to all Greek banks being nationalized and capital controls to prevent euros leaving the country/banking system. Given that Greece still has a primary budget deficit, it would need either immediately close that or else exit the euro.

(5) The IMF and EU provide the next tranche without receiving sufficiently tangible commitments from Greece, because the wider consequences of default outweigh €12bn.

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The IMF and EU review mission teams in Athens are remaining tight-lipped as they assess Greek progress to date and the feasibility of new austerity and privatisation plans. They must be the only people in this drama that are remaining tight-lipped.

First up, the ECB. Executive Board member, Jose Manuel Gonzalez-Paramo called yesterday for a repeat of the Vienna Initiative in 2009 which saw private lenders roll-over maturing debt. Next up, governor of the Dutch central bank and ECB governing council member, Nout Wellink expressed confidence in Greece’s ability to comply sufficiently with the wishes of the EU/IMF to see the release of the next drawdown. Greek central bank governor, Giorgos Provopoulos rowed in behind the positive sentiments of his colleagues in the ECB and described the possible exit byGreece from the euro as “entirely ridiculous” and he too expressed confidence in the success of the present efforts by the Greek government to comply with the bailout terms.

In Washington yesterday, the IMF’s weekly press conference was dominated by questions over Greece’s woes. The IMF’s Director of External Relations, Caroline Atkinson was adamant there was no question of Greece leaving the euro – “absolutely not. I would just point that I think there’s a broad view has been expressed about the absolute importance of Greece being a part of the Eurozone” but seemed more defensive than usual about the need for funding assurances from Greece (or the EU) before the IMF would release the next tranche of funding (tranche 5, totals €12bn of which the IMF’s contribution would be some €3.3bn) – “the other part of the discussion [the present review mission] is the financing part, including our own financing”. Now to be clear, Caroline didn’t say that Greece or the EU needed to provide assurances, for example on the funding of maturing debt in 2011, but she also didn’t dismiss the notion of the IMF requiring assurances which seems to give legs to suggestions in recent days that the IMF is seeking assurances from the EU that the EU will fund maturing Greek debt in 2011, and in the absence of such assurances, the IMF may withhold the next tranche of funding.

Elsewhere yesterday, the European Director of the IMF and the boss of Poul Thomsen (Greece and Portugal) and Ajai Chopra (Ireland), implied that the release of the next tranche would not be contingent on the EU putting funding in place to deal with Greek maturing debt in 2011 and 2012. However the same Reuters report claims that “he EU is preparing a new aid plan that would meet Greece’s funding needs in 2012 and 2013”

There was a rare meeting of Greek political leaders earlier today under the auspices of the Greek president. The last such meeting was in 2009. The publicly stated objective of the meeting was to secure consensus across all political parties to the proposed austerity measures and privatization programme. The meeting has ended without any such consensus. The Greek prime minister has stated that he will press ahead with the measures and will not seek early elections, as had been rumoured. There were public protests inAthenslast night and in some other key cities, smaller than the previous night due to heavy rain but the protesters say they will be back on the streets after 6pm this evening.

From the safety of the sidelines, economists Paul Krugman and the ECB’s former chief economist Otmar Issing seemed to be in agreement at a conference inCopenhagen that Greek default or restructuring was a very high probability event.

It was reported on Greek news service Capital.gr citing Dow Jones Newswires says that Greece is seeking an additional bailout package totaling €60bn on top of the existing €110bn package agreed last May 2010. It goes on to say “Greece expects to receive that next installment of aid, about EUR12 billion, by June 29. The government says it has enough cash on hand to continue operating until July 15”. Remember that the Review Mission presently on the ground from the IMF and EU expect to conclude their work by 6th June 2011 and it is expected that there will be a view by then as to whether the tranche draw-down will proceed. That’s why this GreekWatch series will conclude on 6th June.

In terms of explaining a bit more about the Greek domestic measures that are causing all the bother; today, the privatization of OTE (Organisation Telecoms Ellenos or Greek Telecoms Organisation), a major provider of telecoms in Greece and other south east European countries (Albania, Serbia, Bulgaria, Romania). The Greek government owns a 20% stake in the company that is worth an estimated €800m. German telecoms giant, Deutsche Telekom (DT) owns 30% of the company and the likelihood is that DT will buy whatever stake is put up for sale by the Greek government. OTE employs some 30,000 people and the unions and employees are not happy with the “privatization”. In fact they have now scheduled strikes for the start of June 2011 to make their feelings clear. The latest suggestion is that Greece will not dispose of the 20% stake but will sell an “option” for the future purchase of 10%, that is half the stakeholding.

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In what must be one of the most dramatic announcements by NAMA to date, its head of lending and corporate finance, Graham Emmett is reported to have told an audience in London on Tuesday this week, that NAMA would dispose of all of its assets in the UK by the end of 2013. Graham was speaking at the launch of the DTZ Money into Property UK report – his speech does not appear to be available yet so the best reporting is that by Property Week. This news is a bombshell because NAMA’s line previously, including that advanced by its CEO, Brendan McDonagh in an interview with Neil Callanan for the Financial Times in April 2011, was that it would dispose of only 25% of its UK portfolio by end of 2013.

NAMA’s UK portfolio is estimated to be worth €19bn at nominal value. It is unclear how much NAMA paid for these loans. NAMA’s average discount has been 58% but the expectation would have been that the UK discounts would have been far less than this. NAMA is understood to have received 100% of the nominal value of the loan for Richard Caring’s 20 Grosvenor Square building, for example. A 58% discount would imply a €8bn value at November 2009. Graham Emmett repeats the claim that the majority of NAMA’s UK portfolio is secured on assets located in London and the south-east ofEngland. NAMA has to date approved the disposal of €3.3bn of assets with “the majority” in theUK.

The reasoning for the rapid UK sell-off is, according to Property Week, the UK is a more liquid market than Ireland. The difficulties of disposing of property in a buoyant market first whilst nursing assets in other markets which continue to decline in value, was examined on here last week; a conclusion was that it would not be wise to dispose of assets in buoyant markets if the future rate of growth in those markets was greater than the declines in poorer performing markets.

UPDATE (1): 28th May, 2011. Emmet (two “m”s and one “t”) Oliver in the Irish Independent today seems to have been the only journalist to have gotten a reaction from NAMA to their Head of Lending’s statements in London. “NAMA will explore opportunities to dispose of assets in all markets over the coming years and will not restrict its disposals agenda to any one area or country, nor is it committed to exiting any particularly market by a particular time” was the NAMA reaction given to the lucky Emmet. Emmet is less fortunate with his spelling – NAMA’s Head of Lending, according to NAMA is Graham Emmett (two “m”s and two “t”s) and not as spelt by Mr Oliver.

UPDATE (2): 28th May, 2011. Actually the Irish Times today also reports a response by NAMA to Graham Emmett’s statements – “Last night, a NAMA spokesman said that “too much attention has been given to specific comments” and that it “may hold on to some assets for a longer time”, adding that the timescale would be set “by the appetite in any market to acquire assets at reasonable prices”.”

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