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Archive for May 7th, 2011

There seem to be a lot of new visitors on here today, on the back of a comment in today’s Irish Times by UCD professor of economics, Morgan Kelly. In terms of the specific comment which related to the estimate of bailout needs, I believe Morgan is referring to this blog entry. And to short-circuit any possible quest by you to identify the difference between these €200bn+ estimates of bailout need and those from government sources, in summary the difference stems from (a) the emergency funding from the ECB which is propping up our banks will need to be converted into a term-loan which will no doubt have conditionality attached and will be, in all but name, a bailout and (b) the belief that we won’t be able to return to the markets in the second half of next year to access funding to repay maturing debt and we will need some source of new funds to pay off old debt. Now I wasn’t saying that these two requirements would permanently affect our national debt because funding banks on the back of solid collateral should be regarded as an investment and plainly exchanging old debt for new debt doesn’t increase your net debt. However there remains a substantial risk that the collateral offered by our banks in return for funding will turn out to be worth less than we think and also we will still need convince someone to give us new funds so that we can repay maturing debt and fund our banks. As to the conclusions reached by Morgan Kelly in his article today, the view on here is that unless something radical is done to alter the path we’re following then in all likelihood we will eventually have to deal with a default but, with the passing of each day , with the redemption of each bond, with the running down of our national strategic cash reserves in the NTMA and NPRF, we are reducing our freedom of action and increasing the likelihood that the eventual default will be far more damaging than it needs be.

For those of you new to this blog, the main focus on here is NAMA; NAMA however stretches its tentacles into commercial, residential, development property and even agricultural land, here and elsewhere, particularlyNorthern Ireland,Great Britainand theUSA. NAMA has been intrinsically tied to the banks. Regardless of claims to the contrary, NAMA is affected by political decisions. So NAMA covers quite a large ground. The blog examines general economic matters to a lesser extent – you won’t find a lot here on unemployment, our export sector and taxation, though these subjects are alluded to from time to time, but generally for their impact upon the operation of NAMA. Although there is little on the banking guarantee – the blog was started in January 2010, so it contemporaneously missed the guarantee itself – there has been quite a lot on the bailout, the deposit flight and the intensive efforts by the new government to seek a new deal. The following entries might be of interest to you in this regard.

Is the ECB providing a premium service to Ireland by being lender of last resort providing 1% funding to our banks?

Burning bondholders versus concessions on bailout interest rates

Diplomatic offensive in Europe needs to be more “offensive” and less “diplomatic”

How much is a 1% reduction in bailout interest rates actually worth? (Part 2 of 2)

How much is a 1% reduction in bailout interest rates actually worth? (Part 1 of 2)

Irish bailout set to double as ECB converts overdraft to term loan

Default and futher bank recapitalisation : might as well be hanged for stealing a sheep as a lamb?

NTMA introduces new “Barney the Dinosaur” debt instrument

The IMF/EU bailout : remember those €200bn+ estimates? They haven’t gone away, you know.

UPDATE: 8th May, 2011. There has been some reaction to the Morgan Kelly article. On the irisheconomy.ie website, economist and professor at the National University of Ireland in Galway, John McHale produces a rebuttal of some of the argument in the newspaper article. Professor McHale says that repudiating the guarantee might have produced the same effect as a disorderly default today, that ascribing the real reason for the bailout last November to an attempt to stop contagion spreading to Spain is simplistic, that passing the banking problem over to the ECB would involve huge risks and that should we attempt to engineer an immediate balancing of our budget “A Great Depression would not come near describing the effects on the economy that would result from such a fiscal contraction unless you believe in the mother of all expansionary fiscal contractions. ”  Separately the Department of Finance has not issued any formal statement but the Sunday Independent today reports that a spokesman yesterday said “the cost of bank recapitalisation is already included in the debt level of €190bn, so it should not be double-counted. The Nama debt is €30bn and not €45bn. Also, the Nama business plan projects a profit, therefore, it does not make sense to add the Nama debt to the State debt.” On the last point on NAMA, it is true that NAMA has spent just over €31bn on buying loans, that it will probably spend another €2bn on buying Paddy McKillen and the other refuseniks’ loans. Minister Noonan has said that if AIB and BoI don’t produce credible deleveraging plans by 30th May, 2011 then the sub-€20m loans may yet go to NAMA. These are estimated at €12bn or €16.6bn if you include associated lending. NAMA would pay some €7bn for €16.6bn of loans if the average 58% haircut that has applied to the €71bn of loans already absorbed, were to apply. That would bring you to €40bn. And the jury is still out on exposures to derivatives that NAMA might be nursing.  With respect to the separate point that “the NAMA business plan projects a profit”, that was indeed the central scenario in the NAMA business plan last June 2010 (a €1bn NPV profit to be precise). NAMA has reported a pro-forma loss of €0.7bn for 2010 and the short term outlook doesn’t look great. Whether property will recover faster than NAMA racks up operating expenses and interest charges remains to be seen. I would have said there is still a chance of that happening and NAMA making a profit.  But certainly NAMA isn’t going to lose €31bn or €45bn. That said, until the agency starts to recoup its outlay, its bonds which are guaranteed by the State are effectively part of the national debt. The Department of Finance may not like this, and the NTMA certainly expressed its feelings on the matter last August in robust terms, but ratings agencies and the markets still view NAMA bonds as part of the national debt. And lastly the man referred to 12 times in Morgan Kelly’s article yesterday, governor of the Central Bank of Ireland, Professor Patrick Honohan gave an interview on RTE radio’s This Week programme on Sunday (podcast available here). The governor rejected the notion of repudiating the guarantee because of legal problems and assured us that he had sought advice on the matter. He rejected the figures advanced by Morgan Kelly as the size of the national debt unless there were a lot of footnotes attached. He said that he would be part of any renegotiation of our bailout and that he had cards to play but would not reveal what the cards were. He accepted that much of the analysis was spot-on.

UPDATE (1) : 10th May, 2011. In today’s Irish Times, former Taoiseach and former Minister for Finance and brother of our present Minister for Enterprise, Jobs and Innovation and current ambassador for the Irish Financial Services Centre, John Bruton pens a rebuttal of Morgan Kelly’s article. In the article, John Bruton claims that the course of action suggested by Morgan Kelly could see the collapse of the ECB, the euro and world trade (seriously he says “the resultant uncertainty could have a devastating effect on the world economy”). With respect to the suggestion that we immediately balance our budget, he claims “doing it all in one year would be impossibly disruptive”. He concludes his article with pointing out that money and banking is all about trust and the Morgan Kelly’s suggestions would undermine that trust. For interest our 10-year bond is now trading at a record 10.72%, our banks can’t access market funding to the extent that they rely on the ECB and Central Bank of Ireland for €150bn in liquidity funding.

UPDATE (2) : 10th May, 2011. Taoiseach Enda Kenny has responded briefly to Morgan Kelly’s article. The Irish Times reports that the Taoiseach said “Politics is about people and their lives and their careers and their opportunities and that’s what I deal in. I have no intention of delivering a lethal injection to the Irish economy by trying to bridge that extent of the deficit in one year”

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