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.
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”
“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.”
Absolutely. As I said before, the only difference between FF’s and FG’s approach to the banking crisis is one letter and one month.
IMHO, the Government must change its negotiating stance and adopt a very tough line with the terrible three (IMF/UE/ECB) and threaten them (gently initially) with default (especially in relation to the €180 bn of CBI and ECB emergency funding where we could have real leverage – MK indicates that this could become equity in the broken banks which they can have along with Nama). It should highlight the prospect of MAD (Mutually Assured Destruction) which is hangover from the East-West cold war but relevant in the current situation where Ireland is fighting to retain/regain its Sovereignty and the alternative is involuntary default with massive contagion across the EZ and EU.
Against this background, it should demand a reduction in the bailout interest to a nominal rate (say, 1%) and a write down of the o/s bank bonds by about 50%. I don’t care how this is done and what protocols are breached – force majeure conditions apply and, as the ECB has shown when it suits, where there is a will there is a way. In return, Ireland must undertake to follow through on the MUI agreed with EU/ECB/IMF (to address the Exchequer deficit) and agree (for purely political reasons) a temporary levy of, say, 3% on top of the (sacred) corporate tax rate. Any less of a deal and we must look to MAD to bring people to their senses.
More on this at “Help Us or We Default” at http://www.planware.org/briansblog/2011/04/banking-crisis-help-us-or-we-default.html
@ namawinelake
Yes, I think Morgan’s compliments are going to increase traffic but the two links given don’t appear to be working, least not on my mac the “Irish Times” one works.
I agree, we must convince some sources of funding other than the ECB (China, Canada the US) to lend to us again, this will become ever more difficult as the collateral we can offer continues to fall. Rolling over debt does not increase the total amount of debt in theory but the peoples debt has been increasing at an alarming rate as we convert “temporary” assistance into permanent debt by continuing to pay off bondholders as we have been told to do.
More than 70bn of the 135bn owing to the ECB is due to bond holder redemption, and this continues, abated only by the fact that there are fewer and fewer in the line to be paid. Our current budget deficit is still relatively static and this is on top of our ECB borrowing. It is the servicing of the debt at ever higher rates of interest as we roll it over that is a real problem. Our economy may grow by .5% this year but that is academic. The .25% increase in base rates is enough to cancel out any reductions in our bailout rate originally tagged at 5.83% but now over 6%.
I find Kelly’s perception of the role played by Honohan in the crisis, interesting. Nyberg pointed out the Irish propensity for “group think” and this group think included the words ‘Professor Honohan said this, professor Honohan said that.
Recently, when the ECB and its governors were increasing base rates our governor went blindly along. He could have agreed with Stiglitz or Krugman but instead slavishly followed his peers.
What about the view that the ECB cannot get possibly get inflation under control by meting out severe chastisement to the Piigs. What happens to their plan to control inflation if Greece defaults or leaves or Ireland carries out a unilateral structured default, based around what is best for Ireland?
I humbly remind people that Honohan has been wrong most of the time since taking office especially in the big decisions, he told us our “pillar banks” were well capitalised, that they were well on the way to being fixed, that we would not require a bailout, that things were manageable. He also said, that he did not care “who” specifically caused our problems. I find this very insulting, also that he did not know how much the BlackRock report was costing the Irish people but that it would be “in the tens of millions.” All I can say, is, thank god for Kelly and I fully expect his words to come true but not before they are ‘expertly’ twisted because his plan entails a 40% to 50% reduction in the salaries of most of the politicians and experts that have a vested interest in trying to undermine him.
@NWL,
Congrats on the mention, although his article almost brought tears to my eyes. What would be the mechanics of “returning the Nama assets to the banks”?
@Frank, returning the NAMA assets to the banks would presumably involve NAMA signing back over the loans they control, to the banks in return for the banks returning the NAMA bonds to NAMA.
In terms of the mechanics on NAMA’s part there would be no problem.
The banks however have converted the bonds to cash and it might be a problem for the banks to get the bonds back because the banks don’t have the cash. And banks couldn’t just swap over the loans NAMA would hand back with the NAMA bonds as collateral because the NAMA loans wouldn’t be worth as much as NAMA bonds for raising loans. Remember NAMA bonds are nice clean pieces of paper with a certain value backed by a government guarantee. NAMA loans, even following NAMA’s due diligence and valuation, are still nasty assets whose value has in the main dropped and continues to drop.
So on the banks’ side, from the point of view of mechanics, there probably would be a problem with returning the NAMA bonds. The problem wouldn’t be insurmountable though, it would just involve the banks having to go cap in hand to the Central Bank of Ireland or the ECB for more liquidity funding.
So the mechanics mightn’t be too daunting. There would be all sorts of legal and organisational issues but ultimately they too could be surmounted, at a cost.
But what next? Anglo and INBS would receive €16bn of loans back (by reference to their value at 30th November 2009 plus long term economic value). The loans might be worth €13bn now. I think this is the point at which Morgan Kelly suggests we tell the ECB that we, the people of Ireland, are no longer supporting the banks and the ECB will need deal with the losses and lack of liquidity. And the hope would be that the ECB converts its liquidity funding to capital.
The process would be a nightmare. But the view here would be that we are really confronted with a crisis of generational proportions and none of the solutions will be easy or pretty or comfortable.
Kelly’s article is a milestone on the country’s slow shift in opinions towards the banks, the bailout, the ECB, and indeed the Euro and EU. Over the last few months, opinions have considerably hardened in almost all quarters, the exception being the Government parties (particularly FG), who almost immediately adopted pro-bailout positions and rhetoric within weeks of coming into office.
The rest of the country meanwhile, is slowly being driven demented.
The figures involved here are effectively driving the Irish mad. The article mentions debt of a quarter of a trillion euros (In scientific notation, € 0.25 x 10^12 ). Keep in mind that three years ago, a lot of people were still confused about the definition of a billion, and most would probably have considered “trillion” as being synonymous with “bazillion”–a fantastical sum. Now we deal with figures which are literally on astronomical scales on a daily basis.
(For those still having trouble with trillions this link may help you grasp how big a trillion really is)
My opinion is that the country will default(on the bailout), and that it will happen almost overnight, in one collective unspoken decision. Remember the Nyberg report’s points about a “herd mentality”? That collective, unspoken decisions making is still happening in this country right now, and this latest article of Morgan Kelly will play a huge part in that.
The only remaining bottlestop is the government; and I’m not sure what Minister Noonan’s position on a default really is.
It is higher than €0.25 Trillion once you factor in the funny bizniss of backstopping the ELA operation in the ICB which amounts to around €70bn of ‘money’ that seemingly magicked outta nowhere.
As I said on the Pin the easiest way out is to let our existing Central Bank file for bankruptcy ( once we have a new central bank ready to go). Let the 1000 useless central bankers in there queue for soup for what they have done to their country since 2000 and let Hurley and Neary whistle for their pensions, the traitors.
I absolve the printers and security and catering staff from blame just in case anyone thinks I am being too harsh.
Pleased to see the acknowledgement by Morgan Kelly of the stalwart work of this site.
Morgan Kelly has provided serious and honest commentary on the Irish crisis over the last couple of years.
A debt audit, followed by repudiation of debt which was not incurred by the public, retention of our natural assets and infrastructure, and forensic and careful revision of our spending to reduce the deficit is at least a starting point for discussion, but without the ability to devalue, I can’t see anything coming of it in terms of economic survival.
A two speed euro – or getting out of the euro surely would have to be part of a workable solution ? Along with retention of low corporate taxes.
However, I think that a recommendation for immediate balancing of the books, much as I wish it would work, would itself be a shattering shock to the economy, and society, of Ireland and it doesn’t appear that Kelly has thought very much about this.
Let the central bank go and let the ECB take it over fully in a debt for ‘equity’ swap. Why do we need to employ 1000 people in that friggin crapheap.
In 2009
At the end of 2009, the Central Bank and
the Financial Regulator employed 1,043.7
permanent staff from an approved complement
of 1,122. Of this number, 420.5 were assigned
to Central Bank operations, 377.2 were assigned
to Regulatory areas and 239 to shared services.
A further 7 were assigned to the Investor
Compensation Company Limited (ICCL).
The total represented a net increase of 2.3
per cent on 2008 staffing levels. Retirements
increased from 23 in 2008 to 45 in 2009.
Back in 2007
Staffing
There were 991 permanent staff serving
at 31 December from an approved
staff complement for 2007 of 1,036.5.
Recruitment is ongoing to fill the outstanding
vacancies across the organisation. Turnover
of permanent staff decreased to 4.9 per cent
from 5.4 per cent in 2006.
Of the permanent staff employed at year end,
341.5 were assigned to Central Banking Operations,
343.5 to the Financial Regulator and
300 to Shared Services.
A further 6 staff were assigned to the Investor Compensation Company Limited (ICCL).
Staff employed
comprised 752.5 clerical, professional and
management staff and 238.5 industrial,
technical and service staff.
We got a better breakdown in years of yore. EG 2002 and 2001 when we employed
2002 818
2001 773
Staff Serving at Year End
Department 2002 2001
Governor & Management Board 7 7
Financial Financial Control 48.5 41
Payments and Securities Settlements 40 39
Financial Markets 27.5 29.5
Economic Services European Monetary Affairs & International Relations 14 14
Economic Analysis, Research and Publications 20 21.5
Monetary Policy & Statistics 38 28
Supervision Banking Supervision 43 35
Regulatory Enforcement & Development 18 16
IFSC & Funds Supervision 65 64.5
Securites and Exchanges Supervision 42 38.5
Retail Investments & Insurance Supervision 43 31
Currency Services Currency Issue 98 106.5
Currency Production 76 76
Resources Human Resources and Planning 32.5 31.5
Information Systems 36.5 34
Corporate Services 133 127.5
Engineering Services 26 25
Audit Internal Audit 10 8
Total 818 773.5
Of which:
Clerical, Administrative and Professional Staff 577 538.5
Industrial, Craft and Service Staff 241 235
Back in 1998 and 1999 when we had a CURRENCY, RESERVES TO MAINTAIN and guess what, A BANKING SYSTEM!
And we did all that with
638 Staff in 1998
668 Staff in 1999
( smoe of whom were seconded to Europe at times back then as Frankfurt was founded)
Staff Serving at End-Year*
1998 1999
Governor and Management Board 8 8
Financial Control 77 47·5
Payments and Securities Settlements 32
Financial Markets 27·5 24·5
European Monetary Affairs and International 12 12
Relations
Economic Analysis, Research and 20·5 20
Publications
Monetary Policy and Statistics 20 23
Currency Issue 84·5 81·5
Currency Production 62·5 74
Banking Supervision 29·5 32
Securities and Exchanges Supervision 88 47
IFSC Funds Supervision 53
Human Resources and Planning 27 28
Information Systems 36 35
Corporate Services 136 141·5
Internal Audit 10 9
Total 638·5 668
Of which:
Banking and Professional Officials 419 448·5
Industrial, Craft and Service Staff 219·5 219·5
The current situation is utter lunacy. Shut it down now!
Kudos, NWL! I think you may have overturned the quote about prophets in their own land….. Or maybe, “With prophecies the commentator is often a more important man than the prophet” is better suited.
I’m delighted that your research, analysis and balanced commentary have been acknowledged and opened to a wider audience. It is well deserved. Congratulations.
Well done NWL! Fantastic site
I am surprised that little attention has been paid to date on the effects that bank “deleveraging” will have on the economy. I am not talking about NAMA, but AIB and particularly Anglo (in runoff).
I have become aware that over the past month as loans come up for renewal in these institutions, they are being called….. Not property loans, but performing loans to small, medium and even large sized profitable businesses that have nothing to do with property.
These businesses have been given short periods (generally a month) to come up with the cash or face a fire sale by bank appointed receivers. The first flush of these will be seen on the market within the next two months and the names of the victims will surprise most people.
As there is no alternative funding available in the Irish market, a fire sale of Ireland’s prime enterprises is about to begin in the name of bank “downsizing”.
Get ready to welcome our new foreign commercial overlords. The second serfdom of the Irish nation is underway.
@WSTT, many thanks to yourself and others for some very kind words today. The blog depends on fresh analysis and reporting which comes from the blog and the commenters; your own highly informed contributions are part of what sustains the blog. There seems to be a very broad audience here and it is encouraging that we can all converse in a constructive way. Long may it last!
As regards deleveraging, we had the following which predicted some dire consequences for removing €70-95bn from our economy. It’s extreme money supply contraction and it will have consequences – and what you are reporting rings true from many sectors – which I don’t think have been appreciated.
https://namawinelake.wordpress.com/2010/12/05/%e2%80%9cdeleveraging%e2%80%9d-%e2%80%93-what-does-it-mean-and-what-does-it-really-mean/
@wstt I’m hearing the same thing in the North, about Anglo especially. The feeling among some seems to be that the Belfast office has been told to take every opportunity get shot of all the non-Namafied stuff left on the book and not to be too fussy about how they do it.
Which as you might imagine is leading to
a certain degree of anxiety.
Hi NWL,
LTR FTP. Is it not more likely that MK is referring to this comment when he referenced your €220 billion estimate of the end-2014 public debt. I think it will be a bit lower again – maybe in the €205 billion to €210 billion range. MK throws a figure of €250 billion out there.
Secondly, and related, why are looking for alternative sources for the funding from the ECB and CBoI? Should we not be trying to use this for as long as we can? The banks will not get cheaper funding anywhere. It’s the ECB’s job to act as “the lender of last resort”. They’re not going to suddenly pull the funding.
@Seamus, welcome. Thanks for that and indeed that may well be the source of Morgan Kelly’s comment. Really though the point was that the funding requirement would be in the €200bn+ zone rather than the €85bn that was being presented as the upper estimate of what was required at the time of the bailout.
Yes the ECB may practically be the only source of this funding. The point however is that if the ECB provide funding for say, a three year period, and attach strict conditionality to that funding and require the Irish state to guarantee the funding, then that will be a bailout in all but name and again, we the people will be on the hook should further losses emerge in the banks.
@JP: Yes, Anglo is the main culprit. As the companies concerned are highly profitable and the loans are performing, Anglo countenance no “haircuts”. It’s just a question of “Pay us off, or else!”
Now this attitude is OK, when there are banks available to replace this working capital, most of it borrowed for expansion during the bubble. The companies are strong, but lack liquidity so even though they are profitable they cannot access borrowing facilities locally.
Either there will be massive lawsuits, when Anglo go to appoint the receivers and the process will be delayed; or the vultures will have a field day.
There is one price for a business sold to a free open market devoid of coercion, there’s an other price entirely when the vendor has a gun to his head and the sharks smell blood.
There’s an interesting couple of months ahead, but the writing on the wall is not good for Irish business or the Irish economy.
It would appear that our mention of Anglo’s deleveraging is indeed timely. This article by Damien Kiberd in today’s Sunday Times:
Damien Kiberd: Pledges to EU show complete surrender
A once serious, sovereign country has been subjected to the equivalent of a fiscal and monetary military occupation. Yet we have only ourselves to blame.
The Sunday Times Published: 8 May 2011
Two documents published by the government last week represent the Jekyll and Hyde nature of Ireland’s predicament. The first, entitled Ireland Stability Programme Update April 2011, is a measured tome. It sets out revised forecasts for the economy and public finances that are only marginally worse than those of the December budget. It predicts growth of 0.8% for this year, annual growth of 3% a year from 2013 to 2015, and gross government debt peaking at 118% of GDP in 2013.
By that stage, interest payments will eat up €8 billion, or 20%, of the total tax take of €40 billion. While not quite as pessimistic as the figures we predicted here last September (an interest bill of €10 billion), they are heading in that direction.
The predictions acknowledge some uncertainty and incorporate assessments of risk factors and a detailed assessment of the sustainability of the public finances into the future.
The second document is the real ballbreaker. The European Union/International Monetary Fund (IMF) programme of financial support for Ireland is addressed to Jean-Claude Trichet of the European central bank (ECB), Jean-Claude Juncker, the chairman of the Eurogroup of finance ministers, a Hungarian minister called Gyorgy Matolcsy, Dominique Strauss-Kahn of the IMF and Olli Rehn, an EU commissioner.
It contains letters of intent signed off by Michael Noonan, the finance minister, and Patrick Honohan, the governor of the Central Bank of Ireland.
The programme is a tightly written, legally constructed document that commits us to put our economy into lockdown for five years; obliges us to report every economic development to the EU/ECB/IMF, sometimes within a seven-day deadline; provides for the run-off of two banks and “non-core” parts of others; sets virtually impossible deadlines for bank reform, including the break-up of Irish Life & Permanent (IL&P); and provides for a savage austerity programme, including a two-stage property tax. It undertakes to make the austerity measures legally enforceable through an Oireachtas act.
It can only be described as a surrender treaty. Yet this is not the full extent of the pain. There is also the commitment to unspecified “corrective action” that may be needed if “circumstances change”.
Under the agreement, the obliteration of the Irish banking system, which should be an engine of growth, becomes complete. We undertake to create banks that are smaller, more focused on core operations, more highly-capitalised and that have stable, market-based funding.
The 10-year Irish gilt yield is currently about 10.4%; the latest banking data show €16 billion in deposits leaked from the system in a month. The aspiration, therefore, to return to the sovereign issuance market is pie in the sky.
Honohan and Noonan say the Central Bank of Ireland is enforcing bank “balance sheet dynamics” that are transparent, coherent and conservative. Yet they still haven’t told us where the bank secured the €70 billion in emergency liquidity it has given the Irish banks in recent months or who has guaranteed this money. Neither have they explained the mechanics of the €20 billion the banks have issued as “own use” bonds.
The letters of intent imply that the Eurosystem will continue to supply cash to feed Irish ATMs if the government capitalises the banks to a Tier 1 ratio of 10.5%. The unstated theme of the document suggests that if Irish banks are fully or partially wound down quickly to generate cash to repay the Eurosystem, the ATMs here will continue to work.
A series of ridiculous targets are set. Details of an AIB-EBS merger are due within days, the full deal is due to be consummated by September. IL&P is to be recapitalised by the end of May and Irish Life sloughed off by October. Did the authors of these targets ever do due diligence on a corner shop?
A more leisurely approach is taken with Anglo Irish and Irish Nationwide. Believe it or not, Irish Nationwide is to get a three-year business plan, presumably to run off a residual €2 billion domestic mortgage book. Large chunks of AIB, Bank of Ireland and EBS will be sold off or deleveraged by a deleveraging officer answering to a deleveraging committee, operating to strict six-monthly targets, with quarterly reviews.
Where asset sales are not possible the assets may simply be transferred to the National Asset Management Agency (Nama), thereby moving the problem to another part of the state.
The recapitalisation of IL&P, including burning some subordinated bondholders, is due for completion in July.
There is a mind-numbing passage in Noonan and Honohan’s letter. Not merely will Central Bank of Ireland staffing be doubled to supervise three core banks of small scale, but these banks will also be micromanaged by the EU, ECB and IMF.
Will any lending be possible at these banks with so many official eyes staring over so few shoulders?
Despite the crystallisation of loan losses via Nama, there will be a need to give timely recognition to other loan losses. By the way, Nama is being given two years and seven months to run off 25% of its toxic loan book. There is nothing more stupid than selling into a market full of sellers.
If you don’t believe that all this can be forced through, at whatever cost, just think of the terms of the Bank Stabilisation Act rushed through the Oireachtas and the secret clandestine implementation of these laws by the Irish courts before Christmas.
The letter on the banks to Juncker, Rehn and everyone else is clearly designed to maintain their goodwill by convincing them we will do literally anything to ensure the ECB gets back its cash, or some of it anyway.
The fiscal commitments take a similar tack. A Fiscal Responsibility Bill will appear late in 2011 to ensure targets and performance are met. From 2012 onwards, there will be “binding multiannual spending ceilings”. The targets agreed with the EU/IMF will become structural benchmarks. The bottom line is that we will enjoy no fiscal flexibility whatsoever, regardless of the state of our economy.
By the end of 2011, we will have a property tax, increased carbon taxes, a reformed capital gains tax and capital acquisitions tax, lower tax expenditure (tax breaks), lower tax bands, lower tax credits and lower pension tax relief.
The documents legally commit Ireland to report economic data to the troika with speed. The Department of Finance and the National Treasury Management Agency will be obliged to report the exchequer balance and the government debt within a time frame of seven days from the date of the text.
If the loan-to-deposit ratio at a bank fails to meet the target by 2014/2015, the reporting period to Europe will be reduced and catching up will be required within six months. But if people keep pulling their deposits out of banks at the current rate then how will any lending at all be technically possible?
Each month, the Central Bank of Ireland will have to supply the troika with capital adequacy ratios for each bank, liquidity ratios, loan-to-deposit ratios and a sectoral analysis of loan distribution.
A once serious, sovereign country has now been subjected to the equivalent of a fiscal and monetary military occupation. Yet we have only ourselves to blame. We decided to join a golf club where only the Germans and Dutch play off scratch and we could hardly hit the ball off the tee.
PS: What will Nama do when it appoints receivers to firms controlled by a dozen top developers? It already owns their loans, now it will control their businesses directly via a receiver.
But a receiver is supposed to rule off his or her account and try to trade at a profit. If that’s not possible he sells the assets, in this case property, to the highest bidder or quickly uses a liquidator to do something similar. But sell to whom?
There are no lenders left and the market is populated by tyre-kickers looking for rock-bottom property bargains. Nama is unlikely to want to sell at a loss, even after buying property at knockdown prices. What to do?
Leave the receiver in place for a decade or get Nama to buy the property itself with more public money and book a revenue-neutral transaction? It’s all a bit crazy.
Morgan’s article is important and urgent. It’s accurate, true, simple and eloquent and repeats precisely what Peter Mathews and Constantin Gurdgiev have been saying and writing for over a year. The facts are clear. The arithmetic is simple. and Morgan Kelly is not an attention seeker. It’s imperative for the new government to get the message across to our “partners” in Europe and to keep repeating it and insisting on restructuring now!
We need a new strong negotiating team, leaving the familiar faces from last November’s team off the pitch. Trichet, Lagarde, Rehn etc need to hear the full truth and pay attention, otherwise we face an awful drawn out terrible financial and economic demise.
Courage demands that we see the true facts make the right decision and do the right thing. Now.
@WSTT, the entry above has been updated and there is a link to a rebuttal by Professor John McHale of some of the points raised in the article and also there is a link to the podcast of Governor Patrick Honohan’s very interesting interview on RTE’s This Week today at lunchtime.
The view on here continues to be that we need to confront our deficit and banking problems now, as we are day by day losing whatever freedom of action we now have.
It may seem blithe but to quote from that 1995 film “La Haine”,
“Do you know the story about the guy who falls from a 50-storey building?
To reassure himself, he repeats,
“So far, so good. So far, so good. So far, so good”.
But it’s not the fall that matters, it’s the landing.”
We fell off the building in September 2008, and despite the budget tightening and the depletion of our NPRF and NTMA reserves, we are still falling. That is not accepted by all and there are those that still say we might trade our way out of the crisis, and they may be right. But it seems increasingly that the majority view is that we will hit the pavement, and if that is to be the case, better we deal with the crisis now when we still have some (real) cards.
Hi NWL,
I am particularly pleased to see MK’s remark on your service.
The more people understand what for a real function the forced Implementation of NAMA provides, the better.
Th cards we had were strong, and we allowed a lot to be wasted, still a few are left, but if we think that tiny Ireland will be able to stand up against the EU forces at play without being serious, we will be eaten alive as happened in the past.
A marginal iRate adjustment, a foreseeable mainly political victory that is prepared, will not be sufficient.
Thanks for all your work!
Best wishes
Georg
I think the point has been made elsewhere but he does seem to have counted the recent recapitalisation announcement twice.
Debt of 190bn in 2014 (as forecast by the DoF) includes 24bn recaps. So why he adds another 35bn is beyond me.
Nevertheless….I wish he wrote more often – these salvos are too few and far between for a situation that seems to chnage evry couple of weeks.
@Rob, I think the governor of the Central Bank, Patrick Honohan put it kindly yesterday when he referred to clarification of the figures with footnotes.
The main difference between the figures advanced by Morgan Kelly (as well as others like professors Lucey and Gurdgiev, as I understand it) and on here and, on the other hand, the official estimates, is the bank funding. Speaking for this blog’s estimates, the reason I included bank funding in estimating bailout needs was based on the assumption that the emergency & extraordinary liquidity operations by the Central Bank of Ireland and the ECB would need be formalised at some point unless the markets started to lend to the banks again (and that may happen, markets might start lending to the banks, I hold the view that they won’t in the short or medium term but there are other views). And my view is that the replacement of this emergency and extraordinary liquidity will be a bailout – that is, it will be for a long term, perhaps three years or more, will be subject to extensive conditionality and will require a guarantee from the Irish state.
Now getting what would be a term-loan to solve a temporary liquidity problem at the banks might not permanently push up national debt, by which I mean, if the banks resolve their present difficulties and return to the markets then the liquidity bailout funding can be repaid. The risk and the concern is that banks will disclose further problems or the economy will suffer more and banks will incur further losses. The stress tests were designed to give reassurance that this would not be the case. But the markets don’t seem to now accept that €24bn will be enough and that the State can manage with our projected level of debt. David McWilliams might describe the collateral provided by banks for ECB liquidity as “rubbish” but I think the more general view is that the collateral is valuable, it’s just that it mightn’t be as valuable as the banks or ECB think.
With respect to your other comment, yes traffic was up 50% over the previous weekend.
PS:
Any difference in the website hits after the name-dropping NWL?
Anyone else listen to Honohan’s radio interview? At around the 14 minute mark, it seems as though he admits that he was less than frank with Bloomberg news. I don’t think Honohan should be doing interviews. He sounds like a wimpier Irish Colonel Jessup.
@Frank, the interview yesterday which is available via a podcast here
[audio src="http://www.rte.ie/podcasts/2011/pc/pod-v-0805201120m49sthisweekpart1-pid0-1249752.mp3" /]
is well worth listening to. I interpreted his words to mean that in speaking on Irish economic affairs he will tend to push the positive and as best he can, engender confidence in our banking system. And I think that’s an honourable position for someone in that role. And at a certain level, you have to admire the candour when he challenged the interviewer, Colm O’Mongain and asked him “what was I supposed to say”.
@NWL,
Candour is the one thing missing in this whole debacle – from the schemes to prop up Anglo’s share price, to the guarantee, to NAMA, to the bailout. Bad news should always be delivered swiftly. The regulator, the government, the banks, have all been drip feeding the truth since 2008. They haven’t fooled the markets but they have fooled the public, for now.
Kelly discusses in his article the the damage a bankruptcy will inflict on Ireland’s reputation. What about the damage done by the perception that the Irish are dishonest? I think that’s worse than bankruptcy. Bankruptcy can be the result of a mistake, dishonesty is a character flaw.
@WSTT
It is nothing short of scandalous what is going on.
It appears Timothy Geithner has as much a say in what happens to Greece and Ireland as Mr. Trichet.
http://www.reuters.com/article/2011/04/18/greece-debt-restructuring-idUSLDE73H0DR20110418
@NWL
Happy to hear it re the traffic – richly deserved.