Archive for May 16th, 2011

There aren’t many great news stories on Ireland’s economy at present but news this evening that the IMF has agreed to the early release of the next tranche of funding from the bailout is encouraging. Their statement approves the release of €1.58bn bringing the total from the IMF so far to €7.2bn out of a final total of up to €22.5bn.

In a statement the IMF pays tribute to the new administration’s decisions on the banks after only a few weeks in office. The IMF suggests that “medium-term availability of Eurosystem financing would support this process” of our banks gaining access to market funding which seems like an endorsement of the medium-term facility mooted by the government and others just prior to the stress-test announcements at the end of March 2011 but which the ECB apparently scuppered.

The IMF confirms we are on track to deliver our promised fiscal adjustments in 2011, that is, it confirms the latest Exchequer statement for April 2011 in which taxes and expenditure were seen to be in line with our Budget. The ESRI last week broke ranks with recent forecasts and suggested our GDP might grow by 2% in 2011, this compared with 0.6% in the EU Spring Forecast, 0.75% in the Department of Finance update in April and 0.9% from the latest Central Bank ofIreland forecast. The problem is that the Budget for 2011 is based on GDP growth of 1.75%, so it may be challenging for us to meet our targets as the year progresses but we have had an encouraging start.

There’s no detailed statement on the delays with recapitalizing the banks (the February 2011 recapitalisation has been pushed back to July 2011) or progress with deleveraging or the sub-€20m loans at AIB and Bank of Ireland which might go to NAMA after all unless these two banks can produce credible deleveraging plans in the next two weeks.

The statement from the IMF concludes “although the external environment continues to be challenging, the authorities are committed to sustained strong program implementation. Supporting these efforts with a more comprehensive European plan would help overcome market doubts, regain market access, reduce the threat of spillovers, and bring about a recovery of the Irish economy” If you were to translate this Diplomatic Speak to ordinary English, you might deduce that the IMF is advocating better EU engagement with our debt problems. The thing is that IMF is unlikely to come out and say that.

UPDATE: 20th May, 2011. The IMF released its staff report covering its first and second reviews today and there was also a press conference call where the European Deputy Director, our friend Ajai “Chopper” Chopra and two of his colleagues fielded questions. It is the first press conference under the new Interim Managing Director, the non-French American, John Lipsky and to me at least, Ajai seemed a little more forward on the need for a common European approach to our bank debt and the need for a medium-term ECB facility. Although IMFer, Craig Beaumont seemed confused about the Ireland’s GDP growth in 2011 – at Budget 2011 in December 2010 the government was projecting GDP growth at 1.75% and the general consensus now is that it will be below 1% which will cause some difficulty. That seems to have gone over Craig’s head. As to the Morgan Kelly suggestion of an immediate balancing of the budget, the IMF considers any accelerated fiscal adjustment will negatively affect growth to the extent that it would not be desirable. The IMF say that in relation to our corporation tax rate, changes are not required in the bailout agreement because ” we did not see such a tax increase as consistent with the overall goals of the program in restoring growth” which seems to me to be as strong a form of words that can be deployed by the IMF. There was nothing on burning bondholders but the IMF did say ” the countries cannot do it alone and putting a disproportionate burden of the cost of adjustment on the country may not be economically or politically feasible. The resulting uncertainty affects not only these countries but through the high spreads and lack of market access it increases the threat of spillovers and creates downside risks to the broader euro area. Hence, these costs need to be shared including through additional financing if necessary”


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It’s a cynical question, because the excuse being proffered by Ministers Ceighton and Noonan for our bailout interest rate not being discussed this week – “there’s not enough time and they’ll have to devote all of it to Greece” – is both childish and patronising. It seems that the managing director of the IMF, Dominique Strauss-Kahn was to have held meetings of his own with the group of EU finance ministers meeting in Brussels over the next two days, but because he is now indisposed in Riker’s, presumably that frees up some time in diaries for progress on the 5.8% interest rate applying to our bailout?

Of course the original excuse was a load of rubbish anyway. Negotiations on our interest rate take place below ministerial level and it is really only the most high-level of principle that needs actual ministerial or summit input. If we are to believe that a 2-day meeting of EU finance ministers is unable to find any time forIreland, then what does that say about the fragility of the EU decision-making process. What would have happened if problems were uncovered in Spain’s banks this week? “Too bad, because we don’t have the time”

Of course even a 1% reduction in interest rates will have a negligible effect on our debt, when set against the €35bn in senior unguaranteed secured and unguaranteed unsecured bondholders. And because this table never gets too old, let’s remind ourselves again of the bondholder position in Ireland banks, courtesy of the Central Bank of Ireland.

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Barry Gilbertson, the former president of the RICS and now a consultant to Knight Frank gave a very sobering presentation in Londonlast Tuesday on the subject of banks dealing with distressed property loans (reported in PropertyWeek here, the speech is not online yet but should be available here). It was reminiscent of the Kubler-Ross stages of dealing with grief as he described the four Phases banks are going through in dealing with distressed property loans in the UK. According to Professor Gilbertson, Phase 1 was total shock. This was followed by Phase 2 in which “the banks micro-managed their advisers, pulling the plug on the odd hopeless case” In terms of the UK, Phase 3 started in 2010 when banks realised that, in many cases, their borrowers are the best people to help them maximize returns from a distressed loan. And Phase 4 should now be beginning with wide-scale disposal of property by banks. Sobering. Particularly if you’re working in NAMA and trying to maximise returns from the London market where you just might find that supply of property will swell with banks offloading property. And what was just as sobering was the reminder that even if NAMA forecloses on a loan and sits on the asset, the asset management costs are likely to be 5% per annum, and there may potentially be other costs. Very sobering indeed. The picture above is of one of the many Grehan brothers assets in theUK to which NAMA appointed administrators over the past fortnight.

Today sees the publication of the UK April 2011 IPD Monthly Property Index – the index covering UK commercial property up to the end of April 2011. The IPD (Investment Property Database) index is the only UK commercial index referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page.

The Index shows that capital values are still increasing but at a modest rate compared with the end of 2009/start of 2010. The Index rose by 0.1% in April 2011 compared with March 2011. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 10.9%. Commercial prices in the UK are now 34.6% off their peak in June 2007. On an annual basis prices are up by 2.7%. The NWL index is now at 886 which means that NAMA needs to see a blended increase of 12.9% in property prices across its portfolio to break even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss).

The table below shows the change in value of an index set at 100 at 30th November, 2009 and applying the month-on-month % increases in a compound manner.

In terms of outlook for commercial property in the UK, the short term looks challenging particularly outside London. If banks start offloading property as suggested by Professor Gilbertson, we might just find that supply exerts a downward pressure on demand. It was interesting to witness the Pick ‘n’ Mix innovation by Jones Lang LaSalle recently where they bundled together disparate property in one portfolio and are selling it as one lot. On the other hand, as revealed in the May 2011 Driver Jonas Deloitte survey ofLondon construction in the pipeline, there may well be shortages of property for some years to come, which might consequently boost prices inLondon.

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