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Archive for May 25th, 2011

Because domestic reporting on Greece’s current difficulties is abysmal, and international reporting is hit-and-miss, and because any restructuring or default in Greece is likely to have major ramifications for Ireland, there is a new temporary feature being launched today, a daily update on Greece as the countdown progresses to the decision on the release of the next tranche of its IMF/EU bailout on 6th June. If Greece fails to secure its next tranche of €12bn, the fifth since entering into a €110bn agreement with the IMF/EU last May 2010, then Greecewill be unable to repay €13.7bn of maturing debt in June 2011 and there will be some form of default. Already Moody’s is warning of dire consequences of any Greek default on other peripheral countries, including Portugal and Ireland. Standard and Poor’s today toned down the impact of a default on Ireland and this evening Taoiseach Enda Kenny dismissed any notion of a default here. Our 10-year bond closed at a record 10.99% mid-point today which suggests markets are not so sure.

The update will combine the best of international and domestic Greek reporting, and may help inform the debate here about strategy and tactics to deal with its own debt.

The players:
George Papandreou. Prime minister since 2009. Leader of PASOK, a centre-left “socialist” party. Controls 160 of the 300 seats in parliament, so can push through legislation and reforms.
Giorgos Papaconstantinou. The Finance Minister.
Antonis Samaras. Leader of the main opposition party, New Democracy, a centre-right party. Controls 91 seats in parliament, so a minority but if consensus is required, this is the party PASOK needs to talk with.
Poul (not “Paul”) Thomsen. IMF Mission Chief forGreece (andPortugal), the equivalent of Ajai Chopra inIreland. Both are officially Deputy Directors forEurope.
Labour unions. In Greece, these are many times stronger and vociferous than our own. Effectively they represent the Opposition on the street.

The bailout:
Agreed in May 2010
€110bn total with €30bn from the IMF and the remainder from the EU.
Four tranches thus far drawn-down by Greece totalling €53bn
Fifth tranche of €12bn due for draw-down in June 2011 but dependent on a positive outcome of the current review mission, reviewing progress to date and outlook
The effective interest rate on the bailout is understood be around 1% less thanIreland’s, or 4.8% approximately

The ruling PASOK political party finally gets its finger out and produces a tangible set of privatisation and austerity measures. But now, the opposition led by Antonis Samaras is being unco-operative and is criticising the austerity measures for being so severe as to affect growth. Opposition co-operation is not needed to get the measures through parliament but the IMF and EU want consensus, and if there isn’t consensus, protests are likely to spill over onto the streets.

Following their shock departure last Thursday, citing lack of progress by Greek authorities, the IMF & EU teams have returned to Athens to review progress and the feasibility of current plans to introduce more austerity and commence privatisations which are ultimately aiming to raise €50bn. The teams are scheduled to remain until June 6th when they are expected to issue pronouncements on the feasibility of Greek plans.

The OECD outlook today was mixed in its projections for Greece compared with the EU Spring Forecast. The OECD says Greek GDP will drop by 2.9% in 2011 and will rise by 0.6% in 2012. The EU Spring Forecast projected a 3.5% drop in 2011 and a rise of 1.1% in 2012.

This evening there are citizen gatherings in Athens,Thessaloniki and Patras modelled on the Spanish demonstrations. There have been calls for peaceful protest, thoughGreecehas a difficult history of violent protests in the past two years. The main focus of the protests is ongoing austerity.

A panel of Angela Merkel’s political party, the CDU, has called for wage and pension moderation in Greece. Greek pensions are still around 94% of average Greek income, while Germans’ are only 40%. At 39.6% Greece also recorded the highest increase in wages in the euro zone from 2000 to 2008, according to the panel head, Kurt Lauk said. In Austria by contrast, wages only rose by 2.9%. Greece raised its retirement age from 61 to 63 to 65 last year.

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Breaking news this afternoon (not available online yet) that NAMA has announced a decision to redeem €500m of senior NAMA bonds this week. This comes on the back of the snippet buried in last week’s speeches that NAMA had redeemed €250m of NAMA bonds since January 2011. Taken together these two announcements will mean that by the end of May 2011, NAMA will have redeemed some €750m of the €30.5bn in NAMA senior bonds that it issued in exchange for the €73bn of loans that the agency has acquired. The agency’s chairman, Frank Daly can barely contain himself saying “this is further evidence of NAMA doing what it was set up to do; ensuring the repayment of loans by debtors, managing those debtors very carefully and using the proceeds to repay the bonds NAMA issued to fund the whole project.  NAMA has made very good progress in 14 months since EU approval” Here’s why the announcement is curious.

NAMA has paid for its loans with NAMA senior bonds and NAMA subordinated bonds, the latter comprising 5% of the consideration for the loans. If NAMA doesn’t break even by the end of 2020, NAMA will not need honour the subordinated bonds. So NAMA hands over the bonds to the banks in exchange for the loans. NAMA has to pay interest on the bonds, in the case of senior bonds, it pays interest at the 6-month Euribor rate (currently 1.71%), on the subordinated bonds it pays a rate tied to our 10-year bond but it only pays this interest in any given year if the agency meets its objectives each year. NAMA is sitting on a mini cash mountain having approved the sale of €3.3bn of loans/property, although some of this will have gone to non-NAMA banks. NAMA has approved some €800m of development funding for developers but has actually advanced less than half of that. And the curiosity?

By redeeming €750m of NAMA senior bonds, NAMA is signaling that the best use it can make of its cash is to pay down debt which costs it only 1.7% per annum. What sort of business is incapable of generating more than 1.7% on its investments each year? For heaven’s sake, stick it in a deposit account for a year and NAMA would probably get more than 3%. US private equity funds are happy to boast that there are 30% annual interest paying, practically risk free investments available in European property at present. So why redeem the bonds now?

I can’t help but explore the move for some sinister motive, and here’s my shot. NAMA bonds are used by our banks to raise funding. They do this by redeeming the bonds at the ECB for relatively short periods of time and the ECB provides the banks with cash. The ECB is quite unhappy with its exposure to Irish banks (€82.8bn at last count) and is known to be seeking to reduce that exposure. Today’s announcement happily converges with that position. Another angle is the fact that ratings agencies regard NAMA bonds as part of our national debt. The NTMA, NAMA’s parent organization that looks after the national debt, is very unhappy about this and our government has gone to extraordinary lengths to create a NAMA structure that keeps NAMA bonds off our national debt. And as far as Eurostat, the government and the IMF is concerned, NAMA bonds are not part of our national debt. The ratings agencies take the contrary view that because NAMA bonds are state-guaranteed and are secured against property loans which can’t be readily converted into cash and whose value is uncertain, that NAMA bonds should be regarded as part of our national debt until repaid. Paying down €750m of NAMA bonds now is not going to change the ratings agencies views, not when NAMA has already booked a €700m loss and made a provision of €1bn against its loans. The press release this afternoon makes a point of stating that “Minister for Finance, Michael Noonan TD, has been advised of this decision” as if to emphasise that NAMA is acting on its own in this matter. So this is not a political decision, it’s presumably a commercial decision which is really depressing because it means that the best return NAMA can get on its funds is less than 1.7% per annum.

UPDATE: 25th May, 2011. The NAMA press release is now online here. In point of fact, NAMA had previusly flagged that it was going to redeem €250m of its bonds, when it provided a progress update in February 2011. So last week’s speech was confirmation that it had in fact completed that redemption that the agency had previously flagged.

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Laura Noonan reports in today’s Irish Independent that Sean Mulryan (pictured here), the NAMA Top 10 developer whose business plan has been apparently approved by the agency, has just submitted a major planning application in London. The application reportedly covers a 41-acre plot at Minoco Wharf, North Woolwich Road, Silvertown, London E16 2BG. The application was submitted to the London Borough of Newham on Monday and is available here. In addition to some 3,500 dwellings there will be shops, offices and services and the development would appear to be on the same scale as the Battersea Power Station site further up theThames, which is being developed by Treasury Holdings vehicle, REO.

The Independent was unable to get any comment from Ballymore as to the cost of the development and source of funds; comment wasn’t forthcoming from NAMA either as to whether the agency would be stumping up some of its €5bn development pot for the project; indeed it’s not even clear if the project is subject to NAMA loans.

The scheme will reportedly be marketed from the end of 2011 and units will be ready for occupation in 2013. It’s a welcome piece of good news for an Irish property company, given that much of the industry is on its knees.

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