Archive for May 30th, 2011

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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