Archive for May 31st, 2011

The IMF and EU teams on the ground in Athens are expected to conclude their work by tomorrow, according to the Greek finance minister. “We are concluding the negotiations and I hope they will be finished … by Wednesday,” Finance Minister George Papaconstantinou told Antenna TV. It is still expected that it will be next Monday 6th June, 2011 that the troika give their verdict.

Nationally, protests continued inAthensand some cities on Monday, though on a smaller scale than Sunday’s. The protests take the form of gatherings often co-ordinated over social networking websites and there seems to be a jumble of issues publicized by protesters. Once the precise austerity measures and privatization proposals are placed before parliament in early June, you can expect protests to intensify.

On the EU national political front, central European minnow Slovakia put its oar in when its prime minister Iveta Radicova yesterday called for Greece’s €327bn of debt to be restructured, and Belgium’s finance minister promptly shot the proposal down. An axis of hard-love is developing involving Germany-Finland-Holland, with national ministers all calling on Greece to get on with implementing the plan or risk not getting the next tranche – “if it does not, Holland, Germany and Finland will follow the IMF should it decide not to give more money to Greece” said the Dutch finance minister on Saturday last.

The ECB continues to ensure that no board or governing council member, past or present, remains silent on Greece– the current post-holders are all listed here and it is difficult to pick one out that has kept his or her own counsel in recent weeks. Outgoing ECB executive board member, the Austrian economist Gertrude Tumpel-Gugerell re-iterated what is emerging as the strong ECB view that there can be no deviation from the EU/IMF bailout and there can certainly be no restructuring or reprofiling. When asked whether or not the ECB might soften its approach towardsAthens, the firm reply from Ms Tumpel-Gugerell was “that is not the case”

You might be interested in Harvard professor of economics, Martin Feldstein’s contribution on the Greece crisis and suggests a “temporary leave of absence” for Greece from the euro, and interestingly he suggests the Maastricht Treaty allows such a move. He points out that Greece has the largest trade deficit in the EuroZone and that Greece suffers from chronic competitiveness problems. For those contemplating a permanent exit byGreece from the euro, it’s a novel proposal.

Some details today of the new austerity measures being considered by Greece. Schoolbooks will have to be returned by schoolchildren at the end of each year so that they can be used by the following year’s intake and this will save a portion of the €80m per annum that the Greek government spends in providing schoolbooks. Greece like Ireland has different VAT rates and there are proposals to move certain products from the low (13%) rate to the higher (23%) rate. This includes heating oil and natural gas. There’s to be a 1% solidarity levy applied to all public sector salaries and a similar levy in the private sector to be borne by employer and employee. There is now a proposal that any budget overspend by any government department would require that department to come back to parliament which would permit an over-spend only if the money could be found through savings in another government department; the proposal is aimed at the notoriously uncontrolled government departments to impose better financial control on overall government spending. The Opposition led by conservative, Antonis Samaras is not only opposed to tax rises, he wants corporation tax reduced from 24% to 15%. And he citedIreland as evidence of the benefits of low taxation. I wonder what our French friends might make of that proposal…


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Figures released by the Central Bank of Ireland (CBI) this morning for the month of April 2011 show that the flight of domestic private sector deposits from Irish banks reversed in April 2011. Deposits in the six state-guaranteed financial institutions were up nearly €2bn to €108bn, the first month-on-month increase since October 2010. This will be particularly welcomed because the April 2011 deposit figures are the first to show the aftermath of the stress test and bank restructuring announcements on 31st March, 2011. Although the two other metrics advanced by Minister Noonan at the start of April 2011 to demonstrate the positive reaction to the banking announcements, the 10-year bond yield and the two pillar bank share prices, both show deteriorations; in the case of the 10-year bond, it had closed at a record mid-point of 10.22% on 31st March, 2011 and although that interest rate declined by a full percentage point in the following week, the mid-point as I write this is 11.03%; in the case of AIB’s share price it closed at a record low of €0.19 at the end of March 2011 and is at €0.18 this morning and BoI closed at €0.22 in March 2011 and is now at €0.17 this morning.

From an Irish perspective, possibly the most significant figure to watch is the total of private sector deposits in the six State-guaranteed financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS). The total which represents businesses and households rose to €108.2bn in April 2011 from €106.3bn in March 2011 and €108.6bn in February 2011 and is now down €21bn from a year ago, €9bn since the IMF/EU bailout in November 2010 but is up €2bn over the course of just one month. The CBI and ECB continue to provide substitute funding for Irish banks which replaces this flight of deposits and Irish banks continue to provide extensive State-backed guarantees on deposits.

Overall deposits were up in all three of the following category of banks but if you strip out the NTMA’s deposit of liquidated NPRF funds and IMF/EU bailout funds, the overall deposit figures are slightly down.

So, looking at the deposit figures produced by the CBI. First up is the consolidated picture for all banks operating in Ireland including those based in the IFSC which do not service the domestic economy.

Next up are the 20 banks which do service the domestic economy and include local subsidiaries of foreign banks like Danske, KBC and Rabobank. There is a list of all banks operating in Ireland here together with a note of the 20 that service the domestic economy.

And lastly the six State-guaranteed financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS)

(1) Monetary Financial Institutions (MFIs) refers to credit institutions, as defined in Community Law, money market funds, and other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs, and, for their own account (at least in economic terms), to grant credits and/or to make investments in securities. Since January 2009, credit institutions include Credit Unions as regulated by the Registrar of Credit Unions. Under ESA 95, the Eurosystem (including the Central Bank ofIreland) and other non-euro area national central banks are included in the MFI institutional sector. In the tables presented here, however, central banks are not included in the loans and deposits series with respect to MFI counterparties.

(2) NR Euro are Non-Resident European depositors

(3) NR Row are Non-Resident Rest of World depositors (ie outside Europe)

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There’s a curiosity on page 97 of the Central Bank of Ireland Annual Report published yesterday. The Governor, Patrick Honohan’s salary is shown as €276,324 whilst the Financial Regulator who reports to the Governor was apparently paid €348,462 and in addition was paid €75,299 for relocation, rent and other expenses. Now why would you pay an underling €150,000 more than the boss? Presumably the CBI might say that it has to pay a competitive salary to attract the best talent. There is a slightly contemptuous stance towards the Financial Regulator on here because it seems difficult to see where the world-class talent is having an effect. But having got “the best” inIreland, what have we to show for it in 2010?

Well at least we still have a banking system. But is that the best that can be said for the activity of the CBI? Let’s examine the results by reference to what the CBI says it is supposed to do

(1) Stability of the financial system; the Bank didn’t do very well at all in an absolute sense. Deposits flew out the doors of Irish banks, the six state-guaranteed ones in particular, this despite the extensive Government guarantee, higher interest rates for depositors, at least two stress tests (one domestic, one European), the commitment to overcapitalise the banks and a 17% increase in staff at the CBI many of whom supervise banks. The financial system was less stable at the end of 2010 than at the start by reference to deposits and capital needs to cushion elevated losses. It is hard to find any metric by which the system was stronger at year end. Competition contracted with the exit of Bank of Scotland (Ireland) and itsHalifaxunit. And moving into 2011, we seem destined to have two pillar banks with the effective disappearance of EBS, Permanent TSB (it seems), Anglo and INBS.

Of course the CBI might point to the elevated sovereign risks that intensified in 2011 withGreece, thenIrelandseeking IMF bailouts. The bank might justifiably point to the higher than expected losses on property lending which were only exacerbated during the year as the property markets continued to dive inIreland. But let’s call a spade a spade here; the stress test in March 2010 was risible in its failure to capture the extent of loan losses and the CBI seeking to offload the responsibility for that under-calculation on others is reprehensible. The CBI should not have added its imprimatur to stress tests unless it was satisfied with the basic data, and banks getting information wrong or NAMA underestimating its haircuts are no excuses for the CBI not sampling the information upon which the stress test was based. The European stress tests in July 2010 were equally risible with AIB seeking a multi billion bailout just three months later, and the CBI should again bear a degree of responsibility for this stupidity.

Of course it is arguable that even if the earlier stress tests identified the final extent of the capital needs then that wouldn’t have altered any action because the sum would be injected by the government regardless. That misses the point that in a democracy, decision-making and prioritisation of scarce resources need accurate information, and if we did know in March 2010 that the banks would need some €70bn of injections, the State might have made different decisions about guarantees. It most certainly would have been better prepared for any bailout negotiations.

At the end of 2010 Irish domiciled banks were dependent on €132bn of funding from the ECB and a further €51.1bn from the CBI. That funding is short term and is provided against collateral, the value of which the ECB may alter at any time. Central bank funding was up 80% during 2010 and as a result the Irish state is now dependent on an outside organisation ruled by a 6-man executive board and a governing council of the 17 governors of national cental banks. And as we have seen in recent weeks, that ECB can threaten to withdraw funding or change the collateral rules. This must be the most serious loss of control which cannot be acceptable in the medium or long term.

Could it have been a worse year for the CBI? Yes, we mightn’t have had a functioning banking system at the end of the year but it’s a pretty poor show when a central bank would need point to the continuing bare existence of a banking system to justify its performance.

Going forward it seems that the CBI doesn’t appear to appreciate the potential value of having one of the most poked and tested banking systems in the world. We all know that there is a slow-burn unravelling of problems with German banks,Britainis far from out of the woods and anyway has quantitatively eased itself to higher, safer ground. God alone knows the extent of the issues inSpain’s banks. And yet here inIreland, we have a small banking system, stress tested three times in the past year, with daily and weekly reporting to the ECB and IMF, in-your-face supervision by a much bolstered CBI, new boards of management in many cases and more stringent corporate governance. Add to that the fact that our deposit rates are higher than the euro norm, we are overcapitalising our banks and we still provide relatively generous state guarantees and you would have to wonder at a CBI that couldn’t capitalise on all of that. I can’t seeIrelandovertakingSwitzerlandas the destination of choice for global banking, but surely our reputation should be better than it is.

(2) Regulation of financial institutions. 2010 wasn’t a bad year for consumer scandals in Irish financial institutions compared to previous years.There was the AIB ATM mini-scandal in May 2011 when it turned out that if you attempted a withdrawal at an AIB ATM and didn’t collect your cash so that the cash was mechanically taken back into the ATM, AIB was still charging you. AIB refunded some €8.7m to customers. It is difficult to say whether or not the much bolstered Financial Regulation function contributed to a better environment as there doesn’t appear to be any metrics by which you could judge performance. The CBI did publish a new code for mortgage arrears during the year which reinforced forbearance measures. Although the intentions were no doubt honourable, it is hard not to conclude however that the CBI is just delaying the inevitable and giving succour to the pussy-footing in government over the reform of personal bankruptcy arrangements. A review of credit unions started during the year.

One area where it seems that the Financial Regulator has been weak has been where mortgages are being restructured, and banks have demanded borrowers surrender valuable tracker mortgages as a condition of getting any assistance. It is still not clear how widespread this scandal has been.

(3) The efficient operation of payment and settlement systems. Well the all-important ATMs worked and CHAPS and SWIFT seemed okay and the mechanics of providing liquidity including emergency liquidity seemed to work fine. Perhaps it is mean-spirited, but the presumption would be that these would all operate efficiently.

(4) The provision of analysis and comment to support national economic development. This is a difficult objective to judge. The CBI got the initial stress test spectacularly wrong. The CBI issued some new information including an overview of bond-holdings in state-guaranteed banks. But having provided the basic totals, the CBI didn’t issue any other detail to assist a debate that rapidly descended into a broad consensus of burning bondholders without any meaningful understanding of the consequences. New information was produced on mortgage arrears and repossessions which show the former ballooning but the latter being artificially contained. There were enhancements to the bread-and-butter monthly and quarterly statistics.

So it hardly seems a world-class performance in 2010 by reference to results. It could have been worse had it not been for the efforts of the CBI but the bottom line is that our financial system is less stable than it was the previous year. Finally it should be highlighted that Governor Honohan volunteered a 20% reduction in his own salary which equates to about €60,000; that sacrifice deserves more attention.

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Well it’s the very last day of May 2011 and despite rumours that they would have been published sooner, the governor of the Central Bank of Ireland, Patrick Honohan confirmed yesterday with the launch of the Bank’s annual report that the stress test results would at last be published today. Minister Noonan had previously said that he didn’t expect anything “untoward” to arise with the stress tests. Governor Honohan repeated those sentiments yesterday. To date Anglo has received €29.3bn of public funds, mostly via promissory notes and Irish Nationwide Building Society (INBS) has received €5.4bn, again mostly in promissory notes. BlackRock is again central to these latest stress tests, with the hope being that the independentUS asset manager giant will lend the results the credibility that has been lacking in the past. The previous stress testing results for AIB, Bank of Ireland, EBS and Irish Life and Permanent were published on 31st March,, 2011 and identified an need for an additional €24bn of capital, some of which might be secured by banks convincing certain subordinated bondholders to accept a haircut or a debt-for-equity sway. The IMF/EU bailout last November 2010 earmarked a maximum of €35bn for additional capital injections to the banks.

There will be coverage here later when the stress test results are unveiled.

UPDATE (1): 31st May, 2011. RTE is reporting that the stress tests show pre-existing estimates for capital requirements were adequate, that is €29.3bn for Anglo and €5.4bn for INBS. The CBI has not yet issued any general release setting out the results in detail. Expected shortly.

UPDATE (2): 31st May, 2011. The Central Bank has now published its report on Anglo and INBS. As far as Anglo was concerned the latest stress test was not as comprehensive as applied to the other financial institutions in March 2011. That was because the IMF, EU and ECB agreed to waive the requirement for a comprehensive review and because PwC had undertaken what was considered to be a complete review for the Department of Finance, and that review was “current”. The so-called addendum to the March 2011 stress tests – called the Addendum to the Financial Measures Programme report – is here.

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