Archive for June, 2011

Figures released by the Central Bank of Ireland (CBI) this morning for the month of May 2011 show that the flight of private sector deposits from domestic Irish banks, which had reversed in April 2011 for the first time since October 2010, has resumed. The flight has resumed at a modest pace. Deposits in the six state-guaranteed financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS) were down just €753m from €108,235m to €107,482m; though such deposits are still up €1bn from the low of €106,309m in March 2011. The banking authorities might take some small comfort from the fact that the pace of private sector withdrawals from the covered banks has slowed considerably from the €3-4bn monthly declines that we were seeing earlier this year and late last year.

However the picture generally is still pretty dismal. All deposits (including Private Sector, Govt, Monetary Financial Institutions, and non-Irish resident) at the covered banks are down €26bn in the month to €285bn, the largest monthly drop since last November 2010 and are now down €130bn on a year ago.

It is noteworthy that the Government has €21.2bn on deposit with the covered banks. The NTMA refuses to disclose if it is paid interest on these deposits.

These deposits are presumably the bailout funds earmarked for the bank recapitalization in July 2011. We are paying the IMF/EU 5.8% on this funding which amounts to nearly €4m per day and which is arguably being totally wasted.

Looking at the total Irish banking system there is one curiosity in the May figures – private sector deposits in Irish-based banks that don’t service the Irish economy (those in the IFSC) increased by nearly €8bn.

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.

So, looking at the deposit figures produced by the CBI. First up is the consolidated picture for all banks operating inIreland 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 outsideEurope)

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This morning the Irish Central Statistics Office (CSO) has released its preliminary analysis of the five-year census that was undertaken on 10th April, 2011. In the so-called inter-censal years, we rely on estimates from the CSO and the Economic Social Research Institute, so the actual census results are eagerly awaited. Here are the highlights

(1) The population in April 2011 was 4,581,269 which is considerably up from the inter-censal estimate of 4,470,000 for April 2010. It is also 8.1% from the last census in 2006. The reason : world-beating birth rates, very low mortality rates and strong inward migration for 2006-2008 partly offset by subsequent outward migration.

(2) For interest and this is not in the census results today : add in the estimated 1,789,000 souls in Northern Ireland and the island of Ireland now has a population of 6,370,269 which compares with an all-time high of 8,175,000 in 1841 just before The Famine and 6,552,000 in 1851 and 5,798,000 in 1861 and an all-time low of 4,228,000 in 1926. Contrast that with the population ofEngland,ScotlandandWaleswhich was 18,500,000 in 1841 and is over 60m today.

(3) There are 2,004,175 dwellings in the State, up from 1,769,613 in 2006. That’s an impressive increase of 13.3% or 234,562 dwellings.

(4) Vacant dwellings which were estimated at 300-350,000 last year are actually 294,202 which is slightly below estimates. Unfortunately we do not have information at this stage about holiday homes, which will feature in the full census reports in 2012. So it is not possible to determine the level of overhang of vacant property inIreland. Overhang is the amount of vacant property excluding holiday homes and what is termed the normal vacancy rate, and is taken to indicate the particular problem thatIreland now experiences as a result of the construction boom in the early/mid 2000s. The overhang was estimated at over 100,000 dwellings last year. Most of the overhang is not in ghost estates where only 33,000 completed or near-completed dwellings are vacant.

(5) The vacancy rate, the percentage of dwellings not occupied, actually dropped from 15% to 14.7%. That might raise eye-brows. Population increased by 8.1% in the period from 2006, whereas dwellings increased by 13.3%. So a decrease in the vacancy rate means there are fewer people on average living in each dwelling. In 2006 there were 2.82 people living in each occupied dwelling, in 2011 that had dropped to 2.68.

(Click to enlarge)

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The Nationwide Building Society has this morning published its UK House Price data for June 2011. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £168,205 (compared with GBP £167,208 in May 2011 and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 9.6% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of June 2011 being GBP £168,205 (or €183,005  at GBP 1 = EUR 1.1108) is 1.6% below the €185,993 implied by applying the CSO May 2011 index to the PTSB/ESRI peak Irish prices.

With the latest release from Nationwide, UK house prices have risen by 3.34% since 30th November, 2009, the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index is now at 885 (because only an estimated 20% of NAMA property in the UK is residential and only 29% of NAMA’s property overall is in the UK) meaning that average prices of NAMA property must increase by a weighted average of 13.0% for NAMA to breakeven on a gross basis.

The short-term outlook for UKresidential remains bumpy. Interest rates may need to rise to contain inflation that is beginning to take hold –  4.4% in February 2011, 4% in March 2011, 4.5% in April 2011  and 4.5% in May 2011 – all on an annual basis. The UK target is 2% so the base rate which has been at 0.5% since February, 2009 may need be raised. The UK March 2011 Budget estimated growth in GDP of 1.7% and 2.5% in 2011 and 2012 and inflation of 4-5% this year falling to 2.5% in 2012.  Net debt will be 60% of GDP this year rising to 71% in 2012. Scary for the UK but paradise compared to the 100%+ in Ireland. The UK is also struggling with a deficit that was 11% last year (compared with 12% in basket-caseIreland) but there are swingeing cuts to public services in prospect to bring the deficit down to 4% by 2014/5. What all of this means for property prices is uncertain of course but the betting is that prices will come under modest pressure and may fall by less than 5% in 2011 – the Office for Budgetary Responsibility was saying 2.7% late last year but finances have deteriorated since then. TheUK has plenty of micro-markets and the betting would be thatLondon and the south-East will fare better than the North of England and elsewhere,Northern Ireland in particular.

This morning also sees the publication of the Q2, 2011 Nationwide’s quarterly series which provides a little more information on regional variations.

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It looks as if Greece is going to avert a crisis for now by agreeing in its parliament the austerity and privatisation programme agreed with the EU and IMF. And the Greek vote tomorrow should be sufficient to release the next €12bn tranche of the first bailout so that Greece can, for now at least, avoid default. In his interview on RTE Radio’s This Week programme on Sunday last, the Irish Minister for Finance, Michael Noonan said that he expected Greece would indeed approve the austerity plan but seemed unconvinced that the plan would actually be implemented. But it will be September 2011 when the next review mission from the IMF/EU descends on Athens to examine progress, so the present fudge provides some breathing space to prepare better and in particular make plans to assist Spain.

As for the remainder of the present Greek phase, a second bailout will be required and it seems that private bondholders might contribute to the second bailout by agreeing to roll-over some of the debt that is maturing in the next 12 months; the so-called French model would allow bondholders to “cash out” a portion of the par value of their bond, and re-invest part of the remainder in a 30-year Greek bond and the rest in an EU bond. The full details seem not to be available but what is important is the claim that some French banks will agree to it, and apparently it is French banks that are most exposed to Greek sovereign debt. But even if the private bond initiative were not to work, the betting on here is that the EU would stump up 100% of the second bailout, such seems to be the resolve to avoid a Greek default.

How Greece will cope with 160% debt:GDP and what happens in September 2011 remains to be seen but for now at least the crisis appears to have receded. So ouzos, cognacs and schnapps all round then? Apparently not inIreland.

On Monday last on the under-rated Vincent Browne show, the veteran broadcaster was going through the regular preview of the next day’s newspapers and then from 30:00 into the programme he said “and we start with the Irish Times and it leads with “Government cautious on initiative to help Greece avert default” turmoil drives notional Irish borrowing costs to a new record and the Government has given a cautious welcome to a French initiative to help Greece avert default by extending some of its debts for as long as 30 years. The plan unveiled by President Nicolas Sarkozy is supported by French banks who have the greatest exposure to Greek sovereign debt. I am surprised that the Government is cautious [ly welcome] about this because I understood that that was going to be the way that we were going to get out of our difficulties here ourselves and ah, that doesn’t come from a junior source.”

There had been a perception in Ireland that should Greece seek a managed default now which would have impacted upon European banks then Ireland might have sought parity of treatment and be given approval to haircut bonds owing by Irish banks. Remember Ireland has practically no bank exposure to Greece and is understood to have a perhaps €200m of public/private sector exposure plus €375m which we lent to Greece last year as our contribution to the first Greek bailout; so a Greek default would have a minimal direct impact on Ireland. But a Greek default agreed to by our partners in Europe might have brought €16bn of unguaranteed senior bonds into play for Ireland, bonds which are presently being repaid at par despite the fact that upto €70bn of public funds are being shovelled into the banks.

So Greece’s success (for now) might result in Irish tragedy. I wonder who the non-junior source, to which Vincent Browne referred, was. And I wonder do we have a Plan B?

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The Central Bank of Ireland (CBI) initiatives to improve transparency in Irish banking continue with the publication of new quarterly statistics on consumer lending and deposits at Irish banks (that includes the so-called covered institutions or state-guaranteed banks, AIB, Anglo, Bank of Ireland, EBS, INBS and Irish Life and Permanent and also the local branches of foreign banks and also credit unions but excluding the Post Office).

The new statistics exclude most lending to businesses, and we can see for the first time how households are engaging with the banking sector. The

(1) In March 2011, there were €87bn of deposits in Irish banks. Now while that is down from the peak of €95bn in March 2009, it is still €13bn more than in March 2007. Remember that these figures are for all Irish banks and they don’t indicate the scale of transfers from the state-guaranteed banks to local subsidiaries of foreign banks. Incidentally it is not clear why there was a 16% increase in deposits between Q4,2008 and Q1,2009 and a query has been submitted to the CBI.

(2) The late Brian Lenihan commented last year that deposits in Irish banks were sticky becauseIreland is an island and he seems to have had a point. Deposits are down by 6% or €5bn in the last 12 months. Now that is a significant outflow but with €87bn remaining, it hasn’t quite been the run sometimes reported. Again though, we don’t a split of how deposits have fared between state-guaranteed banks and local subsidiaries of foreign banks.

(3) With just over 1.5m households in Ireland, the average deposit per household is €60,000. Of course there will be skewing and many households may have no deposits. On the other hand those with millions of euros may have moved their deposits to what they perceive to be safer havens. So when Minister Noonan last week called for us to open our wallets to go shopping, he mightn’t have been as insensitive as he was widely perceived to be.

(4) Those €87bn of deposits might become very attractive to a government which is running out of options with closing the deficit; with the ruling out of income tax increases or cuts to social welfare and presumably our corporate tax arrangements will remain as they are, the government will have to raise €3.6bn-plus next year through cuts to the public sector and what we might term stealth taxes (property, water, community). And with the precedent of imposing a levy established with the pension levy to fund the Jobs Initiative and with a further wealth tax to be introduced (the property tax), then sizing up deposits for a contribution might become feasible as well as attractive, through presumably the ease with which deposits can be moved would be an obstacle to such a tax.

(5) €85bn of the €99bn of outstanding mortgage lending is floating rate, not fixed. So Irish mortgage holders are particularly vulnerable to ECB and banks’ own changes to interest rates. This is likely to be an issue as the ECB is expected to continue to increase interest rates over the next two years. The chart below shows the history of ECB interest rates, and although we have gotten used to low interest rates since the financial crisis in 2008, the main European economies are growing with inflation ticking up so we might find ourselves at the receiving end of unwelcome interest rate rises. According to The Economist magazine “mortgages in southern Europe andIreland are typically variable-rate, whereas fixed-rate housing finance prevails inGermany andFrance” Less than 2% of Irish mortgage lending has a rate that is fixed for more than five years.

(6) Buy-to-let comprises 25% of total outstanding mortgage lending and 90% of it is floating rate.Holidayhomes comprises 1% of total outstanding mortgage lending and over 90% is floating rate.

(7) In March 2008, there was €125bn of total mortgages outstanding. That had shrunk to €99bn in March 2011, with an €8bn reduction in one quarter, Q4 2010 accounting for one third of this decline. It is not clear why there was such an apparent repayment of mortgage debt in that quarter and the matter has been queried with the CBI. Remember also that new mortgage lending has practically ground to a halt with just €577m being advanced in new loans in Q1,2011.

In addition to new quarterly statistics on private household borrowing and deposits, the CBI yesterday also introduced new quarterly statistics for Irish businesses showing borrowing and deposits. Of note:

(8) The outflow of deposits from Irish companies from Irish banks has been far more pronounced than with private households. In the past year alone, deposits have dropped by 18% (from €93bn to €76bn) and business deposits are now back at December 2004 levels.The pace of decline hasn’t eased.

(9) Business lending is down 30% in the past year from €144bn to €100bn; that excludes so-called “financial intermediation” lending like NAMA and is probably a more representative measure of lending in the economy. However there was actually a small increase in net lending in the first quarter of 2011, the first increase since just before the financial crisis blew up in September 2008.

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The cost of Minister Noonan’s inaction on Anglo Irish Bank (“Anglo”) and Irish Nationwide Building Society (INBS) is highlighted today as Anglo repays a €12m senior unsecured unguaranteed bond at par, that is without any haircut or discount. The bonds (ISIN ref: XS0306086157, SEDOL ref: B1ZBPV0) were issued in June 2007 – Sinn Fein finance spokesperson Pearse Doherty yesterday described the bonds as “unguaranteed unsecured” and there is no reason to doubt him. Historical prices appear to be unavailable at the Irish Stock Exchange this morning, but last month Anglo redeemed senior bonds which yielded 30% annualized returns to investors who had bought last December 2010. Our recently announced Jobs Initiative costs €470m per annum, so in a single transaction today we are spending more than the proceeds of one week’s raid on private pensions.

Anglo of course is in receipt of €29.3bn of state-aid, and we are unlikely to see much if any of that back. Indeed the Anglo stress tests published at the end of last month were inconclusive as to whether additional capital, on top of the €29.3bn, would be required – the stress tests merely claimed that the loan loss projections at Anglo that were produced last year were still valid. Anglo no longer has customer deposits which were sold to AIB in February 2011. Anglo is no longer advancing new loans, though there is apparently some lending going on in respect of legacy loans eg Anglo might have an existing loan agreement which compels it to lend additional tranches; however it is understood this additional lending is not significant. And of course Anglo is steadily being merged with that other zombie, INBS. Signs above branches which are closing are being removed. By the end of this year INBS is expected to have merged with Anglo and the merged entity will merely be running-off existing loans over the coming years.

Minister Noonan made some bold announcements Stateside exactly a fortnight ago that he had a plan to burn the remaining €3.5bn of senior unguaranteed unsecured bondholder debt at Anglo and INBS, institutions he referred to as “warehouses” – “it’s no longer a bank. Anglo is now merged with Irish Nationwide. It’s a warehouse for impaired assets. Its deposit base has been moved out into the pillar banks. And it doesn’t work as a bank anymore. You can’t put your money on deposit in Anglo Irish. You can’t get a loan from Anglo Irish. So the only thing that gives it the name of a bank is because it has a banking license. It needs the banking license to access the monies from the Central Bank. So I said that as far as I am concerned, this is not a real bank. This is a warehouse, and we need your [ECB] assistance in dealing with the senior bond holders because we don’t think the Irish taxpayer should have to redeem what has become speculative investment.”

Subsequent to the Minister’s brave announcement, the ECB responded in the language of extortion and the subject now seems to have died, at least until the autumn. Why the autumn? Because Anglo has a particularly big bond repayable in November 2011 according to Minister Noonan (I think he’s referring to the €700m repayable on 2nd November 2011 with bond ISIN ref: XS0273602622).

Meanwhile today, €12m goes from our pockets to Anglo’s account to senior unguaranteed bondholders in a bank without deposits, which doesn’t lend and which wouldn’t exist without €29.3bn of our money, to investors who may be seeing 30% annualized returns on their investment. The reason we are allowing this to happen is because what Central Bank of Irelandgovernor Patrick Honohan refers to as the Calculations mean it is wiser to pay than not to pay.

There are lists of all bonds in the state-guaranteed banks sorted by maturity date here.

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I despair for the future of our society which we know is going to financially suffer in the next four years as the government tries to eliminate the budget deficit – simplistically, the difference between what the government takes in tax and what it pays out for the public sector and welfare. We know that gross wages will remain under pressure with low inflation, high unemployment and anaemic economic growth, at least for the next two years. We also know that there are cuts and additional taxes, €3.6bn in 2012 alone which will need be detailed in  Budget 2011 in December this year. What is despairing is that there doesn’t appear to be any centralised effort in bringing down the existing cost of living so we face the prospect of having lower take-home pay in the years to come but the same or higher living costs.

This is confirmed in the Eurostat report issued today which examines price levels across the EU and in selected other countries. It shows price levels by reference to the EU average which it sets at 100. The table below shows the results,Ireland’s average prices –highlighted in red – are shown as 118 which means that on average, our prices are 18% above the EU norm. And if you look at what I suggest are comparative countries which exclude high-tax/large-public sector Nordic countries, very high income countries and recent Central Eastern European joiners, we are still at the top of the league. Our prices are 13% (118/104) aboveGermany and 18% higher than in theUK for example.

Of course price levels by themselves don’t illustrate standard of living. You need to compare price levels with income which in Irelandhas been at elevated levels in the 2000s in particular. Last week Eurostat released GDP figures for the EU and we are still in the top three countries for per capita GDP in Europe. Subsequent to that release, the veteran journalist Vincent Browne wrote to Eurostat and asked for the GNP figures, which are arguably more relevant to Ireland as so much of our GDP relates to the activity of foreign companies, which when you extract out profits that these companies repatriate, gives a more representative view of the amount of money in the economy. The figures provided to Vincent as reported in the Sunday Business Post showed Ireland’s GNP to be 102.7 being just 2.7% above the EU average, but the Netherlands was 134, Germany at 120, the UK at 115.5 and France at 108.7. Our GNP income has declined dramatically in recent years – as recently as 2007, our GNP was apparently at 127.

So what appears to be happening in Irelandis our income has contracted substantially but prices have remained high. And yet in Irelandwe have a plethora of competition agencies which to my mind are there to ensure products and services are delivered at competitive prices. There is, what I have found to be, the practically-useless National Consumer Agency (who have another two days to start rolling out a mortgage comparison product on the itsyourmoney.ie website; at least that what the EU Competition Commission mandated in February this year). Then we have the National Competitive Council who produced a report last week which included a focus on property cost but ignored the huge price differences between here and Northern Ireland. And then we have the Competition Authority, which was in the headlines recently for its dawn-raid on the Irish Farmers Association’s premises in an investigation into the milk industry. We even have a private-sector Consumers Association. And yet for all of that, prices inIreland are some 18% above the EU average while income is just 2.7% above the EU average.

Now might be a good time for a top-down review of competition. After all, if wages are going to be further hit in the next few years, we might actually have an opportunity to soften or eliminate the effects, if we can get our prices down. Many costs in the State will be a function of wages, so unless wages come down, prices can’t come down. That is why we need a strong competition czar because the circle has to be broken so that prices and wages can come down together. There is also an issue with legacy debt, but that’s an issue for another day.

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