Archive for June 2nd, 2011

The IMF and EU review mission teams on the ground in Athens continue their work, and there is plenty of speculation that they will be done by tomorrow, Friday. There was a denial today of an emergency meeting of European finance ministers in Brussels on Monday next 6th June but that is still the date when this temporary GreekWatch feature is scheduled to end.

The most dramatic news today was of ratings agency Moody’s decision to downgrade Greek sovereign debt by three notches from B1 to Caa1 with a negative outlook, or from “Junk: subject to high credit risk” to “Junk: poor standing and are subject to very high credit risk and may be in default” and Moody’s point out that a Caa1 rating carries a 50% risk of default within five years. There’s nothing surprising in Moody’s rationale for downgrading Greece’s debt, save perhaps for the timing, in another few days it seems that we will have better clarity on Greece’s way forward.

The Greek prime minister is set to meet the leader of EuroZone finance ministers, Jean-Claude Juncker in Luxembourgtomorrow afternoon where he will try to convince the EU that Greecehas a credible and achievable plan for austerity and privatization. Back home in Greece, there are claims that a referendum will not be possible on whatever austerity and privatization measures are presented to parliament in early June. An opinion poll puts the Opposition ahead of the government for the first time in three years, giving a sense of the national mood. Jean-Claude for his part said today “my personal feeling and knowledge is thatGreece will have a new program”

Our Finnish friend Olli Rehn at the European Commission expressed a degree of satisfaction with ongoing talks between the troika andGreeceand say the troika would finish its work “in the coming days”.

The ECB seems to be backing the rumoured plan for getting private bondholders to roll over their debt in return for higher coupon payments and possibly collateral. ECB board member and Portugese economist, Vitor Constancio said today that “some forms of private sector involvement which are voluntary — there are many forms — and some forms we have always admitted as possibilities”

The view on here is more pessimistic than might be suggested by the lack of drama in recent statements from the interested parties. The bottom line is that Greece will need either a new bailout (which will be difficult to agree given the abysmal behaviour by Greece in relation to the old bailout, the 13-month old bailout) or a roll-over of debt, and bondholders don’t seem enthused by the prospect of remaining exposed to Greece a moment longer than necessary, regardless of higher coupon payments or collateral. And the bottom line is thatGreecewill have to get its budget to balance and the present government doesn’t seem to have the character to enact the cuts and privatization needed, and we are just approaching the difficult summer months inAthenswhere protesters will not be shy in making their views known. The Financial Times said yesterday that a muddle-through was expected at least for the time being, but from this perspective Greece’s situation is looking beyond that. Perhaps the troika will give a better steer tomorrow.

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Apparently Frank is now making an offer which you might find difficult to refuse if you’re a developer. This worked example would seem to be how the deal works.

You are a developer with a €100m loan on a development.

NAMA bought the loan from your bank for €42m

NAMA gets your business plan and together you work out a plan whereby the development will be sold for €45m

The development actually sells for €50m

NAMA will give you a cheque for €300-450,000, just for yourself.

The above is based on Emmet Oliver’s article in today’s Independent in which he claims such deal terms are now on offer from NAMA. The “Frank” is Frank Daly, the NAMA chairman. The claim is that NAMA is offering a 6-9% bonus to developers on any excess value received on a development, above the value agreed between NAMA and the developer in the business plan. It is reported that NAMA will not put the bonus into a legally enforceable agreement but it will be in the memorandum of understanding, and the deal is conditional on co-operation and a full disclosure of assets by the developer. Apparently NAMA is not in a position to confirm the details, but it does have a ring of credibility about it.

Of course, if you’re a developer, the trick will be to convince NAMA in the above example that the best the agency can possibly get for the development is €40m, so when it comes in at €50m you’ll get double the bonus. Or if you’re a really tuned-in developer, you might be able to find out what NAMA paid for the loan and pitch the base sale value at that level, since NAMA is going around telling everyone its primary objective is to recover what it has paid for the loan.

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I am a little confused by the way in which Irish Nationwide Building Society’s (INBS) results for 2010 were released. Most mainstream media carried reporting on the results on 20th May, 2011 (for example here and here). There was a press release on the INBS website on that date which summarised the results for 2010. But there was no annual report. And for much of the past fortnight, I have checked daily on the INBS website and still no annual report was available. Which was irritating, because I wanted to get a proper look at the full accounts and also to update the NAMA wine lake page which has links to Irish banks’ financial reporting since the crisis began in 2008. And then on Tuesday this week, 31st May 2011, I checked again and lo and behold the accounts for 2010 were finally available though oddly INBS claim it uploaded the report on 20th May, 2011 which I’m pretty sure it didn’t. “So what?” you might ask, we have the annual report now so what’s the big deal? This entry will answer that.

With an accountant’s hat on, when you pick an annual report you tend to skip immediately to the audit opinion and check for qualifications and then quickly proceed to the financial statements and the accompanying notes. INBS’s auditors, KPMG give the financial institution’s accounts a clean bill of health in terms of providing a true and fair view of the company’s financial position. But then the balance sheet on page 22 of the annual report shows that INBS is insolvent, or at least was insolvent on 31 December 2010. By “insolvent” I mean that its assets were less than its liabilities by €18.3m. Yes €18.3m isn’t a huge number and remembering that INBS is being run down, mightn’t immediately ring any alarm bells.

Next I confirmed that the insolvent position had arisen after the government had injected €5.4bn of public funds into INBS. So even after shovelling in €5.4bn, we the people who own 100% of INBS are potentially on the hook for €18.3m or since we’re going to be talking about “red cents” shortly, 1.8bn cents. That was the position on 31 December 2010, what about transactions since? Well we know that INBS made a profit of some €125m on the buyback of subordinated bonds in March 2011. But the betting is that INBS made a book loss on the sale of its deposits to Irish Life and Permanent. And the stress test results two days ago indicate that INBS will need another €50-200m of loss provisions that are not yet accounted for. So at 2nd June, 2011 it is not clear if INBS remains insolvent but I would have said there was a good chance that it still is. That being the case, the State may have to inject some more into INBS.

But wait a moment; Fine Gael has said that it will not put another “red cent” into INBS above the €5.4bn already injected unless senior bondholders take a haircut. And INBS still has €601m of “unguaranteed unsecured” senior bondholders. Wonderful, so will we at last see a senior bondholder burned? Actually, the quantum of burning is less important than the principle. If we burn €18m from €601m of senior bondholders for example, then why can’t we burn the whole lot? After all it is our €5.4bn that has kept INBS afloat. INBS’s senior bondholders comprise €598m which matures on 26th June 2012 (bond identifier XS0306307694) and €3m which also matures on 26th June 2012 (bond identifier XS0306306613).

So Minister Noonan, time now to start burning senior bondholders in INBS? And if so, what sort of principle might that establish in other state-funded banks?

The Central Bank of Irelandhas been asked for a comment on INBS’s apparently insolvent position on 31 December 2010 and also for an estimate of future cash injections. This post will be updated with any response.

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