Archive for June 20th, 2011

High-end residential estate agent, commercial agent and all-round property services company, Knight Frank last week released its quarterly league table of global house price movement which show that Ireland continues to experience close-to-the-worse performance (the press release is here which shows the full league table). Our 11.9% annual decline is just below the 13.9% decline in Russia, but Russia aside we are ahead of  the rest of the world, in most cases by a substantial margin.

In the EuroZone, Greece has dropped 5.7% in the past year, Spain by 4.6% and Portugal by just 1.8%. As discussed here on Saturday, Spain might well be the country to watch because even with the 4.6% annual decline, it is still just 15% off peak.

The report reminds us that there is still strong growth in some parts of the world. Poland and China are building up quite nice little property bubbles with prices up 8.6% and 8.4% respectively in the past year. In the EuroZone, France tops the league with 8.7% annual growth. Germany and Italy experienced modest movement of 1.3% and minus 1.4% respectively. The UK is essentially flat at minus 0.2% but with inflation running at more than 4% per annum, the real decline is considerably more. The US decline continues and prices there are down 4.9% year on year.

For Irish that invested overseas during the boom the news is mixed with the United Arab Emirates (including Dubai and Abu Dhabi) down 8.2%,  Bulgaria down 5.6%, Croatia down 3.8%, South Africa down 1.8% but Turkey was up 3.5%.

Lastly, the top performer was Hong Kong where prices were up 24.2% followed by India at 21.9%. I wonder if we will ever again see such positive growth here.

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Traditional Extortion (scene from HBO’s The Sopranos)

Mafiosi Patsy and Burt enter what looks like a half-empty Starbucks coffee store

Patsy [peering at name badge] Manager Adare. Welcome to the neighbourhood [shakes hands] We’re from the North Ward Merchants Protective Co-operative

Manager: I’m kinda busy. Are you guys looking for a donation?

Burt: Let him finish

Patsy You may have noticed, not to denigrate anyone but this is a transitional neighbourhood; I mean demographically speaking, you still have a lot of marginal types

Burt And we Merchants have found that you really should have some round-the-clock security here

Manager Isn’t that what the police are for?

Patsy  They do their best but they got their hands full. Your weekly dues to us will give you all the supplemental safety net you’ll ever need

Manager I can’t authorise anything like that. It would have to go through Corporate inSeattle

Patsy We Merchants prefer to deal on a personal one-on-one basis

Manager I don’t have any discretionary funds. It’s gotta go through Corporate

Burt How do you think Corporate would feel if, for the sake of argument, somebody threw a brick though that window

Manager They’ve got like 10,000 stores inNorth America. I don’t think they’d feel anything

Patsy [menacingly] What if, God forbid, it wasn’t just vandalism. What if an employee – even the manager, say  – was assaulted

Manager Look, every last fucking coffee bean is in the computer and has to be accounted for. If the numbers don’t add up, I’ll be gone and somebody else will be here

Patsy [giving up, walks back outside with Burt in disgust and laments] It’s over for the little guy

ECB Extortion

“In the meantime, we may have to come to the conclusion that it doesn’t really make sense for the ECB to keep putting €100 billion into Irish banks.   What we are doing is actually illegal, but we have being doing it because we want to helpIreland.  Maybe we might come to the conclusion that we should stop,” said the ECB source (Sunday Times inIreland– Sunday 19th June, 2011, not available online without subscription)

Spot the difference between the above two threats? The main one is that in the fictional Sopranos example, the manager of what looked like a Starbucks store told the mafia to get lost. In the second example,Irelandagreed to repay some €57bn of bondholder debt in banks in return for the ECB agreeing to continue to provide liquidity to our banks. This entry has a stab at exploring the economics of both.

Now traditionally, and in certain venues still in this country, extortionists demands a weekly protection payment. Otherwise the owner or their family gets harmed or the venue is damaged or destroyed. The demands are usually fixed sums of money, extortionists don’t usually do percentages of revenue and audit management accounts. So the owner does a calculation and works out if the venture can still return any value to him whilst paying the extortionists. If the extortionists demand too much then the owner might walk (quickly and far) away. But the point is, there is a calculation where the victim weighs up the costs.

The second example of extortion is what now appears to be what governor of the Central Bank of IrelandPatrick Honohan referred to as “influence” brought to bear by “the people” during Ireland’s bailout negotiations in November 2010. This “influence” didn’t make it into the Memorandum of Understanding, though it might have made it into the secret side letter. By way of background, as we all know, Irish banks relied less on customer deposits during the boom and sought funds by issuing bonds. And both the customer deposits and bonds were lent out to customers, often to buy or invest in property and again, as we all know, these days those loans are in bad shape. Worse, depositors have withdrawn much of their funds and our banks can’t get any new funding from the bond market that regards Irish banks as close to basket cases. So our friendly “North Ward Merchants Protective”, the ECB steps forward and sympathises with our predicament and offers us €100bn (from the Sunday Times article above) to replace lost deposits. It provides the €100bn at cost, 1.25% today, which is very good value indeed because Irish banks can’t get funds at that rate or at all. In fact the ECB might be, God forbid, breaking the law by providing this non-standard liquidity to what might be insolvent banks. The non-standard liquidity is provided mostly on a week-to-week basis and the ECB has extended the programme a few times, most recently to September 2011. So as things stand today, Irish banks should be able to remain liquid until September 2011 (at least). The ECB refuses to offer us a medium term facility even though the IMF says it would be appropriate.

But, in return for that funding, the ECB demands that “we” repay all senior bondholders in Irish banks – €21bn of guaranteed, €20bn of unguaranteed secured and €16bn of unguaranteed unsecured. And the “we” is effectively the Irish citizen because the banks are bust and we are putting €70bn of “our” money into the banks. So how are we dealing with this extortion, what calculation do we make?

Like the victim of traditional extortion we should be weighing up the costs. Walking away would mean the ECB withdraws its cheap money (which doesn’t cost it anything remember) and the Irish banks would collapse and remaining depositors would lose their money and we would have social unrest as we got used to living in a cash economy (the cash being what people had squirreled away under their mattresses). Of course potentially there would still be a post office and credit union network and local branches of foreign banks but Bank of Ireland and AIB (and their associates Permanent TSB and EBS) would disappear. In fact the fallout might be so great that we might have to leave the euro which might mean any deposits in Irish banks might be converted at €1=IRL £1 but if you tried to exchange your IRL £1 you might only get €0.50 and because we import a lot, costs would shoot up, petrol would perhaps cost you twice as much which would be a difficulty if your wealth was mostly in savings. Of course wages and social welfare would also increase in IRL £ but many would see their standard of living fall. If you mention all of this to most economists, they will roll their eyes as if you are talking fantasy – yes, it’s the theoretical nuclear option but in practice it will never happen. And if we lose the euro, our image will certainly be tarnished by foreign investors who seeIrelandas a small, flexible economy in the EuroZone and the EU with a decently-educated workforce, low corporation tax, okay infrastructure and English-speaking. If we lose the euro, the foreign investors will see currency exchange risk but also more broadly regulatory and political risk.

So what’s the calculation? How much is it worth to us to keep our existing banking system and potentially the euro? €1m, €1bn, €10bn, €57bn, €100bn, €1tn? Logically there is an answer. And I don’t think it is anywhere near €57bn.  By the way, why €57bn when only €16bn is unguaranteed, unsecured? Well, we can potentially legislate to undo the guarantee and we have such powers under the Credit Institutions (Stabilisation) Act that we can play about with the notion of “secured”. Add into the mix that there might not be a EuroZone in the next six months as we confront the Greek crisis and as the larger EU countries get to grips with their own banking issues – Spain and Germany being good examples of countries with different types of difficulty, Spain being suspected of nursing undisclosed property-related loan losses and Germany brushing the losses under the mat and hoping things improve before losses need be crystallised. InIrelandat least, we have confronted full-on our banking losses with NAMA, stress tests, intense IMF/ECB/EU supervision and a beefed-up regulatory system. Add also to the mix that the ECB might withdraw its non-standard liquidity arrangements in September 2011 (or August or July 2011 if it feels like it) and anyway the ECB says it might be illegal to provide Irish banks with any liquidity; there are also rumours that a medium-term facility might come from the EFSF which might end up charging is 3-4% for a three year facility.

This entry didn’t set out to quantify the extortion cost which would tip us towards one course of action rather than the present course. It just set out the principle that at a certain point, we walk (fast and potentially far) away. Maybe in our “re-negotiations” we should have a good idea of that cost, because from this perspective if we are committing to €57bn of senior bond repayments in bust banks, then we should be walking away, even if it means all the mess outlined above.

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