Archive for June 21st, 2011

As reported on here two weeks ago, a group of subordinated bondholders in theUK is unhappy at Bank of Ireland’s proposals to buy back its bonds at discounts of up to 90%. And I have now seen what appears to be the group’s application to England’s High Court on Friday last – attached here.

The application essentially claims that Bank of Ireland is in fine fettle as a bank and that the agreement, under which the bondholders bought the bonds from Bank of Ireland in the first place, means that before haircuts are imposed on subordinated bondholders, contributions should be sought from other classes of stakeholder.

In practice this means that Ireland’s National Pension Reserve Fund (NPRF) being the only preference shareholder with some €1.8bn of preference shares should be wiped out first, and then the ordinary share capital and share premium and revenue reserve – the NPRF owns 36% of all that, so would be a loser to the tune of €2bn there. And only then should subordinated bondholders be burned. Or at least that is my interpretation. The application itself is worth reading.

The application is interesting because it will potentially test the legality of draconian Irish banking law in the English courts – still no word on the Fir Tree Capital v Anglo case in New York which appears to be held in abeyance; in the Irish courts the Aurelius v AIB case continues at Dublin’s High Court and we await a conclusion there. Bank of Ireland is the healthiest of the six Irish state-guaranteed financial institutions which makes the English application all the more interesting, and should the case reach a hearing it might be amusing to hear the bank justify some of its rosier pronouncements in recent times.

There has not been any comment yet from the Department of Finance on the application.

UPDATE: 28th June, 2011. Bank of Ireland has backed down in the face of the above application and withdrawn the offer to the €75m PIBS holders. This is the Bank of Ireland press release which states “the Bank currently intends to instigate a new offer to holders of the £75,000,000 13.375 per cent. Unsecured Perpetual Subordinated Bonds at a future date. In so doing, the Bank will seek to address the unique difficulties that have been highlighted to the Bank to date with regard to participation in the terminated Offers by the holders of the £75,000,000 13.375 per cent. Unsecured Perpetual Subordinated Bonds.”

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Ireland’s Department of Finance has issued an economic bulletin to presumably make sure an international audience is in no doubt that although we might be adjacent to Greece in the acronym PIGS, economically we’re in a wholly different league.

The bulletin aims to put our present financial standing in context; compared with the 1980s the claim is that the country is overcoming less challenging economic obstacles, for example in the 1980s interest on debt rose to as much as 33% of GDP in 1985 – that is of every old punt generated in the State, 33p went on interest payments on our debt – but based on present projections the interest on debt in the current crisis is likely to peak at a shade over 20% in 2015. The bulletin forecasts debt:GDP to max out at just under 120% at the end of 2013 before slowly falling back. That compares with a maximum in the 1980s of 113% in 1987 – you won’t find that comparison in the bulletin, oddly enough.

The bulletin gives an overview of the recent IMF/EU bailout and howIrelandis getting its economy back on its feet. There are some interesting charts and statistics in there, but overall it’s a pretty light document and if the intention was to differentiate Ireland from Portugal or Greece in the eyes of international investors, it might have done a better job. The red-lettered text above is suggested additions from here.

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What’s happening at NAMA?

Quite a few private messages have been received at the blog asking about the apparent change to the mix of blog posts, in that the number NAMA-related posts appears to have dropped off to be replaced by posts on the banks, the economy and Greece.

There has been no change in approach at all. There has simply been little to report with respect to NAMA’s operation. The agency is immersed in negotiations with developers, behind closed doors. The negotiations are sensitive and there is evidence on the part of NAMA and the developers themselves, of attempts to work out commonsense approaches to developer debt. There are likely to be details on business plans, developer rewards and incentives in due course, don’t worry. There are unconfirmed rumours of an investigation into the structure of NAMA and whether its asset management functions can be sub-contracted to a number of private companies, but that was part of the FG approach in the general election so even if true, that would not be totally new.

There has not been a single high profile NAMA receivership scalp since the Grehans in early May 2011 (there was a small-scale Kilkenny developer placed in receivership at the start of June 2011). The Iris Oifigiuil is carefully studied twice a week on here to ensure nothing is missed on that front.

With respect to Irish and international media reporting, I don’t think there have been any significant NAMA stories that have gone unnoticed; perhaps it should be said that quite a few recent NAMA articles appearing in the media don’t report new information (eg here and here and here – watch out for the Irish Times story as most of the information is wrong and was subsequently corrected).

NAMA’s annual report will be published at the start of July 2011 as will its Q1, 2011 report. We’ve already seen the pro-forma annual accounts but we’re expecting more detail on loan losses and disposals. NAMA may also launch its receivership property-for-sale feature on its website at about that same time.

So the focus remit here is still on NAMA and the related subjects of Irish property and banking, but plainly what is happening in Europe is vitally important so coverage of the EuroZone crisis will continue for the next couple of weeks, alongside any NAMA stories.

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Examining the Irish media today, you would think that there have been positive proposals coming from the Eurogroup meeting of EuroZone finance ministers in Luxembourg on Sunday and yesterday, where the Greek crisis was at the fore. Reporting here suggests that a proposed change to a new bailout fund, the European Stability Mechanism (ESM) is to address Irish concerns about not being able to return to the bond markets in 2012 or 2013 – “EU acts to ease Irish return to private debt markets” shouts the Irish Times front-page headline. Separately RTE reports that there is unlikely to be any change to Ireland’s bailout interest rate in the immediate future – the Irish state broadcaster reports “he [Minister Noonan] said this was due to the fact that French Finance Minister Christine Legarde was now almost a certainty to take the top job at the IMF, and she would have to take up duties almost immediately.” There is no word at all about Minister Noonan’s widely reported proposal to burn senior bondholders at zombified Irish financial institutions, Anglo and Irish Nationwide Building Society. The general tenor of the reporting is that this is being a positive week forIreland inEurope. This entry is going to strip that notion away with a few home truths.


Right, you could be forgiven for switching off completely when politicians in particular talk about the EFSF, EFSM and ESM not to mention Eurogroup, Ecofin, troika and the many other new terms that have made it onto our media in recent times. But please bear with this for just a moment.

There is a proposal to create a new bailout fund for Europe in 2013. The name given to this new bailout fund is the “European Stability Mechanism” and it is often shortened to “ESM”. If you follow matters military, it’s like the European Rapid Operational Force, except instead of dealing with military emergencies, the ESM will deal with financial emergencies that we have seen inGreece,PortugalandIrelandand which might affect other countries in the future.

The ESM was mooted last year after the Greek crisis. And there are many that blame loose talk by Franceand Germanyin October 2010, about the ESM, for the rapid deterioration in Ireland’s finances late last year. What the French and Germans were suggesting in the Deauville Declaration was that if a country borrowed from the ESM, then the ESM would have first dibs if that country subsequently defaulted (actually second dibs, because the IMF always gets repaid first). The bond market considered this and thought “hang on a minute, if Ireland has to borrow from the ESM to fund its crippling deficit not to mention the black hole in the banks, then any money we lend now might be lost, because if Ireland defaults, which is a strong possibility, we’ll have to take our place in the queue behind the ESM”. And there are many that believe the consequence of the German and French loose talk was to drive up our cost of borrowing, and that belief is supported by the history of our bond prices.

So the proposal coming from the Eurogroup meeting over the last day, that the ESM will rank equally with normal bondholders, is positive for Ireland, that is true. But if it weren’t for the different suggestion last October, then Ireland mightn’t have needed seek a bailout in the first place. And as for the suggestion that yesterday’s change of heart had anything to do withIreland, what absolute bollocks (forgive the language but sometimes you need vulgarity to clearly communicate a point). Spain has €660bn of bond debt to roll-over in the next 24 months and remember if Spain needs a bailout then the EU’s capacity to contain this crisis will be strained to its limits, and maybe beyond. Instead ofIrelandbeing grateful this day, we should be furious at France and Germany for undermining our economy last year, only to change their minds now that Spain’s funding crisis is hoving into view.

Interest rates

It says something for this financial crisis that many ordinary citizens in Ireland can tell you that we are paying around 5.8% for our bailout funds but that the EU is paying 3% less (or 2.8%) to raise those funds on the market and is consequently profiting to the tune of some €7bn from the bailout. And we all know that the new government has been seeking a reduction in interest rates; in fact the old government was also doing that and had largely broken the back of the negotiations in February, but this is not a time for politics. From this perspective, the new government applied itself with gusto to the task of securing an interest rate reduction, and it is to be commended for that. Minister for Finance Michael Noonan has displayed the patience of Job in explaining our predicament in Ireland and promoting this country’s adherence to the bailout agreement. The campaign has been supported by the Department of Finance and indeed by our diplomatic corps. In terms of effort, it seems very creditable. However, France and to a lesser degree Germany have stood alone and demanded a quid pro quo from Ireland in return for a reduction in bailout interest rates. And that demand is thatIreland raise its corporate tax rate of 12.5% which is one of the lowest headline rates in the EU. For Ireland the tax rate is a lynchpin of economic policy and any change to it would seriously damage international investment and exports, which are seen as the lifeline that allows us to climb out of this crisis.

So in a system which requires unanimity, France’s vetoing of the reduction in our bailout interest rate is really the end of the matter.France’s particular stance is curious – why should it alone, with bit-part support from Germany, set itself against the taxation policy of what is a small European country? The speculation is that Enda Kenny personally torpedoed the discussion by grandstanding at a meeting on 24th March this year, a confrontation that came to be termed a “Gallic spat” in the media but which might have been far more, and it seems that the interpersonal relationship between Enda Kenny and Nicolas Sarkozy has broken down. Was European president Herman Van Rumpuy trying to act as a go-between in an act of shuttle diplomacy last week? Take a look at his diary and form your own conclusion.

One thing is for certain, the reason we are not getting an interest rate reduction now is not, as RTE reports above, that French finance minister Christine Lagarde is more pre-occupied with her potential appointment as the next managing director of the IMF. Think about that for a moment. Repeat those words to yourself – “sorry, I can’t discuss your interest rate issue now because there is a possibility I might be appointed MD of the IMF in two weeks” Now imagine that it wasn’t someone with Minister Noonan’s authority making the excuse; plainly the excuse is a load of rubbish, on Minister Noonan’s part.


Last week Minister Noonan captured financial headlines all around the world as he announced he had a plan to burn senior unguaranteed unsecured bondholders at Anglo Irish Bank and Irish Nationwide Building Society, two Irish financial institutions without deposits, with legacy loans in run-off mode and in receipt of €34bn of public funds. There has not been a formal response from the ECB, but the ECB had a delegation at the Eurogroup meeting yesterday that included its president, Jean-Claude Trichet. Was there any discussion of Minister Noonan’s “plan”? If there was, then there has not been an announcement but the betting is that it was diplomatically ignored.

So I hope you’ll forgive on here, the downbeat assessment of events which is at odds with the positivity and optimism in our media. From this perspective, Ireland is yet again being tossed around like a rag doll whilst it is grappling with a crisis that threatens economic life in the State. Taoiseach Kenny is scheduled to attend the EU summit in Brussels at the end of this week. Is there any possibility that he might discover a voice, self-knowing and plain-speaking, that might stand up for this country?

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