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Archive for June 29th, 2011

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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