Archive for July 14th, 2011

It was all smiles today as the missionaries from our bailout creditors, the IMF, the EU and the ECB held a press conference in Dublin to pronounce themselves pleased with Ireland’s progress to date with implementing the bailout programme as set out in the Memorandum of Understanding. Ireland had met all of its tasks for the second quarter of 2011, and we have now seen the back of the missionaries until October 2011 when they will, by all accounts, have a more challenging sets of tasks to review. A recording of the televised press conference may be available via RTE later here. The Troika issued a joint statement, available here. Concluding the love-in, the Irish Department of Finance has issued a statement welcoming the positive conclusion of the review.

So to extract the good from the concluded review mission, Ireland has met all the targets set out in the “Programme” which is the Memorandum of Understanding as amended by the Technical Memorandum of Understanding in April 2011. Contrast that with the position in Greece at the end of May 2011, when the review mission downed tools (or calculators and charts) and threatened to abandon the review because Greece was simply not making progress in its programme. InIreland’s case, it is particularly encouraging that we are meeting deficit reduction targets – the end-June 2011 Exchequer primary balance, that is, the Exchequer balance excluding Exchequer debt interest payments was the subject of a target of -€10.9 billion and the actual result was “was -€8.4 billion meaning this target was met.” It seems truly wondrous that Ireland has performed so well against a target set only three months ago.

Not meaning to be churlish, some of the achievements noted by the Department of Finance during the quarter are pretty hollow at best, and seemingly downright misleading at worst. For example, it is a fact that an “Irish Fiscal Advisory Council was established on an administrative basis” in the sense that on 7th July 2011 (seven days after the quarter end, mind), Minister Noonan did issue a press release stating that five named people have been chosen for the Council but the work and operation of the Council was be given effect by “legislation to be brought forward by Government later in the year in the proposed Fiscal Responsibility Bill”. So the Council may have been (just about) established on an “administrative basis” at Q2 end, but it seems it will be some months before being established on an operational basis.

But it is in respect of NAMA that the Department of Finance seems to have taken real license with its creativity when it says “NAMA is constructively contributing to the restoration of the Irish property market. NAMA has committed to the disposal of 25 percent of assets by end 2013.” To recap, this is listed as an achievement in Q2, 2011. I would have said the view remains that it is NAMA that is holding up the restoration of the Irish property market with delays in agreeing business plans with developers, and even greater delays in releasing property onto the market. The proposal to create a new mortgage product by the end of this year is apparently just that, a “proposal”. Bank of Scotland (Ireland) and its asset management company Certus has done infinitely more than NAMA by holding two Allsop/Space auctions which have aided price discovery and apparently led to a restructuring of asking prices which is likely to lead to a more realistic market in which transactions can take place. What has NAMA done in the quarter to restore the Irish property market? There is still uncertainty about the agency’s plans with suggestions that disposals will be focused in the UK rather thanIreland. This is just plain misleading and the 25% disposal plan has been around since NAMA published its second business plan in July 2010, a year ago.

But aside for the present, what was striking about the news conference today was the apparent rift between the IMF and Europe. There is a “need for a European solution to a European problem” said IMF deputy European chief, Ajai Chopra. It seemed like a well-rehearsed line as Ajai allowed himself a little smile as soon as he had uttered the phrase. This is in line with previous IMF pronouncements, but it is significant that it has remained the line after the recent appointment of former French finance minister, Christine Lagarde as managing director of the IMF. Ajai also urged Irelandto remain “robust” in its stance on burden-sharing, which seemed diagonally at odds with the stance of the man from the ECB sitting next to Ajai at the conference. And it was the man from the ECB, Klaus Masuch that perhaps provided the most interesting contribution to the news conference.

The ECB is plainly aware of local feelings towards using state finance to repay senior bondholders in banks, and in fairness to Klaus he genuinely seemed to take a step back to explain the ECB’s stance. It’s unlikely to make the Irish audience any happier but here was the reasoning:

Ireland benefits from over €100bn of non-standard liquidity provided by the central banks (the ECB and the Central Bank ofIreland) at rates from 1.5%. This is a massive intervention from the ECB, and wereIrelandnot part of the Eurosystem, this intervention would not be available to its banks which are unable to source financing elsewhere. And as part of the Eurosystem, the ECB requires the repayment of senior bondholder debt lest a default cause contagion throughoutEuropeand drive up funding costs for European banks generally. The ECB is there to protect the banking system for 330m people, and of courseIrelandgenerally benefits from a sound European banking system.

The above is debatable, but it was striking that the ECB did not just refer to “the plan, the whole plan and nothing but the plan (which on paper at least doesn’t even mention bondholders)” but that the ECB has moved at least in its communication strategy and seems keener to explain its position.

Of more interest domestically was the well-placed question from Emmet Oliver at the Irish Independent who asked if there was any point to Minister Noonan seeking a discussion with the ECB in the autumn regarding imposing haircuts on senior bondholders at Anglo and Irish Nationwide. The answer from the ECB was that it had a position on that, that that position had been explained and that that position had not changed. So it seems Minister Noonan can seek to open discussions until he goes blue in the face – the ECB has effectively stated the matter is closed.

And lastly, it was striking how many times during the press conference that the recapitalization of the Irish banks was mentioned. The recapitalization has now been deferred three times – remember it was originally to happen at the end of February but then-Minister for Finance, the late Brian Lenihan decided to defer the recapitalization until after the election, after the election it was decided to defer the recapitalization until after the results of the stress tests were published at the end of March 2011 and after that, Minister Noonan decided to defer until the end of July 2011. The July 2011 deadline was mentioned several times at the news conference and is also mentioned in the joint press statement. It’s not, however, mentioned in the Department of Finance statement and it is to be hoped that Minister Noonan defers again. After all, the next Troika review is not due until October 2011 and the ECB has guaranteed its funding until October 2011 also. In light of rapidly evolving events in Europe and also a deterioration in the outlook for Irish banks (see here), the Minister may well have the freedom to defer the recapitalization for another two months (at least).

UPDATE: 22nd July, 2011. The transcript of the press conference reported above has now been made available by the IMF.


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Today sees the publication of the UK June 2011 IPD Monthly Property Index – the index covering UK commercial property up to the end of June 2011. The IPD (Investment Property Database) index is the only UK commercial index referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page.

The Index shows that capital values are still increasing but at a modest rate compared with the end of 2009/start of 2010. The Index rose by 0.2% in June 2011 compared with May 2011. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 11.2%. Commercial prices in the UK are now 34.4% off their peak in June 2007. On an annual basis prices are up by 2.0%. The NWL index is now at 858 which means that NAMA needs to see a blended increase of 16.6% in property prices across its portfolio to break even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss).

The first table below shows the month-on-month % change in commercial property capital values since 30th November, 2009. The IPD index is broken down into three components – retail, office and commercial.  The second table shows the change in value of an index set at 100 at 30th November, 2009 and applying the month-on-month % increases in a compound manner. Overall it shows that commercial property in the UK is worth 11.2% more at the end of June 2011 2010 compared with the end of November 2009

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This morning Ireland’s Central Statistics Office (CSO) has released its inflation figures for June 2011. The headline Consumer Price Index (CPI) was down 0.1% month-on-month but up 2.7% year-on-year (same as last month). The biggest driver of inflation in the past 12 months continues to be the CSO category of housing-related costs, and within that, the most significant component is mortgage interest* which has risen a staggering 22.2% in the past 12 months and indeed a significant 1.8% in the past month alone as ECB and domestic bank-driven interest rate rises take effect. Mortgage interest comprises nearly 6% of the CPI so the effect is significant.

Elsewhere it seems that private rents continue to stabilise, though there was a small monthly drop of 0.2% in June 2011, and an annual drop of -0.7%. It seems that in our financial crisis, the big correction in rent took place in 2009 with a 19% maximum decline, compared to a decline of just 1.4% for all of 2010. Since the start of this year there has been a 0.1% decline. So on that basis, I think it fair to characterise rents as stabilising. There is a view however that rents are artificially elevated at present as a result of the social welfare rent assistance programme. Although it is the case that many properties that are advertised for rent will not accept rent-assistance claimants, it is arguable that landlords for these properties still reference their prices to rent assistance provided by the State, which by the standards of other countries, is seen as generous (the latest allowances are available here) Will rent assistance survive the budget cutting as we to deal with our deficit? We currently spend €500m annually on rent assistance.

*The CSO notes the following in respect of mortgage interest “In line with normal practice for a fixed base price index, the current approach to measuring mortgage interest in the CPI reflects the situation in the base reference period December 2006 when the standard variable rate was dominant. Subsequently, tracker mortgages have become more popular. This did not give rise to any difficulties while the standard variable and tracker mortgage interest rates moved broadly in line with one another, which would be the normal expectation. However, the decoupling that has taken place since August 2009 has resulted in dramatically different trends emerging. For example, between September 2009 and September 2010 the standard variable rate increased from 2.93% to 3.66% whereas the tracker rate did not change. The Mortgage Interest component of the CPI, which is largely determined by the trend in the standard variable rate, increased by 25.1% as a result and contributed +1.25% to the overall change in the All Items index. It is crudely estimated that the latter impact would have been reduced by between 0.2% and 0.5% had the Mortgage Interest component been calculated on a current weighting basis. Users should take this “weighting effect” into account in interpreting the mortgage interest related movements in the index.”

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