Archive for July 18th, 2011

Any day now, we are expecting the publication of NAMA’s annual report for 2010. “What?” you might ask, “haven’t we had that already?” After all we have had the publication of the quarterly accounts for quarter four of 2010, which included cumulative figures for all of 2010. No, the annual report should be different. The quarterly accounts are more akin to draft accounts whereas the annual report will have been audited by NAMA’s auditor, the Comptroller and Auditor General and might be expected to provide a lot more detail on the agency’s activities in 2010. Here are five areas to look out for.

(1) NAMA’s loss on its loan portfolio. In the quarterly accounts, NAMA booked a €1bn loss on its loans in 2010. This was a paper loss to reflect the fact that NAMA’s primary markets had dived, that most of NAMA’s loans were non-performing and that NAMA had paid a long term economic premium when acquiring loans. Now NAMA is not required to assume 100% of its loans will default and that the agency will have to rely on the underlying security, the property. But you would expect a current valuation of the loan portfolios under IFRS 9 to show a loss substantially more than €1bn. An entry here in May examined the likely paper loss and concluded the loss was well in excess of €1bn. And that was before the bombshell last week when Jones Lang LaSalle reported that Irish commercial property had dropped 5.7% in Q2, 2011 – the biggest drop since NAMA was created. Of course the 2010 annual report will not be directly affected by events after December 2010 but the news last week emphasised the multi-billion paper loss being nursed by NAMA.

(2) Detail on the disposal of assets. NAMA claims to have approved the disposal of €3bn-odd of assets last year. That is understood to be mostly loans rather than real property. So a loan might have been re-financed by a non-NAMA bank, and in that way, NAMA has disposed of the loan. There has been precious little detail on these disposals, other than the majority has been in theUK. How much was property? How much represented loans? What profit did NAMA make relative to its acquisition price? What loss did NAMA make relative to the nominal value of the loan? Of all of NAMA’s activities last year, this is the one of most interest on here, and I think generally. And there has been a lamentable absence of detail so far. That must surely be remedied in the annual report.

(3) Detail on additional lending to developers. NAMA has approved almost €1bn of new lending to developers so far, though only a fraction of that has actually been drawn down. We all want to know where that money is going – that is, the names of developers and projects. NAMA’s protection of confidences might mean we get little information, but the public will want to know where its money is being invested. Should NAMA be prioritising investment inIreland? What projects are receiving funding? To what extent does funding indicate NAMA’s trust in any particular developer?

(4) Derivatives and hedging profit and loss. Most of the general public glaze over when you mention derivatives and hedging but when you boil it down, all these are, are insurance policies designed to ensure NAMA gets paid back what has been lent to the developers. That said, derivatives and hedging have come to dominate the quarterly reporting, to the extent that it is becoming confused as to what “insurance policies” NAMA is buying. The annual report will be looked to, to provide clarity on NAMA’s use of derivatives and hedging instruments.

(5) Salaries and bonuses. Until NAMA closes up shop in 2020, it can expect intense interest in its salaries and bonuses. In yesterday’s Sunday Independent, Chief Reporter Daniel McConnell eked a complete article out of NAMA and NTMA salaries and bonuses as he “revealed for the first time” the number of employees on different salary bands in the agency (actually the information was “first revealed” on here two weeks ago, but why let that get in the way of a claim to exclusivity). The point though is that the public is interested almost to the point of obsession, in what the state agency pays its staff. We might get a little more information in the annual report. But what we should see for the first time is directors fees broken down by director and as far as I can tell from the Q4, 2010 report the average director emolument is €80,000 per annum or if most of the directors are still on less than €50,000 then the last director in the door, Steven Seelig is being paid in excess of €200,000 for what is very much a part-time role.

Are we on tenterhooks already?


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“There’s always an alien battle cruiser
or a Korilian death ray…
or an intergalactic plague
about to wipe out life on this planet.”

Men in Black

This Thursday 21st July, the 165* men and women who comprise our main democratic organ, Dail Eireann, will take off for their summer holidays and return again eight weeks later on 14th September. Nothing unusual about that – last year they took off on 8th July and returned 12 weeks later on 29th September, and we now know that in August 2010 the distinct possibility of an IMF bailout was known in government circles. And the year before, 2009, they took off on 15th July and returned nine weeks later on 16th September, during the period of the bank guarantee, after the fiscal shock which saw our deficit needing €500m per week in borrowing, on the eve of the creation of NAMA. So the 165 men and women might say that there is ALWAYS the political equivalent threat of a Korilian death ray, but politicians are workers like anyone else and are entitled to time off, from what can be 24/7 jobs. And further, they might ask, is the present crisis in the EuroZone and major questions over domestic banking policy, bailouts and the likelihood of the most austere budget ever in December 2011 really good enough reasons to keep politicians away from the beach for eight weeks (there will be some work in committees during the period and there may be some constituency or extra-curricular work, but the statement broadly holds true)

Indeed there is another issue – many of the 165 men and women in the present Dail may not have much to contribute one way or the other, to dealing with current threats. After all, the decision-making cabinet comprises only 15 ministers, and within the Opposition, Fianna Fail hasn’t even appointed a finance spokesperson after the death of Brian Lenihan in June. Last night on RTE, Minister for Children, Frances Fitzgerald told us that a 2% interest rate reduction on the bailout was worth €1bn a year whereas Minister Noonan was telling us only a matter of weeks ago that a 1% reduction was only worth €148m. With economic literacy like that coming from the childrens minister last night, would it make any difference to the country if the entire Dail spent the next eight weeks at the beach?

Yes it would. Whilst Minister Fitzgerald mightn’t have the best grasp of the detail of the country’s financial crisis, she most certainly is a capable minister for childrens rights and she has a major policy workload, graphically illustrated with the publication of the Cloyne Report last week into clerical abuse of children in the diocese of Cloyne. The calls to tighten processes amongst social services, to provide greater protection to children are all very well and good – and indeed some extra protection might be provided by charities and greater efficiency amongst social workers – but the bottom line is that many initiatives will need funding. And when the Minister for Children asks for that funding, she is likely to be told the cupboard is bare because of cuts to the public sector needed to balance our deficit and pay for bank losses.

Economics is not the main discipline or concern of the majority of deputies in the Oireachtas. This was graphically illustrated during the debate on the Finance Bill in January 2011 – remember that was the Bill which was crucial to this country as it contained budget measures demanded by our bailout creditors. At the time, there were vociferous demands for a proper allocation of time to debate the Bill and not have it galloped through the Oireachtas; in the end the government reluctantly gave way and allowed a few hours of debate. Only to get contributions like this one from that great windbag, Mary O’Rourke (very nice woman personally and quite popular amongst her constituents even she lost her seat at the last general election). During the debate on the crucial Bill, Mary entertained us with stories about geriatric sex but managed to completely ignore the content of the Finance Bill itself. The present Dail has fewer Mary O’Rourkes, but all deputies, in government and Opposition will face a barrage of challenges later this year as austerity measures are revealed. And “I know what you did last summer” may well become their own personal horror films.

So what could the Dail usefully debate in July and August?

(1) The bank recapitalization. Minister Noonan has twice deferred the recapitalization of the banks, and those deferrals came after the former Minister for Finance, the late Brian Lenihan, deferred once. The current plan is to shovel some €20bn into the banks in July 2011. And last week, the Troika frequently referred to the July 2011 deadline. But shoveling €20bn into the banks now will not restore confidence, not whilst there is a firestorm raging through Europe’s economies. The stress tests conducted in March 2011 are redundant and sovereign bond exposure has grown considerably since March (and demonstrably, just compare present yields with those in March and the assumptions in the stress tests) whilst both commercial and residential property prices have since shown that even the adverse stress test scenarios in March 2011 were not adverse enough. There is no rush to recapitalize the banks in these circumstances, and remember the Troika won’t be back here again until October 2011 and the ECB has guaranteed its non-standard liquidity funding of European banks to October also, so why the rush?
(2) The calculations that it is better to comply with ECB wishes and repay bondholders in Irish banks rather than unilaterally burn said bondholders, are secret it seems. Governor of the Central Bank of Ireland, Patrick Honohan seems to be privy to the calculations but precious few others are. And yet, over the next few years we will repay €60bn+ to bondholders. And such payments will be funded in part by the State, or more precisely by you and me through higher taxes and cuts to services and social welfare. Don’t forget that austerity will, in addition, be needed to balance our budget which has practically nothing to do with the banks. But still, each deputy in the Dail should understand why Ireland has adopted the position it has with bondholders, and what the calculations are. Because each deputy will need look their constituents in the eye to explain why in May 2011 we repaid €200m of unsecured senior bondholders in the zombified Anglo Irish bank. And in November we will repay €700m, again to bondholders in a bank which is benefiting from €29bn of public money. And in September, we will repay €1.5bn to AIB bondholders, AIB being the “pillar bank” which is due to get €10bn from the state in coming weeks.
(3)The banking sector in Ireland. It is still not clear why this State needs two pillar banks and why it can’t manage with a single “obelisk” bank together with a competition oversight department in the Central Bank. For a detailed argument in favour of one bank, rather than two state banks, see here. With the Post Office, which according to reports this morning holds 10.3% of all deposits in the State, a credit union sector and local units of foreign banks, do we really need AIB and Bank of Ireland? Or rather, do we need shovel €10bn into AIB if we planned to run down or merge that bank with Bank of Ireland?
(4) Developments in the EuroZone. According to Deputy Shane Ross, there are now dark rumours that the Central Bank of Ireland is secretly printing a replacement for the euro, should there be a fissure in the EuroZone. There are similar rumours that Germany is contingency planning for a future outside the euro, with a return to the deutschemark. Rumours aside, it seems pretty much agreed that Greece’s debt of 172% of GDP, according to the IMF, must at some point be written down or defaulted upon. There are some who say Ireland’s debt is also unsustainable and must be restructured in some way, and possibly in a way in which there is some element of default. Portugal is likely to need a new bailout. As for Italy and Spain, well? I would not be surpised to see Spain’s debt downgraded this week by Moody’s. At Aa2, it looks like an island in the sky when you analyse the health of Spanish banks and the Spanish property market. On Thursday this week, the scheduled last day of sitting of the Dail, there is due to be a landmark meeting of EU leaders to thrash out a solution. Yet this solution will not be debated here afterwards in the Dail until at least the middle of September.
(5) Budget 2011 and beyond. Whether it’s €3.6bn of €4bn or €6bn (these estimates only tend to go in one direction), it seems likely that the December 2011 Budget will be the toughest budgets in the history of the state. After three austerity budgets that have taken unprecedented sums of money out of public spending or pay packets, we are to have another budget which may take a smaller additional sum, but remember the low-hanging fruit have already been picked; that is if you want to call pension levies, the universal social charge, reductions in tax thresholds and previous cuts to services “the low-hanging fruit”. In the next four years, we plan to eliminate the deficit entirely and we cannot rely on substantial economic growth or emigration to take a significant amount of the strain. So there will be cuts and there will be new taxes, and lots of both. That austerity should be prioritized and debated openly so that whatever measures are taken are owned by Irish society. And that debate shouldn’t be a few hours in the Dail in December. The changes coming will be massive and politicians should be debating measures now.

So are the threats this year any different to previous years? Would a shortening of the Summer Recess appreciably improve the prospects of this country and mean forthcoming austerity is better owned by Irish society? The view on here is “yes”, and no holds will be barred in the next two months in highlighting the democratic deficit, which will be placed at the door of An Taoiseach, in not being engaged during a period which is expected to be turbulent at best and chaotic at worst.

*The normal Dail complement is 166 members. Brian Lenihan’s death in June 2011 has left a vacancy in the Dublin West constituency, which has yet to be filled.

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