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Archive for November 15th, 2011

Here are three seemingly unrelated snippets

Today the Irish Independent reports the hardly earth-shattering news that the Gaelic Athletic Association (Irish organisation that oversees gaelic football and hurling) is looking at properties in the NAMA portfolio as possible sites for new facilities including a new 25,000-seater stadium.

NAMA announced last month that it intends redeeming €500m of its NAMA bonds by the end of 2011. These are the pieces of paper which NAMA gave to the banks in return for the loans that were acquired last year. The banks exchange these pieces of paper with the ECB for cash. NAMA pays the holders of the pieces of paper 1.7% each year. NAMA is electing to redeem the bonds early, the agreement with the ECB is that they be redeemed by 2020.

Last week the Government announced €755m cuts to the State’s capital budget in 2012. The response from industry and from political opposition parties was of outrage as the cuts will cost jobs, perhaps as many as 10,000. The cuts were announced as part of the State’s commitment to balance its budget in 2015.

So drawing the three snippets together – the GAA has an immediate need, NAMA has cash which it intends using to redeem bonds which only cost it 1.7% and the Government has reduced the capital expenditure which will cost jobs. How about the following:

(1) NAMA sells land to the GAA which will be developed into stadia. NAMA agrees to fund the construction of the stadia. NAMA earmarks the cash that it was going to use to redeem its bonds to pay for the construction. NAMA charges the GAA 4% on the development funding.

(2) The GAA get the stadia and generate commercial income, which they use to repay NAMA for the next nine years. At the end of the nine years, if the GAA has not repaid all of the sums due to NAMA then it obtains a loan for the balance.

(3) The Government sees the construction of new facilities which will generate income in the economy and will reduce unemployment numbers and cost.

So win-win

(1) NAMA loans money at 4% which is only costing it 1.7% so NAMA makes a profit of 2.3% per annum on the loans to the GAA

(2) The GAA gets its facilities without needing to find the development finance now which would be a challenge anyway because banks aren’t lending. It pays NAMA a modest rate for the loans.

Oh yes, and a third win

The Government sees increased economic activity, lower unemployment, better sporting and social facilities, taxation.

Who loses in all this?

The ECB, which might have hoped to see an earlier repayment of NAMA bonds. But this isn’t costing the ECB anything at all, and the terms of the NAMA bonds say that they must be redeemed by 2020 so NAMA doesn’t need redeem them before then. The NAMA chairman Frank Daly says that the early repayments of NAMA bonds is now “copperfastened” into the IMF agreement but when asked to indicate that provision, there was no response from NAMA and the Memorandum of Understanding with the Troika contains no such term at all.

Of course this is just one example of how NAMA’s cheap cash could be used to stimulate the economy. NAMA has already reportedly lent €10m to Fingal council to build a road which would increase the value of NAMA’s property nearby. NAMA should only enter into these arrangements if it can generate a profit on them but it is hard to see from the above how Ireland would lose by making full use of the NAMA project.

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Now that we are nine months into a new government term in Ireland, and it is slowly but surely being confirmed that there is little practical difference between the new administration and the old, is it time for Ireland to consider going the way of Greece and Italy and creating a so-called “technocratic” government*? A government which sets aside personal and party-political ambitions so as to restore the finances of the country to an equilibrium which allows growth without the unsustainable burden of legacy debt?

It’s been 10 months since the usual high promises were spread like confetti by all the competing political parties in the 2011 General Election. But remember the commitments given by the eventual victors to burn bondholders, to put Ireland’s future before that of the ECB’s in Frankfurt, to change the IMF deal, to deliver interest rate cuts, to get Ireland working, to ensure banks made efficiencies to absorb 0.25% interest rate rises, to implement changes to Upward Only Rent Reviews. In response to criticism the Government might say that it has only been in power for nine months, that it has changed the IMF agreement by reversing the minimum wage cut and extending the period to balance the budget to 2015, it might say that the unemployment rate hasn’t risen and has been broadly flat now since summer 2010, it might point to the bailout interest now set at a level which is even better than the campaigning parties imagined possible in February, and the Government might point to Ireland’s borrowing costs staying stable at 8% whilst Spain, Italy, Greece and Portugal are trending into the swamps.

But let’s face it, the Government didn’t just turn up for work on March 9th , rub their hands and ask what next. For a good 12 months previously, the prospect of a snap election was appreciated by all, and it was a near certainty since the Greens announced their intention to quit the coalition in November 2010 (remember Paul Gogarty and the crying babe in arms?). So the new administration should have hit the ground running.

But what was achieved? What looks like a damp squib with the Jobs Initiative (Minister Bruton recently claimed that it may have created 17,000 jobs but the general unemployment figures would point to no material effect), the undisputed fact that we achieved an interest rate cut on the coat-tails of Greece’s woes and further had to suffer the indignity of having to offer corporate tax concessions whilst Portugal pocketed the saving without any concession, and the fact that at 8%, our notional bond market borrowing costs are still unsustainable; and we will not forget the ignominy of paying €730m, 0.5% of our GDP, in one transaction to unsecured, unguaranteed bondholders on 2nd November at Anglo, a bust bank in receipt of €29bn of the nation’s wealth.

Taoiseach Kenny to his great credit delivered one of the post powerful coalitions in the history of the State in March, a coalition that hasn’t been at the infuriating mercy of independents or handful of own-party dissidents, and he generated pride in some corners of the State with his attack on the Vatican and all-in-all he has projected a better image of the office of Taoiseach and of the country generally than his predecessor. But he upset our partners in Europe with his grandstanding in March, he has failed to communicate with his peers in the sense that he hasn’t taken the initiative to speak one-to-one or visit European leaders since assuming office, he might as well have been a silent bystander at the summits and hasn’t even sought to put Ireland’s admittedly parochial needs on the agenda, he’s displayed ignorance on a grand scale by telling the nation that Anglo was repaying its bonds out of its own resources, and despite the good intentions of his self-imposed 10% cut in pay, seems to have done very little to cut the cost of government generally – there are more quangos and they’re being stuffed with party apparatchiks and his stance on the cost of special advisers is questionable. And from this perspective he looks like a dreadful man-manager – every piece of new legislation seems to be delayed or mired in indecision: where is the personal insolvency legislation, the house price database, the Upward Only Rent Reviews, a deposit scheme for renters. Why was the Keane report so badly specified and where are the mortgage arrears initiatives that were promised “for a fortnight hence” – with Bill Clinton a witness – at the start of October? Why wasn’t the Comprehensive Spending Review completed in September as required by the IMF? Why wasn’t Minister Noonan able to publish a roadmap of taxes and levies in October? Just three months after establishing a Fiscal Advisory Council why did the Government ignore its main recommendation of expediting the balancing of the budget. Demanding that banks pass ECB cuts whilst ignoring their present interest rates looks economically illiterate. Nominating Secretary General Kevin Cardiff as the most appropriate person in all the land, to the plum €276,000-a year job in Europe, a “relative doddle”, amidst errors and criticism of the Department of Finance just reinforces the old stereotypes of political expediency – we are where we are, and that’s practically identical to where we were; that’s a glib line but it’s hard to challenge its essential truth.

I would have said that in the normal course of events, Taoiseach Kenny would be given another 6-12 months to demonstrate his mettle before he faced judgment by his own party in the first instance, but can the country wait another year? At the heart of the challenge facing the nation is whether or not the debt which has been shouldered by the country, the sovereign debt and the bank debt, is sustainable. With a projected peak of 120% debt:GDP which is akin to Italy’s and what Greece is on track to “achieve” by 2020 and less than Japan’s 200%, our partners dismiss any protestations. But it will be 150% of GNP which is a more accurate measure of Ireland’s finances, and not just that, a lot of it is for paying the private debts of bust banks, so financially and morally some argue, part of the debt needs to be dis-owned or defaulted upon. Our friends at BlackRock who were feted by the Central Bank of Ireland earlier this year when they led the stress testing of Irish banks said yesterday that certain Irish debt should be haircut 75-80%. And harping back to the 1980s when we had similar debt:GDP but didn’t have the distortion of foreign company operations so GDP was akin to GNP back then, and to a time when we had control over our currency and had the luxury of much low-hanging fruit to improve competitiveness, doesn’t distract from the fact that we are in unprecedented muck.

So can leaders across the political divide put their personal ambitions aside for 18 months and allow an economically literate leadership, charged with putting Ireland on an economically sustainable path, to be installed? Or at least a leadership that will demand to be heard in Europe regardless of how inconvenient it is to have a relatively small nation demand attention whilst there are deep problems with Greece and other countries.

So will it happen in Ireland, will we somehow arrive at a position where we have our own technocratic government? Not from today’s perspective; those in power see the challenges ahead but believe they can be overcome, painfully overcome, but that on the other side the country will return to growth and the debt will be managed, and over time will be demonstrated to be sustainable. But give it another few weeks though; let’s see the Budget 2012 cuts and taxes; let’s see the continuing turmoil in Europe where we seem unable to project our needs into the Euromix and let’s see how the ruling parties feel before Christmas. And if you look carefully, and set aside the usual Opposition shouting, you might find some genuine malaise within the ruling parties. In a short few weeks, a technocratic government might not seem as farcical an idea as it might seem to some today.

[*technocratic government seems to be a recent invention in the Euro crisis context. It seems to imply leaders based on technical competence and qualification rather than those getting the best popular vote. In both Italy and Greece’s case, the leader is a technocrat in the sense of being an economist/banker but it is unclear how the rest of government is to function and whether there will be widespread appointees based on technical qualification. In an Irish context it might mean a collective of economically literate leaders who are prepared to deal with unsustainable debt and an unlistening Europe]

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Enforcing debts against people and companies is set to be a national occupation for the next few years, and it shouldn’t be surprising that we are breaking all sorts of records; Sean Quinn’s €2.9bn bankruptcy – using Anglo’s numbers, which Sean is disputing – is the biggest ever in the UK and would be in Ireland should the State ever get jurisdiction over his bankruptcy; last week the judgments against the Grehan brothers of some €300m were the largest in the State, but not too far off the €280m that Jim Mansfield will owe to NAMA and other banks, if Bank of Scotland is successful at the High Court later this month. And you can probably expect common-or-garden repossession orders to have increased when the Financial Regulator shortly publishes the state of mortgage arrears for Q3, 2011 shortly. It’s surprising that there isn’t a blog or magazine dedicated to the subject….

NAMA is continuing to enforce its loans, and last week saw the agency was reported in the Iris Oifigiul to have appointed receivers to four companies, Tinryland Properties Limited appears to have been a John Fleming legacy company and of course John successfully emerged from UK bankruptcy last Thursday so he is not likely to be bothered. Cordil Construction was put into receivership in May 2011 but NAMA last week enforced its own security and appointed its own Statutory Receiver. Cordil is associated with Gerry Dillon and Pat Corrigan and had developed a mix of residential and commercial property in the Galway area and earlier this year blamed the slowdown in public sector work for its difficulties. Knocknacarra Investments Limited, to which NAMA also appointed receivers, seems to have been an associated company of Cordil. NAMA also appointed Michael Cotter of Ernst and Young as receiver to Clerihan Developments Limited in Clonmel, a company associated with Paul Whelan and which was responsible for the residential development at Abbey Farm, Innislounacht, Cahir Road in Clonmel and the Poppyfield Business Park in Clonmel.

Remember you can see a comprehensive list of Irish foreclosure action by NAMA here and in this regularly updated spreadsheet.

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