Archive for March 5th, 2012

You might be forgiven for thinking the referendum to ratify the Fiscal Compact was to be held in the next week, given the drama of the last few days, with Eamon O’Cuiv forced to resign – when did the term “fired” become redundant in favour of “forced to resign”? – over his stance on the Compact, Minister Joan Burton being rounded on for suggesting it would be helpful to the passage of a “Yes” vote if the negotiations on the Anglo promissory notes were to bear fruit, and a range of ministers coming forward to show that although the Irish people might not be up for bribing, we are sure as hell up for having the bejesus scared out of us.

Minister Varadker claims that we would be locked out of any future bailout if we vote “No” Minister Burton claims that Foreign Direct Investment would suffer, which might be true, though the UK and Czech Republic don’t seem too concerned about that risk. An Taoiseach Enda Kenny says that the vote is about whether or not we want to keep the Euro as our currency.

But despite the drama, we still don’t have the text of the referendum; most people probably haven’t read the 11-page Compact which is available here and the betting is the referendum is at least two months away. There are concerns about some basic aspects of the Compact such as the absence of a definition for “structural deficit”. There are also concerns about how this Compact may eventually put our corporate tax arrangements or our financial services industry in jeopardy, the former through Europe pushing through a consolidated tax base which would mean most of Google’s revenue would be taxed elsewhere and the latter through the risk of a financial transaction tax which would hurt our interests if not applied in competing countries, such as the UK and indeed non-EU countries. There is also a fear that the Compact copper-fastens the promissory note debt to our sovereign debt, in a way not hitherto done. These are all concerns, I mention them because the “No” side hasn’t really launched its campaign yet. It should be said there are plenty of attractions in the Compact, not least having the safety net of substantial and cheap EU assistance, should we need a second bailout.

And the troubled question of a second bailout has provoked strong feelings in the last couple of months with Minister for Finance, Michael Noonan dismissing as “ludicrous” the notion that Ireland will need a second bailout after the end of 2013 when the first bailout is projected to end. The “ludicrous” dismissal was Minister Noonan’s response to highly-regarded Citigroup economist Willem Buiter saying in January 2012 that Ireland should be preparing for the possibility of a second bailout. So Minister Noonan is not going to be at all happy with the weekly outlook report from ratings agency, Moody’s, this morning in which that agency says that they“expect Ireland to face challenges regaining market access in 2013 and it will likely need to rely on the ESM, at least partially, when the current support programme expires” The Weekly Credit Outlook report from Moody’s is here (free registration required).


So Moody’s says Ireland“will likely need to rely on the ESM, at least partially”. Or in other words we will likely need another bailout from official sources because the traditional market sources won’t lend us what we need to run our country. Fair enough, that’s Moody’s view. In the past, such projections and ratings by the ratings agencies have been dismissed as “clairvoyance” and in the run-up to the global banking crisis in 2007/8, the ratings agencies didn’t cover themselves in glory. Ireland’s “paper of record” however curiously reported Moody’s statement earlier today with the headline “Ireland is likely to need second bailout, ratings agency warns” and you will note that is pretty much verbatim what the Moody’s report says – there’s only four paragraphs given over to Ireland in the report and where a second bailout is referred to twice the term “likely” is used.. This afternoon however, the “paper of record” has changed its headline to “Ireland “may need” second bailout”. Not only does the verbatim “may need” not appear in the Moody’s report but it softens the language actually used in the report – it “may” snow tomorrow would be materially different to “it is likely to snow tomorrow”. Below you can see the extract of the current headline with the old headline shown in the bottom right hand corner.

Given the official reaction to Willem Buiter’s contribution in January – widely misreported when what he actually said was we should prepare for the possibility of a second bailout, not “we will definitely need a second bailout (without doubt!)” – Moody’s statement today is unlikely to be welcomed. In fact it’s strange we haven’t yet heard the now-hollow thunderings of the NTMA and the Department of Finance. But it is to be hoped as we get into the proper debate on the Fiscal Compact that reporting the facts doesn’t suffer. There are very serious concerns on both sides of the debate, and thankfully we will have weeks if not months to examine the concerns, and it is hoped this blog will contribute to understanding of the important issues, and misreporting/scaremongering/obfuscation or misdirection/untruths will not be sympathetically reported on here, regardless of whether they support a “Yes” or “No” vote.

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Property Week (free registration required) is today reporting that the Wyndham Grand Hotel in Chelsea in south west central London is being offered for sale with a price tag believed to be around GBP 80m (€96m). The 5-star hotel which comprises 158 suites is said to be a favourite of the local Chelsea FC team and is owned by a company controlled by Pat Doherty and Patrick Power of Harcourt Developments fame. The hotel was bought from Lloyds TSB for GBP 63m in 2006. The hotel is presently being managed by an entirely separate business, the Wyndham Group International which, it is believed, has an agreement to operate the hotel under a 20-year arrangement entered into in 2006.

The property is believed to be subject to a loan from Anglo Irish Bank (now part of IBRC, and a NAMA Participating Institution). It is not confirmed that NAMA acquired the loan, but as it would appear to be associated lending relating to a NAMA borrower, it would sense that it would (though as we recently saw in the case of the Thomas McFeely development at Priory Hall in north Dublin, not all projects associated with a NAMAed developer are acquired by NAMA even if they are subject to loans at Participating Institutions)

At the end of last week, the EU issued a report on Ireland’s progress in emerging from the financial crisis and in a brief reference to NAMA said

The mission also sought an update on NAMA’s operations. Deleveraging to date has proceeded in line, or ahead, of plans. While this has involved sale of NAMA’s better-quality assets abroad, this was a strategic decision to take advantage of market prices which were expected to weaken, which has indeed happened. While cash-flow has to date been strong, allowing for earlier repayment of EUR 1.25 billion of NAMA debt, the overall quality of the loan portfolio is deteriorating, with the share of performing loans down to 23% as of end-June 2011 and further inching down in the second half of 2011. Company management anticipates to meet its deleveraging targets (repaying EUR 7.5 billion, or 25% of its senior debt, by end-2013), but expressed some concerns about post-programme deleveraging, as this will depend crucially on whether the domestic commercial property market will have stabilized by then.”

It is not clear what the EU means when it claims that market prices “abroad” having “indeed weakened”. The UK’s commercial property sector has certainly slowed down overall but NAMA’s assets – over half – are understood to be concentrated in and around London which has remained buoyant. Having said that, these London assets which NAMA is selling are presumably performing to some extent which indicates NAMA’s pool of performing loans will run dry as these assets are sold off.

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It is indeed curious to see the reaction of NAMA these days to being questioned about its activities. “Why focus on us, why not Anglo or AIB” seems to be a subdermal reaction, even if it’s not exactly articulated in those words. NAMA seems to ignore the fact it is a new agency, with new legislation, new personnel and teams, new IT systems and suppliers. And whilst the Agency has notched up some successes, it has not been painted in glory either with delays in acquiring and conducting due diligence on loans, agreeing developer business plans and some of its financial projections haven’t turned out so well.

But back to NAMA we must go this morning and challenge the Agency about its dealings with the Dublin Docklands Development Authority (DDDA) following the revelation that two prominent developers, Derek Quinlan and Bernard McNamara have cut their valuation of the site by a whopping 40% in the past year from €50m to €30m – remember this was the site originally bought for €412m with nearly €100m extra spent on decontaminating and improving the site.

Yet the DDDA in 2009 maintained the value of the site was €50m, unchanged from the previous year and although the 2010 accounts don’t separate out a value for the site, the implication from the revaluation of the DDDA’s assets in the accounts is that the €50m remained unchanged in 2010 also. And in November 2011 we learned that NAMA had underwritten any future financial exposure the DDDA might have for the site in return for a mish-mash of properties – worth €7.9m according to the DDDA’s annual report for 2010 and which included a dry-dock, all of which the DDDA gave NAMA in return. I’d love to know NAMA’s expertise in realising value from a dry-dock!

Given the revelation this morning, which it must be said, is unsupported by professional valuation input, will the Agency respond to the challenge? What are the financial details of the deal with the DDDA? How much were the properties worth that NAMA received in exchange for accepting the assignment of exposure to the deal on the site – the DDDA says €7.8m, what does NAMA say? Did the DDDA get a dig-out? Why didn’t the DDDA revalue the site down in 2010 from €50m in the previous two years, when most evidence suggested development land continued to decline in price? Does NAMA accept the €30m valuation of the site placed on it today by Messrs McNamara and Quinlan?

Remember there are two feature blogposts on here covering the 24-acre former site of the Irish Glass Bottle company in Ringsend, Dublin– here and here.

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Much has been made about the IMF coming out on Ireland’s side last Friday and urging the EU/ECB to do a deal on the Anglo/Irish Nationwide Building Society promissory notes which are set to cost us €3.1bn a year for the next decade with smaller annual payments for the following decade, with the next payment of €3.1bn just weeks away, being due by 31st March 2012. However, as prominent as the IMF position might be, it is curious that it didn’t make it into the IMF staff report where a whole section is given over to the issue of Ireland’s debt sustainability and indeed the IMF position only came out as adlib comments in an interview with the Irish Mission Chief, Craig Beaumont. Nothing formal, nothing from the deputy IMF Europe chief, Ajai Chopra and certainly nothing from IMF Managing Director, former French finance minister Christine Lagarde.

This morning the Irish Times, citing “Government sources” claims that “while they are confident a deal reducing the debt will be reached, it is unlikely to be finalised before the vote” – the “vote” referred to is the referendum vote on the Fiscal Compact which is required before the start of 2013 but looks increasingly likely to be held in May 2012. The consequence of the Irish Times claim is that the €3.1bn payment in just a few weeks will proceed. And I note this is in line with the tone of comments made two weeks ago by the junior minister at the Department of Finance, Brian Hayes when he told the Dail “the Government is aware that payment of the promissory note is due at the end of March 2012. However, given the nature of advocacy and the decision-making process in the EU, I would not expect this matter to be concluded in the short term”

As if to further tamp down expectations, yesterday the President of the European Parliament, Martin Schulz told RTE Radio’s This Week programme that “Ireland is not a special case and easing the burden of its banking debt is a separate issue to the Fiscal Compact Treaty” In other words the 40% of GDP in debt that this country is proceeding to shoulder to bail out busted, but formerly systemic, banks is “not a special case”. And this is I believe the view of not just the European Union but of the ECB also, whose president Mario Draghi was pointedly uninterested in the initiative in a press conference at the start of February 2012.

The view on here, elaborated here, is that the current approach to restructuring the promissory note debt is likely to result in failure in the sense the net present value of the debt will remain the same as it is today and there will be no writedown of the debt for Ireland or no sharing of the debt burden with beneficiaries of the bailout.

Unless Ireland adopts a more risky and aggressive stance which opens up unpalatable options for both this country and our partners in Europe.

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