On what basis is Irish residential property 26% undervalued?

The special report published this morning by the Central Bank of Ireland may well have perked up your spirits if you’re a homeowner inIreland. The Bank has calculated that residential property inIreland is between 12-26% undervalued – in other words you might think your home is worth €148,000 but the Bank thinks it should be worth up to €200,000. The Bank has even produced a graph – shown above – which shows the degree of undervaluation based on four different models.

But on what basis does the Bank arrive at its conclusions? Despite studying the 13-page report, I’m afraid the best you’re going to get, is the Bank has used four models to examine actual prices versus expected prices. The expected prices are derived from observations of property prices over the long-term and their relationship to various factors such as average income, population, housing stock and the availability of credit. It seems that on an “affordability” basis, the biggest undervaluation of 26% occurs.

How did they get to 26%? I have not a clue. You can’t tell what actual prices have been used. The CSO’s index is probably the most reliable in recent times but it only goes back to the mid 2000s but as noted in the Bank’s paper there is a range in actual house prices of between 43-70% recorded at Myhome, DAFT, the CSO and the Allsop Space auctions. So which actual house price has been used?

And how are the models constructed? Again, not a clue is offered by the paper, though there shouldn’t be any reason to doubt that the Bank staff have diligently carried out their calculations. On the other hand it’s worth noting that The Economist reported in November 2011 “despite their collapse, Irish home prices are still slightly above “fair” value—partly because they were incredibly overvalued at their peak, and partly because incomes and rents have fallen sharply.” – The Economist was using rents and income to come to its conclusions – you’d expect income used by The Economist and affordability as used by the Bank to throw up similar results though.

The Bank is being asked for its calculations as it is noted that the report states “Detailed econometric results are available, upon request, from the authors”

There will be cynics who will suspect any projections issued by the Central Bank of Ireland on property prices. There are some who will claim that the Bank made itself a hostage to fortune in March 2011 when it used baseline and adverse scenarios for future property prices to assist with estimating the capital requirements of banks. And cynics might suggest it is in the Bank’s own interest to undershoot the adverse estimate in order to avoid additional calls on taxpayers’ funds to prop up the banks.

Speaking of cynicism towards house prices forecasts, yesterday the Sunday Independent – “Ireland’s most profitable newspaper group” according to the Independent but a group which made a loss of €41m in 2011, is balance sheet-insolvent and has seen its share price dive by 66% in the past year according to everyone else – claimed that house prices in Dublin had “finally hit the floor” based on the monthly release of the CSO’s index during the week. If that is true, then Dublin house prices have “finally hit the floor” seven times since prices started declining from peak in 2007, and on each occasion after a rise, prices subsequently fell. For a media company starved of property advertising revenue, with negotiations with banks over €400m of debt looming and with circulation falling, you’d wonder if IN&M is reporting fact or merely composing a prayer.

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Latest central bank statistics show tentative signs of growth of private sector deposits at covered banks

On Friday last, the Central Bank of Ireland (CBI) has released its monthly snapshot of the state of Irish banks focussing on deposits and lending. The data covers the period up to 30th March 2012 and shows that during the month of March 2012, deposits by ordinary households and businesses actually increased at the so-called “covered” or State-supported banks – essentially the two pillar banks, Bank of Ireland and AIB, and also Permanent TSB. The increase of €1.2bn from €102.7bn in February 2012 to €103.9bn in March 2012 was the biggest monthly increase since Mar/Apr 2011 when deposits received a fillip from the March 2011 bank stress tests. Deposits are now back at June 2011 levels which is indeed very positive but are still down €21bn from October 2010, the month before the IMF/EU bailout. Private sector deposits fell at covered banks in the past 12 months by €2.4bn from €106.3bn to €103.9bn, but most of that fall took place in May/June 2011 when the intensifying Greek crisis undermined confidence across the PIIGS countres. After four months of modest rises and with a €1.2bn increase in March 2012, I think it is fair to say there are tentative signs of growth, but it would be a gross exaggeration to claim “deposits were flowing” into Irish banks.

The CBI doesn’t provide an analysis of deposits at the covered banks – about the only analysis it doesn’t provide – but in terms of all banks operating in Ireland including foreign and IFSC banks, Irish household deposits increased by €0.8bn in March, which brings such deposits to €92.1bn, the same as the June 2011 level. Total deposits from all sources in all Irish banks fell €15bn in March, mostly as a result of a decline in €10bn in deposits by euro area (non-Irish) depositors.

It should be said that the CBI has adjusted the Rest of World deposit figures for All Irish banks and the following increases to the figures have been identified – January 2012 (+716m), December 2011 (+727m), November 2011 (+701m), October 2011 (+675m), September 2011 (+693m), August 2011 (+576m), July 2011 (+192m). The CBI was asked a month ago about these adjustments but there was no response. Perhaps the next time someone has an opportunity to speak with Governor Honohan, they might ask why his Bank is altering past figures and do they think people won’t notice.

It should also be said that the Central Bank’s statistics do not include overseas deposits at Irish banks – for example, Bank of Ireland has a joint venture with the Post Office in the UK which attracts more than €10bn of deposits. And the figures may include what the Dept of Finance calls “consolidation differences”. Having said that, these are the most accurate figures on deposits in Irish banks in Ireland. The Department of Finance publishes its own deposit figures each month and has this morning published its figures for March 2012 which echo the growth suggested by CBI, and show that retail deposits at the covered banks grew by €2.1bn in March 2012 to €149bn and the Department says that “half the increase” came from deposits in Ireland.

Here is the full set of deposit statistics for the different categories of bank operating in Ireland.

First up is the consolidated picture for all banks operating in Ireland including those 450-banks based in the IFSC which do not service the domestic economy.

Next up are the 20 banks which do service the domestic economy and include local subsidiaries of foreign banks like Danske, KBC and Rabobank. There is a list of all banks operating in Ireland here together with a note of the 20 that service the domestic economy.

And lastly the six State-guaranteed or “covered” financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS – Anglo and INBS have now been merged to form the Irish Banking Resolution Corporation, IBRC)

(1) Monetary Financial Institutions (MFIs) refers to credit institutions, as defined in Community Law, money market funds, and other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs, and, for their own account (at least in economic terms), to grant credits and/or to make investments in securities. Since January 2009, credit institutions include Credit Unions as regulated by the Registrar of Credit Unions. Under ESA 95, the Eurosystem (including the Central Bank of Ireland) and other non-euro area national central banks are included in the MFI institutional sector. In the tables presented here, however, central banks are not included in the loans and deposits series with respect to MFI counterparties.

(2) NR Euro are Non-Resident European depositors

(3) NR Row are Non-Resident Rest of World depositors (ie outside Europe)

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Upwards Only Rent Review crusader unveils final banner

Owner of the Korky’s chain of shoe shops, John Corcoran has unveiled the latest in a series of banners above his shop on Grafton Street in central Dublin. John has campaigned for several years to have Upward Only Rent Review clauses in pre-February 2010 commercial leases abolished; he himself is understood to be in an ongoing court battle with his own landlord Canada Life over the rent on his Grafton Street store. The previous banner – unfurled in August 2011 and pictured here – accused the coalition government of being liars after the sudden abandonment of reforms to UORR leases promised in both Labour and Fine Gael’s election manifestos for the 2011 general election.

The latest banner reads “No to Upward Only Rent, No to Political Liars, No to the Fiscal Compact”. John’s objection to the fiscal compact appears to be based on the view that further austerity will turn the retail landscape of Ireland into a “wasteland”. There’s even a video to announce the launch here, with a raucous music accompaniment.

This will be the last Korky’s banner. John explains in the video that Dublin City Council had taken him to court over previous banners and last week, he gave a pledge to the judge that this latest banner would come down on 31st May 2012 after the referendum for the Fiscal Compact.

Both Sinn Fein and Fianna Fail have tabled bills to abolish UORR clauses but both seem destined to gather dust given the emphatic decision by the Government on 6th December 2011 which claimed that changing UORR clauses in pre-February 2010 leases would not be possible for constitutional and cost reasons.

John has apparently set up his own organisation Irish Commercial Tenants Association Limited which was registered with the Company Registrations Office three weeks ago and has his own blog here.

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The Fiscal Compact referendum on 31st May 2012, the position advocated on here.

We Irish love to own our own homes and at 75%, have one of the highest home-ownership rates in Europe. We’re also a fairly conservative people. Marry the two traits together and we become a building insurer’s dream. And most of us hand over the best part of €1,000 each year to insure our homes and their contents.

As a nation, we face a risk that in two years time, we will be unable to get anyone to lend us money to fund what will still be an ongoing gap between tax receipts and what we pay in social welfare and public sector costs. That risk has been recently dismissed as “ludicrous” by our Minister for Finance, but many doubt what he says, and believe that Minister Noonan is merely trying to build confidence and hope.

The view on here is that there is a very real chance that this country will need a second bailout programme when the first one concludes at the end of 2013. And with that in mind and considering we are a conservative nation, it naturally make sense to vote “yes” to what is being described as an insurance policy or safety net in the Fiscal Compact referendum on 31st May. However the position on here is to advocate a “no” vote and here’s why.

If your insurance broker were to offer you the pick between the following two insurance policies which would you choose? (a) a policy which covered you for all risks, entails a premium of  €1,000 and is payable now or (b) an identical policy but instead of paying now, you can pay after disaster strikes and it will still cost you €1,000. Wouldn’t you be crazy to plump for the first policy?

And in the last analysis that is the reason that a “no” position is being adopted here: if we do need a bailout at the end of 2013 and there is no other lender in prospect, then we simply hold a second referendum. It’s not as if we’re not used to such phenomena!

Of course it is a matter of dispute that there wouldn’t be any lender available to us unless we vote “yes”. Some, like Sinn Fein and Fianna Fail’s Deputy O’Cuiv claim that if we do vote “no” to this referendum, then we can stymie the whole ESM – that’s the new European bailout fund that will have €1tn available to lend to countries in distress – and if we do stymie it, then there will be no bailout fund for any EU country which is unconscionable so some solution will be devised which will allow Ireland access funding without ratifying the Compact. Others like Fine Gael, Labour and most of Fianna Fail say that access to the ESM is conditional on us voting “yes” and unless we do vote “yes”, we will be in the dark and be uncertain of how we fund the country. The view on here is that both sides’ arguments have their own merit, but even if the “yes” vote advocates are right, then all we need do is buy the insurance policy in late 2013 and hold a second referendum then.

Why vote “no”

Besides not having to adopt the Fiscal Compact yet, there are really three reasons embraced on here for voting “no”

(1) Reducing the debt burden. This country will have a debt:GDP next year of about 120% of which 40% has arisen from bailing out the banks and the remaining 80% comes from our initial debt in 2007 plus the deficits that we have run up since. There is a debate as to whether this debt level is “sustainable” or “manageable”. Economists might point you to debt over 80% as unsustainable, Deputy Stephen Donnelly oftentimes refers to Harvard research which shows that only one country in history emerged from such a level of debt without default, and that was Britain during the Industrial Revolution. On the other hand, others point us to the fact that Ireland had a similar level of debt in the 1980s which we repaid without default and which didn’t stop the development of the Celtic Tiger in the 1990s. The position on here is that managing this debt will have such a negative impact on Irish society, our health, education and security that it is unmanageable. That’s a view, others will have different views. But with this view in mind, our debt level must be cut and the obvious candidate for cutting is the residual bank debt – the €28bn of promissory notes and to a much more limited extent now, the bondholders. A negotiation to cut this debt looks like this “I will pay you 20c in the euro on the bonds and promissory notes and if you don’t accept that, then I will pay you zero”. At this stage, no-one in Ireland should believe that fairness or a 120% debt:GDP will convince our partners in Europe that they should give Ireland debt relief. After all, what Irish person is losing sleep over a man who kills himself in front of the Greek parliament leaving behind a suicide note which says he doesn’t want to live eking a life from foraging  from rubbish bins, and what Irish person is losing sleep over Greek debt which is worse than our own? So ask yourself this question – will a “no” vote improve our chances of a renegotiation of our debt, damage our chances or leave our chances the same? The position on here is that a “no” vote will improve our chances by signalling that Ireland will be inconvenient and un-European and a “no” vote in a referendum one day may become a unilateral disowning of promissory notes the next. Unless Ireland adopts a stance which at least makes clear the threat of default then the view on here is we will get no-where. And as for the ECB and the withdrawal of its support, please, at this stage the ECB is lending about 3% of its balance sheet to Ireland, pretty much in line with our economic proportions in Europe– gone are the days of unprecedented assistance when our banks received 25% of all ECB lending.

(2) Here’s the economic argument: this Fiscal Compact is taking monetary policy off the table for EU countries to use as a tool to cope with financial crises. Monetary policy concerns itself with money supply and interest rates. In this global financial crisis we have seen how monetary policy has been deployed in the UK and US to help their economies over the crisis hump – both have lowered their interest rates to rock bottom levels, both have increased their money supply using so-called “quantitative easing” and both have seen elevated inflation, over 5% in the UK though this is now down below 4%. For heavily indebted countries like Ireland, struggling to shrug off a recession, an increase in the money supply and reduction in interest rates would be how we would, in part, have tackled this crisis if we still had our own central bank. But we no longer have our own independent central bank, we have handed that institution’s role in monetary policy over to the ECB as part of our membership of the EuroZone. And the ECB has a primary objective of “price stability” or in simple terms, keeping inflation at around 2% per annum. If the ECB printed so much new money that our inflation grew by 10% in 2012 then even if there was no real economic growth, our debt:GDP would decline by about 10% from 108% to 98%. That however would not suit other economies in Europe and it appears to be psychologically repugnant to Europe’s biggest economy,Germany. You could argue that the Compact will not alter the current position of the ECB independently working to preserve “price stability”, but the view on here is that this Compact is going a step further and pre-empting a request from a crisis-hit country and making it clear they will not find any comfort in monetary policy. And that is wrong.

(3) Here’s what might be called “the Varadkar” argument : A “no” vote will rattle the cage of a Fine Gael/Labour government, a coalition with a massive majority but which has been complacent in its efforts to deal with the debt and deficit, a government which cost this country tens of millions of euro in interest by “grandstanding” in March 2011 and stopping us getting an interest rate reduction on the bailout funds for a further five months and only then on the back of Greece’s woes, a government which knew about the household charge for at least a year and yet oversaw the consequence-less fiasco whereby nearly half the households in the State have not paid the new tax, a government which showed contempt in its pursuit of the promotion of Kevin Cardiff to the European Court of Auditors and yet six months after uncovering a €3.6bn error in his Department’s calculation of the country’s debt we have yet to understand how the error occurred, a Government that has singularly failed to deal with the household mortgage and debt crisis and even this week has deferred the publication of a Personal Insolvency bill. And let’s not forget the weak-wristed efforts to reduce the burden of the bank bailout and to get a deal with Europeon repaying bondholders – yes the manifestos might have been drafted in Jesuitical terms, but these chickens come home to roost when the Government seeks our support. A “no” vote will force the many bright and resourceful deputies in both Fine Gael and Labour to take a peek through the curtain and to contemplate the vista that lies ahead after the next general election in 2016, or sooner – single-term TDs from a government that has the potential to become discredited, cast back into cufflink-less, grubby-shoed local council politics. By the way, I wouldn’t have said there is any real risk to the Coalition from a “no” vote on 31st May, the risk is more likely to come with the Budget later this year when plummeting poll figures for Labour may cause an irreparable fissure to develop between the two parties in Government

There are other reasons to vote “no” – the Compact is very restrictive and it may not be wise to bind ourselves in advance to remedies for unknown ailments, the rules would not have prevented our crisis in 2008 and its aftermath though they might have alleviated the subsequent size of the deficit and in any event we now have adopted the “six pack” rules now anyway, a key measure in the Fiscal Compact the structural deficit is not precisely defined, EU and non-Irish institutions and personnel will have a greater say in how Ireland manages its economy and as we have seen with our corporate tax and financial transaction taxes, others may have different agendas and may seek to promote their own national interests ahead of ours, we have twice suffered the ignominy of our financial affairs being available to the German parliament ahead of the Dail and on neither occasion has there been sanction though the Government is as unhappy about the leaks as anyone. As well as ruling out monetary policy as a tool to help crisis-hit countries, there is no attention given to stimulus for growth.

Why vote “yes”

The position adopted on here towards the referendum is set out above, but it needs to be said that this is not a black-and-white question by any stretch. And there are good reasons to consider a different stance.

(1) Voting “yes” will help clear the way to accessing cheap and abundant funding from the ESM in 2014. The jury is out on whether or not a “no” vote will allow us put the kibosh on the ESM fund for everyone else, and the uncertainty may damage our interests. Just this week, a ratings agency Standard and Poor’s warned that a “no” vote would have a negative impact on our credit rating “in the short term”. And that makes sense, if the market thinks there is no backup fund available to the country, it will see a greater risk of default and demand a higher interest rate if we do get back into the bond market, which we are scheduled to do in the latter part of 2013.

(2) Voting “yes” is likely to signal to international investors that all is well in Ireland and that the country continues to be a stable destination for long term investment where the people are willing to make sacrifices for the overall good of the country. Both the IDA and IBEC have backed a “yes” vote.

(3) A lot of well-respected people have given their support to a “yes” vote including. Governor of the Central Bank ofI reland, Patrick Honohan and one of our veteran economists Colm McCarthy. I don’t wish to misinterpret the positions of others but it seems on here that Professor John McHale who chairs the independent Fiscal Advisory Council, UCD’s Professor Karl Whelan, UCC’s Seamus Coffey as well as others who might be less well-known and who offered their wisdom and expertise to the special Oireachtas committee which is examining the Fiscal Compact, they all appear to adopt the “yes” position. I recommend you take a read of the Oireachtas committee transcripts linked to below, there is a treasure trove of common sense and knowledge there which may get distorted in the reported media.

There are other reasons – I could cheerfully throttle the Sinn Fein bod who thought of describing this as the “Austerity Treaty” because regardless of whether or not the referendum is passed, we still need cuts and new taxes totalling €8bn over the next three years. That is an almighty adjustment in a country that thinks it has already seen pain. It’s an average of €5,000 per household per year – it mightn’t be new taxes, it might be reduced services, but the average cost of the adjustment from 2013-2015 is in that order. Voting “no” won’t remove the need for this State to balance its books over time, and from where we are starting now, that will mean more austerity – Fiscal Compact or no Fiscal Compact. We can try to stimulate growth and carry through reforms but most of the adjustment is likely to come from austerity. And for the next 18 months at least, we will have the Troika poking around our finances with quarterly reviews as well as weekly/daily reporting, so close international oversight of our finances hasn’t been a disaster.

Because the stance taken on here is in support of a “no” vote, there is a brief rebuttal of the above – we don’t need access the bond markets until the second half of 2013 so “short term” negativity on ratings agencies’ part is of limited interest, we are rated as junk already by Moody’s because of our colossal debt. International investors for the long term are just as likely to be interested in the deterioration of health, education and security as they are in what may be just a temporary “no” vote, and as much as these well-respected people believe in a “yes” vote, there are a great many other, perhaps equally-respected who support a “no” vote. And lastly a“no” vote won’t dispense with the need for more austerity, but it may allow the adjustment over a longer period and may bolster the chances of a debt write-down.

This referendum is likely to cost the country about €4m to run. That’s one tenth of the €40m that was repaid on Friday last to unsecured unguaranteed bondholders at what was Anglo Irish Bank, a completely bust bank without branches, deposits which doesn’t transact new business. We could run ten referenda for the same cost. On 31st May I hope you will consider voting “no” but even if the “yes” arguments persuade you, we will still have a www.stabilitytreaty.ie website in 2013, we will still have the same 10-page text of the Fiscal Compact, we will still have the opportunity to say yes and buy the insurance policy if and when we need it.

Resources:

(1) The Fiscal Compact, or officially the “Intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union” – it’s 10-pages long and takes a half hour to read.

(2) The Fiscal Compact website which should contain unbiased material on the Compact – www.stabilitytreaty.ie

(3) Deputy Eamon O’Cuiv’s speech on the Fiscal Compact; Deputy Stephen Donnelly and the Fiscal Compact – parties’ views are represented in the Oireachtas hearings below. If any other independent TD issues a position on the Fiscal Compact, it will be linked to here.

(4) The transcripts of the hearings before the special Oireachtas committee set up to examine the Fiscal Compact

Meeting	Witnesses
February 2nd	Dr. Alan Ahearne (NUIG)Prof. Karl Whelan (UCD) Mr. Tom McDonnell (TASC) Prof. John McHale (NUIG)
February 23rd	Mr. Paul Sweeney (ICTU)Mr. Seamus Coffey (UCC) Dr. Karen Devine (DCU)
March 1st	Ambassador Emmanuelle d’Achon (France)Ambassador Dr. Eckhard Lübkemeier (Germany) Ambassador Javier Garrigues (Spain)
March 15th	Prof. Gerry Boyle (Teagasc)Mr. James Doorley (National Youth Council) Ms. Marie Sherlock (SIPTU) Dr. Seán Healy (Social Justice Ireland)
April 3rd	Ambassador Dr. Tomas Kafka (CzechRepublic)Ambassador Ms Diana Zagorianou-Prifti (Greece) Ambassador Mr. Marcin Nawrot (Poland) Ambassador Mr. Niels Pultz (Denmark) Mr Bill Cash, MP (Conservative Party) Ms. Nessa Childers, MEP (Labour) Ms. Marian Harkin, MEP (Independent) Mr. Paul Murphy, MEP (Socialist Party) Ms. Phil Prendergast, MEP (Labour)
April 4th	Ms Sharon Bowles, MEPLord Lyndon Harrison
April 4th	Prof. Philip Lane(TCD)Mr. Dan O’Brien (Irish Times) Mr. Jim Power (Friends First) Dr. Gavin Barrett (UCD) Dr. John Brennan (NUIM) Mr. Declan Walsh (UCC)
April 5th	Mr. John Bryan (IFA)Mr. Mark Fielding (ISME) Mr. Brendan Bruen (FSI) Ms. Patricia Callan (SFA) Mr. Brendan Butler (IBEC)
April 5th	Mr. Brendan Halligan (IIEA)Ms. Brid O’Brien (INOU) Ms. Noelle O’Connell (EMI)
April 5th	Mr. Declan Ganley (Libertas)Cllr. Andrew Muir (AllianceParty) Mr. Roderic O’Gorman (Green Party)
17th April	Mr. Joe Higgins TD (Socialist Party)Mr. Michael Martin TD (Fianna Fail) Mr. Eamon Gilmore TD (Labour) Ms. Catherine Murphy (Independent)
18th April	Mr. Jimmy Kelly (UNITE)Mr. Michael Taft (UNITE) Ms. Megan Greene (Roubini Global Economics) Prof. Brian Lucey (TCD) Dr. Andrew Storey (UCD) Prof. Terence McDonough (NUIG) Mr. Ian Talbot (ChambersIreland) Prof. Gerry Whyte (TCD)
19th April***	Ms. Margaret Ritchie (SDLP)****Debate not available yet
25th April	Mr. Gerry Adams (Sinn Fein)
26th April	Mr. Enda Kenny (Fine Gael)
26th April	Mr. Jonas Sjöstedt MP (Swedish Left Party)

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NAMA is sued by developer

Whilst sitting on its €5bn mountain of cash, NAMA isn’t doing an awful lot for the domestic economy generally, but the Agency is stimulating one specific sector of the economy with gusto: the legal sector. We find out today that NAMA is being sued in Dublin’s High Court following an application there yesterday.

The Courts Service shows the plaintiff as “Bumbold Builders” but I think they mean “Rumbold Builders” which has a registered address at Moritz House at the Old Court Centre, Firhouse in Dublin, and it looks as if it is a company in Michael Whelan’s Moritz Group. The case reference is 2012 / 4218 P and the defendant is National Asset Loan Management Limited and there isn’t yet a solicitor on record for NAMA.

Rumbold Builders is represented by solicitors, Noel Smyth and Partners. And as we all know by now, Noel Smyth is a developer as well as a solicitor and was behind the development of The Square shopping centre in Tallaght. Noel is now a NAMAed developer and has seen his art collection handed over to the Agency. It is not clear if Noel is himself dealing with this case, but if he is, he is presumably clocking up the airmiles at an impressive rate given his relocation to an address in south London – not as a precursor to declaring bankruptcy in the UK, Noel assures us.

Rumbold Builders is one of the companies that NAMA itself sued earlier this year, and last month the Agency failed to get a High Court judge to enter a judgment in its favour against Rumbold Builders and other companies in the Moritz Group and a stay was placed on the matter for three months.

We don’t yet know the details of the application yesterday, but NAMA has been sued in the past by an insolency practitioner and building company over unpaid bills.

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Of the week…

Economic initiative of the Week

Merging local authorities. They’ve already done it in Greece, reducing its number of local authorities from 1,134 to 355 which saves €1.1bn annually. And in Spain they’re considering a reduction from 8,000 to 2,000 with the intention of generating savings of €10bn per annum. And what criteria are the Spanish considering? If a local authority has less than 10,000 people then that is merged with an adjoining authority. In Ireland, we have taken tentative steps towards cost-saving mergers – the merger of Limerick city and county should save €15-20m a year .  A quick look at the top salaries and people to whom they are being paid, by local authority area in Ireland, might convince you of the rationale for more mergers.

Table of the Week

As we saw during the week when Eurostat released its economic statistics for the EU in 2011, some countries have been affected by the financial crisis more than others. At 108.2%Ireland has the third highest debt:GDP in the 27-member EU, after Greece and Italy. On a GNP basis which was not shown, we are no 2 after Greece. The betting is that Greece will have further defaults, as indicated by its sovereign bond rates, and eventually leave or be kicked out of the EuroZone even after the debt forgiveness this year. What are the prospects for Ireland?

Chart of the Week

A week ago, the deputy Governor of the Central Bank of Ireland, Stefan Gerlach delivered a speech in Galway on “Housing Markets and Financial Stability”. He reproduced the chart created by Reinhart and Rogoff in 2009 which shows historical property crashes and their duration. Ireland appears near the low end of the chart with a 20% decline in prices from peak and a downturn that had lasted just a year. That was 2009; fast-forward to 2012 and we are in the fifth year of the downturn and, according to the Central Statistics Office this week, prices are now down 49% in nominal terms and 51.8% in real terms. That places us at number two in this chart, marginally behind Hong Kong where prices dropped 53% in real terms in a downturn that lasted six years.

(Mis) Quote of the Week

“From the government point of view there will be no attempts to sort of pressurise people one way or the other., We want to inform the people about our belief that this is very necessary for the future of our country, the future of our children.” An Taoiseach Enda Kenny speaking about the Fiscal Compact referendum on RTE’s The Week In Politics 22nd April, 2012 (from 6:00); oblivious to the paradox of what he is saying. Or else paying tribute to Tony Blair’s “A day like today is not a day for soundbites, really. But I feel the hand of history upon our shoulders. I really do”

The “no” camp wasn’t any better with Sinn Fein rumbled and rapped on the knuckles by Professor Karl Whelan who wasn’t impressed to see his words quoted out of context. The UCD professor had appeared before a special Oireachtas committee which is examining the Fiscal Compact and told the committee

“All that said, although I think the economics of this treaty are pretty terrible, on balance, the arguments favour Ireland’s signing up to it”

Which someone in Sinn Fein re-interpreted as support for a “no” vote and chopped off the pesky unsupportive parts of the sentence which just left

“the economics of this treaty are pretty terrible”

Headline of the Week

While poor old Ned O’Keeffe – who listed his activities in the 2010 Dail register as including “growing grass” (no Ming, not that type of grass!)  – was having his collar felt by the boys and girls in blue yesterday, spare a thought for former Fianna Fail junior minister, and later senator Ivor Callely who had his own bother with mobile phone invoices in the past. But yesterday the Independent reported that the hapless ex-politician had been fined €150m for driving an untaxed car. Some mistake surely? No, the first sentence beneath the headline confirms the amount and reads “FORMER junior minister Ivor Callely has been fined €150m for driving an untaxed car” Well that’s the 2012 household charge sorted so!

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NAMA appoints receivers to three more companies

NAMA is certainly taking its differences with Treasury Holdings to heart. As well as suing the founders, the colourful Johnny Ronan and understated Richard Barrett this week in respect of the so-called TAIL transaction,  today’s edition of Iris Oifigiuil reveals the Agency has had receivers appointed to three more companies in the Treasury Group.

The three companies in question are Bluetone Properties Limited (directors Richard Barrett, John Ronan and Niall Kavanagh), Simcrest Limited (directors John Ronan and John Bruder) and Oceanrock Limited (directors John Ronan and John Bruder). The receivers in all three cases are William G O’Riordan and Declan McDonald, both of Pricewaterhouse Coopers who were appointed on 20th April, 2012.

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

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Stop press: NAMA publishes new foreclosure list of properties

(The new properties added in March 2012, click to enlarge)

NAMA has today published its now regular monthly list of properties subjected to foreclosure action – the list shows NAMA foreclosed properties at the end of March 2012. The full list is here, the list of new properties added is here, and you will find previous editions of the monthly list which was first launched in July 2011, here. It is hoped to have the list in an spreadsheet format shortly, available here.

You should read the full list of NAMA’s terms for accessing the lists here. But in summary, this is what you’re looking at:

(1) Real estate property subject to loans in NAMA to which receivers have been appointed. The receiver’s website is shown against each property.

(2) This is all the real estate foreclosed sorted by country, and then region.

(3) Not all of the property may be for sale.

(4) Contact the receiver with enquiries or expressions of interest in the first instance. Only pester NAMA if you’re not getting any response from the receiver and make allowances for receivers being busy with queries, particularly after a new release of foreclosed property.

(5) If you think there are mistakes on the list, contact NAMA.

Comment and analysis here shortly.

UPDATE: 27th April, 2012. NAMA has issued a press release in which it says “The list includes 44 properties which were added in March. The total number of properties now listed is 1,195 (some of which are multiple properties such as apartment blocks). The updated listing includes assets which are for sale (with sales agents appointed) and which have an estimated market value, based on price indications guided by sales agents, in excess of €1 billion.”

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Mystery over how Treasury Holdings has magicked up multi-million euro security for costs in NAMA case

It’s Friday, so it seems unfair to have to scratch your heads at a conundrum that emerged from the High Court yesterday. NAMA Top 10 developer Treasury Holdings is in the wars with NAMA. In January, NAMA had receivers appointed to a slew of Treasury properties and companies; Treasury got upset and applied to the High Court in Dublin for a judicial review of NAMA’s dealings with its loans; the courts last month granted Treasury its wish for a judicial review which is set to take place in the coming months. Treasury is, according to NAMA and it doesn’t seem to be disputed by any party, “massively insolvent” – it has loans of €2.7bn including €1.7bn from NAMA and its assets are worth half that, so that NAMA says the company was insolvent to the tune of €859m. So NAMA, naturally enough given it is facing into an expensive court case where it will defend its dealings with Treasury’s loans, sought security for its costs (should it win of course). This preliminary point was set to come before the High Court yesterday, but just beforehand, NAMA came to an agreement with Treasury which is reported by the Irish Times today and is as follows:

Treasury provides the following as security for costs and damages (the Irish Times refers to “a fortified undertaking for damages based on those same resources [as detailed below]”)

(1) €600,000 in cash plus
(2) a charge over a 50 acre development site at Valverde, Cala Llonga in Ibiza
(3) a charge over a property at St Laurence’s Park, Stillorgan, Dublin
(4) a charge over 20 car parking spaces a tTownsend Street and Clanwilliam Terrace in Dublin

What is the total value of the above? Difficult to say, but a 50-acre development site in Ibiza alone, is likely to be worth millions of euro.But the mystery is how “massively insolvent” Treasury could magick up this security which presumably is unencumbered, that is, not subject to claims from anyone else including NAMA and Treasury’s other lenders who are owed €1bn.

Presumably NAMA has its “asset recovery specialists” examining the provenance of this security right now.

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While the Irish economy burns, NAMA fiddles atop a €5bn cash mountain

At the end of March 2012 many observers might claim that NAMA crossed the Rubicon when it agreed to provide the Government with a temporary €3.1bn dig-out to pay the Anglo promissory note that was falling due. “Not so” says the Government, the Direction that was given to NAMA makes clear that NAMA is required under the NAMA Act to “address the serious threat to the economy” (section 2) and that NAMA is allowed “provide equity capital and credit” (section 14). And so NAMA tamely handed over €3.1bn of its €4.6bn cash mountain to Anglo for a period of up to 90 days and it is hoped that Bank of Ireland will reimburse NAMA in a month or two when its shareholders have had a change to vote on the transaction at an extraordinary general meeting.

And what will NAMA do with all this cash when Bank of Ireland does reimburse it? According to an interview with Bloomberg’s Neil Callanan this week, NAMA “will repay more than 3 billion euros of bonds this year”. What bonds are these? These are the pieces of paper that NAMA gave to the banks in 2010 and 2011 in return for the €74bn of loans it was acquiring. The bonds amount to €32bn in total, of which €1.25bn exactly have been repaid to date. NAMA must pay the bondholders – the banks from whom it acquired the loans a rate of interest equal to the 6-month Euribor rate, currently about 1.25% per annum. NAMA is required to redeem the bonds by latest 2020. To do so earlier is a matter of discretion for NAMA.

Yesterday in the Dail, the following parliamentary question was posed by Sinn Fein’s finance spokesperson Pearse Doherty and answered by Minister for Finance Michael Noonan

Pearse Doherty:
To ask the Minister for Finance if he will confirm that the National Asset Management Agency is not required to redeem its senior debt until 2020 and that NAMA is paying a rate of interest on its senior debt equal to the six month Euroibor rate; and if NAMA is entitled to invest its cash reserves in projects which support the Irish economy pursuant to sections 2 and 12 of the NAMA Act..

Michael Noonan:
The ECB did not provide loans to NAMA to acquire assets from the participating institutions. NAMA issued Senior Notes to the Participating Institutions which can be extended annually subject to the agreement of the note holders. NAMA has already redeemed €1.25bn of these Notes. I am advised that the objective of the NAMA Board is to redeem all Senior Notes on a phased basis by the end of 2020.

NAMA also advises me that it pays interest on its senior debt at the same rate as the six-month Euribor rate, which is reset in March and September.

Under the NAMA Act 2009, NAMA may invest funds to protect or enhance the value of the collateral securing its loans. Where it considers that it makes commercial sense to do so, NAMA may advance funds to projects, including projects located in Ireland, under the control of its debtors or receivers.

Now the Minister didn’t really answer the question asked of him, which is surprising really, given how expert he was in the workings of NAMA just a month ago when he danced his jig to repay the Anglo promissory note. Irelandis undoubtedly coming under pressure from the ECB to redeem the NAMA bonds which involves NAMA redeeming the bonds with the banks and the banks redeeming the bonds with the ECB which is presently lending funds to the banks secured on the NAMA bonds as collateral. But as our Finnish friend might say “pacta sunt servanda” and the “pacta” that underpin the NAMA bonds say that the bonds don’t need be repaid until 2020 and that they cost NAMA a measly 1.25% at present. And according to the “pacta” that underpin the operation of NAMA, NAMA can use its cash not just to “advance funds to projects, including projects located in Ireland, under the control of its debtors or receivers” as Minister Noonan coyly says above but in accordance with section 2 and 14 of the NAMA Act, can use its funds to support the economy.

And how exactly might NAMA support the economy with its mountain of cash? Step forward the NationalChildrensHospital. Indeed NAMA has submitted plans for a hospital at the site of one of its debtors atElmPark in Ballsbridge, so this project could be funded by NAMA without even overstepping Minister Noonan’s suddenly narrow interpretation of the NAMA Act. But the NAMA cash can be used for far more, it can extend schools, convert pre-fabs to permanent structures, build nursing homes or retirement villages, it could even build a proper prison. As long as NAMA gets paid back by 2020 and, in the interests of maintaining NAMA’s commercial remit, as long as NAMA generates over 1.25% per annum on the use of its funds.

In a country in a double-dip recession, with a 14.5% unemployment rate, with GNP contracting, with its highly educated young emigrating in search of work and with a vista of austerity in prospect for the next three years at least, you would really have to question why NAMA is allowed choose this time to hand over its cash mountain for bonds which are practically free. And why it doesn’t lend this cash into an economy on its knees but which is likely to have recovered by 2020 when the NAMA bonds contractually fall due for redemption.

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