Archive for April 19th, 2012

This morning’s Irish Times carried the results of the latest opinion poll relating to the forthcoming referendum to approve the Fiscal Compact – 30% say “Yes”, 23% say “No” but a whopping 39% are undecided and the remaining 8% say they won’t vote. Although the “Yes” vote seems to be running ahead, it is clear from this poll that those who have yet to make up their minds will determine the outcome. And possibly just as importantly, Paddy Power is saying the “Yes” is ahead offering odds of 1/3 for “Yes” and 9/4 for “No”.

This morning, the Government launched its own website – www.stabilitytreaty.ie – to promote a “Yes” vote. We are still waiting for the independent Referendum Commission to launch its own information campaign but you might as well get used to it now, the next six weeks will see blanket national coverage of the debate before the referendum itself is held on 31st May.

You will find the text of the 10-page Fiscal Compact here, takes about half an hour to read and its official title is the “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union”. For those of you with time, I would recommend the transcripts of a special Oireachtas committee set up to hear from experts, economists and interested parties – it is presently conducting its hearings.

The political position is that the Compact is supported by FG and Labour. It is also supported by Fianna Fail, though that position saw the departure of veteran politician, Eamon O’Cuiv from the office of party deputy leader. Deputy O’Cuiv supports a “Yes” vote but only in the context of concessions from Europe, principally on the 40% debt:GDP that this country is shouldering to bail-out the banks – there is a recent speech by Deputy O’Cuiv on the subject. Sinn Fein is against as is the United Left Alliance. I believe most, if not all, of the Independents are in the “No” camp but we wait to hear from them all. So in terms of the Dail, 80% is in the “Yes” camp and just 20% against. But as Minister Leo Varadkar correctly, if injudiciously, says, referendums are “never about what the referendum was supposed to be about. And I would be concerned it would turn into a referendum on extraneous issues like septic tanks, or the bondholders, or the banking crisis, or decisions being made by the Government like cutbacks, for example”

The position on here is far from black-and-white. The treaty seems to rule out monetary policy initiatives – adjusting money supply and ECB interest rates – to deal with financial crises, it gives Europe a bigger say in our economy and given we are starting with a debt:GDP of nearly 120% that means we will need cut debt for some years to come, until we get to a debt:GDP of 60%. On the other hand, the treaty helps clear the way to access cheap funding from the EU should we need a bailout in the future, it reaffirms existing rules about how we manage our economy in a sensible way and it reduces the possibility of local gombeenism damaging our prospects.

There will be a feature blogpost here on the Compact at the start of May, but for the time being, it might be wise to just sit back and listen.


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Okay the above is tongue-in-cheek and is intended to illustrate the complexity of what actually happened last month when the Irish State was required to give €3.06bn to Anglo which was going to use that money to repay a loan from the ECB.  Yesterday on the first day back at work after the Easter break in the Dail, there were exchanges between Minister for Finance, Michael Noonan and Peadar Toibin and Stephen Donnelly on the mechanics of the payment last month of the Anglo promissory note.

Minister Noonan has had three weeks to prepare an explanation on what was summarily announced in the Dail on 29th March 2012. There was then a refusal to have a debate and we must have looked like eejits to the rest of the world as the Dail then devoted itself to sheep worrying on the Cooley Peninsula, though in fairness to the Deputy who spoke on the subject he did offer to give way to facilitate a debate on the Promissory Note announcement. The Dail then went into recess for three weeks, and yesterday was the first day back.

Minister Noonan was asked about the €90m additional negative impact on the 2012 deficit and for the first time we have something nearing a calculation in the response which was “I will deal with the €90 million calculation first and then with the second part of the Deputy’s question. The €90 million is estimated to have an incremental impact on the Exchequer which is calculated as follows. The status quo was estimated as the cost of borrowing under the programme for the promissory note instalment, namely, €3.06 billion at 3.5% for the remainder of 2012 giving an interest cost of €80 billion. On 29 March, before the Government bond was issued it was estimated that the bond power value would be €3.53 billion. The coupon was known to be 5.4%. In 2012 the interest cost was therefore €140 million. There is also a technical adjustment under the Government accounting rules which increases the deficit impact to €170 million. The €90 million was therefore the difference between the estimated status quo of €80 million and the estimated deficit impact from the new Irish Government bond of €170 million.”

So there was a “a technical adjustment under the Government accounting rules” which increased the cost of pursuing the current route by €30m and when added to the cost of the bond that was issued, the total cost of what happened last month was €170m for the remaining nine months of this year and that compares with borrowing from the Troika at €80m. Apart from the technical adjustment, that is clear.

But is the €90m a true additional cost to this State or is it just a payment from the Government to IBRC which we own anyway? It seems that the true cost to the State is an interest payment to Bank of Ireland which totals 2.35% of €3.06bn which for nine months equals €54m which is less than the €80m that would need be paid to the Troika had we borrowed from it at 3.5%. So it seems clear that what happened in March 2012 has, in net terms, saved this State about €26m for the remaining nine months of 2012. Which is not to be sneezed at. Indeed Minister Noonan indicates the Bank of Ireland deal will last for 364 days which would mean a net saving to the State over a full year of €35m (3.5%-2.35%*€3.06bn) Mind you, it would be nice to understand what the “technical adjustment” of €30m was.

There appears to be one outstanding question about the transaction. Why would Bank of Ireland lend €3.06bn to the State at 2.35% secured on a 10-year bond, when Bank of Ireland could go out and buy a 10-year bond on the open market today which pays 6.9%? Ah, but Bank of Ireland will get its money back in a year, you say, not 10 years. That is true but then why doesn’t Bank of Ireland go out and buy the Irish bond which matures in April 2013 which was trading yesterday at 3.9% according to the NTMA. It seems to defy commercial logic, and because Bank of Ireland is 85% owned by private shareholders who are being asked in May 2012 to vote on this transaction, they might ask their management why they are gifting away the difference between a 1-year bond at 3.9% and the 2.35% being paid by the State – the difference is nearly €50m for one year.

Minister Noonan was also being misleading yesterday about NAMA yesterday when he said “the money which we accessed for bridging finance from NAMA was money which is due to be repaid to the ECB for the loans it gave to NAMA to acquire the impaired assets in the bank.” The view on here is that Michael Noonan is the most articulate politician in Irelandwho chooses his words carefully and considers his audience when he composes his message – he would have made a terrific teacher. Whilst NAMA may owe nearly €29bn to the banks – AIB, IBRC and Bank of Ireland – following the acquisition of their loans, NAMA doesn’t need repay that €29bn until 2020. The banks used NAMA’s bonds to get loans from the ECB. So although NAMA owes €29bn, it is not due today, nor tomorrow but 2020. Laura Noonan reports in the Irish Independent today that if and when Bank of Ireland’s shareholders agree to loan €3.06bn to the State, then that €3.06bn will be given to NAMA and “it is understood that between €1.5bn and €2bn is now likely to be paid out to the banks [by NAMA] in May.”

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Why don’t you take a look at Cushman and Wakefield’s Irish partner, Lisney’s, market update for Q1,2012 published yesterday. The highlights:

The commercial property investment market: “While Q1 saw much effort, there were virtually no concrete results”

The office market: “The year started with a healthy, but balanced, optimistic sense that 2012 would be better than 2011 in terms of activity.  Yet after the first three months there has been some disappointment at the number of transactions completed”

The retail market: “The retail landscape remained very challenging in Q1.”

The industrial market : “There were 19 transactions completed in Q1 totalling approximately 26,000 sqm.  The vast majority of these were in the smaller size bracket and in the north region.  Supply continued to increase, most notably in the south and southwest region”

Commercial rents : “Market less active than expected with take-up generally less than Q1 2011”

Residential market : “An active healthy market with more buyers than sellers” – at least that is the case when commenting on the residential market in established areas in Dublin city and inner suburbs, and when it is remembered that it is 2012 and not 2006”

Of the six market segments analysed, all but residential paint a pretty depressing picture, and even on residential where there is a pick-up in activity, that is not translating into price growth.

Yesterday the Minister for Finance, Michael Noonan responded to questions about NAMA’s performance from Fianna Fail’s finance spokesperson Michael McGrath. Minister Noonan included the following in his remarks

“As I said in my reply, there are many moving parts. We do not know what will happen in the property market inIreland. It looks now as if there is the beginning of slight growth in the property market inIreland. We are not sure what will happen in the property market in theUnited Kingdomor in the economies of countries where NAMA has significant portfolios. However, on the basis of the information available to NAMA at present, which the agency has shared with me, I share the view of NAMA that it will at least break even by 2020 and will complete its task in accordance with the Act”

So Minister Noonan says “it looks now as if there is the beginning of slight growth in the property market in Ireland”. Was this the desperate grasping at straws so as to protect the State’s investment in NAMA, to deter Eurostat from reclassifying NAMA debt as national debt on the basis that it is no longer assured that NAMA will break even and an attempt to restore confidence in a vital section of the economy.

And make no mistake about it, it is in the overall interest of our economy to have stable competitive property prices that are slightly rising – it mightn’t suit potential buyers, it mightn’t suit certain businesses but it suits practically everyone else including the State. It is the “competitive” part which causes problems though, because if we have huge distortions like 290,000 vacant homes of which 80-100,000 are in excess of normal vacancy levels and an overhang of potential mortgage defaults, foreclosures, repossessions and distressed sales, then there is a deterrence to transactions as people will wait to see how the distortions are resolved. The same with commercial property where vacancy levels generally continue to be elevated and where you have the National Competitiveness Council saying that commercial property is still overpriced.

What do the indices tell us? At present the CSO produce the most comprehensive index of settled prices in residential property. Trouble is, the CSO analyses mortgage-only transactions and whilst the cash transaction market only accounted for 6% of the market in 2009 – the last year for which we have any cash/mortgage analysis – it is widely believed to account for far more than that today, perhaps 25-35% according to a number of industry sources. And whilst the CSO says that residential property nationally is down 49% from peak, with the most recent declines being

Feb 2.2%
Jan 1.9%
Dec 1.7%
Nov 1.5%
Oct 2.2%
Sep 1.5%
Aug 1.6%

other sources suggest we are down closer to 60%, but if that is the case, then mortgage buyers are paying a premium of 20% over that paid by cash buyers which seems high. Certainly on the basis of the CSO results, there is “no beginning of slight growth” and indeed it seems there is some acceleration in the pace of declines.

There are signs of stabilisation and growth in residential rents with rents up 4% annually, but we still wait to see how the reductions in rental assistance announced in January 2012 will affect rents in coming months.

With respect to commercial property, the latest index from Jones Lang LaSalle was published two days ago and it is showed a quarterly decline of 1.8% in Q1,2012. Here are the historical indices, and I cannot see evidence here of any “beginning of slight growth”

Having said that, commercial rents rose by 0.7% in Q1,2012 the first rise since Q2, 2008 and JLL does say in its report “Overall the Index results are best described as stable which, given past fluctuations is encouraging for the commercial property market in Ireland”.

So the view on here is that Minister Noonan was talking rubbish yesterday, with good intentions no doubt, but the indices contradict what he is saying.

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Yesterday, Fianna Fail’s finance spokesperson Michael McGrath put a set of questions to the Minister for Finance, Michael Noonan on the performance of NAMA, and it was from these that we learned of NAMA’s preliminary results for 2011. The transcript of the exchanges in the Dail is now available.

In addition to announcing NAMA’s preliminary results, which will presumably be published very shortly as they have been lying on Minister Noonan’s desk since 31st March at least, we received other information : NAMA has now “assessed” 99% of developers’ business plans and the Minister shares NAMA’s current view that it will break even by 2020 when the Agency is still scheduled to wind-down.

The Minister also reminded us of the NAMA review. NAMA is to be reviewed in 2013 pursuant to Section 226 of the NAMA Act which allows the Minister to assess, on a triennial or three-yearly basis, how NAMA is meeting its objectives.

Review of NAMA

226.—(1) As soon as may be after 31 December 2012, and every 3 years after that while NAMA continues in existence, the Comptroller and Auditor General shall assess the extent to which NAMA has made progress toward achieving its overall objectives.

(2) The Comptroller and Auditor General shall present a copy of that report to the Minister as soon as may be and the Minister shall cause a copy of the report to be laid before each House of the Oireachtas.

227.—(1) The Minister may at any time require NAMA to report to him or her regarding progress with regard to the achievement of NAMA’s purposes.

(2) The Minister shall lay a copy of a report under subsection (1)before each House of the Oireachtas as soon as reasonably practicable.

(3) As soon as may be after 31 December 2012, and every 5 years after that while NAMA continues in existence, the Minister—

(a) shall assess the extent to which NAMA has made progress toward achieving its overall objectives, and

(b) shall decide whether continuation of NAMA is necessary having regard to the purposes of this Act.

So, for those people who ask “how is NAMA doing”, we will get a formal ministerial response. For the rest of us, we can probably have a fair stab today as to how NAMA is meeting its objectives, though in fairness to NAMA the organization, much of what has transpired in the last three years has been outside its control. Here are the aims of NAMA as set out in the NAMA Act.

(a) to address the serious threat to the economy and the stability of credit institutions in the State generally and the need for the maintenance and stabilisation of the financial system in the State, and

(b) to address the compelling need—

(i) to facilitate the availability of credit in the economy of the State,

(ii) to resolve the problems created by the financial crisis in an expeditious and efficient manner and achieve a recovery in the economy,

(iii) to protect the State’s interest in respect of the guarantees issued by the State pursuant to the Credit Institutions (Financial Support) Act 2008 and to underpin the steps taken by the Government in that regard,

(iv) to protect the interests of taxpayers,

(v) to facilitate restructuring of credit institutions of systemic importance to the economy,

(vi) to remove uncertainty about the valuation and location of certain assets of credit institutions of systemic importance to the economy,

(vii) to restore confidence in the banking sector and to underpin the effect of Government support measures in relation to that sector, and

(viii) to contribute to the social and economic development of the State.

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