Spain at the “Gates of Hell”

Above, artists impression of characters from the Spanish banking world that might become familiar to us over the coming months – Miguel “Los Dedos” Fingleton and Juan Fitzcaraldo

It was our own Minister for Finance, the late Brian Lenihan who said of the crisis confronting Ireland in November 2010 on the eve of the first bailout “I had fought for two and a half years to avoid this conclusion. I believed I had fought the good fight and taken every measure possible to delay such an eventuality and now hell was at the gates” Today it seems that Spain has finally arrived at the same staging post with its 10-year bond at record highs of 6.7%, with turmoil in its banking and bank regulation system, and with the ECB being distinctly unhelpful. Presumably the ECB is drafting a letter along the same lines as the one served on Brian Lenihan in November 2010, reminding Spain of the unprecedented assistance being graciously provided by the ECB to Spanish banks and warning that should Spain do anything to threaten bondholders then the ATMs might or might not be working next week.

Spanish funding requirements – how much and when?
Spain needs funding under three headings (1) for its deficit (2) to repay maturing debt and (3) to bailout its banks. The latest forecast from the EU is that Spainwill have a 6.4% deficit in 2012 meaning it will need find €64bn in its €1tn economy to fund the gap between this year’s income and expenditure. What about deficits for 2013-2015? Spainexpects to get back to a balanced budget by 2014 but it’s not looking promising, so easily add another €50bn for 2013-2015 deficits. The maturity profile of Spain’s €800bn of debt is difficulty to come by, but it has reportedly  €118bn of maturing debt that needs to be refinanced before the end of 2012 – add say €80bn times three for 2013-2015 and it needs €358bn under this heading. As for the banks, who knows, and indeed who knows how much further Spanish property prices have to decline but the betting on here is that the sub-25% decline from peak is not the end of that story and that unprovisioned losses of about €250bn might be lurking in the books of Spanish banks. All of this comes to over €700bn.

Spanish bond yields
Today the 10-year bond reached a record of 6.7% which was equalled last November 2011 on the eve of the announcement by the ECB that it would pump colossal amounts of cash into the EuroZone banking system, a promise fulfilled in December 2011 and February 2012 when €1tn of lending for 3-years at 1% was hosed around Europe. There is no magic number which compels a country to seek a bailout – in Ireland’s case our 10-year bond was at 6.9% at the start of November 2010 when Ireland sought its first bailout and Portugal’s 10-year bond yield was 8% on the eve of its bailout. This has led some to conclude that 7% is the magic number, but in truth it could be less than that, especially given that the existing European Financial Stability Fund is lending to Ireland,Greece and Portugal at 3.5%. Why would Spain accept a situation where it paid 6.7% for its bonds when it might potentially access EFSF funding for 3.5%? Of course even at notional rates above 7%, a country might prefer to borrow small amounts in order to avoid reputational costs and conditionality that would accompany any bailout.

The Spanish banks
The last fortnight has seen a flurry of activity to help shore up Spanish banks which are widely believed to be harbouring nasty undisclosed losses stemming from the collapse of the property boom which was as much a feature of Spain’s economy of the 2000s as Ireland’s, yet so far Spanish residential property is down less than 25% from peak (compared to 50% in Ireland) and Spain’s paltry billions of bailout funding offered to its banks from its so-called FROB are dwarfed by the €68bn – equivalent to 45% of our GDP and over 50% of our more representative GNP – which the Irish bank bailout has so far cost. In Ireland Sean Fitzpatrick, the former chairman of Anglo, and Michael “Fingers” Fingleton, the former boss at Irish Nationwide Building Society have become the poster boys for our failed banks, but do we think the accusations of greed and incompetence against Irish bankers will not be reproduced as the Spanish crisis unfolds?

The ESM
The European Stability Mechanism (ESM) is set to come into existence in July 2012, that is, in five weeks time. This is a year earlier than originally planned. Minister for Finance Michael Noonan advises that the ESM will be the main funding source for new applications from July 2012. If Ireland votes “Yes” tomorrow and if the Government ratifies the ESM Treaty by the start of July – something thrown into doubt by the apparent commitment by the Government not to ratify the ESM Treaty until Deputy Thomas Pringle’s court case to force a referendum on the ESM Treaty is heard in June – then we will be providing the ESM with €254m in July. The ESM was to have initial paid in capital of €80bn which would allow borrowing up to €500bn but if Spain does in fact need a €700bn bailout then we may need accelerate our contributions. And remember we may be on the hook for €11.145bn or more if lending from the ESM to bailout countries is defaulted on, as with Greece.

(Graphics above produced by Japlandic.com, contact here)

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Is the latest addition to the Drowned and the Saved at NAMA a guarantee of future cooperation? Is it f*ck!

Reporting this morning in the Irish Examiner suggests that another developer has received NAMA’s approval and joins a small band of developers currently working with the Agency. Bovale Developments, the company controlled by the Bailey brothers from Roscommon, Michael and Thomas – or plain old Mick and Tom – owns substantial land-banks in and around Dublin and in an audit statement to accompany unpublished accounts for what is a private company which is reported today, it is stated that NAMA has approved Bovale’s business plan. The Bailey brothers were controversially implicated in the Flood Tribunal of having made payment to disgraced Fianna Fail politician Ray Burke in return for planning permission favours. It was alleged that Michael Bailey paid IR£ 40,000 to Ray Burke and when asked by an associate whether or not a receipt might be forthcoming, is said to have replied with the immortal words “will we fuck”

On the basis of the reporting today, the Drowned and the Saved of the NAMA Top 30 developers is being updated below.

 

It should be said that NAMA has approved business plans for other developers, eg the Grehan brothers, Ray and Danny, but has subsequently taken high-profile enforcement action, so business plan approval is not necessarily a guarantee that there won’t be a falling out in the future. And it seems that Bovale is far from healthy with unquantified losses reported for the years ending June 2010 and June 2011, and the audit statement makes clear that the company’s liabilities exceed the company’s assets.

The NAMA Top 30 above is a list of developers suggested by newspaper reporting and there has not been any confirmation or denial by NAMA that any individual or group is amongst the largest-scale borrowers at the Agency. There has also been reporting which indicates NAMA is working with developers not categorised above, eg Gerry Gannon whose 49% share in the K Club was recently sold to Michael Smurfit and Castlelands Construction which was recently reported to have sold a 450-acre land-bank beside Cork city for €7m. NAMA is understood to have funded the development of residential property at the Dun Laoghaire golf club which is controlled by the Cosgraves. Just a fortnight ago, it was reported that NAMA was funding the development of the Charlestown shopping centre in Finglas which is reportedly controlled by Bovale. And on the negative side, NAMA has taken possession of an art collection formerly belonging to Noel Smyth, though the Square shopping centre in Tallaght which is Noel’s flagship Irish development has received support from NAMA. The Courtney O’Reilly receivership relates to involvement in Bernard McNamara’s Radora Development and its development at Elm Park.

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Is the Anglo Promissory Note “deal” announced in March 2012 now in tatters?

If you ask the Government what it has done to deal with this country’s debt, particularly the debt arising from the €68bn* bank bailout, you will get a three-part response. Firstly the Government claims to have saved the State €10bn through negotiating a reduction in the bailout interest rate from about 6% to 3.5% last July 2011, secondly the Government has saved €5bn by negotiating deals with subordinated bondholders at the state-guaranteed banks and thirdly the Government negotiated a deal whereby the €3.1bn payment of the Anglo Promissory Note in March 2012 was deferred.

On the first you might rightly point out that the interest rate reduction was secured on the shirt-tails of Greece’s woes and that Ireland had to give corporate tax concessions for the reduction, something Portugal didn’t have to provide even though Portugal got the same interest rate reduction on its €52bn EU bailout (Ireland’s EU bailout is €45bn).

On the second, the Government has indeed saved us €5bn on subordinated bondholders. Having said that, Fianna Fail and the Greens saved us €10bn on subordinated bondholders up to March 2011, so all the Government did was continue the same programme of negotiations. And indeed the Government was met with more legal challenges, some of which are still ongoing eg the Fir Tree case in New York.

But on the third, it seems that you will shortly be able to say “what deal?”. Remember the outline of the “deal” was that NAMA would temporarily pay the promissory note in March until Bank of Ireland had ratified with its shareholders a deal whereby it would loan IBRC the €3.1bn for a year, after which the Government would seek to get the bond markets or Troika to fund the payment. The Minister for Finance, Michael Noonan issued a Direction to NAMA to provide the temporary loan for a period of up to 90 days. In fact NAMA loaned IBRC the €3.1bn for 60 days which expires on 30th May, 2012 – that’s today and it looks as if “the deal” is now in tatters.

Bank of Ireland was to have held an Extraordinary General Meeting to approve the Bank of Ireland board’s nod to the Government that it would provide temporary lending. 53 days after the announcement of the “deal” in the Dail by Minister Noonan, there is still no notice of any such EGM. And today, NAMA’s loan runs out.

Will NAMA renew its €3.1bn loan for another 30 days to an institution which is bust? Where the planned source of funding – Bank of Ireland – is showing no signs of agreeing to provide that funding? All for a total interest return of 2.35%? Or will NAMA do what it should have done in March and seek a judicial review of the Direction, have its board, particularly the non-Irish former-IMFer, Steven Seelig, speak out about political intereference? Minister Noonan’s Direction issued on 29th March, 2012 told NAMA to extend facilities to IBRC for up to 90 days which expires at the end of June 2012, so the betting is that NAMA will renew for 30 days its loan “on commercial arms-length terms” to one of the most bust banks in history, with serious doubts that NAMA will get repaid at the end of June.

It’s funny that even An Taoiseach Enda Kenny has gotten involved in the Quinn shopping centre machinations inKiev,Ukraine where there are accusations of “raidering” whereby the €50m shopping centre is being stolen from beneath Anglo’s noses. And we hold our noses at the corruption in Ukrainian courts and business generally. And yet here in Ireland, we have the farce of Minister Noonan “raidering” NAMA’s coffers to support a deal which looks as if it is coming off the rails, and which may substitute €3.1bn of cash in NAMA’s books with a doubtful loan to IBRC. “Classy” as the Americans would say. It certainly tarnishes the three accomplishments of reducing the debt burden, about which the Government is so proud.

*So far the Government has pumped €62.8bn of funding, cash and promissory notes, into the six state-guaranteed banks, AIB, Anglo, Bank of Ireland, EBS, Irish Life and INBS plus NAMA has paid €5bn in state aid to the banks in acquiring its loans

UPDATE: 30th May, 2012. The Sunday Business Post website is reporting that a NAMA spokesperson told Bloomberg News that the loan from NAMA to IBRC has been extended to the end of June 2012. No further information on the extension is provided.

UPDATE: 31st May, 2012. Bank of Ireland issued a circular announcing the EGM yesterday afternoon. The Bank’s board is recommending acceptance for four reasons, the margin, the benefit to the wider economy, protections and a guarantee of repayment from Minister Noonan. There is NO MENTION of the fact that the Irish government bond repayable on 18th April, 2012 is presently paying 4.62%. So the “protections” which have not yet been disclosed in detail may account for the difference between the 2.35% that Bank of Ireland is earning versus the 4.62% it could get on the open market. The “protections” are described as follows : “The Agreement contains several provisions which protect the Bank against market, liquidity and credit risk. These features include early termination provisions, daily margining requirements and protections in the event that the Bank is unable to fully finance the purchase of the Bonds under the standard ECB open market operations.” The EGM is set to take place on 18th June, 2012 and reporting suggests that NAMA has extended its loan to IBRC until 20th June 2012. Bank of Ireland is set to loan IBRC €2.83bn based on the ECB discounting the value of the collateral by 5.5% (this is not quite clear because the bonds were to have had a face value of €3.5bn) but it will seemingly mean IBRC has to rustle up €180m from its own cash to add to the €2.83bn to pay NAMA back its €3.06bn. Curiouser and curiouser…

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