Of the Week..

“Don’t say you weren’t warned” table of the Week

There is really no excuse for anyone in this country being surprised in December 2012 or December 2013 or December 2014 when the Government announces severe budget measures to close the gap between what we spend as a country and what we generate in taxes. The numbers are all set out in the Memorandum of Understanding with the IMF and EU, and they are shocking. Last week the Department of Finance produced a report on the Irish economy which included the above table which summarises the adjustments. And remember these annual adjustments will accumulate, so that by 2015 compared with 2012, there will be an adjustment in that one year alone of €8.6bn, equal to an average of €5,000 per Irish household. This is NOT an adjustment over three years, or €1700 per year – it is the adjustment in ONE YEAR ALONE.

Banker Maths of the Week

2.35%>4.56%

Richie Boucher, the CEO of Bank of Ireland is seemingly recommending acceptance of a “deal” done between BofI and the government whereby BofI will loan IBRC €2.8bn for one year, so that IBRC can repay the temporary digout received from NAMA in March as part of the jig to repay the promissory note tranche which fell due then. The BofI “deal” will see the bank lend €2.8bn to IBRC at 2.35% per annum, and the lending will be secured on the Irish government bond that was created in March. BofI will exchange the government bond at the ECB for a cash loan on which it must pay 1%, which means that BofI should make a profit of nearly €40m on its 1.35% margin. Make sense?

Except right now, BofI could go out and buy Irish government bonds which mature in April 2013 and January 2014. The interest rate or yield payable on the former is 4.56% and on the Jan 14s is 6.07%. These bonds are also eligible to be used as collateral for 1% lending from the ECB.

So why would BofI recommend a “deal” to its shareholders which might generate €40m in profit and ignore another “deal” which might generate €140m? Banker Maths.

7.4%<7.63%

At least president of the European Central Bank, Mario Draghi got his comparison (just about) correct during the week when he said “One would not be excessively optimistic if one says that if Ireland continues with these efforts, the return to market access is not a distant perspective. It could actually be closer than we all expected until, I would say months ago.” Those of us listening to the ECB press conference, including Irish journalists, actually thought he said “nine months ago” rather than just “months ago”. Problem is the yield on our 9-year bond today is 7.4% and in September 2011 – nine months ago – was at 7.6%. The difference is minuscule and presumably that’s why the ECB transcript omits the “nine months”. Neither 7.4% nor 7.6% is sustainable for large volume lending and we need get down below 5% which seems a distant and perhaps forlorn hope. Our benchmark yield was less than 7% on the eve of the first bailout in November 2010 and indeed was less than 5% in August 2010. Unfortunately next year,Ireland will have a debt:GDP of 120% and will still have a deficit of 7.5%, high unemployment and anaemic growth. And with ESM funding available at 3-4%, you would be doubtful of any prospect of returning to the market at this stage.

Quote of the Week

 “Euro rises on speculation euro zone will remain intact” Reuters report, Monday 4th June 2012 – you KNOW you’re in trouble when the “speculation” is the euro zone will remain intact, though there are still serious doubts that Greece will survive as a member after its 17th June 2012 re-run of its general election which is likely to return another stalemate government or one which is keen to tear up the bailout arrangements.

“The debt position is sustainable, however, provided the correct economic and fiscal policies continue to be pursued. Fiscal consolidation measures (those already implemented as well as future adjustments) together with the implementation of growth-friendly economic policies will help reduce the build-up of public debt. The General Government debt-to-GDP ratio is expected to peak at around 120% of GDP next year before declining to approximately 117% by 2015.” Department of Finance in its May 2012 “Economics Perspectives” publication which provides the novel definition of sustainable debt, which is debt which shows signs of decline in future years!

Table of the Week

Minister for Public Expenditure Reform Brendan Howlin, responded to a question this week in which he referred to the above table which is a sobering look at public sector numbers and salaries. Not every public sector employee is on €100,000-plus, as is the tone of a general perception, though there are large numbers on salaries above what is considered the average wage of €32-35,000.

Yesterday the NTMA produced its error-ridden “investor road-show” presentation – it says private rents in Ireland are rising when they have in fact fallen in the last two months, it says there is a Troika agreement for NAMA to pay down €7.5bn by the end of 2013 when in fact any commitment is for asset disposals, not debt repayment and there are lots of other little simulations and dissimulations, the usual. But for the NAMA audience, the presentation shows the indebtedness of the biggest exposure NAMA debtors. NAMA has about 850 debtors in total, apparently, so this will be most of them.

Glasshouse Stone-Thrower of the Week

Wexford independent TD Mick Wallace has had a bad week. It was revealed – by Mick himself apparently in advance of an official publication – that Mick had under-declared his company’s Value Added Tax due in 2009 and that, in a subsequent settlement with Ireland’s tax authorities, the Revenue Commissioners, his company had agreed to pay €2m in unpaid VAT, penalties and interest. His company, M&J Wallace has gone subsequently into receivership and the bill has not been paid. Mick became a TD in February 2011. Mick says he knowingly under-declared the VAT in 2009 but claims he did it to protect his company and its 60 employees. There are some questions outstanding in this case, principally around the behaviour of the Revenue Commissioners who agreed to a settlement in a case where someone knowingly under-declared VAT, and where this settlement has not in fact been paid and is seemingly unlikely to be paid. Also the timing of the settlement is unclear and the implication is that it was recent as Mick says he revealed the settlement now, to preempt the news that would emerge in the quarterly list of tax defaulters. To many people in this State, Mick Wallace is walking away scot-free from something that others think should involve severe penalties, up to and including imprisonment. So Mick did bad and is facing the consequent music. Fair enough, but take a look at his self-righteousness of his critics and you might begin to wonder if any glasshouse might withstand this degree of stone-throwing.

The Irish Independent wrote on Thursday about how Mick and his son had doubled their salaries even as their company was facing financial difficulty in 2008. Hmmm. What about the company which is balance-sheet insolvent, which owes its banks €427m, has declining sales, haemorrhaged shareholder value in the past year, which has a nasty pension deficit and which made a loss of €41m in 2011? That company paid its departing CEO a golden handshake of €1.8m. And the name of that company? Why it’s Independent News and Media, the company which publishes the Independent. There is no suggestion whatsoever of wrong-doing on departed CEO Gavin O’Reilly’s – pictured above – part, but there are suggestions, notably set out in an ongoing court case in Dublin’s High Court, that the payment was “excessive and totally without justification” To shareholders who have seen their shares decline by 66% in the past year, the €1.8m settlement will probably be more galling than two people in Mick Wallace’s company getting a pay-rise which gave them annual salaries of €145,000.

Expect lots more stone-throwing in glasshouses in the days ahead.

Images of the Week

There is something disarmingly inspiring about the tiny community of Ballyhea making their way to Frankfurt in Germany this week, to “nail” a proclamation – available here with the story of their trip to Frankfurt – to the doors of the ECB. The fifteen protestors who included representatives from Charleville and elsewhere, door-stepped governor of the Central Bank of Ireland, Professor Patrick Honohan on his way into the monthly ECB meeting and he agreed to hand their letter to the ECB. Upon their return to Ireland, one of the protest leaders, Diarmuid O’Flynn from Ballyhea appeared on the Vincent Browne show. And these are the images of the week, the protest in Frankfurt, the proclamation “nailed” to the ECB door and one of the dynamos behind the protest, Diarmuid O’Flynn – all screengrabs from TV3. Tomorrow, they’ll be holding their 67th weekly protest march – details and photographs here – this week in Charleville, starting at 11.30am from the library, it’s 10 minutes, peaceful and dignified, but screams out the message of what bank debt is doing to this country. All are welcome.

 

Chutzpah of the Week

Or maybe it should be “schadenfreude of the week” as residents of the Priory Hall apartment complex in north Dublin pondered the seven week’s grace being given to NAMA developer Tom McFeely to vacate his €10m home on Dublin’s up-market Ailesbury Road, and they compared this notice period with the 48 hours they were given to get out of their homes last October 2011, following the discovery of building faults which had the potential to make their apartment complex a fire trap. Since then, the residents have been living in hotels and temporary accommodation as the Department of the Environment, Dublin City Council and others have argued about the cost of the debacle and the repairs needed to make the apartments safely habitable again. The developer who built the complex, Tom McFeely has meantime arranged to have himself declared bankrupt in the UK. During the week, NAMA was in action in Dublin’s High Court to take possession of the valuable property on Ailesbury Road – pictured here with Priory Hall protestors on New Years Eve 2011 –  on foot of loans the Agency has now acquired. The McFeelys sought a stay on the order for another year, apparently on the basis of not disturbing the studies of their teenaged son who will be taking his Leaving Certificate in June 2013. The judge wasn’t having any of it, and granted a stay on the repossession for seven weeks. The 200-plus residents of Priory Hall are still living in limbo with mortgages outstanding on worthless apartments, with an uncertain future and  repair work which has not yet been completed.