Archive for June 18th, 2012

We are living in the Days of Big Numbers, and have been since 2008. It won’t last forever; with each passing week, our ability to change the Big Numbers diminishes and by the second half of this decade, it’s likely the only Big Number remaining will be our sovereign national debt and the time for action will have passed. By then, all the bondholders will have been repaid and all the negotiations on our national debt will be – subject to a messy sovereign default – over. But in these Days of Big Numbers there is still time to change outcomes, even though the sand is quickly running from the top half of the hour glass – next week we will pay €635m to senior unguaranteed bondholders in what was Michael Fingleton’s Irish Nationwide Building Society and we will also pay more than €500m to senior unguaranteed unsecured bondholders in what was Sean Fitzgerald’s Anglo Irish Bank. But once these bonds are paid, there won’t be any more Big Numbers for bonds in these two banks. We still apparently have some time with another Big Number, the €25bn promissory notes plus interest in IBRC, so it is still relevant to examine how well our leaders have been negotiating on our behalf.

All of the negotiations have taken place behind closed doors so we have little – though we do have some – information on the performance of our negotiators. We do however have a fair idea of the what we wanted to achieve from the negotiations and the negotiation outcome, so we have some information on which to assess An Taoiseach Enda Kenny and Minister for Finance, Michael Noonan – it is these two who have been to the fore in national negotiations with our partners in Europe and with the ECB.

It should be said that perhaps the really Big Numbers were in play during the last administration of Fianna Fail and the Greens, but that is history now. Fianna Fail still suffers from Post Traumatic Stress Disorder and the Greens have been put out to pasture. In what remains of these Days of Big Numbers, it is Fine Gael and Labour that we can hold to account. So how have they done?

When and what: March 2011, negotiate with EU to reduce the interest rate and extend the term of the European component of the bailout
Negotiation objective: A 1-2% cut in the 5.5-6% interest rate charged on our bailout from the EFSF and EFSM.
Negotiation outcome: 0/10. Failure. Whilst Greece did secure a 2% reduction in its interest rate and an extension to its repayment period during the same meetings in March 2011 we achieved nothing. Enda did claim that he came under pressure to yield up concessions on Irish corporate tax arrangements but he pointedly refused to hand over paperwork which might have backed up such a claim, including a compromise position paper drafted by president of the European Council, Herman van Rumpuy.
Performance: 0/10; Not only did we fail to get a cut in our interest rate but Enda Kenny managed to upset his peers in Europe. Faisal Islam, a finance and economic journalist with Britain’s Channel 4 reported that behind closed doors, Enda had “grandstanded” which upset his peers, particularly the French president Nicolas Sarkozy with whom Enda had what he described in his own words as a “Gallic spat”.

When and what: June 2011 onwards, negotiate with the ECB a burden-sharing arrangement for senior bondholders at IBRC, formerly Anglo and Irish Nationwide Building Society
Negotiation objective: Secure agreement from the ECB to apply a discount on the circa €4bn of unsecured, unguaranteed senior IBRC bondholders whose bonds remained unpaid.
Negotiation outcome: 0/10. Failure. There has been no burden-sharing and at the end of next week, we will have repaid in full most of the remaining bondholders at Anglo and INBS.
Performance: 1/10. There is some evidence of communication between Minister Noonan and the bailout Troika to seek to build a position. There is some evidence of conversations with the ECB, including with its then-president Jean Claude Trichet. Despite the intensifying funding problems for all banks across Europe which meant that Ireland was no longer receiving “unprecedented support” and the ECB had bigger fish to fry, there appears to have been a total capitulation to an implacable ECB.

When and what: March 2011 onwards, negotiate a discount on the repayment of junior bondholders at bailed-out banks
Negotiation objective: Redeem all subordinated debt in the covered banks – AIB, Anglo, Bank of Ireland, EBS, Irish Nationwide Building Society and Irish Life at a discount
Negotiation outcome: 5/10. Partial success. Remember this was the continuation of the programme started under the previous administration. And it was Fianna Fail and the Greens that saved €10bn from these so-called “Liability Management Exercises (LMEs)” and since March 2011, only a further €5bn has been saved. Basically all the junior bondholders were told the banks were bust and that they risked getting nothing back on their bonds, so the subordinated bondholders typically accepted the sums on offer.
Performance: 3/10. Most of the work had been done under FF/the Greens. However this Government encountered more resistance. There is still an ongoing case in New York where Fir Tree Capital is suing Anglo. And in the UK, Bank of Ireland bondholders were successful at stopping a forced redemption in London’s High Court.

When and what: July 2011, negotiate with EU to reduce the interest rate and extend the term of the European component of the bailout
Negotiation objective: A 1-2% cut in the 5.5-6% interest rate charged on our bailout by the EFSF and EFSM.
Negotiation outcome: 6/10; Success, interest rate reduced by more than was sought, to just above cost of 3-3.5%. The new rate was to apply to all European loans from July 2011 onwards but because it wasn’t backdated to March 2011, we lost tens of millions of euro in interest which, by contrast, Greece saved. Ireland was forced to make a concession on its corporate tax arrangements, to agree to enter into “constructive discussions”.  Whilst Greece was allowed a write-down of its debt, that is not something that Ireland won, though it might be that An Taoiseach never even asked for such a write-down.
Performance: 1/10. The new deal was driven by the intensifying chaos in Greece and the European acknowledgement of the seriousness of that country’s problems. There is strong evidence to suggest that Enda Kenny did not understand what had been agreed at the summit. In a post-summit interview with RTE in what looked like a photocopying room in the summit building inBrussels, Enda was unable to even estimate the effect of the concession. If anything, his second, Minister for Europe Lucinda Creighton looked even more baffled. It took days and weeks before the Irish side was able to put a concrete number to the effect of the outcome of the summit. Portugal, which entered into a bailout programme in April 2011, just four months after Ireland, secured the EXACT SAME conditions on its loans, but it did not have to offer up any concession on its corporate tax arrangements. The outcome suggests that even if we had no representative at the summit, we would have obtained the same deal but without the corporate tax concession, because “solidarity” should have meant an equality of treatment between Ireland and Portugal, not happy-clappy unicorns-and-rainbows “solidarity” but the understanding that if one small country is bullied into unusual concessions without other countries standing up in solidarity, then such bullying might visit other countries in the future.

When and what: September 2011 onwards, “re-engineer” the IBRC promissory note debt of €30bn so as to reduce its burden on the Irish economy.
Negotiation objective: Unclear but reductions in the interest rate of the promissory notes, an extension of the period in which the promissory notes can be paid and a cheap source of funding for the promissory notes have all been mentioned.
Negotiation outcome: 1/10. Apparently there is a so-called “technical” paper still being produced, but as of last week when Enda Kenny answered a question in the Dail, it was still not completed.
Performance: 1/10. It’s been 10 months since Minister Noonan started throwing shapes around the promissory notes. He met with then-ECB president Jean Claude Trichet last September 2011. The Troika came and went on their review mission in October 2011 and there wasn’t a dickybird about the promissory notes, and in January 2012 An Taoiseach announced that the Troika was preparing a technical paper which might then be circulated to the ECB. Five months later, and still nothing. Not even a technical paper.

When and what: March 2012, avoid the payment to IBRC of €3.06bn in respect of promissory notes given by the previous government
Negotiation objective: Defer the payment of the €3.1b promissory note payment that fell due in March 2012 in order to give space to the ongoing discussions about the overall promissory note obligation of €30bn.
Negotiation outcome: 3/10. Mixed outcome. Minister Noonan failed utterly with the ECB to secure any arrangement which deferred the payment. However there is success in getting firstly NAMA and from today, seemingly, Bank of Ireland to lend the government cash at 2.35% per annum when the April 2013 Irish sovereign bond is trading at over 4% and the January 2014 bond is trading at over 6%. We might carp at NAMA being arm-twisted in providing cheap funding, though NAMA says it provided the funding on arms-length commercial terms. We might wonder why Bank of Ireland, in which the State has only a minority interest of 15%, has agreed to such an arrangement when the open-market is providing a far greater return. But bottom line, the Government has saved the difference between the 3.5% per annum it would have paid to the Troika for the cash to pay the promissory note in March 2012 and the 2.35% per annum which it is paying to NAMA and Bank of Ireland. On €3bn, that’s a saving of €45m over the 15 months that the arrangement is expected to last. Not a huge saving, but nonetheless, a minor win.
Performance: 2/10; we were able to issue a Direction to NAMA to do the deal, but because NAMA was required to do the deal on arms-length commercial terms, we needed to know that NAMA could only get 2.35% on its cash mountain in the short-term. We own 15% of Bank of Ireland, so we had to convince that bank that it was in its interests to lend to us at 2.35% when it might have, instead, bought a one-year bond which would generate more profit. We have converted a €3.1bn borrowing from the Troika in March 2012 to a 13-year Irish sovereign bond and we have a solemn commitment to that bond. We still need find a buyer for that bond after the one-year deal with Bank of Ireland expires. Overall the objective was not met because we took on a sovereign debt commitment to make the payment in March 2012, and we cannot renege on our commitment to repay that sovereign bond. The arrangement showed signs of being rushed, with the Minister summarily announcing it to the Dail and declining to answer questions.

When and what: June 2012, maintain freedom of action with NAMA’s cash
Negotiation objective: Maintain NAMA’s freedom to redeem its bonds at any time up to 2020, thereby ensuring NAMA cash could be deployed with full freedom
Negotiation outcome: 0/10. Failure. Without making any special announcement, we found out on Friday last that Minister Noonan has agreed that NAMA will redeem €7.5bn of its bonds by the end of 2013.
Performance: 0/10. There was no apparent quid pro quo for the concession. The Minister has now taken off the table more than €5bn of cash presently available for a stimulus by committing to repay ultra-cheap NAMA bonds – costing us the 6-month Euribor rate of less than 1% per annum.

Overall the past 15 months have revealed An Taoiseach Enda Kenny in particular to be a lousy negotiator. He appears not to understand the mechanics of what he is discussing on behalf of our nation behind closed doors. Reporting suggests he does not have the interpersonal qualities to negotiate, and indeed we can see week-in, week-out in the Dail his “I’m a little teapot” routine – pictured above – where he places one hand on his hips and jabs the air with the other. It comes across as arrogant and cocky – which Ireland cannot afford to be – and irritating and ignorant because his peers know he has a weak command of his brief. This is all pretty amazing, because compared to his predecessor, Enda Kenny has a physical presence which is smarter, leaner, spryer and more earnest. And yet he blows it with his “grandstanding”

Minister Noonan doesn’t suffer from “grandstanding” and is said to be a likeable and clear communicator. Like Enda, he does suffer from holding a lousy hand of cards, for which he is not primarily responsible but he also seems to suffer from poor information, particularly with respect to his own negotiating positions.

Lastly, it should be recognised that 15 months into the term of this new administration which has not been easy, with VAT increases, a raid on private pensions, the farcical implementation of the household charge, cuts to special needs assistants and medical facilities around the country, closure of Garda stations and a moratorium on recruitment in parts of the public sector, the lack of urgency in dealing with the mortgage crisis and personal insolvency, the farce over upward only rent review commitments and breaching pay-guidelines for special advisers, Fine Gael is still the most popular party in the opinion polls. Which says something about voters and their engagement, or perhaps it says something about the competition; either way, the poor negotiation outcomes haven’t yet come home to roost and pretty soon, the time for action in these Days of the Big Numbers will have passed.

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“NAMA’s appointed management company have sent someone out to cut the grass but we’ve had nothing else happen in terms of getting street lights. “We even had to fight to get someone out to collect our bins, and that’s despite the fact we pay quite high rates,” confirmed Mrs Kiernan. While issues such as bin collection and landscaping may sound frivolous, more concerning are aspects of safety. With gaping holes in the street, not to mention unfinished pavements and no street lights, accidents are a major concern” Life on a NAMA estate in county Armagh, reported by the Ulster Gazette

For political and economic reasons, much attention is focussed on the Northern Ireland dimension of NAMA’s operations. According to the press release that marked last Friday’s meeting of the North South Ministerial Council, there was discussion of NAMA but alas the press release doesn’t provide any further details. It would seem that the re-appointment of Frank Cushnahan and Brian Rowntree – profiles and photographs here – to NAMA’s Northern Ireland Advisory Committee did come up, as today NAMA has announced the duo have been re-appointed for a further two years until April 2014, the tenure of their first term having apparently expired. The re-appointments followed consultation between NAMA and Minister for Finance, Michael Noonan and the Northern Ireland finance minister, the sometimes-bohemian Sammy Wilson.

There is still no news on the search for a non-executive director to replace Peter Stewart who resigned from the NAMA board last October 2011, and the vacancy for which the Department of Finance advertised with a closing date for applications of 6th March, 2012. The Department is responsible for filling director roles at the Agency.

It would appear from the recent Comptroller and Auditor General report on NAMA’s asset management phase that our neighbours across the Border have been getting their way, with NAMA disposing of a proportionately small number of Northern Irish properties, thereby avoiding fire sales presumably. On the other hand, it would appear that Northern Ireland is getting a proportionately small amount of NAMA investment funds.

We had a reminder last week in the Ulster Gazette that ghost estates are not just a Republic phenomenon, when the Gazette reported on a NAMA estate, Limestone Square on Rock Road in county Armagh, a Sam Thompson development, The report painted a picture of woeful neglect which corresponds to the picture of such estates on this side of the Border, though we know that NAMA has set aside specific funds here to complete the construction including estate lighting and footpaths. Seems like those re-appointed Northern Ireland representatives may need to give NAMA a nudge…

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Fresh from covering itself in poop last week when it took the “unprecedented” step of removing from its website, a working paper which showed that a significant number of Irish households would be better off on benefits, Frances Ruane’s government-funded ESRI this morning published its quarterly economic forecast. Often an outlier when it comes to projections, this mornings publication is very much in line with recent government forecasts with GDP forecast at (with last February’s forecast in brackets) 0.6% in 2012 (0.9%) and 2.2% in 2013 (2.3%) and GNP forecast at 0% for 2012 (0.1%) and 0.5% for 2013 (1.0%). Of course, none of us has a crystal ball but it is difficult to see, with ongoing difficulty in the UK, the rest of Europe and the US, how we will have GDP growth this year, and I would not be surprised if the Central Bank of Ireland quarterly outlook report due in July 2012 reflected that.

On Friday last, we had a bit of a laugh at Mark Fitzgerald of Sherry Fitzgerald’s musings on the recent Moody’s assessment of Irish property. Who knows if the Fitzgeralds enjoy a Sunday dinner together, but today, Mark’s brother John Fitzgerald and another ESRI researcher, David Duffy published a special report on the Irish housing market, in particular supply and demand, which makes the simple points that the over-construction in the last decade was more pronounced in some areas than others, and that in Dublin today, although the vacancy level is still above that in 2002, there is closer matching between supply and demand.

There is little reference to the availability of credit or construction costs or indeed very little on emigration, which almost criminally for a country historically scourged by emigration, is not routinely accurately monitored by either the CSO or the ESRI. However the conclusion is that we will need about 20,000 dwellings per annum to cope with household formation until 2015 even after “assuming significant emigration”, though there is little information given on what assumptions were made. Somewhere in Sussex, an hirsute Dutchman is choking on his chips with mayonnaise!

Somehow – and perhaps this is hypersensitivity – I get the impression the report wants to suggest an imminent flattening and rebound in prices. Its conclusion that the large numbers who have started renting since the 2006 Census may switch to buying seems to ignore what might perhaps be a just-as-likely possibility of renting numbers growing as existing households escape from under-water mortgages and contemplate an economy where it is expected we will still have 12%-plus unemployment in 2015. And the wording used in the conclusion – “when expectations change it is likely that the recent sharp fall in house prices will be halted” – is odd, given the recent two-month-running increase in prices in Dublin, does the ESRI that expectations have now changed because the “recent sharp fall” has “halted”, at least for two months running? Would have been great to be a fly on the wall during the dessert course at the Fitzgeraldses yesterday.


And lastly, for all the flak that was directed, by the ESRI and others, at the trio who produced the working paper “the cost of working” which was removed by the ESRI last week, today’s publication tells us that in 2001 Ireland had “total dwellings per thousand adult population” of 467 and “occupied dwellings per thousand adult population” of 467 also. Elsewhere the report says that there was an Irish vacancy rate of 9.8% in 2002 which seems reasonable. Never mind “peer review” just a common-sense second pair of eyes might have picked up on that clanger.

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