Archive for July 8th, 2012

Media failure of the Week

This week’s long-awaited legal clash between Treasury Holdings and NAMA promised to have it all: a judicial review with Michael Cush SC set to attack the very core of NAMA’s being, the colourful Johnny Ronan on the stand as well as NAMA’s owlish Brendan McDonagh being subjected to some fairly intrusive questioning. The judicial review hearing commenced on Tuesday and sure enough there was media reporting of Day One. On Day Two, RTE filed a report, so did the Irish Times courtesy of Mary Carolan (pictured top) and the Independent produced a remarkably similar report by Tim Healy (pictured bottom).


But after Wednesday, there seems to have been a media blackout. It’s potentially a critically important case for NAMA, because if the Agency is held to have acted unlawfully in its dealings with Treasury, there might be an avalanche of claims by other disgruntled developers whose loans have been foreclosed.

Runner-up this week must go to all the media organisations that turned up at the Battle of the National Library; that’s where TV3’s political editor Ursula Halligan is accused of “leading a charge” – sounds like something out of Crimean War! – on An Taoiseach, who is said to have nearly collapsed into a flower pot surrounded by the press pack, baying for comment on his stance on gay marriage. Sadly, there appears not to have been a single image from a stills photographer or cameraman or indeed a sound recording of the incident. Strange that.

Demolition (arithmetic) of the Week


The amount of money spent by NAMA on protecting and maintaining a 12-apartment block on the Gleann Riada estate in Longford between December 2010 and July 2012.


The amount of money put aside by NAMA to demolish the 12-apartment block on the Gleann Riada estate in Longford


The amount fetched at auction Friday, of the 14 part-complete houses at Castlemaine (pictured below), a ghost estate at Annagh Banks in Kerry.


The amount fetched at auction in May 2012 of an unfinished group of three houses in Cavan.

In fairness to NAMA, auctioneers have told me that some buildings they have seen will be beyond economic recovery but the fact remains in this case that NAMA didn’t even try, it seems, to sell the block. “It’s on a flood plain” seemed to be the NAMA deflector of choice, ignoring the fact that the rest of the estate is presumably also on a flood-plain, and if there are measures taken to protect the estate, they would presumably have been taken for the apartment block also.

Economic bright-spot of the Week

On Tuesday, the Department of Finance released the June 2012 Exchequer Statement, and, overall, it is revealing remarkably good news. Despite the State slipping back into recession in Q4, 2011 and both the domestic and international economies still facing considerable challenges,Ireland is on track to meet its deficit reduction plan in 2012. Not too shabby. Income tax and corporation tax account for most of the good news (see below), but it is encouraging that VAT is also on target despite the hike at the start of 2012. Minister for Finance, Michael Noonan says he is confident our deficit will in 2012, come in at less than the 8.6% agreed with the Troika. Not too shabby at all.

On Thursday, the National Treasury Management Agency managed to sell €500m of 3-month treasury bills at an interest rate of 1.8% per annum, the first such sale or issuance since September 2010. The issuance was oversubscribed with a cover of 2.8 times, and CEO of the NTMA, John Corrigan said most of the buyers of the bills were from overseas, market sources indicate overseas buyers might have represented 90%. The issuance was reported from New York to London to Frankfurt, and presented as a small sign of Ireland’s recovery. ECB president Mario Draghi did say (with emphasis added) “Ireland is a euro area country that, through extraordinary efforts, has run a programme which is on track – so much so that Ireland returned to the markets today, if I am not mistaken. This is much earlier than anybody could have expected until two or three months ago. Even though this might not yet be part of a regular extended programme for a long period of time, I think that this success should be properly celebrated, and it is a testament to the determination of the Irish government and the capacity of the Irish people to understand and “own” this programme and make the needed sacrifices. I think this is very important. Actually, it is so important that an event like this could be one of the factors that are making the financial environment nowadays a little less tense than it was a month ago. I think this ought to be taken into account.” and there might be some concern at the interest rate paid when Ireland has access to cheaper funding, but overall it was a positive. And it is noteworthy that at the end of the week, Ireland has the second lowest yield amongst the PIIGS on its bench-mark bond and at 6.3%, is just 0.3% above top-of-class Italy at 6.03%.And we are now back to rates last seen in late October 2010, just before the Troika bailout.

Economic low-point of the Week

For a couple of months on here, there has been confusion at the apparently upbeat claims by the Government about unemployment on the one hand, and, on the other hand, the evidence from statistics and anecdote, and this week the Central Statistics Office confirmed that unemployment in Ireland had reached a record in the present crisis of 14.9% equating to around 310,000; this, despite apparently high emigration. It seems that some spectacular job announcements like the 1,000 jobs at Paypal in Dundalk are being offset by a high volume of layoffs that are not making the national headlines, plus some of the job announcements actually refer to recruitment over a period of years. There are approximately 450,000 on the Live Register which captures all recipients of employment-related benefits. The unemployment rate in Northern Ireland is 7.1% and is 8.2% overall for the UK.

Banking Shockers of the Week

In theUK, they are navel-gazing at the manipulation of interest rates by Barclays, and potentially others. Here in Ireland, we had a couple of court cases to shed even poorer light on the state and practices of Ireland banks

“In that regard, it is possible that the expert on behalf of Anglo has not yet fully appreciated how abnormal a bank it was…” High Court in Dublin judgment published this week where Anglo’s lending practices were examined, with stinging criticism from the judge. The case involved Belfast developer Peter Curistan and the Parnell Centre in central Dublin and the Odyssey centre in Belfast. Anglo lent money on terms which included a 25% profit share and a CB Richard Ellis valuation of the Parnell Centre that was bizarre. A couple of email messages reproduced in the judgment are unkind to other Colossuses in the world of Irish property development.

“About this time Mr McDonald [Bank of Scotland (Ireland)] told Mr Walsh that he was coming under considerable pressure to lend more money due to increased lending targets imposed by the bank and the bank was keen to expand the loan book to key customers and Mr Walsh was identified as a key customer or a preferred customer.  Mr McDonald advised that the bank had received particulars of Direct Line House in Leeds and it was proposed that Mr Walsh should acquire this property” High Court in Belfast judgment published this week where BoS(I)’s lending practices came under the spotlight. There were allegations of bankers driven to increase lending and informally waiving standard banking terms. The case involves Northern Ireland developer Chris Walsh and is set for a full airing in 2013.

And lastly – and although this is a month old – this little line from the sixth Troika review of Ireland hasn’t received any publicity. The condition of the four state-guaranteed banks – AIB/ESB, Bank of Ireland, IBRC and Irish Life and Permanent – deteriorated last year with the % of non-performing loans across all four rising from 12.1% to 19.5%. The Troika sounds a warning note about the immediate prospects for the covered banks with the continued de-leveraging of quality assets. Sobering.


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The European Stability Mechanism (ESM) is the new EuroZone bailout fund which was supposed to come into effect this month, but developments at both ends of the EuroZone economic spectrum threaten to delay and possibly de-rail the new fund.

In Germanythis Tuesday, 10th July 2012, the special constitutional court is to commence its examination of complaints that the ESM fund may offendGermany’s famous constitution.

The scope of the ESM seems to be changing from week to week, but at its core, it was supposed to provide a centrally managed fund with up to €700bn available for EuroZone countries that got into financial difficulty. The original plan last year, was that the ESM would provide bailouts to countries in return for countries agreeing to take corrective action to restore their finances. But now it seems it is intended that the ESM will buy stakes in banks and may buy sovereign bonds without imposing conditions on countries. That’s this week, of course, next week the scope of the ESM might be different.

In Germany, there are concerns that Germanywill end up on the financial hook for wayward EuroZone countries which may borrow using Germany’s good credit standing, but then fail to implement reforms or repay the borrowing, leaving the German taxpayer nursing a loss.

What is expected this week in Germany is a decision whether or not to grant an injunction preventing the ratification of the ESM treaty in Germany until the constitutional court has fully examined all the issues. The ESM commits Germany to providing 27% of the ESM’s capital.

Near the other end of the spectrum, the ESM commits Ireland to providing 1.5% of the ESM’s capital and indeed we are supposed to start handing over that capital from this month, the initial contribution is €1.27bn and we were supposed to start handing that over in five €250m tranches over the next year and a half.Ireland’s maximum contribution is currently capped at €11bn should the ESM lose money or need more “firepower”.

But tomorrow at 10.30am in the High Court, those plans may also be de-railed, as Donegal South-West independent TD, Thomas Pringle is set to hear whether his challenge to the ESM treaty has been successful.

Deputy Pringle has argued that the ESM creates such a significant liability for this State that it should be subject to a referendum. “A referendum!” I hear you ask, didn’t we have one of those in May on this? No, what we voted on then was the Fiscal Compact, that Irelandwould agree to certain economic rules.

The ESM treaty is different.

If Deputy Pringle is successful, then we may have an “emergency” referendum. But the betting is that, regardless of who wins tomorrow morning – the Government or Deputy Pringle – the matter will be appealed to a higher court. If Deputy Pringle wins, then that means the ESM treaty will be put on hold in Ireland until any appeal is considered. If the Government wins, the betting is that there is a strong chance of an injunction being sought to prevent the ratification of the ESM treaty pending the outcome of any appeal.

Deputy Pringle’s action has already prevented the Government delivering on its promise to ratify the ESM treaty “immediately” after the Fiscal Compact vote on 31st May, 2012. If he is successful tomorrow morning, the consequences could be colossal for Ireland with the prospect of a second referendum amid a EuroZone context in which Spain and Italy are at what the late Brian Lenihan referred to, in Ireland’s context, as the Gates of Hell with borrowing rates at the end of last week unsustainable for both.

UPDATE (1): 9th July, 2012. Ms Justice Mary Laffoy has rejected Donegal South West independent TD’s challenge to the ESM treaty and she has ruled Ireland can ratify ESM treaty. The full judgment will be published at a later date. An appeal of the decision by Deputy Pringle is expected, and there may be an application for an injunction to stop the Government ratifying the ESM treaty pending the outcome of any appeal.

UPDATE (2): 9th July, 2012. RTE reports that the High Court is to refer an issue raised in the application to the European Court of Justice, which means that this case continues to have legs. The High Court has rejected an application for an injunction by Deputy Pringle, but that decision may be appealed to the Supreme Court. The Government has indicated that it will ratify the ESM treaty today. The judge’s decision is to be published at 2pm today, and it is hoped to publish a copy here. Deputy Pringle is reported to have said that the matter was “only at the halfway stage”

UPDATE: 10th July, 2012. Deputy Thomas Pringle has now posted the summary judgment on his website. I understand that an appeal to the Supreme Court has been made and the hearing is set to commence on 23rd July, 2012.

UPDATE: 10th July, 2012. It is understood that the Government will NOT now ratify the ESM until the German constitutional court has ruled on challenges there. Should the Government seek to ratify the ESM treaty before the Supreme Court has dealt with Deputy Pringle’s appeal, it is understood that an injunction will be sought by Deputy Pringle, presumably via an urgent appeal to the Supreme Court as the High Court has refused an injunction. Meanwhile in Germany, the ESM challenge is still being heard.

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Following last week’s injection of €1.3bn by the State into Irish Life and Permanent and the revelation on Thursday that NAMA has paid €5.6bn in state aid to the banks in its acquisition of €74bn of loans, we now have a new gross total of the cost of bailing out Ireland’s banks – €69.7bn. Or 45% of our 2011 GDP of €156.4bn, or 56% of arguably our more representative 2011 GNP of €123.9bn – we really don’t need the IMF to confirm that ours has been the most expensive banking crisis in the developed world since 1970.

How do we arrive at a €69.7bn gross cost?
Minister Noonan recently confirmed in the Dail the gross cost of the bailout so far in a Parliamentary Question here. Last week’s €1.3bn payment to Irish Life and Permanent brings the total to €64.1bn, split as follows:

AIB/EBS: €20.7bn
Bank ofIreland: €4.7bn
IBRC (formerly Anglo/INBS): €34.7bn
Irish Life and Permanent: €4bn

On Thursday this week at the Oireachtas Committee of Public Accounts hearing, the NAMA CEO Brendan McDonagh confirmed that NAMA has now paid €5.6bn of state aid to the banks when it acquired €74bn of loans for which it paid €32bn. Despite what the NAMA CEO “categorically” said, NAMA did pay more than the loans were worth, there was an overpayment of €5.6bn, though there is no suggestion – at least not here! – that NAMA didn’t assiduously follow the valuation methodology agreed with the European Commission. It should be noted that property values in NAMA’s main market, Ireland, have declined by a further 20-30% since NAMA’s valuation date of 30th November 2009, and indeed NAMA has itself declared a cumulative loss in 2010-2011 of just over €1bn. So the €69.7bn excludes further losses at NAMA.

And it also excludes the interest that we will need pay on loans generally, obtained to fund the bailout. Or the lost profits that we would otherwise have made on the National Pension Reserve Fund which we depleted to rescue the banks.

Is all of that money gone?
On the other hand, the State has received some benefit to date from payments from the banks for the state guarantee that was first given in September 2008 and extended on limited terms since. These payments have so far totalled €3.1bn.  And there are our shareholdings in the banks – 100% of IBRC, 99.8% of AIB/EBS, 99% of ILP and 15% of Bank of Ireland – and these shareholdings also have an overall value. How much? The National Pension Reserve Fund is valuing our shareholding in Bank of Ireland and AIB at €9.4bn, though that is being subjected to what the NPRF calls an “independent review”. What value our control over IBRC? Although the IBRC CEO Mike Aynsley and chairman Alan Dukes have in the past claimed that the Anglo component of IBRC may only cost €25bn compared with the €29bn bailout, indicating the State may get back €4bn, given we are five years plus from winding down IBRC, it would not be prudent to rely on those claims from officials who constantly underestimated the financial horror of Anglo in 2009/10. What about Irish Life and Permanent which has cost us €4bn so far? Difficult to say, and at this stage, the concern on here with ILP is that the €4bn bailout will need additional funds from us.

Can the cost increase even further?
You betcha it can! Our property markets are far from stable, our economy is bouncing along the bottom – at best – and the EuroZone continues to lurch from one crisis to the next. Unemployment is trending upwards, we’re in a double-dip recession and the domestic economy is overall moribund. Industry sources suggest the recent sale by GE Money of its Irish mortgage loanbook to Australian outfit, Pepper Home Loans was at 35c – even less than the 40c estimated on here – in the euro. Okay, GE was a subprime lender and was active during the boom, so its loan book will probably be at the very top end when it comes to impairments, but suspicions linger that even our pillar banks may come in for further major losses on Irish mortgage lending. The first draft of the Personal Insolvency Bill published last week appears to weigh the advantage in the borrower-lender relationship on the banks’ side, but it remains to be seen what amendments are made as the Bill goes through its stages in the Oireachtas. NAMA is complicated because it starts out with a €5.6bn handicap and property prices in Ireland have declined since November 2009, the NAMA valuation date. However, NAMA’s loss won’t need be accounted for nationally until 2020 when the Agency is scheduled to wrap up, but even so, we can see that NAMA is in a bit of a hole today, and the immediate outlook for the Agency doesn’t look great. NAMA’s performance later on this decade will depend on the economy overall, so it is probably too early to project, and you can dismiss NAMA’s recent “we will break even” – NAMA doesn’t have a superior crystal ball!

But what about the EU summit?
A week on from the game-changing EU summit, we are no wiser as to what relief, if any,Ireland can look forward to from any new initiative. But studying the media in Germany and other financially healthier countries, it is difficult to see any gift in prospect. We may see some relief on interest on borrowing to fund the promissory notes, but that interest is not even accounted for in the €69.7bn; we may see the ESM acquiring our shares in the covered banks, but the ESM is unlikely to be able to pay in excess of the market value of those shares, and the market value is uncertain and the view on here is that there is downside to any current valuation.

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