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:
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.