Archive for July 11th, 2012

Some of you might have thought that we would never again see the €300m we gave to Greece at the start of 2010 when we were feeling flaithulach, before the rude awakening with our own bailout in November 2010 when our contributions to Greece were suspended. But it seems we might see some or all of it, even if it will be later than originally planned.

In May 2010, Greece became the first EuroZone country to be given a bailout. The first Greek bailout was done on the nod before the establishment of the formal bailout funds, and we were originally going to contribute €1.3bn but by November 2010 when we sought our own bailout, we had only contributed €345.7m and our additional commitments were suspended.  The original plan was that Greece would start repaying the principal from 2013, but last year, we apparently agreed to a deferral and the principal will now be repaid from 2020 and despite all of Greece’s woes we might see it back and we haven’t agreed to a write-down.

We have however received €25.96m in interest from Greece on our loan since 2010. You might recall Minister for Finance Michael Noonan recently reducing economic links between Ireland and Greece to including feta on the weekly shopping list. €25.96m in interest and an outstanding principal of €345.7m – that’s a lot of feta!

The information was revealed in the Dail yesterday in a parliamentary question by the Sinn Fein finance spokesperson Pearse Doherty, responded to by Minister Noonan. This is the full exchange (with emphasis added).

Deputy Pearse Doherty: the contribution made by the State to the first bailout in Greece in 2010; the way this contribution was accounted for in the deficit and national debt figures; the amount of interest received by Ireland from this contribution; when the sum is due for repayment by Greece to Ireland; if he will provide an assessment of the prospects for the repayment of the contribution; if any provision will be made for any non-repayment in our national accounts..

Minister for Finance, Michael Noonan: Under the Euro Area Loan Facility as agreed for Greece in May 2010, stability support in the form of a joint Euro area/IMF financing package of €110 billion is being provided to Greece over a three-year period.

Ireland contributed €345.7 million (net of a 50 basis points service charge) in respect of the first two tranches of the loan in 2010. Ireland withdrew from participation in the facility when we entered the EU/IMF Programme of Financial Support.

This amount was accounted for as a loan under non-voted capital expenditure.

Interest payments on the loan in respect of Ireland’s contribution to the facility are due quarterly and are calculated on the full nominal amount of the loan (i.e., including the 50 basis points service charge). The original loan agreement provided that the principal would be repayable quarterly over two years starting in 2013 and that the rate of interest, which is variable, would be based on three-month EURIBOR (the average rate at which euro interbank term deposits are being offered by one prime bank to another within the EMU zone) plus a margin of three hundred basis points (3 percentage points) for the first three years and four hundred basis points subsequently. However, the lending countries agreed in 2011 to extend the grace period and term of the loans and to reduce the margin in the interest rate charged to Greece to 100 basis points (one percentage point). As a result, the principal on Ireland’s loan to Greece is due to be repaid over five years beginning in June 2020.

The total amount of interest received by Ireland on the loan to date is €25.96 million.

As the Deputy will be aware, Greece came to an agreement with its private sector creditors in March 2012 which allowed it to restructure debt held by banks and other private investors. However, that restructuring and the consequent losses for investors did not apply to loans under the Euro Area Loan Facility under which Ireland provided a loan to Greece in 2010.”


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The Memorandum of Understanding (MoU) under which Spainis to receive up to €100bn of funding from the the EuroZone’s bailout fund, has been published here. Amongst the conditions for providing the loans, there is a requirement for Spain to set up what looks like the equivalent of our own NAMA. It is merely referred to as an “Asset Management  Company” or “AMC” in the MoU – no doubt a catchy name for it will be decided upon later.

What will surprise many here, is the speed with which the AMC is supposed to be up and running, and to have acquired loans from the Spanish banks. Remember in our own case, NAMA was conceived at the start of 2009, the legislation giving effect to it was passed into law in November 2009, the first tranche was acquired in March 2010 and it was only in Q1, 2012 that NAMA acquired all the loans. And we are STILL awaiting European Commission approval of nearly 65% of NAMA’s valuations. It has been slow.

In Spain’s case, the AMC is supposed to be established in the next few months (2012!) and supposed to have acquired all the impaired loans in the most problematic Spanish banks by December (2012!). Spain’s economy is six times bigger than Ireland’s and although there is dispute over the level of property loan distress in Spanish banks, every seems agreed that there is at least €50-100bn of problem loans. It’s difficult to see how Spain can possibly deliver on the MoU in the timeframe stipulated. But regardless, the MoU states “the European Commission, the ECB and the IMF, will prepare a comprehensive blueprint and legislative framework for the establishment and functioning of this asset separation scheme by end-August 2012. The Spanish authorities will adopt the necessary legislation in the autumn with a view to assuring that the AMC will be fully operational by November 2012.”

In Spain’s case, they are categorising the banks into three categories according to how much difficulty they’re in. The “Group 1” banks are in most difficulty and would be akin to our Anglo, AIB, INBS. The “Group 2” banks are in less difficulty and might equate to our EBS and PTSB. And finally  they have a “Group 3” which might (just about!) equate to our Bank of Ireland. The Group 3 banks have a year to decide how they want to deal with their problem loans, and if they can demonstrate they are not so problematic, they may be allowed keep the loans rather than transfer them to the AMC.

You will be amused to hear that Spain’s AMC will adopt the Long Term Economic Value concept that caused such uproar here, though in Spain they’re calling it the Real Long Term Economic Value or “REV”. In addition, the banks will get an equity share in the AMC, so if there is any upside if the property market in Spain recovers faster than the AMC runs up costs, the banks will get their share.

It is interesting that the IMF will have oversight of the bailout even though it appears that it will be the EFSF (and the ESM when it is established) that will fund the bailout. The IMF has extensive global experience of AMCs.

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Jones Lang Lasalle (JLL) has today published its commercial property series for Ireland for Q2, 2012 – the report should be available shortly on the JLL website but for the time being, there is Jack Fagan’s report in today’s Irish Times. The JLL series is one of the two Irish commercial indices referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page. The other quarterly Irish price series is published by SCSI/IPD and will be available on Tuesday 24th July at 3pm; because it is generally published after JLL’s, it is not used here to help compile the NWL index, but the SCSI/IPD index does historically show a very close correlation with JLL’s.

The JLL Index shows that capital values fell in quarter two, 2012 by 2.3% – this means that with the exception of Q4,2011 Irish commercial property has declined in value for 19 of the last 20 quarters and the aberration in Q4,2011 when a 1.2% increase was recorded was due to the exceptional measures set out in Budget 2012 – the reduction in stamp duty on commercial transactions from 6% to 2%, the abandonment of proposals to abolish Upward Only Rent Review terms in pre-February 2010 leases and the enhancement of capital gains arrangements for commercial property held for several years.

Overall since NAMA’s Valuation Date of 30th November, 2009 prices have declined by 23.8%. Commercial prices in Ireland are now 65.7% off their peak in Q3, 2007. On an annual basis prices are down by 7%. The NWL index is now at 806 which means that NAMA needs to see a blended increase of 24.1% in property prices across its portfolio to break-even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss). NAMA acquired loans underpinned by €9.25bn of Irish commercial property. The Q2, 2012 decline of 2.3% means that the underlying NAMA property has declined by €166.5m in Q2, 2012 (€9.25bn minus 22% to Q1, 2012 adjusted for 2.3% in Q2, 2012) – so much for NAMA claiming the market was stabilizing!

Rents decreased by 1.4% in the quarter, reversing the 0.7% increase in Q1, 2012 which was itself the first increase since Q2,2008. This is unsurprising as secondary market rents have continued to slide even though there are indications of prime rents stabilizing.

UPDATE: 24th July, 2012. The “other” commercial index for Ireland has been published today by the SCSI/IPD and is available here. It shows commercial property prices fell by  2.3% in Q2, 2012 with retail falling down 2.2%, office by 1.5% and industrial by 1.5%. Prices are now down 65.8% from peak, which compares with 65.7% shown by the JLL index.

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“our position is that if all these properties were sold today, we might get approximately €2.7 billion. We expect that figure to rise to €3.5 billion by the time we dispose of them between now and 2020” NAMA CEO Brendan McDonagh at an Oireachtas hearing on 5th July, 2012

In 2010/11, when NAMA acquired the loans secured by 13,000 Irish dwellings it paid €3.5bn or €269,231 each on average. Since then, NAMA estimates that the price of its average home has dropped 23% to €207,692 – or €2.7bn in total – but it told an Oireachtas committee last Thursday that it expects prices to rebound to their original acquisition price by the time NAMA comes to sell them.

If you apply the CSO index to the house price series formerly compiled by the Permanent TSB and ESRI, then the average price of a home nationally today in Ireland is €157,601 and in Dublin, it is higher at €187,147 and outside Dublin, it is €143,356. These prices are considerably lower than NAMA’s average of €207,692 today but NAMA does say that most of its homes are clustered around main population centres. Even so, it would seem that NAMA’s homes are superior to the average, even in Dublin. That may be the case, but given the range of developers whose homes NAMA now manages, it is surprising. Remember Liam Carroll is in NAMA and he is Mr “shoebox apartment”. Though on the other hand, other developers like NAMA Top 10 developer, Gerry Gannon focussed on more upmarket housing.

Now you mightn’t think that a €62,000 increase in prices on a €208,000 home today over the next 8.5 years is a major challenge, particularly in Dublin where there has been some recent evidence of a flattening of prices. After all it’s just 3% compound growth for the next 8.5 years or 29% growth overall. Inflation alone is currently running at about 2%.  NAMA says if it sells at €269,000 it will break even. But here’s NAMA’s problem: its annual cost of funds and its operating costs total about 3% of its loans. So NAMA will in fact need a 6% annual increase just to break even. And that assumes that it sells 8.5 years hence in 2020. If it sells before, it will need an even bigger annual increase. Now 6% annual growth in residential prices in Ireland will be no mean feat in a country which will struggle to achieve GDP growth of 3% in the short to medium term. The truth is that NAMA can hope and talk up the market, but in reality it faces an uphill challenge to recoup what it paid for its loans by reference to November 2009 values.


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