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Archive for July 22nd, 2012

Last week’s surprise offer from Ryanair for all the shares in Aer Lingus generated many column inches in newspapers and much national discourse. The €694m valuation of Aer Lingus derived from the €1.30 a share offer, would have valued the State’s 25% stake at about €175m. And because the State’s stake in Aer Lingus is slated for disposal anyway, there has been much talk about the price. Last week, Minister for Public Expenditure and Reform, Brendan Howlin, when asked about the value of the State’s stake, referred reporters at a press conference to a reply given by his colleague Minister Noonan the previous week, when he said you don’t show your negotiating hand in advance, and have you never sold a calf at the Fair of Glen. Alongside our stake in Aer Lingus, you can also expect much discussion over the coming months with the disposal of stakes in Bord Gais Energy and parts of the ESB. All told, the plan is to raise €2-3bn in the disposal of stakes in State companies.

Isn’t it incredible therefore that the State is RIGHT NOW selling billions of euros worth of assets and there is next to no national discourse on the disposals, and no cross party political oversight. And this brings us to the third PQ during the last week, which received a non- or partial answer from the Department of Finance, this time the question is from the Sinn Fein finance spokesperson Pearse Doherty

The above response is arguably a serious abuse by the Government of the PQ system. We KNOW about several sales worth hundreds of millions of euros, eg AIB’s Project Kildare sale of €675m of loans relating to Irish office properties and AIB’s Project Pivot sale of nearly €500m of loans relating to 251 UK properties. But the word on the grapevine is that Irish Life and Permanent is close to concluding a sale of its UK mortgage portfolio worth GBP 6.4bn (€8bn). We own more than 99% of ILP, so this is a sale of state assets, and this ONE sale is worth a multiple of all the sales contemplated in the Aer Lingus, BGE, ESB sell-offs. The word on the grapevine is that there are two Indian bidders to the fore of final negotiations with ILP for the mortgage book. When asked about this sale on Friday, the ILP spokesperson had nothing to officially say on the matter. Remember this is a sale of a portfolio that was originally offered on the open market last year, but the sale was abandoned. And the implication of the current rumblings is that the portfolio is being privately offered off-market. The Department of Finance and Minister Noonan know the total number of sales now being conducted off-market, and it might be well in excess of €10bn.

Should there not be oversight of such a massive sale of state assets?

Apparently not in our democracy.

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One of the key means by which the government of the day in Ireland is held to account, is provided by the parliamentary questioning (PQ) system where any deputy in the Dail can submit in writing any question of any minister, and they’re generally supposed to get a response in three working days. It’s a powerful tool in this democracy, but as was evidenced in this Government’s Programme for Government (extract above), it is a tool that could benefit from additional support.

Not all questions will get answers of course. Sometimes the information sought isn’t recorded any place, on occasions the information is too voluminous to collate and sometimes the information is commercially confidential. This blogpost will examine three finance parliamentary questions from the past week, to show that the Department of Finance is both stupid and mischievous.

Firstly

What the Fianna Fail finance spokesperson Michael McGrath is after is the funding position of this State, a fair enough question in any democracy, particularly in a heavily indebted country with giant deficits and which is locked out of the bond market.

What he gets however is a misleading and incomplete answer. On first reading of the response above, you might conclude that we have €32.5bn of potential funding available to us today, €14.5bn in cash and a further bailout of €18bn. And if you set this against the funding requirements set out in the answer – €20.5bn in 2013 and €18.6bn in 2014 – you might conclude we could get to the third quarter of 2014 at least before we would run out of money.

WRONG!

On closer reading, you will note that the figures omit any funding requirement between now and the end of 2012. A quick reference to the profile of income and receipts at the Department of Finance for 2012 tells us that we will have net voted expenditure of €22bn from Jul-December 2012, tax receipts of €18bn and we’ll have to pay interest on our debt of about €3bn .So overall, that’s a deficit for the remainder of this year of about €7bn.  So now we can see that we have just enough funding to get us to the start of 2014 – €32.5bn of potential funding today less deficit of €7bn for remainder of 2012 and €20.5bn deficit in 2013 which is bad enough

BUT

Remember the Anglo promissory note payment in March 2012 – or the “lit-on-fire paper bag full of crap” as I’ve heard it described. In March 2012, the Government issued €3bn of bonds repayable in 2025, and arm-twisted NAMA to fund them for three months, and then on 20th of June 2012, Bank of Ireland agreed to fund them for up to one year. So, in June 2013, Bank of Ireland is going to come knocking on  the Government’s door looking for its €3bn back.

SO

The real funding position is that Ireland has enough funding to get us to what looks like the very start of 2014, but given that we had always intended keeping €5bn in reserve so that we didn’t get down to our last few cent, that means we need a bailout/access to market funding by the third quarter of 2013 at latest. We may be able to issue more short term treasury bills but these are typically repayable in three months. We hope we can get back into the bond markets where we can issue bonds for periods of years at sustainable rates, and on recent Ireland-specific bond performance that doesn’t look unfeasible with our 10-year rates down to the lowest level since October 2010. But with last weeks events in Spain and Italy, where a region in both countries looks set to default on debt,  both Spain and Italy are likely to be looking for bailouts which means the ESM cupboard will be bare for Ireland in late 2013, and without an official source of funding as a backstop and with deficits that are still unacceptably high and with debt:GDP of 120%, we can’t bank on market access at sustainable rates and we might not be able to bank on the ESM if Spain and Italy get there before us.

So, a perfectly reasonable question from Deputy McGrath which received a misleading and partial response.

Secondly

Now this response is more obviously incomplete. Deputy McGrath asks for the position at the “covered banks” and anyone in finance in Ireland knows that the “covered banks” are the institutions “covered” by the bank guarantee which are Anglo, AIB, Bank of Ireland, EBS, INBS and Irish Life. So any response to the above question should make reference to not just AIB and Bank of Ireland, but to the four other institutions as well. Okay EBS has merged with AIB, and it is probably the case that the response above relates to AIB/EBS. But what about Anglo and INBS, which are now merged together into IBRC? The stress tests last year indicated that what we put into these two banks – €34bn so far – will probably be enough, but we shouldn’t be expecting any change back. So, in other words, the value of these two banks is zero. On the other hand, the two men at the helm of IBRC, CEO Mike Aynsley and chairman Alan Dukes say that we might get €3-4bn back. Personally, given the deterioration in Irish commercial property which is the main asset now in IBRC, I would have doubts that we can escape without a further bailout. And then what about Irish Life, in which we have injected a total of €4bn? What is that worth today?

The response above is at best, a half answer, and if the Department of Finance doesn’t know what a “covered bank” is, then it might be time to show some civil servants the door.

Of course, there is a reason for Deputy McGrath’s question, and what he is after is the value of our stakes in the banks, which is relevant at the moment because we are supposedly negotiating with our partners in Europe to sell these stakes and get some of our bailout back. So the question is perfectly reasonable in our democracy crushed under the burden of the bank bailout, but again, the response is plainly deficient.

And the third example? It merits a blogpost of its very own…

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