Archive for February 15th, 2013

With the ECB president this morning stating that he is examining “further” the deal on the promissory notes which was reached last week, this blogpost looks at what is likely to be the weakest point, given present low interest rates, in the deal – the discretion of the central banks to stop accepting the bonds as collateral for loans.

In the Dail this week, both the Sinn Fein and Fianna Fail finance spokespersons asked Minister for Finance Michael Noonan to provide more detail on this aspect of the deal, presumably to better understand the circumstances in which one of the most advantageous aspects of the deal – the ability to issue government bonds against which the ECB is lending cash at its main interest rate, currently 0.75% per annum.

Alas, Minister Noonan has not been very forthcoming and responded one question about when the bonds would be sold to the open market, with the nebulous “as soon as possible, provided that conditions of financial stability permit” and to the other question he said the bonds would be sold when “a sale is not disruptive to financial stability. The limits of the option to exchange will be the amounts of the mandatory sales and the option lies with the Central Bank as a right but not an obligation”

This is worrying because if the ECB comes under pressure to provide a similar arrangement to other countries which might threaten to open the floodgates to monetary financing, or if some of the northern European countries get antsy about the prospects of the floodgates being tested, then we might find pressure from the central banks, the ECB and the Central Bank of Ireland, to sell the €25bn of bonds into the market.

The full parliamentary questions and responses are here. Deputy Doherty’s question is from Wednesday, Deputy McGrath’s from Thursday.

Deputy Pearse Doherty: To ask the Minister for Finance if he will confirm the maximum period for which the Central Bank of Ireland may hold any sovereign bond issued as part of the proposed bond issued as part of the proposed new scheme to substitute the promissory notes provided to the Irish Bank Resolution Corporation with sovereign and National Asset Management Agency bonds; and the factors that will affect the period for which the Central Bank has discretion in any decision to hold the sovereign bonds..

Minister for Finance, Michael Noonan: The Central Bank have undertaken that minimum of bonds will be sold in accordance with the following schedule: €0.5bn by the end of 2014, €0.5bn per annum from 2015 to 2018, €1bn per annum from 2019 to 2023 and €2bn per annum  from 2024 onwards.

This schedule of mandatory sales would exhaust the portfolio in 2032.  The bonds will be placed in the Central Bank’s trading portfolio and sold as soon as possible, provided that conditions of financial stability permit.  The disposal strategy will maintain full compliance with the Treaty prohibition on monetary financing.

Deputy Michael McGrath: the circumstances under which the Central Bank of Ireland will be permitted to exchange a portion of the new floating rate bonds issued under the revised promissory note arrangement for fixed coupon bonds; and if he will make a statement on the matter.

Minister for Finance, Deputy Michael Noonan: The Central Bank will sell these bonds but only when such a sale is not disruptive to financial stability. The limits of the option to exchange will be the amounts of the mandatory sales and the option lies with the Central Bank as a right but not an obligation. The Central Bank have undertaken that minimum of bonds will be sold in accordance with the following schedule:-

– €0.5bn by the end of 2014;

– €0.5bn per annum from 2015 to 2018;

– €1bn per annum from 2019 to 2023 and €2bn per annum from 2024 onwards.


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In the Dail yesterday, the Minister for Finance Michael Noonan fielded a series of questions from the Fianna Fail finance spokesperson Michael McGrath about the liquidation of Irish Bank Resolution Corporation. Some questions were stonewalled with what has become a template response on the subject – a non-response followed by “I thank the Deputy for his understanding in what is a crucial phase in the liquidation”

One response which was more revealing and which addresses a question posed on here this week, relates to the termination arrangements for the former CEO of IBRC, Mike Aynsley who is now understood to have left IBRC. What termination payments did he get? Did he get a full year’s salary of €500,000 as was understood to be part of his employment contract? Apparently not.

The parliamentary response from Minister Noonan confirms that Mike simply gets statutory terms which would be two weeks’ notice plus six weeks’ statutory redundancy plus any outstanding annual leave.

So, what is it worth? According to Citizens Information, for an employee with 2-5 years of service as Mike has, having joined in September 2009, he is entitled to two weeks’ notice, and there doesn’t appear to be any cap on sums payable, so Mike would presumably get €20,000 under that heading.

With three years of completed service, according to Citizens Information, he would be entitled to seven weeks’ pay but capped at €600 per week. So that would be €4,200 under that heading.

We have no way of knowing about unused annual leave but assuming he was taking his leave in the year in which it arose, it is likely that he would have 2-3 days or €4-6,000.

The full parliamentary question and response is here.

Deputy Michael McGrath:  if he will provide details of the termination payments that will be made to the former CEO of the Irish bank Resolution Corporation, in liquidation (details supplied); and if he will make a statement on the matter.

Minister for Finance, Deputy Michael Noonan:   Following the liquidation, all employment contracts in the Republic of Ireland have been terminated, including that of the former CEO, Mr Mike Aynsley. Mr Aynsley is entitled to apply for a statutory redundancy payment, a payment in respect of accrued but unused annual leave and a statutory notice payment, subject to the limits prescribed by statute.

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When examining the promissory note deal on here, the conclusion is that it does amount to monetary financing – allowing a State to create one fifth of its annual economic output in new money and charging a mere 0.75% per annum for such money, possibly for 15 years, in the view on here, is “monetary financing”.  In Ireland’s case we have been allowed issue €25bn of bonds, equivalent to 1/5th of our annual Gross National Product of €127bn in 2011, and the plan published last week anticipates the ECB providing cash to us against these bonds for 15 years.

When analyzing the deal on here, there was high praise for Irish negotiators in convincing the ECB to accept such a deal. But the risk of other EuroZone countries seeking a similar deal was raised, and the triumph of last June’s EU summit when the communiqué afterwards said “similar cases will be treated equally” was regarded not as an asset to Ireland, but something that could come back to bite us on the bum. So what happens now if Cyprus demands 0.75% loans from the ECB to bail out its banks?

And this morning, there are reports emerging of the ECB threatening to renege on the deal, after the Germans said the Irish deal came “dangerously close” to monetary financing. [CORRECTION: 15th February, 2013.   The president of the German Bundesbank Jens Weidmann is reported to have said that, in relation to the deal, the ECB “has to make sure that its actions are in conformity with its rules and statutes”. The ECB president has said that the ECB will re-examine the deal]

Perhaps we should be grateful at the deal last week which saw €25bn of promissory notes, which were almost definitely illegal in the context of ECB rules, and may well be unlawful in Ireland – something we may find out as David Hall’s challenge progresses through the courts – converted into sovereign debt. The view on here is that we should not be at all grateful, because even though the overall debt shouldered to bail out the banks has been reduced in net present value terms, we are still shouldering debt which threatens to seriously undermine our society.

How might the ECB renege on the deal? It might require the term in which the Central Bank of Ireland can hold our bonds, to be cut from 15 years to a much shorter term, perhaps even months.

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It seems that NAMA developer’s wives are not immune to the ravages of the downturn in the property market, with news today that Jacqueline Dolan, wife of Jermon’s Peter Dolan, is the target of a bankruptcy petition by Irish Bank Resolution Corporation, the zombie bank finally put into liquidation by the Irish government last week.

The Belfast Telegraph today – not available online for some reason – reports that “Jacqueline is understood to be challenging a bankruptcy petition by Irish Bank Resolution Corporation on the basis of a class action against swaps, the controversial financial product for small firms” – the “swaps” in question are believed to be interest rate swaps which are the subject of multi billion euro compensation claims in the UK at present, and in the Republic, there have been at least three applications in the Dublin High Court on foot of the mis-selling of such products.

Peter Dolan is the county Tyrone pharmacist who was, for a time, fantastically successful in property development, until the downturn. He is a NAMA developer but was bankrupted by the British tax authorities, HMRC last year. His developments included office blocks and shopping centres, and in 2011 NAMA sold one of his Scottish shopping centres for €5.5m, last year a Belfast office block was sold for €4m.

It is not clear what will happen to the IBRC bankruptcy petition in light of last week’s liquidation. Under normal circumstances, the liquidator would evaluate the economic feasibility of pursuing litigation or assigning it or abandoning it.

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Two US law firms have this week submitted €1.2m claims for unpaid legal fees to the US bankruptcy court which is dealing with former Anglo CEO David Drumm’s bankruptcy, reports Simon Carswell who is back on his home-ground specialism in the Irish Times today, even if the Irish Times has bizarrely physically relocated him to Washington.

Given David owes about €10m in his bankruptcy already including a €8.5m loan from Anglo, and given David has sold his property at Abington, Malahide for about €1.4m of which half will go to his creditors,  and his property at Stage Neck Road, MA – where Charlie Bird famously doorstepped David – “have some respect Charlie, I have my family in here” – was sold for just over €3m with half again going to the creditors, and there is still a property in Wellesley which has oddly been recently withdrawn from the market but was said to be worth €1.5m, and given these three properties are likely to be David’s main assets, you would be doubtful of his creditors even seeing anything like substantial repayment.

In total, David’s half share of the properties is worth less than €3m, David’s shares in Anglo were wiped out and his chattels including a couple of vehicles are unlikely to be worth more than €100,000. So (a) Anglo is facing a large loss on its loan and will be lucky to get 25c in the euro back and (b) the two US law firms acting on behalf of IBRC would appear to have a snowball’s chance in Hell of recovering their outstanding fees.

The two US law firms involved in the case on behalf of IBRC are New York’s Sidley Austin claiming USD 1.463 (€1.1m) and Boston’s Foley Hoag claiming USD 191,276 (€0.1m). It is not known how much these firms were previously paid before IBRC was placed in liquidation last week.

Minister for Finance Michael Noonan refused to even provide IBRC’s total legal costs in a response to a recent parliamentary question.

The claims lodged by IBRC’s lawyers this week are indicative, though not yet probative, of IBRC abandoning the case against David.

Separately, last year, claims for USD 628,000 (€0.5m) were submitted for work undertaken on behalf of the bankruptcy trustee, Kathleen P Dwyer.

Unless there is a belief that David has assets squirreled away – and the sorry truth appears to be that David shoveled his income, salary and bonuses into Anglo shares which were wiped out – then it would seem that this case has no further economic value to Ireland. Which begs the question, how much money should Minister Noonan now spend on pursuing David for what will be politically-motivated ends. The answer would appear to be zero, given the claims earlier this week.

David may still have to contend with the bankruptcy trustee, Kathleen P Dwyer, who hasn’t been happy with his conduct. And of course David also faces sanction from the Chartered Accountants Regulatory Body in Ireland. Whilst An Garda Siochana is said to want to speak to David, no attempts have been made to extradite David from the US, and David does not form part of the trio – Sean Fitzpatrick, Willie McAteer and Pat Whelan – who will face trial in Ireland at the start of 2014.

Looks like we might have uncovered another winner from the IBRC liquidation.

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