Archive for March 8th, 2013

On this side of the Irish sea, he has been on the wrong end of NAMA’s foreclosure action, but in London, it is reported that Michael Whelan’s Moritz group is selling a GBP 210m (€240m) office block in the City of London to Kuwaiti property group, St Martins. UK commercial property portal, CoStar today reports that St Martins is in off-market talks to buy the 180,000 sq ft block at 70 Gracechurch Street in the heart of the City. If the sale completes at GBP 210m, it is understood that this would represent a 5% yield.


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“We also think that when program countries are on the right track, they should receive support to help them regain market access and reduce dependence on official assistance” IMF managing director Christine Lagarde speaking in Dublin today

“You know that OMTs cannot be used to enhance a return to the market.” ECB president Mario Draghi speaking in Frankfurt on Thursday

Yesterday at the monthly ECB press conference, we were treated to some levity as ECB president Mario Draghi stated in all seriousness, that, because journalists had stopped asking him about Outright Monetary Transactions, that must mean that everyone now clearly understood what OMT was and especially what criteria had to be established before it could be offered by the ECB.

“OMT” by the way, is the new ECB wheeze whereby it will buy your country’s bonds at what should be a discount to the market rate, in other words, the ECB will offer cheap loans. Which is great, except everyone wants cheap loans, so the ECB has criteria for its OMT programme. Trouble is, none of us seem to precisely know what the criteria are.

Yesterday, President Draghi suggested that countries which were issuing long term bonds to a wide pool of investors for substantial sums would qualify. But of course, he didn’t specify what he meant by “long term”, “wide” or “substantial”, but he did say that OMT was not there to assist countries get back into the market after they had been locked out.

So, there, you have the ECB position.

This morning in Dublin, and not for the first time, the IMF has adopted a different position. IMF managing director, Madame Lagarde said

“Going further, Outright Monetary Transactions can help monetary policy work better and sustain fiscal adjustment efforts by reducing financing costs in countries facing severe market constraints. We also think that when program countries are on the right track, they should receive support to help them regain market access and reduce dependence on official assistance.”

Yesterday, the charmingly British reporter from the Financial Times suggested to President Draghi that many in the media didn’t understand the criteria that would apply to OMT, and he received a curt brush off for his troubles. But regardless of the precise criteria, it seems that the IMF takes a different view to that of the ECB on principle with the IMF seeing OMT as a facilitating scheme to get locked-out countries back in the open market, whilst the ECB seems implacable in its position that a country already be back in the market before OMT can be offered.

And this may become relevant to us quickly, because the funding from our Troika bailout comes to an end by December 2013. At this stage, we don’t know if our recent issuance of €2.5bn of 2017 bonds in January 2013 allowed us to meet the criteria for OMT. The NTMA CEO has indicated that Ireland may attempt to sell 10-year bonds into the market during the summer, but it is not satisfactory to be a member of a single currency scheme and not know the rules. No wonder, they are so resistant to adopting the euro across the water.

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Question: Last month you said that we have not heard the last word on the Irish promissory notes. So, I wonder, when will we hear the last word?

Mario Draghi: We periodically review compliance with Article 123 by all countries. If I am not mistaken, the review should happen at the end of the year, but the Governing Council will decide in complete independence when to have this review, or a review of similar situations. I do not have a date to give you now. I think there is a date when this is going to be done, and I believe it is at the end of the year, but I cannot let you know for sure .” ECB president Mario Draghi – pictured above – responding to a question at the ECB press conference in Frankfurt yesterday. Feeling reassured?

It hasn’t gone unnoticed on here that a group of Labour TDs are asking some sharp parliamentary questions. Labour party chairman Colm Keaveney, who now sits on the Opposition benches with fellow Labourites, Roisin Shortall, Tommy Broughan and Patrick Nulty in particular has been pressing Minister for Finance Michael Noonan, on the underlying principles behind the promissory note deal announced on 7th February 2013. Deputy Keaveney’s concern appears to be that it is outside the control of Ireland, when the bonds used to swap with the promissory notes, will be sold.

Stick with this for just a few seconds. What happened on 7th February 2013, was Ireland swapped €27.7bn of the infernal promissory notes held at Irish Bank Resolution Corporation, with €25bn of Government bonds which don’t have to be repaid for 27-40 years. The promissory notes had to be paid off within 18 years maximum, so we kicked the can down the road on that one, and in that sense made the debt more  manageable. But the real benefit of the deal comes from the agreement of the ECB to accept Irish government bonds as collateral for cash loans on which we are charged the ECB main interest rate which is presently a record low of 0.75% per annum. If we borrowed long term funds on the open market, it would cost us nearly 4% per annum, so you can see that we have obtained an ultra-cheap way of paying off the losses at what was Anglo and Irish Nationwide. And kudos to the Government for  getting the ECB to agree to this arrangement, because the view on here is that the arrangement constitutes something called “monetary financing” which is illegal under ECB rules – simply, Governments shouldn’t be able to print money by issuing bonds against which the ECB extends cash loans.

But the essential benefit of the above deal is the cheap source of financing at the ECB. But what happens if the ECB decides tomorrow that it will no longer loan Ireland cash at 0.75% secured on these Government bonds? Yesterday, at the ECB press conference – see top of blogpost – we were remined that this is not a done-and-dusted deal and that the ECB would be revisiting it, though that is not to say the ECB will necessarily vary the deal.

Minister Noonan has now been challenged by the two finance spokespeople in the Opposition on the security of the prom note deal, and the criteria that will be used to trigger the disposal of the €25bn of bonds. Last week, it was established by Deputies Doherty and McGrath (and Deputy Keaveney) that it was not the Government of this State, but the Central Bank which decided when to dispose of the bonds, and given the Central Bank of Ireland is independent of Government and acts under the auspices of the ECB, the implication was that the ECB itself could trigger the disposal of the bonds into the open bond market, even if it were in our interest to hold onto them and use them as collateral for cheap cash from the ECB.

Deputy Keaveney asked Minister Noonan a straight question in the Dail this week – “if the European Central Bank has the lawful authority to direct the Central Bank of Ireland to dispose of the bonds” amd the response direct address the question.

Feeling reassured?

The full parliamentary question and response are here.

Deputy Colm Keaveney: asked the Minister for Finance further to Parliamentary Question No. 185 of 26 February 2013, if the European Central Bank has the lawful authority to direct the Central Bank of Ireland to dispose of the bonds, referred to in his reply, in accordance with a schedule different to that detailed by him in his reply; and if he will make a statement on the matter. [11797/13]

Minister for Finance, Michael Noonan: The Irish Government fully understands the need for the ECB to ensure it is operating within its mandate. As previously outlined by the Central Bank of Ireland, the bonds will be placed in the Central Bank’s trading portfolio and will be sold, provided that conditions of financial stability permit. The disposal strategy will of course maintain full compliance with the Treaty prohibition on monetary financing. The Central Bank of Ireland has undertaken that minimum of bonds to 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.

The Central Bank of Ireland is responsible for financial stability considerations. I would expect the Central Bank to take full account of the health of the domestic and international banking system, the global economic situation and developments in markets when considering financial stability considerations in relation to the disposal of these Irish government bonds.

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