Archive for March 19th, 2013

It seems that the most controversial part of the Cypriot bailout deal reached in the wee hours of Saturday morning last, are set to unravel with the controversial tax on deposits about to be abandoned – the tax was planned at 9.9% on deposits over €100,000 and 6.75% on all other deposits regardless of amount. There is a vote scheduled in the Cypriot parliament at 6pm local time (4pm in Dublin) and the word is that this aspect of the €17bn bailout will be rejected. There is a proposal that the tax – or “snatch” – on deposits might be changed so that larger deposits pay more and smaller deposits such as those below €20,000 escape tax free. The EU seems to be saying that as long as €5.8bn is raised from the measure, the specifics can be amended. The governor of the Cypriot central bank says that the tax will be unfeasible in terms of its targets if smaller depositors are excluded.

Cyprus is the south easternmost country in the EuroZone and we are at the furthest extreme to the west, but events in Cyprus have the potential to come up close and personal on the streets of Ireland.

There has been a bank-run of sorts in Cyprus, but with banks closed since Friday evening last, and not scheduled to open again until Thursday this week at the earliest, with electronic transfers unavailable and just some ATMs working, we have had a glimpse of what another bailout or financial shock could have in Ireland. The Eligible Liabilities Guarantee expires in Ireland on midnight on 28th March 2013, after which point normal deposits in Irish banks will be covered by a State guarantee of €100,000. This guarantee is overseen by the Central Bank of Ireland which holds a reserve equal to 0.2% of the deposits in Irish banks and credit unions, and the Central Bank has about €400m presently in reserve though some of this will be called upon to repay depositors at Irish Bank Resolution Corporation which is now in special liquidation.

Fortunately for Ireland, our banks are amongst the most poked and probed in the world, and they are capitalized to withstand reasonable shocks. We are in a bailout programme where the IMF, ECB and EU get daily and weekly reports on the health of our banks. We have a Central Bank which is largely unrecognizable from the laxness which presided over the financial crisis in the mid 2000s, so we might consider our deposits safer than those in most other countries. We still have a mortgage crisis that is unresolved and there are fears that imminent losses in banks to cope with the mortgage crisis could spark more difficulties.

So could we ever see our banks closed for three continuous working days with a ban on electronic transfers. Could we face a tax on our deposits, after all, we allowed €1.88bn to be taken from private pensions in 2011-2014 to help fund the Jobs Initiative.

But what about the corporate tax rate change in Cyprus? We know that back in early 2011 when An Taoiseach Enda Kenny sought to renegotiate our bailout interest rate, he was met with fierce demands from France, and to a lesser extent Germany, to increase our headline rate from 12.5%. An Taoiseach resisted the demands though he still had to agree to enter into constructive discussions on the controversial Common Consolidated Corporate Tax Base.

What impact will an increase of 2.5% from 10% to 12.5% have on the Cypriot economy. It should be overall negative as foreign companies will be spooked by the change and the possibility of further changes. Cyprus has done good business in attracting financial services companies in the past decade, it is now a major hub for offshore banking, insurance and trusts, and has enjoyed a boom in Cypriot-incorporated companies. There is no withholding tax on the payment of dividends and no wealth tax on the assets of Cypriot-registered companies. Unlike Ireland, where we impose DIRT tax on deposit interest, interest earned in Cypriot banks is tax free.  Cypriot-registered trusts don’t pay tax on overseas income and there is no public register of trust owners. But what now for all of this business?

Could Ireland face demands to change its tax arrangements? Why yes, we know that the Outright Monetary Transaction scheme whereby the ECB promises to buy our bonds, carries so-called “conditionality” and one such condition might relate to tax; after all, we now have the precedent of Cyprus being forced to make changes in return for a bailout. We may not need to call on the ECB’s OMT scheme at all, and we have already raised 75% of our required funding in 2013, so we might avoid talk of such conditions. But it is sobering that a fellow EuroZone country could face such demands, despite the damage the demands will have on that country’s prospects.

There has not been a whit of concern expressed by Ireland for the demand for changes to Cypriot tax arrangements. I wonder what that says for solidarity, should one of the bigger economies ever try to single Ireland out for changes to our tax arrangements in future.


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This afternoon, NAMA has issued a statement to clarify how it plans to manage its Irish Bank Resolution Corporation loans. Remember, NAMA had already acquired nearly €45bn of loans from what was Anglo and Irish Nationwide, and before the special liquidation of IBRC announced on 6th February 2013, NAMA managed the bigger of these loans in-house, but the smaller loans were managed by over 200 IBRC staff on IBRC premises. As a result of the special liquidation, NAMA is set to acquire further loans from IBRC – those loans which the special liquidator is unable to sell. This afternoon, we learn how NAMA is going to be managing all of these loans.

First up, in respect of the existing IBRC loans, NAMA is appointing our friends, Capita to directly manage the loans at IBRC. What this means is that NAMA is putting clear blue water between it and the IBRC staff managing these loans.  Capita already provides loan administration services to NAMA in respect of IBRC loans so this announcement will just leave IBRC staff in no doubt that they are NOT employees of NAMA.

In respect of new IBRC loans that NAMA will take over, NAMA says that it will acquire these loans on a phased basis. Remember, we were previously given to understand NAMA would acquire these loans in one big hit in August 2013. Now the acquisition is being “phased” but we don’t know the start and end dates of the phasing.

NAMA is tendering for a provider of loan admin services this afternoon with a closing date at the end of April 2013. There will be two loan admin service providers, one for a portfolio of commercial loans and one for the IBRC mortgage loanbook. This is interesting and may indicate that the special liquidator, KPMG is shelving plans to sell the mortgage loanbook.

NAMA says that by the time the “transition of the new arrangements has fully completed later this year [2012]”, at that time, “a significant number of relevant IBRC employees will be re-employed by one of NAMA, Capita or one of the two new loan admin service providers”. If I were a betting person, I would say that few IBRC staff will actually  up at NAMA, and that they will face short term contracts at Capita or at one of the two new loan admin service providers.

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We learn via the UK commercial property portal CoStar, that AIB, in which we own 98.8% of the  shares, has put a portfolio of seven loans on the market. The loans have a par value of GBP 200m (€235m) and are expected to sell for 50c in the euro, according to CoStar, even though the underlying property is said NOT to be distressed.

Citgroup is managing the sales process, and it has been ongoing for some time, with a second round of bids expected “within the next month”

The loans relate to hotel assets of Surinder Arora dotted around the UK, one loan alone relates to a portfolio of 33 hotels. The loan sale has been dubbed “Project River”

AIB has been busy in recent months in offloading loan portfolios; just last month it sold €400m of loans secured by Banca Santander branches in Spain for €320m, and late in 2012, EBS which is part of AIB sold €660m of Irish commercial loans dubbed Project Kildare for €250m to Lone Star.


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