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Archive for March 23rd, 2013

MCRredux

NAMA appointed receivers to a slew of companies in the John McCabe group last 31st August 2012 after a personnel supply and recruitment firm, MCR had initiated moves to have the group wound up on foot of relatively modest outstanding invoices. John has since become famous as a NAMA developer after NAMA secured judgments against him and his family in the region of €300m and of course, it was John’s wife, Mary and her 8.38 carat diamond ring which impressed and entertained us earlier this year.

Yesterday’s edition of Iris Oifigiuil reveals that MCR is again getting serious with pursuing its bills with a notice that on 8th April 2013, MCR will petition to have McCabe Builders Limited wound up in Dublin’s High Court. It would seem that MCR is impatient or unhappy with NAMA’s receivership and figures a liquidation will either yield more money or will spur the receivers into action.

No recent news on John McCabe and family, the latest from the courts is that a derisorily small amount has been paid off against the judgments.

UPDATE: 30th April, 2013. A footnote on McCabe Builders, one of the most prominent house building companies during the boom; today’s edition of Iris Oifigiuil notes that the company will now be wound up at the behest of one of its creditors, MCR Personnel.

McCabeBuildersLiquidation

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The Cypriot parliament has been debating new bills aimed at meeting the ECB requirement to have a sound funding plan in place by midnight on Monday next 25th March 2013 (otherwise the ECB will call in its emergency liquidity assistance, apparently). The bills are really just re-arranging deckchairs on the Titanic and the notion that Cypriots would en masse contribute to a solidarity fund or that due diligence could be undertaken on a ragbag of assets including natural gas in disputed maritime waters or that splitting a bank into a good and bad part solves the underlying insolvency, is all laughable. The betting on here is that it will be tomorrow Sunday when the politicians in their Ivory Tower of fantasy sophistry will begin to realize that the trust of citizens in the banking system has been lost and that depositors will withdraw the maximum sum allowed as soon as banks re-open. And no amount of deck-chair rearranging will change that.

So, the main curiosity at this stage is what capital controls Cyprus will impose on its depositors. At this stage, we really don’t know what the details are but it is probably safe to dismiss the claim from Cypriot politicians that capital controls would only be introduced if a funding package has not been agreed by Monday. Because, even if Cyprus could convince the EU to part with €10bn by Monday evening, there will still be a flood of withdrawals if banks are re-opened as normal on Tuesday, and the funding requirement on Monday evening would have changed utterly by Tuesday evening.

So, for now, we have a Bill – there’s a leaked Greek version going around someplace – which gives the governor of the central bank of Cyprus and the finance minister the authority to introduce capital controls in the national interest. The precise details of any capital control are omitted from the Bill.

The capital controls MIGHT impose withdrawal limits from bank accounts, but how will the controls distinguish between a business withdrawing €10,000 from its €30,000 balance to pay rent, wages and suppliers and an individual withdrawing €10,000 to stick in a mattress or home-safe? And if you can differentiate between consumers and businesses then what limit do you place on consumers, and how do you stop every consumer withdrawing right up to the general maximum? Figures for withdrawals over the past week are not available but if you have customers in Cyprus and overseas withdrawing maximum ATM funds from Cypriot accounts, there could well be €300-500m withdrawn in every 24 hours or €3-5bn in the 10 days that the banks will have been closed by next Tuesday. Pretty soon, even these limited ATM withdrawals could eat into the c€70bn deposits in Cypriot banks.

Capital controls might also try to stop people moving euros from Cyprus to other countries. But given the porous border between north and south Cyprus, the official presence of Russia and NATO on Cypriot soil which means planes taking off with a few hundred million euros might be difficult to stop, how effective can such controls be? And even if there are serious penalties, will people take the risk rather than be left with a currency that they could be forced to exchange for a Cypriot pound which might decline by 50% in value in the next few weeks? In other words, people are unlikely to recognize the trust element in these laws when faced with dire financial consequences and the reality of the past week.

Beyond normal households and businesses though, what of Cyprus’s colossal offshore banking and insurance industries. Will capital controls signal the death knell of these businesses, which will just relocate to Malta, Monaco, Gibraltar, Liechtenstein or the Channel Islands? Or even to Dublin? Limossal by the Liffey?

There isn’t likely to be much detail forthcoming on capital controls today because (a) the Bill doesn’t make them explicit and (b) politicians will want to downplay any new measure which will frighten households and businesses more. But it’s all irrelevant anyway. What we want to know is Plan C and the reintroduction of the Cypriot pound and the re-establishment of an independent central bank of Cyprus.

UPDATE: 23rd March, 2013. Thanks to Dorothy Jones below for giving what is likely to be many perspectives on the precise nature of Cyprus’s new capital controls. A German economist, deemed worthy enough by respected newspaper Handelsblatt, has called for cepital controls to include a provision whereby citizens will only be allowed withdraw from the banks that which is absolutely necessary for survival.  Yes folks, we’re practically back at Lord of the Flies level of civilisation!

UPDATE: 24th March, 2013. With many thanks to John Gallaher for what looks like a readable translation (it’s not perfect but generally makes sense) of the capital controls bill presented to the Cypriot parliament last Thursday 21st March 2013. The translation is here.

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Nearly a year ago, there was criticism on here that NAMA still didn’t have a proper handle on its Irish residential property – NAMA would merely say that 9,200 homes were rented but there were 4,000 other homes whose status was not clear. This week in the Dail, we got an update and it seems that right now, some 3,250 of NAMA’s Irish homes are vacant.

NAMA says that it is currently renting out 10,000 homes at an annual rent of more than €100m – that’s an average of €10,000 each per year or €833 per month.

However NAMA says that 4,000 properties have been made available for social housing, but of these 750 have been sold or rented. So that leaves 3,250 homes that are presently vacant. We don’t know exactly where these properties are located but NAMA has said in the past that most of its residential property is located close to major urban centres where there is a strong rental demand. That means that 3,250 properties which might be capable of generating €32.5m in rent per annum, if the properties are similar to the 10,000 already rented, are currently lying empty.

That’s a pretty awful indictment of NAMA’s asset management capability.

NAMA says that it also has 400 properties for sale with its 80:20 deferred payment initiative, or “negative equity mortgage”.

The information was revealed in a response to a question from the Sinn Fein finance spokesperson Pearse Doherty to the Minister for Finance, Michael Noonan, set out here.

Deputy Pearse Doherty: asked the Minister for Finance further to Parliamentary Question No. 207 of 22 May 2012, if he will provide a breakdown of the stock of Irish residential housing in the National Asset Management Agency portfolio, showing the number of units rented and vacant, and showing the number of units being offered for sale and for rent.

Minister for Finance, Michael Noonan: I am advised by NAMA that it is continuing to carry out extensive analysis of data on residential property under the control of its debtors and receivers and expects to be in a position to publish the findings from this analysis in its 2012 Annual Report. At this stage in its analysis, NAMA advises that some 10,000 properties securing its loans are currently rented and are generating an annual rental income in excess of €100 million; a further 4,000 vacant houses and apartments have been made available through the Department of the Environment, Community and Local Government for social housing; and a further 400 properties have been made available for sale under the Agency’s 80/20 Deferred Payment Initiative, which the Agency plans to extend up to a maximum of 750 properties.

NAMA advises that to date sales have been agreed on 120 of the properties included under the 80/20 Initiative. NAMA also advises that in the time required by local authorities to assess and confirm demand for properties identified as being available for social housing, over 750 have been sold or privately let by their owners or, on their behalf, by duly appointed receivers. NAMA advises that the strategy for any given residential property depends on the detail of the asset disposal and asset management plans that have been agreed with individual debtors and receivers and that these plans are subject to on-going review. NAMA advises that the NAMA Board’s policy is that all assets are ultimately intended for sale. NAMA advises that it is not in the business of encouraging its debtors to stockpile assets but that actual sales depend on the level of demand in particular markets segments and on the availability of finance. NAMA further advises that it must also seek to ensure that its debtors do not offer for sale a volume of assets in excess of the current absorption capacity of the market.

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“We have 19 per cent in offices, 19 per cent in retail, 8 per cent in hotels and leisure, 3 per cent industrial, residential 12 per cent, while development land – 9 per cent, and the riskiest part of all – is a lot less than anybody would think” NAMA CEO Brendan McDonagh demonstrating his inability to count percentages to 100% in London yesterday

Well, despite being nearly three months after year end, the NAMA CEO Brendan McDonagh didn’t give us any hint yesterday of the Agency’s performance for 2012. He said that Minister for Finance Michael Noonan would announce the results this coming week. NAMA made a post-impairment profit of €222m for H1, 2012 and a profit before impairment of €141m for Q3,2012.

What Brendan McDonagh did tell the Chartered Accountants (Ireland) London branch was that NAMA collected €1.2bn in rent last year, that’s €100m a month, and that this was evidence that NAMA had not sold off all the low-hanging fruit or performing/better quality loans. NAMA has few development land loans, just 9% according to Brendan but much of the rest is income producing.

What some will be confused by is the fact that only about 15% of NAMA’s loans are performing by reference to the original loan agreements and although further loans are making some contribution, it was understood the effective interest rate on the non-performing loans was less than 1%. A bit of head-scratcher. Given the poor performance of Irish residential and commercial property in 2012, the estimate on here for 2012 post-impairment is €300m though this can be distorted by accounting convolutions.

On hotels, NAMA has an interest in 188 of 900 in Ireland and 36 of these are in Dublin. And NAMA has seen off an inquiry by the Irish Competition Authority that it is distorting the market by supporting loss-making hotels.

On golf clubs, NAMA has an interest in just 17 of the 400 Irish golf clubs, and most are attached to hotels, so again, NAMA is not distorting competition.

NAMA has an interest in only 160 of the 1,500 ghost estates in the country.

The really interesting revelation is that 20% of the assets that NAMA has left TODAY are in London and surrounding areas. You might have thought that with €7bn of London sales that the London portfolio would have been depleted by now. NAMA has about €23bn of assets remaining by reference to NAMA acquisition value less impairment, so based on the %s reported by Mark Hennessy today in the Irish Times

€5bn is in London and surrounding areas

€3bn elsewhere in Britian, that is England, Scotland and Wales

Just €700m (3%) of assets in Northern Ireland

94% of Irish assets are in “Dublin, surrounding counties or major cities”

No word about assets elsewhere, like in the US

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You might have thought that after our issuance on 13th March 2013 of €5bn of 10-year bonds to a wide range of investors, that we had finally met the criteria to gain access to the ECB’s lending scheme to member states.  Seems it still isn’t clear-cut.

Before the latest Cyprus fiasco, the general consensus is the ECB halted the instability and placed the EuroZone on a more certain footing last summer when it announced on 26th July 2012 that it would do “whatever it took” to protect the euro. As a practical expression of its intentions, the ECB announced on 6th September 2012 a scheme known as “Outright Monetary Transactions” where it committed to buy the sovereign bonds of member states, a buyer of last resort if you will, but that convinced the markets that member states couldn’t be spooked by market speculators and the like, and the practical result is that yields on member states declined markedly. In Ireland’s case, our benchmark 2020 bond came down from a notional interest rate of 6.23% in July 2012 to 3.69% today.

As Ireland’s bailout from the IMF, EU and ECB is coming to end this year, we are keenly interested in whether we qualify for the OMT scheme just in case there are some jitters, for example if and when Cyprus leaves the euro in a week or two. ECB president Mario Draghi seems to think that the criteria for accessing OMT are perfectly clear; in fact, he told a news conference earlier this month that because the media had stopped asking him about OMT, he assumed everyone understood the criteria for accessing OMT. A very polite man from the Financial Times disabused him of that belief when he asked

“Mr Draghi, you have just said that we know the rules on OMTs. I do not think I am alone in saying that, actually, I do not think we do. The only thing you have published that I am aware of is an approximately 440-word statement that you read out to us in September; other than that it feels a bit like we are slowly piecing together the picture. Would you consider giving us, at some point, a full, written, point-by-point document stating how it works, what a country must do, etc., or is this a deliberate policy to keep it a little bit vague?”

But Mario Draghi went on to say that the criteria would be met if significant sums of long term bonds were sold to a wide audience. He specifically said that OMT was not there to assist countries in returning to the market, they must have actually returned to the markets before they would meet the criteria.

So, with Ireland selling €5bn of 10-year bonds to a market which according to the NTMA was “18 per cent [..] taken up by domestic investors and 82 per cent by overseas investors. The overseas investors were mainly from the U.K. (25%), Germany (12%), the Nordic region (12%), France (11%) and the U.S. (7%)”, has Ireland now met the criteria.

Minister for Finance Michael Noonan isn’t saying.

In response to a question from the Sinn Fein finance spokesperson Pearse Doherty this week, Minister Noonan rambled on practically incoherently and ultimately said that it was the ECB which would decide if we had met the criteria.

The full parliamentary questions and response are here.

Deputy Pearse Doherty: asked the Minister for Finance if he has confirmed with the European Central Bank, that in view of the recent issuance of €5bn of 10-year bonds to a wide range of investors, that Ireland now qualifies for access to the ECB’s outright monetary transaction scheme.

Deputy Pearse Doherty:  asked the Minister for Finance his assessment on whether this State now meets the criteria for access to the ECB’s outright monetary transaction scheme, following the recent issuance of €5bn of 10-year bonds to a wide range of investors.

Minister for Finance, Michael Noonan: I propose to take Questions Nos. 94 and 95 together.

In my reply to the Deputy’s Question No. 211 of 12 February last, I set out the principal criteria for the ECB’s Outright Monetary Transactions (OMTs) as set out in its press statement of 6 September 2012. Those criteria have not changed. It is clear is that the ECB will decide on the application of OMTs in any particular circumstance to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme. It is also clear that the ECB’s Governing Council will decide on the start, continuation and suspension of OMTs, following a thorough assessment, in full discretion and acting in accordance with its monetary policy mandate. I believe the ECB’s announcement regarding its OMT programme is a significant development and is viewed as such by the financial markets. We are in the final year of our EU-IMF programme. Our focus is firmly fixed on a successful and durable exit from the programme. The recent highly successful sale of long-term bonds by the NTMA is another very significant step in this process. We continue to assess a number of options in this regard. However, we must respect the fact that the decision on whether to grant OMTs or otherwise in any particular case is a matter for the ECB.

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