ECB, NAMA Bonds and the Irish Banks as Issuers of Sovereign Debt

Listening to Richard Downes question Richard Bruton on Morning Ireland earlier today (“The ECB are funding NAMA at a rate of 1.5%”) I am now convinced that very few of even our smartest journalists understand the basic mechanics of how the funding of NAMA will operate or where the ECB fits in. So here goes.

In exchange for property-related loans, the Irish government will print off €X billion in bonds backed by the taxpayer and give them to the banks. It appears that these bonds will differ in yield and maturity from other Irish government bonds. We are being told that the bonds will pay a floating rate linked to one of the Euribor rates for wholesale interbank lending (there’s a bunch of them corresponding to different maturities. See here.) Some people seem to believe that these assets will somehow be “backed” by the property assets acquired by the government and that their value may fluctuate based on how these assets perform. I don’t know why these people think this. They will be government bonds backed by taxes levied on you and me.

A figure of 1.5% has been repeatedly mentioned as the initial floating rate on the bonds paid to the banks but, as far as I know, no formula has been provided to justify this figure. The main point to understand here though is this: The 1.5% is an interest rate the Irish government is paying to the banks. It has nothing to do with the ECB.

What happens next to the bonds? Many people start talking about the ECB at this point. However, that’s getting a bit ahead of things. Alan Ahearne’s column on Saturday stated

Nama will pay the banks for the loans using bonds issued by the Government. These bonds can be exchanged for cash on international markets and at the European Central Bank.

I’ll get to the ECB in a second. However, what’s more important is that Ahearne is telling us that the NAMA bonds can be sold on the open market and don’t have to be held to maturity by the banks.

This has very substantial implications for how the Irish state is going to funds itself over the coming years. NAMA bonds being tradable will in effect make the Irish banks competitors for the issuance of Irish sovereign debt with the NTMA. Indeed, it may be necessary for the banks and the NTMA to co-ordinate sales of NAMA bonds on the secondary market with issuance of new bonds by the NTMA.

Of course, this raises the question of why cash-strapped banks wouldn’t just go straight to the open market with the €X billion of Irish bonds and sell them straight away. After all, according to those who propose the NAMA approach, the government will have also bought assets that will turn out to also be worth €X billion, so its net solvency shouldn’t be affected and markets should be no less willing to buy Irish government bonds.

That’s the theory anyway. In practice, I suspect the markets will have grave doubts about whether NAMA will break even. More importantly X is going to be a big number and there is simply not likely to be a market for that large a quantity of Irish government bonds all to be sold off at once.

Now, and only now, does the ECB come in to the picture. Knowing that there will only be a limited market for the NAMA bonds on the open market, it appears that the government and the banks have made something of a gentleman’s agreement not to sell many (any?) of the bonds at first. Instead, the banks can go to the ECB and look for loans. The ECB requires that a bank have eligible collateral to secure its loans. Dodgy developer loans are not on the ECB’s list of eligible collateral; government bonds are.

So, NAMA allows the banks access to a new source of liquid funds (it appears they are either at or close to their limit in terms of eligible collateral). The interest rate on the loans from the ECB will be at the main refinancing rate. This is currently 1% but it will rise at some point. Note that contrary to what is commonly stated, the ECB will not be buying these bonds—they are forbidden from buying government bonds of member states—they are only requiring that the bonds be available as eligible collateral.

But for how long will this process of large-scale ECB collateralised borrowing go on? Even before the banks receive the NAMA bonds, they have become highly dependent on the ECB, taking about 15 percent of the total liquidity handed out in recent ECB operations. The ECB is currently running unlimited liquidity operations so that any bank with the eligible collateral can get a loan. However, it will at some point return to its usual practice of issuing a fixed amount of liquidity, rationing it off via an auction. One would wonder at that point whether the Irish banks would start selling off the NAMA bonds gradually over time.

For all the information that has been released along with the detailed legislation, I find it strange that none of the issues mentioned here (maturity of bonds, formula to determine interest rates, marketability of NAMA bonds, implications for NTMA issuance, plans for weaning off reliance on ECB operations) have been discussed publicly in any detailed way by the Department of Finance.

105 thoughts on “ECB, NAMA Bonds and the Irish Banks as Issuers of Sovereign Debt”

  1. We have been consistently told by the proponents of NAMA that the ECB is supportively on board. In practice, this is likely to mean the (probable Euro 60+ bln?) of newly minted Irish Government Debt being pledged indefinetely to the ECB by the Irish Banks, in return for newly minted Euro cash ie these Bonds will never see light of day. The same however is clearly not true of said Euro cash – how much of this has been earmarked (via another ‘gentleman’s agreement’ between the government and the Irish Banks?) to buy Irish Government Debt (in the ‘normal’ fashion) from the NTMA? As notably large buyers of such Debt since their ‘life-saving’ guarantee last September, surely the grateful banks can be further expected to keep the fiscal gravy-train on track for their saviours in government? Someone should tell the good Dr that he can stop fretting about us facing the IMF anytime soon! January for renewed ‘Social Partnership’ talks anyone??

  2. “he ECB requires that a bank have eligible collateral to secure its loans. Dodgy developer loans are not on the ECB’s list of eligible collateral; government bonds are. ”

    Is this the first sovereign CMO Ireland is in fact creating?

  3. and dont forget Irish Life and Permanent’s funding requirements. With a €40bn loan book at 3x loan to deposits they will be another Irish government backed (currently) institution tapping the international bond markets to fund their broken business model.

  4. @John
    The key point of Karl’s piece is:
    “The ECB is currently running unlimited liquidity operations so that any bank with the eligible collateral can get a loan. However, it will at some point return to its usual practice of issuing a fixed amount of liquidity, rationing it off via an auction.”

    What then is a situation that would cause the ECB to reduce the scope of its operations? Let’s have a look at what the ECB itself says in its exit strategy:
    http://www.ecb.europa.eu/press/key/date/2009/html/sp090904.en.html
    “A degree of phasing out has been built into the exit process through the design of our measures. In the absence of new policy decisions, many of the measures will naturally unwind over time. An overwhelming proportion of the additional liquidity provided during the financial crisis has been offered through repurchase agreements. Once these operations mature, their impact naturally phases out.”

    The liquidity measures of unlimited repo were supplemented by an extension of the repo agreement to a maximum of one year. So the ECB has two ways of exiting – reduce amount on offer and reduce duration. I suspect they will do both to avoid an avalanche of demand for cash.

    What circumstances would cause them to do this?
    “The first cornerstone of the our exit strategy is the link to our primary objective and thus to our monetary policy strategy. Evidently, the crisis has not changed the ECB’s primary objective. Our actions have resolutely been taken with this primary objective in mind: to maintain price stability in the euro area over the medium and longer term.”

    So, a rise in core inflation or in inflation expectations or an exceptional rise in M3 would probably be enough to see the ECB share to shuffle towards the exit. Once it builds up exit bound momentum, it will continue until it is out the door, even if it has to come back in later. Such are the demand of credibility.

    What would the result for NAMA bonds be?
    This is where it gets tricky. If the ECB raises interest rates, but doesn’t reduce liquidity support (inflation expectations are rising, but M3 is still depressed), there should be no problem in terms of cash. Of course, the state will pay more to the banks and more of its loans in NAMA will default, but that’s a different debate.

    If the ECB reduces its exceptional measures, but doesn’t raise interest rates (M3 is roaring ahead, but inflation expectations are flat), NAMA will have to live in the interbank markets. It will have stiff competition. There will be a lot of good grade government bonds paying handsome coupons that will make NAMA’s 1.5% look rather puny. The effect of all those bonds competing for available cash will tend to have a depressing effect on their price and hence their repo value (if I have that bit right!), mind you that should increase EURIBOR anyway, so the next coupon reset will result in the bonds increasing in repo value on the interbank. As this would, in effect, be a credit crunch, I think it is unlikely, but it could happen if speculative bubbles start to form.

    The result of either of those measures could be serious. An interbank haircut on the NAMA bonds will crimp the cash available to the banks. If they have not been prudent, this will result in a withdrawal of credit from the economy. Credit crunch part deux. On the other hand, rising rates could result in NAMA becoming cash-flow negative, diminishing the fiscal position of the state and resulting in a downgrade. Which would, eh, also have the effect of reducing the price of the NAMA bonds… oh dear.

    The risk is that the debt from the toxic bank could itself become toxic.

    (Sorry about the brain dump and any inaccuracies!).

  5. @yoganmahew

    Each of the scenarios you outline above are at least plausible, and in a rational (that is to say ‘politics-free’) environment, may even be probable. However, as the country historically indulged by our European partners (CAP, Regional Funds, Treaty Protocols etc ..) and the country currently in a position to potentially fatally undermine the Euro; are we not likely now to be insulated from the impact of the ECB ‘exit strategy’? Won’t the ingenuity of Merrion Street, Treasury Buildings & Frankfurt not find a way to keep ‘the tap’ on for the Irish? Or is that mechanism already in place and better known as NAMA?

  6. @John

    I suspect that the patience of our European partners has worn thin. They will indulge us till Lisbon 2 is passed. But I doubt they have forgotten how the Irish were throwing their weight around in the years of plenty. Moreover, domestic constraints and the German aversion to hyper-inflation means that there is less room to coddle the Irish this time.

  7. @yoganmahew

    “Credit crunch part deux. On the other hand, rising rates could result in NAMA becoming cash-flow negative, diminishing the fiscal position of the state and resulting in a downgrade. Which would, eh, also have the effect of reducing the price of the NAMA bonds… oh dear.

    The risk is that the debt from the toxic bank could itself become toxic.”

    I posted on this issue on another thread (not as well)

    Is it the case that this method of funding involves enormous risk for the country? So many variables that it is impossible to forecast with any degree of accuracy. and why?

  8. @Karl

    Thanks for that explanation of how we, the taxpayers/citizens, are going to be exposed to so many risks (maturity of bonds, formula to determine interest rates, marketability of NAMA bonds, implications for NTMA issuance, plans for weaning off reliance on ECB operations) if the government gets NAMA passed in the Dail.

    Brian Lenihan has said that the interest rate the state will pay to the banks for the property related loans is going to be 1.5%. When the banks sell off these loans on to the secondary market, is it not likely that this interest rate will vary? Is it not likely that this interest rate will increase in the future, particularly once the unlimited liquidity operations have been wound down?

    At the very least the public deserve clarity on what kind of gamble we are taking.

  9. There is likely to be little interest in the Nama bonds on the open market.

    The globe is literally awash with bonds likely to prove far more attractive to any investor.

    Would any of you buy a Nama bond?

  10. @KW

    Thanks for that explanation and particularly clarifying that these bonds can be sold as well as repo’d.

    @the rest of you

    I was wrong some time back when I said on the 46 economists letter discussion that I thought a portion of NAMA bonds could possibly asset-backed only. My misunderstanding was cleared up by the ECB note on NAMA. I did point out in the discussion on the ECB note that it clarified that NAMA bonds would have to be guaranteed by the State and my previous speculation had been wrong. I just wanted to clear that up for anyone who saw one comment but not the other.

  11. @Aidan C

    There is every chance that interest rates will increase. As Karl, Brian and others have pointed out, this is a huge gamble. This is Vegas.

    Looking at the bigger picture of global bailouts. This is unchartered territory. Nothing on the scale of what is happening globally today has ever been attempted before.

    The number of bank failures in the U.S. alone this year, taken with the number that is on the watch list or at risk is huge. Any further crisis in the states will have a tsunami effect globally.

    There is not a lot of credit left out there to tap into.

  12. @Michael Harvey,

    Which is all the more reason for the Government to borrow hugely now to nationalise the banks, pay off (or come to a deal – say debt-to-equity- with) the bond-holders, use NAMA with proper accountability to liquidate the dodgy loans, recapitalise and clean up the banks, restructure them and auction them off as going concerns in trade sales. It could all be done within 6 months. the extra borrowings would be paid off at a profit, property prices would come back towards affordability and the whole economy would get a kick-start.

    Will this happen. I’ve just seen those flying green pigs again.

  13. @Karl

    excellent summary. will lazy financial journalists pay attention?

    “Indeed, it may be necessary for the banks and the NTMA to co-ordinate sales of NAMA bonds on the secondary market with issuance of new bonds by the NTMA.”

    A lot of people will be interested to know how this might work. These people http://www.ise.ie/index.asp?locID=472&docID=-1, for example.

  14. @ Karl
    Tip of the hat! excellent.

    @ John L
    Wag of the finger!
    “Won’t the ingenuity of Merrion Street, Treasury Buildings & Frankfurt not find a way to keep ‘the tap’ on for the Irish?”
    = Bars still open, rehab can wait!
    Or I can keep wearing nappies as long as some one is there to change them!

    Al

  15. Reversing the angle in this discussion, suppose we are meant to believe these are mortgage backed securities where the underlying assets of property provide a revenue stream.
    At least that is part of the spin Lenihan has been making that some of these properties are performing assets.
    If Nama bonds are de facto sovereign bonds then there is no requirement for any of these property assets to perform and pay an annual coupon.
    If the valuation is some notion of the ‘future economic value’ of these assets then yields on those underlying assets would be expected to perform in accordance with that ”future economic value”.
    As this method of valuation has never been tried before there are no guidelines to determine a coupon rate.

    If there is no formal evaluation of these performing loans then for all intents and purposes they dont exist.They have been made up for political expediency to snowball the Irish public .
    Therefore Lenihan is truthful in one respect when he states that the taxpayer is not relieving developers of the properties but is relieving them of the loans.

    There is therefore no direct connection between these loans and the underlying assets once Nama becomes law.
    The management of the loans and the assets become two seperate entities.
    The taxpayer is on the hook for the entire loan value whilst there is nothing to stop FF from using whatever revenue they get from the assets to buy the next election.
    Am I wrong or right?

  16. If nationalise then privatise (which is shorthand for the essence of the case being put by many posters, but which, unfortunately, has no political traction) is the efficient alternative, what we need is a quick and dirty estimate of the present value of the additional economic cost over the next twenty years of maintaining, as far as possible, the existing boards and senior managements of the banks and of keeping the developers on life-support.

    Even the dozy journos might be able to get their heads around a number like that – and it wouldn’t be small.

  17. Karl, I agree that very few journalists understand what the mechanics are. This is a very important point. As you point out, most people are utterly confused about who is lending money to whom here. But that’s only the beginning of the confusion.

    But I don’t think that the arrangement has really been well explained to anybody. I suspect (but I could be wrong) that what you say is going to happen to the bonds is not actually going to happen.

    The banks wouldn’t necessarily have to raise cash on the strength of the government bonds or at least not all of them. They might do this if they need liquidity. But the main issue for the banks is not liquidity. The issue is lack of capital.

    There is certainly a lack of liquidity too, but this might be symptomatic rather than structural. They can’t get anybody to lend them money, for the simple reason that they are not profitable and do not have a sufficient capital base, and therefore lending to them is just not a wise thing to do. Once they have a capital base again, new funding avenues will (or should) open up.

    As I understand it, the liquidity position of the banks is improving slightly anyway, as people save. The EIB funds can also give a little liquidity. A bank can get liquidity by hocking its loans. I could be wrong about this, but my he ECB lets banks pawn their property loans (the good ones left after NAMA has been through anyway).

    It’s a lack of capital that is preventing the banks from lending, not lack of cash. (There are also other factors, mind, such as a lack of good projects.)

    The banks are liquid but unprofitable. The unprofitability is the problem, because it eats up the capital. Unlike your local builder or shop, a bank has to have a certain amount of capital, otherwise it can’t trade. That’s what this scheme is supposed to resolve.

    I suspect that the government and ECB is planning that few if any of the bonds will be used as collateral, except as a last resort.

    It looks like the banks are going to have the bonds on their balance sheet at face value. (This is a supposition on my part.) If they try to use them as collateral, they will have to be valued, and if that happens, they will probably turn out to have a lower value than face value, because the coupon is lower than the prevailing yield of government bonds. This would be bad for the banks, because it would reduce their capital. The banks will avoid this if they can.

    The idea overall seems to me to be that the banks continue to trade without the State or the ECB actually having to give them any cash. The only outward cashflow for the State is the relatively small coupon. The hope is that the State will be in a strong position again by the time the bonds come to maturity. The length of the maturity bond is pretty critical. If property assets have come around by the maturity date (or if there is a lot of growth or inflation in the economy generally) then everything will look good and it will be easy to pay back the principal or refinance it. If they haven’t, then it’s going to be tougher.

    A lot of people are saying that the coupon would be variable in line wih euribor, But I don’t think we’ve heard it from a reliable official source. It would seem like a better idea to have it fixed.

    i am no expert on any of this, but all I am saying is that assumptions are being made about how this will work that aren’t necessarily true. In particular, the banks don’t necessarily have to bring these bonds to the ECB pawnbroking window for them to be effective for them.

    Would be interested in hearing views on this from people who actually deasl in bonds or hack bank balance sheets for a living.

  18. @ Bill Hobbs
    “Will the bonds be retired as nama trades down its assets or will Nama sit on a cash pile?”

    This is a very interesting question. NAMA is likely to be able to sell some of the overseas assets quickly at or above current valuations. This will give it cash. However,there is lieky t be a call on that cash to provide working capital to finish development (Anglo HQ anybody). So anybody who thinks NAMA is going to be just a seller of property is under an illusion. It will end up as a trader of property, buying and selling sites, finishing sites etc.

    This has implications for the running cost of NAMA. On another thread,the ex Chinese PM doubted that NAMA would cost more than 300m. I would say this is a low ball estiamte of the cost. NAMA is going to have the biggest and most complex balance sheet of any financial institution.

  19. @JL NAMA is going to have the biggest and most complex balance sheet of any financial institution

    All the more reason to have NAMA paying taxes, publishing audited accounts, regulated, not indemnified from prosecution etc etc etc

  20. @ Garry,

    Absolutely. Instead, we appear to have a model of governance where anybody who dares offer any information is taken away in the back of a lorry to the salt mines.

  21. There was a line from the most recent Ahearne article

    Importantly, this is not true of the loans themselves. In other words, Nama is a form of so-called “quantitative easing” for our economy, in which assets such as bonds can be turned into cash from the central bank.

    This doesn’t sound like ECB terminology, which would surely be averse to the notion of the central bank printing money to buy bonds. In fact as I understand Karl’s explanation, the ECB won’t be buying anything under the NAMA transactions. Maybe AA was just trying to make things sound simpler than are for reasons of accessibility. But it makes one wonder how much the NAMA sales pitch has been cleared with the ECB.

  22. What I find very frustrating myself, is that two economic advisors to the government presently, Alan Dukes and Alan Ahearne seem to contradict one another in their presentation to the public of how NAMA will work. I know that Garret Fitzgearld gave Karl Whelan the ‘dressing down’ of a life time on Newstalk, and I am sure that Karl took it in good form. But what puzzles me, is that anyone can say what they like about NAMA, without any Garret Fitzgearld being there to contradict it. I know NAMA is a semi-flexible plan, with the Greens, their uncle and their god mother attempting to grab something else while it is going. But I do appreciate Karl Whelan going to the considerable trouble and effort to put together the above explanation, so that we can read it.

    What I also find weird to be honest, is that given the experience in the United States after the Crash of ’29, of removing the toxic assets from the knowledge associated with those assets. . . something you get only barely get away with, where stocks are concerned. . . doing it with property loans seems to me, to be a recipe for disaster. I noted Fine Gael finance spokesperson Richard Bruton make the point this morning on RTE radio, that the French tried a NAMA on a smaller scale and lost 60% of the taxpayers’ money.

    Brian O’ Hanlon

  23. But what is the “coupon”?

    Typically, a floating rate coupon will run at a defined euriobor (eg 3, 6, 12 month) plus a margin. So what is 1.5%? Euribor plus margin? Given that 1 month rates are c. .5% and 1 year are c 1.3% it implies the bonds will carry a margin of between 1% and 0.2% depending on what interest roll period is selected.

    The size of the margin normally relates to the riskiness and tenor of the loan. However, in this instance the normal borrower/lender relationship is inverted with the Government doing the borrowing and deciding the terms.

    What does this mean for Nama? In one sense paying floating whilst receiving floating makes sense – IF amounts and tenors are matched. To answer a previous question presumably they will be callable bonds and therefore can be paid off as the cash just rolls in when Mr Mulcahy’s 88% comes true. So no problem with tenor then.

    To answer another question in my experience most development loans will be floating rate but most longer term loans will be swapped into fixed.

    The big potential mistake is that the bulk of the good loans will be longer term paying fixed rates – via interest rate swaps (which although they are technically derivatives, are not toxic and really are only prudent ways of matching fixed rentals to fixed loan repayments). These loans will be the properties that are let to good corporates, government etc with tenors of 7-15 years and repayments tailored to rents. Although beware the personal guarantees for interest rate shortfalls at rent review time that were so beloved of credit committees.

    So using the crude 30 billion, 30 billion, 30 billion for worthless sites, half built developments and good loans would translate to 30 billion paying nothing, 30 billion due to pay floating but struggling to do so and 30 billion paying fixed.

    Doesn’t look like a perfect interest rate hedge to me because when rates go up the fixed portion will stay the same and the floating rate parts will struggle even more.

    Unless of course, John Mulcahy is right……..

  24. This seems clear: it is borrowing on a massive scale, at a time when the government will be borrowing an a massive scale for years ahead, to make up revenue shortfalls. The purpose of the borrowing is to enable future borrowing, to pump up our banks. The money borrowed will be used to prop up prices of an asset that will not reach value for years or even decades. It will be a massive undertaking. It will be subject to legal challenges until developers are happy: with the values offered; the order of sale; the type of development on their land; that new rezonings happen or do not happen. With all this capital tied up, the real economy will get very little lending.

    This is an experiment by a million monkeys who never knew how to lend money or develop land, while the developers and unemployed builders are told to stay out of the market while NaMa is operating as “you will only depress values” by increasing competition.

    Ah yes, the age of capitalism. And what is the real economy going to do while this farce plays out? Can’t borrow, as banks won’t lend until the bottom has been in for a while. This will ensure a big overshoot in deflation as all capital will be tied up in NaMa or zombie banks that we do not need. Will we need the degree of capitalized banking that we currently have? Certainly not until a decade or so after everything has stabilized, so it is just as well that we are going ahead now, instead of waiting until it is needed. Just in case the trough fills again, oink!

    Any “economists” prepared to point out the flaws in what I say? Any example of this succeeding elsewhere? Any other country doing this? And when it turns out that there will be no more international borrowing? And when we double the amount of developable land “held” in NaMa, by new rezoning for vital developments?

  25. @Frank Galton
    The ECB will be purchasing the loans, but the people they purchase them from have to buy them back at the end of a defined time period – repurchase agreement or repo for short.

    So while it is sort of true to say that the ECB will purchase the loans, they don’t really leave the ownership of the banks as they will be returned at the end of a fixed period. It is more like the rental system that prevailed in Korea before the first property crash in the nineties – you give the landlord 100k dollars, live in the apartment, the landlord ‘invests’ it for the year and you get your 100k back at the end of it. In the case of the ECB, it charges you for the privilege of renting the bonds from you.

    The peculiar thing about repo money, as far as I can see, is that few banks want to spend it in the current market. They know they will have to return the case at the end of the year, so they either buy other assets that they can interbank repo at low rates, or they invest in high-yielding structured products that can only go up… It really is liquidity support rather than support for new lending as the rollover is uncertain.

    The interesting thing about this is that the only assets that can be interbank repo’d at low rates and that count as cash are government bonds… guess whose deficit is going to be supported for the next four years… guess what the deficit is likely to amount to…. then guess why they call it a pyramid scheme…

    (I think!).

  26. @Karl

    Useful clarification but one section puzzles me. You say the markets will doubt whether NAMA will break even. Are you implying that the performance of the NAMA bonds are in some way related to the performance of the assets? If so, we have a dream solution, we are able to clean up the banking system avoiding any immediate national default but if the NAMA assets turn out to be duds we still have that option of defaulting on the NAMA bonds.

  27. @BW

    KW said: “Some people seem to believe that these assets will somehow be ”backed” by the property assets acquired by the government and that their value may fluctuate based on how these assets perform. I don’t know why these people think this. They will be government bonds backed by taxes levied on you and me.”

  28. @BW
    I presume KW is talking about the sovereign debt markets, so it is future repayment stress that is being referenced – represented by the higher yield that Ireland has to pay for its debt.

  29. @Antoin O Lachtnain Says:
    September 7th, 2009 at 7:48 pm

    “Karl, I agree that very few journalists understand what the mechanics are. This is a very important point. As you point out, most people are utterly confused about who is lending money to whom here. But that’s only the beginning of the confusion.”

    I really think a picture would help us non-economists to understand how NAMA is supposed to work. If you could see the flows then it might be possible to assess the risks e.g. rise in interest rates (guaranteed IMHO) etc.

    I’ve posted on it before but totally agree that FG/Lab have made a complete hames of both explaining what’s wrong with NAMA as is and what their realistic alternative is. A real opportunity missed and just more ammo for the “they’re all the same” brigade.

    John

    John

  30. @ Z_E & Yog Yes thanks that clarifies the comment. It seems to me that a 1.5% rate albeit variable together with a clearance from the ECB to simply print these bonds in such huge amounts is one of the big wins in the Government approach. Maybe Lisbon 2 did concentrate Frankfurt’s minds to pull out all the stops.

    Market value? Why buy one of these at par if you can get over 4% on fixed coupon conventional bonds? But MV doesn’t matter, what matters is ECB acceptability and the accounts treatment – I don’t think these will be marked to market.

  31. @Brian

    I’m afraid we’re stepping here into exactly the kind of talk that this post was trying to prevent.

    1. The Irish government does not need clearence from the ECB to print its own bonds.

    2. Government bonds are on the list of eligible collateral for ECB repo loan operations so no special favours are being done. The people in Frankfurt don’t sit around worrying about Ireland and Lisbon 2. I know people love a conspiracy but there’s just no basis for this.

    3. There is nothing stopping the governments nationalising the banks now, setting up a NAMA and taking the assets off the balance sheet using exactly the same bonds currently being proposed, which could then be used for ECB repo loans. If this stuff could be done under nationalisation as well then how can this stuff be “a big win” for the government approach.

    But, look, many of you want to believe that there is some brilliant DoF masterstroke going on here and feel free to think that if it makes you feel better.

  32. @Karl

    I accept some of that criticism. But surely, surely, ECB acquiescence was needed here. Why not print 1,000 bn of the stuff, repo it with the ECB for cash and have one helluva party!!

    Perfectly accept that the same “trick” would be available under nationalisation.

    I am not an expert but does anybody know whether these have to be marked to market. I would guess that a 10 year 1.5% variable bond would trade at below 90, so this does seem a very cheap and, if I may say so, clever way to do this. Now if these bonds were paying 4.5% as is more usual then the taxpayer would indeed be suffering.

  33. Or more realistically, why doesn’t the government print One anda Halfers’ to fund the budget deficit? Why put ourselves at the mercy of international bond auctions and pay significant default spreads? I feel sure some big concession has been made here by the ECB (ok not related to L2, silly comment that) and that in no way can the government simply print One anda Halfers at will.

  34. @Karl

    ‘Conspiracy’?

    I don’t think we need to go beyond ‘enlightened self-interest’ to understand the position being taken by some of the central players in the current NAMA proposal:

    1) Irish Government: The perceived electoral necessity of avoiding any precipitous tackling of the bloated Public Sector. Consequent on this, the government need an ongoing mechanism to access the Euro 400m+ a week to keep the current fiscal ‘show on the road’ (while praying that the recent International ‘green shoots’ bear fruit).

    1) ECB: The protection of the integrity of the Euro in the midst of a financial and economic ‘crisis’. Consequent on this, the weakest link in the Euro chain (as underscored by Sovereign Debt Spreads), Ireland, must be helped ‘over the hump’ and kept out of the hands of the IMF.

    Result: A mechanism by which (a sizeable proportion of) Euro 60bln+ will find its way from Frankfurt to Dublin ie NAMA.

  35. @John Looby

    “to understand the position being taken by some of the central players in the current NAMA proposal”

    The ECB are not “taking a position” in relation to being willing to provide loans to the banks based on the NAMA bonds. The ECB is a politically independent organisation and part of this political independence is its clearly established list of eligible collateral for repo borrowing. If you have something on the list you can get a loan, if you don’t, you can’t. Part of the reason for this clarity is to avoid political interference, e.g. the French Minister for Finance can’t ring up and say “give so and so a loan even though they only have poor collateral.”

    So provided the government issued the banks with something that met the criteria of the eligible collateral list (and there seem to have been some discussions with the ECB to check that all was ok with the proposed bonds) then the ECB had already agreed to provide the funds. No position to be taken.

    They may think all the things that you reckon they think. But that’s not why the banks are going to get the funding.

    In another sense, they have taken a “position” on NAMA in the sense that they have issued an “opinion”. They have said that the would prefer that the “pricing of acquired assets is mostly risk-based and determined by market conditions.”

    Of course, they also said that in principle they prefer private ownership to nationalisation (so do I). Funnily enough RTE reporters like to mention this aspect of the ECB report but aren’t so quick to mention the preference for risk or market-based pricing.

  36. @Karl

    It is because the proponents of the current NAMA proposals have done such an unconvincing job of refuting the arguments of yourself and others, that I’m inclined to look beyond their public pronouncements for the (real?) reasons why they remain so wedded to the seemingly illogical. Very clever people passionately supporting such threadbare arguments just feels ‘wrong’.

    This brings me to the Euro 60 bln+ of government borrowing which lies at the heart of this whole ‘mechanism’, and the sure knowledge that it would be inconceivable for our government to be able to access such a sum in the ‘normal’ fashion.

    The idea therefore, that NAMA may be less the (well documented) mechanism of bailing out the risk-capital providers to the Irish Banks, and more the mechanism for our fellow-Eurozone members (via the ECB) to see the Irish State avoid an embarassing recourse to the IMF, is one which strikes me as at least plausible.

    Why do you think such clever people are persisting with the all but indefensible?

  37. @KW

    It is my understanding that central banks dont typically allow a bond to act as full collateral at the discount window or for refinancing (or is this only when they are accepting non – soverign debt as collateral?)

    In other words a 100euro bond only acts as collateral for 95euro or something like that.

    If that is the case, do we know if NAMA bonds will be treated differently from government debt in this regard?

    Assuming they trade openly, they will surely be worth less then standard gov debt as they have a lower coupon (albeit a floating one).

  38. @Karl

    Slightly off topic here. You state that in principle you are against nationalisation. So is everybody else. So we all see nationalisation as a last resort. But in current circumstances there is a cost in avoiding nationalisation. That cost is that we are leaving something on the table for current shareholders. Since everybody agrees that nationalisation is to be avoided if at all possible we only differ in the cost that we are prepared to pay, we are haggling about the price. Personally, if the taxpayer ends up with 80% bank ownership that is sufficient dilution to ensure shareholders will not enjoy a gratuitous windfall, after all if they do the taxpayer will enjoy 4 times that windfall. But 50% bank ownership would be leaving too much on the table IMHO.

    So what is your price Karl?

  39. @Brian Woods

    I´d guess that Karl wants to have a go at a few subordinated bondholders as well – in order to do that you typically have to wipe out all the equity holders first.

  40. @Christy
    We dont know nutting…but heres the thing. If we issue 50b say of 1y nama-bonds we are in a red queens race, having (despite what Mr Frank Fahy TD thinks) to repay the wee buggers next year. If we issue 50b of ten year at 1.5% we should only get 35b or so at any window. So we would need to issue 70b to give the banks 50.
    Not great either way is it?

  41. @BL

    If it transpires that the ECB will accept medium term 1.5%ers at par or near par or through some other mechanism we only need to issue 50 to pay 50 (I am pretty sure this will be the case) would you agree that we have pulled off a fantastic deal at least in this particular aspect?

  42. @KarlW
    “They may think all the things that you reckon they think. But that’s not why the banks are going to get the funding.”
    @John Looby
    “Why do you think such clever people are persisting with the all but indefensible?”

    I suggest that the answer has been succinctly put to the High Court as reported today “to allow time for the markets to stabilise and help ensure property asset values are enhanced to the benefit of the companies and the banks.”
    It could not be simpler.

  43. @Christy

    We know a bit more than nutting. Look at Table 7 (on page 52) of this fascinating publication.

    http://www.ecb.int/pub/pdf/other/gendoc2008en.pdf

    Haircuts relating to how much funds an asset can secure from the ECB depend on types of collateral, coupon type and maturity. I’m assuming NAMA bonds won’t have much a haircut applied.

    @Zhou

    Where would I be without your help in explaining my opinions! 🙂

  44. @John Looby

    “Why do you think such clever people are persisting with the all but indefensible?”

    Great question. Not sure I have a good answer. We can make a better judgment on September 16.

  45. @Brian Woods
    No. I dont see how funding short to buy long when we see the interest rate cycle at the trough is a fantastic deal. nor do I see stiffing the ECB, even if they want to be stiffed, a fantastic deal. Not in the long term. What would stop Spain or Italy demanding the same deal?

    @Karl W
    When I say nutting I mean on the side of how these bonds will be structured here….

  46. @ Z_E

    This is the problem with these e-debates, points can be picked up in entirely the wrong way.

    Karl has stated in this thread that he is normally against the Big N in principle. Indeed, everybody, even Labour, is against the Big N in principle. I am well aware that Karl and many others support the Big N in the current situation, as a temporary measure.

    The only basis for that reversal of his normal stance can be that he thinks the savings in terms of torching the equity holders of the banks outweighs the negatives of the Big N. I am arguing that that is merely a haggling matter. Presumably Karl is sufficiently against the Big N in principle that he wouldn’t begrudge the equity holders, say, a meagre €100M to avoid that last resort.

    Richard Bruton argues that the taxpayer will pay €10Bn over the odds under the current proposals. Now we won’t be able to size that properly until N-day (9/16) but given the usual capacity for opposition exaggeration and given that we are veering towards a Nama 2.0 I would say that the amount that the taxpayer is “overpaying ” will be more of the order of €2.0Bn. Is that too much to pay to stave off everybody’s last resort, the Big N? IMHO the answer to that is no.

    @ Christy

    I am not sure the subbies are more torchable under the Big N than under the current proposal. Presumably they can only be torched according to their Ts & Cs which shouldn’t deteriorate because of a change of ownership, indeed they may well be enhanced as we saw with Anglo.

  47. @ BL

    We will have a pretty immediate guage whether these are a good deal. If their market value is substantially below par, and I guess it will be, then at least by today’s market assessment we are getting very cheap funding. It seems we are substantially avoiding Ireland’s high default spreads.

  48. @BL

    You see dude. You can learn a thing or two from coming on here. The whole thing’s brilliant. If we didn’t do this whole overpaying NAMA thing, we’d have to borrow on the sovereign markets to get the “real cash” to recapitalise the banks.

    Note to passers by: Sarcasm warning.

  49. @ Karl

    My contention is that the facility to issue 50-60Bn 0f 1.5%ers and have them acceptable by the ECB is a major concession.

    Your refutation is that this is our right. These are eligible by the rules. But these rules are not handed down by Moses. They are set by the ECB. If we printed 1,000Bn of this stuff the ECB would clearly make them ineligible. As it is we are going to print an enormous amount of this junk debt (surely trading below par) and the ECB have given the noddy that they will still remain eligible.

    Perhaps the motivation is not pure paddyphilia, perhaps it is to do with defending the weakest link in the euro, whatever, a beggar should not look a gift horse in the mouth.

  50. @BW

    this is one of my classic long posts….

    I am pro NAMA myself but against overpayment. I think that while the warrants are still there we have to be practical and if you spend €1bn to make €2bn then so be it.

    I also do not understand how technical issues of hoe shareholder equity can be totally wiped out. Even Lehman Bros stock has increased in value recently.

    My main problems with Nationalisation are:
    (1) I don’t trust the bankers to put their heart and soul into itand to highlight their own mistakes. I don’t trust other bank employees to stay motivated and keep the tempo up. I don’t trust borrowers to keep paying their loans.
    (2) I don’t trust politicians not to interfere. If they don’t interfere I don’t trust the markets to believe them.
    (3) If things are worse than expected or if the world ecconomy lurches again while we are mid nationalisation it could be very very gory.
    (4) I don’t believe the transfer of assets to an AMC can be done quickly enough to allow for a temporary nationalisation.
    (5) If nationalisation reveals that a bank is seriously insolvent then we could be left with another Anglo-zombie.
    (6) Nationalsisation may only give us one bite at the cherry. This sucker may still go down as George said. We have already gone “all in” once and managed to survive. With NAMA there is every chance that we will be able to bring in private equity as part of recapitalisation. That private equity may provide a buffer against future shocks.

    So I am in favour of NAMA but I have a healthy fear of it too. I know all the pension owners and middles class and wealthy middle class have just lost their shirt on bank shares. I know all of these people vote.
    I know the Govt has its warrants and is calling them a “risk sharing mechanism”.
    I know there may be some value to overpaying slightly to keep our bnking system private but there is a huge limit to this and a clear limit to the risks I am willing to take.

    I have already paid enough to the older generation and to the public service in this country by over-paying for a house, by paying a huge lump of stamp duty and by now payuing increased taxes. I am still willing to play ball and pay a small bit over the odds if it means preserving jobs and enhancing our economic future.

    However, Mulcahy said to the Oireachtas committee on finance that property values generally rise 88% from trough and that he guesses we are at or near the bottom of the trough now because rental yields on Grafton street are so high. I am with Hugh Hendry on the theory that monkeys pick bottoms and we shouldn’t take advice from monkeys. Businees income has gone through the floor around Grafton Street and rents are only being kept up by an illogic rent review methodology. There is every chance that property prices will lose 70-80% as forecast by some experts. In that scenario an optimistic 88% rise from trough won’t even get them them back to the level they are today in seven years time. Now I am a nice guy and I am a realist and I am happy to see other people hang onto their pensions but I am not going to pay through the nose and punish my children for it. I am not going to let some FF or FG Minister decide today what the valuations should be unless he is tweaking them downwards only.

    So, I am in favour of NAMA, and the Minister for Finance has said all the right things for my ears so far. I listen to him carefully and he satisfies me. I do not care if he tells the market that 100% nationalisation in a remote possibility even if he might intend marching down that road for AIB later. However, the Minister will not always be around and whilst I like what he says I know what pressures will come to bear and I know what I don’t know. Support for NAMA must be conditional on the necessary amendments to the legislation being made in terms of tight LTEV definition, additional oversight and checks and balances on Ministerial powers of intervention.

  51. A little off topic but there is an intersting article in today’s FT about European banks having to change the type of capital they raise. This may be of relevance as we plan on recapitalising and refinancing our banks soon:

    Europe’s banks face questions over funding

    http://www.ft.com/cms/s/0/293a0e38-9bda-11de-b214-00144feabdc0.html

    “…European banks in particular are under the spotlight because of concerns over how they will meet finance ministers’ calls for much bigger and better capital buffers against shocks. Analysts have warned these pressures could lead to a fresh round of capital raising.

    At the core of the concerns is the future of the near $450bn market for tier one debt in Europe and the US. Of this figure, European and UK banks account for $283bn and US banks $161bn. European banks are felt to be too dependent on hybrid debt which, as the crisis has unfolded, has not proved loss-absorbing enough to act as a buffer against shocks.

    Hybrid securities are subordinated debt instruments, which have equity-like features, but which count as loss-absorbing tier one capital.
    ….

    Richard Thomson, a senior financial analyst within Henderson Global Investors’ Credit Alpha team said the market was looking for new forms of capital for banks.

    “Potential new forms of capital for banks are being considered such as convertible bonds where conversion would be mandatory in situations where a bank was in need of capital. The problem may be finding investors that are willing to buy into these instruments.”

  52. @BW

    Argumentation by extreme example is fun but not always helpful. Table 1.1. here

    http://www.ecb.int/pub/pdf/mobu/mb200908en.pdf

    tells us that the ECB has lent out 800 billion already. An extra 50-60 bn is a lot but it’s not going to make them change the rules just to tell us to take a hike. I’m sure some careful, respectful, meetings were had at which everything was cleared.

    But, look, see it your way if you wish. FF and the DoF are geniuses who won us a major concession from “Europe”.

    In any case guys, I’m off tomorrow morning to the Labour PP meeting in Waterford. Communication should be nill or sporadic for the next few days.

  53. The 1.5% coupon rate was first leaked by Frank Fahy on radio in August. The reference to 6m-Euribor came later.

    @Karl – it is correct to point out that the ECB is not buying these NAMA bonds, the banks will ‘Swap’ them as eligible collateral for RePo. Six months later the same backs will return to the ECB window and rollover the 1st tranche with a new 6m tranche. This is why Aheane accurately portrays this as QE – it is tantamount to ECB printing money.

    This funding cost will increase in-line with interest rate rises and a flattening of the yield curve. So it will not be a 1.5% coupon in say 2012, so there is an element of political disingenuity in portraying the funding costs of NAMA as ‘cheap’ (only because we’re at bottom of rate-cycle now)

    @Brian – the coupon rate does not matter as much as you think, the maturity profile does. Even Federal Bundesrepublik issues 6m Bills with 0% coupon that trade with a price of 99.75 due to short-tenor. Whether or not these bonds are FRNs or Fixed rate is irrevelant – again due to the short-dated nature (and investor base)

    The ECB is facilitating the Irish government with NAMA, by allowing them to play “the interest-rate game” i.e. issuing ultra-short dated securities and then allowing them to roll them over periodically & continuously.

    Again the reference to trading in the secondary markets has been overplayed, as AA-rated Sovereign G’teed ultra-short dated bonds that are designated as eligible collateral for repo will not compete with longer term Taps/New issues of Irish Gilts. There are distinct groups of investors who purchase Gilts (Life/Pension/Insurance etc) and those that purchase short-dated bonds (e.g. repo desks of banks/investment banks).

    Lastly, with respect to size, again does not matter as the ECB has already agreed to be ‘the backstop Bid’.

    As NAMA gets up and running (will take at least 6 to 9 months) the bonds will be issued in tranches or in serial form, as and when loans are transferred from each bank into NAMA e.g. Jan 2010 could be 5bn, then February could see say 7bn and so on…..

    The bottom line here is that the ECB agreed to fund NAMA, they have no choice but to protect IRL from a funding crisis which would undermine the Euro (or any of the 16 countries using the currency). Latvia went to IMF for assistance as it is EU but not EA. Comments by Dr. Fitzgerald & Alan Dukes were with all due respect misplaced as they implicitly assume EUR collapse – a prerequisite for a currency bloc member receiving IMF assistance. No EA member can default on its Sovereign debt without bringing down the entire currency-bloc as FX market is 3 trillion dollars turnover per day, if ECB had to defend the currency with intervention they’d be broke by lunchtime – just ask BoE post Sep-92.

  54. @Derek B
    Great post – yeah, the duration, the more I think of it, is the one that is dangerous. As you say the interest rate structure is also irrelevant if they are 6m, except that of course the trajectory is upwards, so resetting every 6m resets upwards.
    Fully into political economy, the ECB (reluctantly) agreeing to fund our follies cant do our political capital any good can it?

  55. Surely these have to be medium/long dated. How could there be a roll-over facility? If they mature in 6 months, say, then the government has to pay cash to the banks, so how can they be guaranteed that the banks will reinvest that cash in roll-over replacements?

    I think we are overplaying this ECB liquidity dimension. I am not hearing that there is any problem in that respect, the banks seem to have adequate collateral already.

    Isn’t the key issue that these bonds are accepted at par in the regulatory balance sheet? It will be very interesting to see their MV. If they are medium term floating instruments with such a low premium over ECB/Euribor they surely must trade at a discount to reflect Ireland inc. CDS and that of itself would be evidence that this is a very good deal for the taxpayer.

  56. @Derek Brawn

    “This is why Aheane accurately portrays this as QE – it is tantamount to ECB printing money.”

    Surely this is wrong.

    If the ecb agreed to buy back long-dated irish debt by creating cash, that would certainly be quantitative easing. Some of Ireland’s longer-dated liabilities would simply dissapear, and the yield curve would flatten.

    All NAMA amounts to is the Irish Gov issuing a lot of bonds. Forget coupons, fixed vs floating etc – this debt has uncertain but long effective duration. Ireland’s longer dated liabilities increase, and the yield curve steepens.

    Call me old-fashioned, but this is not quantitive easing in any meaningful use of the term.

  57. @ bg

    you’re right in that its not technically QE, because all the cash being printed (ie being lent from the ECB repo facilities) is being sterilised via a matching bond liability due at some term in the future. However it is effectively QE in the sense that we’re being allowed to defray our exposures due today out for another 10 years or so at a significantly reduced rate vis-a-vis the real prevailing market rate.

  58. below 10 per cent of tax revenue

    That is a quote from the FT blog dealing with a ratings agency rule of thumb for AAA status on debt interest repayments by countries. Will Ireland ever get back there? A low tax economy will mean it won’t. A NaMa economy means it won’t. Was this cost of borrowing ever relevant or is it simply borrowing at any price? Do people at the top get commission, as with the IMF payments according to that whistleblower?

  59. @Derek Brawn

    Succinctly and simply put – many thanks ..

    NAMA – the ECB santioned vaccination to innoculate the Euro from Irish toxicity …

  60. @Eoin

    by your definition a regular NTMA bond auction where

    “..we’re being allowed to defray our exposures due today out for another 10 years ..”

    is a form of QE.

    NAMA is not QE, its not even a version of QE. It is just borrowing.

  61. @Zhou
    We’re not that far apart in opinion!

    I see a sort of NAMA as a requirement for Angelo’s pcik-a-pay loan book.

    I don’t see that the big two need a bailout any more. Market conditions have improved enough that they are clearly not in trouble any more. Sure look at their share price 🙂

    I also don’t agree that NAMA per se is a form of QE. What I do think is QE is that NAMA will be allowed to print bonds on behalf of the government and repo them at the ECB without the intermediation of the markets. The ECB are big on intermediation. Or rather were. It’s only a small thing, but it has big effects. If we are to suppose that the Irish government can issue bonds at 6-month euribor with a ten year duration and a six month reset at par, this is waaaay cheaper than equivalent ten year Irish government paper would issue for. How much cheaper? 3%? 5%? I don’t know, maybe bg or Eoin can do some sums?

    It should be noted, though, that the increase in the maximum valuation haircut from 2% to 16.5% for ABS may have more than drained this effect. So perhaps the ECB is easing for governments, but not generally?

  62. @ bg

    its wonderful how you left out the part which provided the context on my statement, “…at a significantly reduced rate vis-a-vis the real prevailing market rate.”

    The benefit of actually being able to borrow the 60bn or so that NAMA provides, at rates well below the standard NTMA bond issues, is the key to the QE argument. If it was “just borrowing” then the coupon on the bonds wouldn’t be the 1.5% thats being touted. Only through the ECB’s agreement to this process can the bonds be issued as per their current structure. Hence it’s ECB generated QE.

  63. zhou_enlai

    Good point. The point being that there is a clear shortage of genuine capital and there is no longer any way to earn new capital in the depression. Existing capital has to be heavily safeguarded. That is why NaMa is so bad. When the dust settles, derivatives honoured and dishonoured, I am sure you looked up that China denies derivatives article, I expect that genuine capital will be both scarce and frightened to come out to play!

  64. I see that what was done in Australia in the 1930s has been proposed already in the blogosphere anyway: government credit. By funding infrastructure projects, value is added to the economy, and money printed accordingly. Abe Lincoln is said to have done something similar. Inflationary effect is nil, so Banksters hate it! CRH might like it though. Hi guys!
    This problem, of lack of capital can be solved, but only by competent government.
    The lack of government in Ireland is frightening. That is our real deficit.

  65. @yoganmahew

    Of course we are not far apart. Even BL will accept NAMA if the valuations are right. I suspect KW would live with it too even if he still thinks pre-emptive nationalisation is a superior solution. Many of the anti-nama people are close to being pro-NAMA subject to modifications. Note BL’s reference to his objections to NAMA-as-is in his latest article. The noise caused by words like “Immorality” is blocking people from seeing this loose consensus on what NAMA should be if NAMA it is going to be.

    Nobody believes the big two banks. That is why we need NAMA to attack them loan by loan. Otherwise nobody will trust their balance sheets.

  66. @Eoin

    You appear to believe that ecb will repo these bonds at greater than their market value. That would be a free lunch from ecb. That would be QE.

    Can you provide evidence that ecb will refi NAMA bonds at above their market value?

    What is the basis for your assertion?

  67. @John Looby – love the succinct nama quote…

    @Zhou – sorry if you think a citizen being concerned with morality is “noise”. Combined with your (usually very useful) legalistic approach, im now convinced your a member of the wig-and-gown appreciation society!

  68. @Eoin and bg
    The calculation is surely simple for chaps like you.

    The posited term for the NAMA bonds is ten years.

    The haircut for ten year fixed or floating bonds is 5.5%, so with the government issuing at 100, the ECB will give back 94.5.

    What would a 1.5% government bond attract in interbank repo? That’s about a five-year bund coupon, isn’t it?

    Subtract the two, work it out as a percentage – there you go…

  69. @BL

    I was just pointing out that some people might just see
    NAMA = immoral
    in your article and not see what you are really saying is
    NAMA-as-is(assumption of rigged overvaluation)=immoral.

    I am all for morality and I am all for paying a price for morality; that this what human dignity is all about. However, it is hard to have dignity and to have the opportunity to exercise and promote morality when you have no job, no home and no future or when you are too old to work and have no money for the fuel. That is why I think that if we are concerned about those on the margins then our first concern must be an effective solution. I think gross overpayment is both ineffective and immoral.

  70. @ bg

    thats exactly my assertion. Given that the bonds will be paying 90-100bps less than comparable general Irish government bonds, they should trade at a huge discount to par. However, given that none of these bonds will be sold on by the Irish banks at any stage in the first few years of the NAMA project, they will still hold a value of 100 in the ECB’s eyes, as im sure has been agreed. As such they will be repoing them at 96 (@ yoganmahew – i think its only 4% for the 7-10yr category?), when clearly they should be repo-ing them much lower than this (by my reckoning at around 93 on price, 89 on repo assuming 100bps higher real yield).

    I imagine this is the deal struck with the ECB, that as long as the Irish banks hold them at 100 on their books on a hold-to-maturity basis (which is fully legal and allowable) then they’ll repo them off par and not their market value. As soon as the irish banks try to sell them openly, well all bets are off.

    You could be right and this may not happen, but quite clearly most other people, including Alan Ahearne, seem to think it will.

  71. err…why are we assuming that these are medium term bonds? AFAIK ,from what I hear, they are shortterm bonds. Which makes the interest rate right….but theres a horrendous rollover required.

  72. @BL

    We will soon know. My bet is that these will be medium bonds aligned to the estimated NAMA cash receipts. The floating rate is what justifies the 1.5% though where is the default spread?

    I cannot conceive of 60Bn 6 month paper rolloing over. The only candidates to do the roll-over are the banks whose bonds are being redeemed and if this rollover is voluntary, there is no it can be assured, and if it is in some was compulsory well then they are medium term bonds by any other name.

    We shall see on N-day.

    Whilst we are in speculative mood, my best estimate for the average haircut is 30% plus giving the banks a piece of the NAMA action. This is a purely political speculation, higher than the stockbroking community is touting, but not so high as to tip the government towards de fact nationalisation of AIB.

    So you saw it here first folks – Medium Term Bonds & 30% haircut.

  73. @Eoin

    “I imagine this is the deal struck with the ECB, that as long as the Irish banks hold them at 100 on their books on a hold-to-maturity basis (which is fully legal and allowable) then they’ll repo them off par and not their market value. As soon as the irish banks try to sell them openly, well all bets are off.”

    It is daft to suggest that the ecb will accept phoney bond valuations and ignore time value of money. they don’t do cute hoor finance. my guess is that the ecb themselves insisted that the bonds be tradable.

    In any case as BL points out, 1.5% is a reasonable market yield on a short dated bonds or tbills. Repos at par, no QE.

    NAMA as a mechanism for a helicopter drop of cash into the irish economy by ecb? Sorry, this is about as plausible and sad as the moving statues of 1980s.

  74. @Brian Lucey, BG

    Just listened to Eamon Ryan selling NAMA on the basis of “very low cost bonds from the ECB”.
    ?????????????

  75. @bg

    When an Irish bank takes the NAMA bond to the ECB, although the ECB does not ‘buy’ it, it is merely swapped for a defined period, it does issue cash – electronically into say that Bank’s account.

    That is QE. Where does the money come from otherwise?

  76. @ Derek @ bg

    i get bg’s point that as long as the ECB repo is done at a correct ‘market’, or ‘fair’ rate, then it does not constitute QE. However, i just don’t think its gonna be done at such a rate.

    As per Brian Woods point above, i also question whether these bonds can really be issued on a 6-monthly rollover basis, hendce why i beliece they’ll be medium0to-long term nature bonds.

  77. @Derek Brawn

    normal repurchase agreements (repo, collateralised loan) happen every day of the week, both interbank and with central banks.

    QE is when ecb buys assets.

  78. @Eoin
    “As per Brian Woods point above, i also question whether these bonds can really be issued on a 6-monthly rollover basis, hendce why i beliece they’ll be medium0to-long term nature bonds.”
    Minister Ryan has confirmed “very low cost bonds from the ECB”. I believe he misspoke. I presume he means 1.5% NAMA bonds for repo at ECB 1%. What I don’t understand is how these could be medium/long term given the current yields on medium/long sovereign bonds

  79. @podubhlain
    or he doesnt understand. How on earth can a minister of the state think we are borrowing from the ECB? HOW!!!!!!!!

  80. The devil is always in the detail

    From RTE site “This means, in the case of a small proportion of the loans, the banks will not get all the money immediately.”

    Are the Greens buying an eviscerated NAMA2 and selling it as the Prof. Honohan solution.

  81. We’re getting obsessed with the repo rate. Does it matter whether it’s at par, 90% or 80%. The system doesn’t even need this collateral at the moment, it is getting as much ECB support as it needs.

    What really does matter is that these bonds are recognised at par for the purposes of the regulatory balance sheet. Eoin has confirmed that so long as they “held to maturity” that will be the case. Meanwhile they may be trading at 90. That means the taxpayer has been able to clean up the banks’ balance sheets using paper only worth 90 but acceptable at par for capital purposes. An amazing coup courtesy of the ECB.

    Why are the anti NAMA faction against every single facet of this initiative. Why don’t thy concede that these 1.5%ers are a wonderful concession but continue to argue that this is irrelevant to the pro/anti nationalisation debate.

    Note that I do not refer to a NAMA debate. Most now accept NAMA in some form. The residual debate is how much taxpayer ownership of the banks is compatable with NAMA.

  82. @Brian Woods
    “Why are the anti NAMA faction against every single facet of this initiative. Why don’t thy concede that these 1.5%ers are a wonderful concession but continue to argue that this is irrelevant to the pro/anti nationalisation debate.”

    Because there are no free lunches.

  83. @Brian Lucey

    I had envisaged the Greens wringing significant changes from their FF partners
    but I now despair at the way they are being manipulated. RTE are reporting on news now = “Equal share of financial risks” for banks. David Murphy then concedes that a small proportion of loan will be affected.

    This is a monumental con.

    I hope Karl can inform the membership of the Greens before their convention.

  84. @Podubhlain
    the GP know…believe me they know. And we have flagged here for days the likely paltry sop towards risksharing.
    The fix is, as they say, in.

  85. The fix is not in. The legislation is not published. We do not know how these new NAMA subbie bonds will be held or who they will be hald by. What if they are not tradable and are held by an SPV owned by bank shareholders instead of the banks?

    what if… what if… what if….

    The only person not what-if-ing is Eamon Ryan becasue he was at the cabinet meeting!

  86. @bg

    What do you call a repo that with a willing buyer (ECB) who will facilitate rollover (whatever the frequency – short or medium) for the next 15 years?

    In return for Cash to a Bank who can use this money to bolster reserves and engage in credit creation by issuing new loans by a factor of 10x/15x

    Originally I stated that it was ‘tantamount’ to QE, which it is as the end result is the same, afterall the purpose of NAMA is ultimately to enable the Irish banks to engage in new lending

    If the Irish banks do increase PSC, then Irish & EA M3 will increase

    The RePo traders that I used to work with had an average security holding period of between 24hrs and 1-week. These NAMA bonds are clearly very different

  87. @Karl

    sarcasm aside, why do you think that 55% of an Irish Gilt issue this year was purchased by domestic Irish banks, who then ran to the ECB with them……for ‘real cash’…..the NAMA bonds are merely a logical progression of this…..perhaps NAMA should be based in Frankfurt??

  88. @Derek,

    its very simple.

    suppose NTMA auctions 60Bn bonds in return for cash. then NAMA uses this cash to buy bad assets from banks.

    would you call this QE? of course you would not. its just borrowing.

    NAMA is equivalent to this, and has the same economic effects.

  89. @Derek Brawn,

    ‘perhaps NAMA should be based in Frankfurt??’

    Just like Nike design in the US and do the grunt work in China; as regards NAMA, the ECB have done the former in Frankfurt while Treasury Buildings here can get on with the latter – we’ve found our level ..

  90. @ John Looby

    the key difference is the lack of sweat shop wages in Treasury Buildings. Indeed, quite the opposite…

Comments are closed.