Resolutions and Bondholders, Again

The S&P downgrades make for depressing reading. I really don’t want to beat the drum again about the government over-promising in relation to what the establishment of a NAMA could deliver. Still, it’s interesting to note that the basic problems afflicting the Irish banks—loan losses, weak operating income and concerns that the banks will be undercapitalised—are pretty much the same as they were this time last year.

This isn’t to say that a NAMA vehicle shouldn’t have been part of the solution: I advocated prior to Peter Bacon’s report that an asset management agency should be part of a comprehensive solution. At this point, it will be interesting to see in the end how different an outcome we get from the one I proposed last Spring and if it’s not so different, whether the government’s policy in the interim period will be seen as the dithering of officials in denial or an inspired period of delay to allow some breathing space to deal with the problem.

One shift in my thinking since last Spring is that the size of loan losses is now clearly large enough to warrant putting the banks through a resolution process and negotiating with bondholders prior to using state funds to recapitalise. In particular, it is worth noting that the covered banks have about €10 billion in outstanding subordinated bonds (€8 billion of which is accounted for by AIB and BoI).

Without doubt, our usual Bond friendly commenters will tell us that any subordinated bondholders losing money would lead to financial ruination for every Irish man, woman and child. However, given that the European Commission has been taking a hardline stance on the idea of state funds being used to compensate subordinated bondholders (see here and here) it is hard to see how this position can really be justified on practical or moral grounds.

S&P Downgrade Irish Banks Again

Standard and Poor’s have again downgraded the Irish banks. The Irish Times story about this is here. The S&P Press releases are here (need to sign up but it’s free.) The reasons for the downgrade of AIB are summarised as follows:

“The negative outlook reflects our view that the quantum and timing of equity raised through recapitalization may not be sufficient to support an ‘A-‘  rating, combined with our expectation of significant losses from the remaining loan book and weak operating income as a result of the challenging economic environment,” said Ms. Curtin.

Negative rating action could occur if we consider that AIB’s recapitalization plans for 2010 are insufficient to adequately recapitalize the bank by our measures or are unlikely to be fully executed in 2010. Negative rating action could also occur if earnings pressures exceed our base-case expectations. The outlook could be revised to stable if there was reduced uncertainty regarding AIB’s ability to restore its capital position to an adequate level in the near term, and greater clarity on the strategic direction of the bank and scope of restructuring.

In relation to Bank of Ireland, the press release states:

“The rating action reflects our opinion of BOI’s prospects in light of our updated view on economic and industry risk in the bank’s core markets, together with our expectations regarding future credit losses,” said Standard & Poor’s credit analyst Giles Edwards.

It also factors in our view of the likely impact of its participation in Ireland’s National Asset Management Agency (NAMA) and associated restructuring and capital raising. We have lowered the ratings due to our view that the environment will remain challenging over the medium term and BOI’s financial profile will be weaker than we had previously expected, with capital expected to be only adequate by our measures and the bank continuing to make losses through 2011. 

S&P’s concerns about future loan losses and capital adequacy of both the major Irish banks are likely to be shared by many potential private equity investors.

Economics Rapping

Denis O’Brien recently seemed annoyed at the sight of academic economists blogging and twittering. I am not sure what he would make of the potential emergence of a new trend, academic economists rapping. The link below is to perhaps the first viral economics rap-song, describing the differences of opinion between Hayekian and Keynesian approaches to recession recovery. One of the authors is Russ Roberts, one of the people behind Econtalk podcasts, which are among the best resources for economics on the web. It is actually quite good but does raise the question of where all this might go. “NAMA: The Musical” would be up there for me.

link here

Improvement in World Economic Outlook

The IMF has raised its growth projections for 2010 and 2011. Although the fastest-growing countries are in the emerging markets group, the upward revisions in the growth forecasts for the euro area, US and UK are also quite substantial (relative to priors): you can get more details here.

Greece and Its EU Partners

The FT website carries this explanation of the ‘rescue scenario’ if Greece were unable to fund its liabilities.