Month: February 2010

Mortgage Repayment Burdens

The Central Bank have released a new paper by Yvonne McCarthy and Kieran McQuinn (link here) that uses data from the 2007 Survey of Income and Living Conditions (SILC) to describe how various types of households were coping with their mortgage burdens on the eve of the economic crisis. The paper also applies various techniques to estimate how these burdens may have changed since 2007.

I think this type of work is vital for gaining a better understanding of the extent of the upcoming mortgage default problem. It would also be crucial that data of this type be utilised if the government do wish to design a mortgage modification program, as discussed earlier here and here.

Forbearance and Bailouts for Builders

Today’s newspapers report (here and here) that control over Sean Dunne’s properties has been transferred to companies whose main shareholders are Ulster Bank, Co-operative Centrale Raiffeisen Boerleen Bank and Kaupthing (Iceland! Iceland!). Personally, I’m relieved that Mr. Dunne’s bankers are not in NAMA, so the Irish taxpayer won’t be at risk of making losses on his loans, either through NAMA overpaying them or through losses generated for state-owned banks. 

The fact that these non-NAMA banks have intervened on Mr. Dunne’s business reminded me of comments from Minister Lenihan in his Last Word interview on Monday. About ten minutes in, the Minister said the following:

There’s no one being bailed out here. Builders have to pay. We’ve already begun to see spectacular crashes among developers. They’re not being bailed out. That is another line of rhetoric we had to listen to for about six months last year, that this was all about bailing out builders. It’s not about bailing out builders and it’s very clear again to anyone who’s reading the newspapers now that it’s not about bailing out builders. Builders who are not paying their debts are going to the wall. That’s what NAMA’s all about.

I think what this misses is that all of the spectacular crashes that we’ve seen so far have come from developers who had the misfortune to borrow money from banks who didn’t get into the NAMA scheme. Perhaps I’ve missed them, but I can’t recall any stories about big developers being closed on by AIB or Bank of Ireland. Indeed, the contrary is the case. Instead there have been stories such as NAMA-bound banks lending Liam Carroll money to pay off unsecured creditors and accepting patently unrealistic business plans in order to give bankrupt developers more rope.

In addition, NAMA’s infamous draft business plan also states that eighty percent of the loans due will be repaid in full, though very little of the repayments will appear until 2013. This is essentially an official statement that NAMA’s officials are planning a program of forbearance for bankrupt developers.  When one factors in the fact that NAMA will have the power to extend further credit to certain developers, the difference between “extreme forbearance plus additional lending”  and “bailout” may appear to be something of a fine line.

All this means that, much as he would like to, it is unlikely that Minister Lenihan will be able to continue dismissing concerns about NAMA’s relationships with developers quite as easily as Matt Cooper allowed him.

Rationale for the Greek Deal

I’ve been following the news stories on the proposed potential Greek bailout. However, reading articles like this, I’m struggling to find a good rationale for the agreement that’s been reached. The following questions come to mind:

  1. Greece needs to address its huge fiscal problems. To do this will require putting through highly unpopular measures. How does the EU’s offer of a potential bailout help get this achieved? How does the Greek government convince its people that harsh measures are required to reduce its deficit and keep open its access to sovereign debt markets when they now know that the EU tooth fairy is waiting by to help?
  2. Even if the senior figures in the leading EU countries have ultimately decided to intervene to prevent the disruptions associated with a Greek failure to roll over its debt, why not wait until that failure has happened?
  3. Why would the EU wish to be associated in the Greek public’s minds with the harsh expenditure cuts and tax increases that would still have to follow even after a bailout deal?
  4. Do those who advocate this policy really believe that the current Greek crisis is sui generis or are they planning to put in place a safety net for the whole Euro zone? If the latter, can such a policy really be credible?
  5. Is the long-run macroeconomic stability of the Euro area better served by avoiding the dislocations associated with one its constituent members going through a sovereign debt default or should we be more concerned about the problems created by the new bailout mechanism that lets governments know that the EU will intervene if they choose not to tackle their fiscal crises?

I feel that in asking these questions, I’ve clearly been missing something. Hopefully those who thrashed out this deal have thought these issues through. My concern is that in the somewhat fevered quasi-crisis atmosphere of this week, precedents may be getting set that we will live to regret.

Update: To be honest, I probably should have linked to this hand-wringing Times editorial as a better illustration of what I’m confused about. The editorial worries about “depressing the value of the euro” (which would in fact be a good thing for the Euro area economy) and discusses how this “raises major doubts about the future of the single currency” without explaining why this is the case.  The piece ends with the dramatic note of “The European Union remains on alert and on financial standby.”  It does make one wonder a little whether this issue is being hijacked somewhat by those who see “Europe” as the solution to most ills.

A New Fiscal Framework for Ireland

You can find this paper (presented to SSISI this evening)  here.

You can find the slides for the talk here.

State In No Rush to Collect Dividend

You may remember that about this time last year, the state’s investment of €7 billion in preference shares of the two main banks was regularly touted as a great investment, with the 8% dividend playing a big role in helping to reduce our budget deficit. The story in relation to these dividends has now gotten a bit complicated and it now appears that instead of getting €560 million this year, we’re perhaps getting nothing.

As discussed here before (here and here) the EU Commission does not like the idea of taxpayer money going into the banks only to be paid out to subordinated bonds. For this reason, the Commission has prevented AIB and Bank of Ireland from paying coupon payments on certain bonds. This has triggered “dividend stopper” clauses which prevent the banks from paying cash dividends on the government’s preference shares, which are due on February 20 in the case of Bank of Ireland and May 13 in the case of AIB. This in turn would trigger the right of the National Pensions Reserve Fund Commission (NPRFC) to acquire ordinary shares equivalent to the amount of the dividend. And €560 million is a large amount of money relative to the current stock market capitalizations for these banks.

However, it turns out that NTMA are not keen on collecting these shares for the taxpayer. Via Bloomberg, the Irish Times reports:

Speaking at a Dáil committee in Dublin today, Mr Corrigan said failure to pay the coupon won’t automatically lead the government to take a bigger stake in the lenders. The NTMA chief executive said he would prefer the banks to pay the coupon in cash rather than shares. He said he is “in no rush” to collect the shares, and will await a European Union decision on the coupon before deciding how to proceed.

In relation to not being in a rush, it is true that the NTMA don’t have to take the shares. The original announcement stated:

Dividend: Fixed dividend of 8%, payable annually. Dividends payable in cash at the discretion of the bank. If cash dividend not paid, then ordinary shares are issued in lieu at a time no later than the date on which the bank subsequently pays a cash dividend on other Core Tier 1 capital.

Since the banks are not currently paying out dividends on ordinary shares, then it is clear that the shares don’t have to be issued, though it is less clear as to who makes the decision to get shares issued—the banks or the government.

It would be interesting to know the exact nature of this EU decision-making process that Mister Corrigan referred to. The Commission has already made its judgment on the payments to subdebt holders and it has adopted a consistent stance on this issue with other EU banks. There doesn’t seem to have been any conversion of the subdebt to some other form of claim that wouldn’t have a dividend stopper. So what exactly are we waiting for? A bit of clarity on this would be nice.