The Future of the Irish Banking System Post author By Philip Lane Post date March 30, 2010 It is timely to open a thread on all the announcements. This Irish Times article carries links to the various files. This Department of Finance file carries a lot of the details and explanatory text. Categories In Banking Crisis, Economic Performance Tags Irish banking reform 26 Comments on The Future of the Irish Banking System ← AIB Watch → Today’s NAMA Announcements: The Good, The Bad and the Ugly 26 replies on “The Future of the Irish Banking System” From the FT this evening: Signs of Celtic Tiger clawing back growth By David Gardner in Dublin Published: March 30 2010 18:20 | Last updated: March 30 2010 18:20 After almost two years of unrelieved misery during which Ireland had sometimes appeared, in local parlance, to have lost the run of itself, a battered and moth-eaten Celtic Tiger may be picking itself up. Since the onset of deep recession, by dint of pay cuts, tax rises and public spending cuts the government has stripped about six percentage points out of the budget. The first Irish generation to taste success and wealth was left reeling and angry. But last year, the budget deficit, though still 12 per cent of gross domestic product, stopped rising – the first milestone on the road to recovery. Ireland is no Greece. EDITOR’S CHOICE Ireland to launch €81bn bad loan bank – Mar-30 Irish unions agree to link pay to efficiency – Mar-30 Ireland’s woes deepen as GDP shrinks further – Mar-26 Doubts cloud Ireland bank reform – Mar-29 In depth: European banks – Dec-21 Wolfgang Münchau: Gaps in the euro ‘league’ – Mar-21 The Fianna Fáil-led government on Tuesday tried for the second milestone: a package to clean up the prostrate banking system. The National Asset Management Agency, or “bad bank”, started drawing the first buckets of toxic property loans out of the banks, but at dramatically higher discounts than initially signalled. The new bank regulator also set higher capital adequacy rules, which will in practice mean the state taking over the bulk of Irish banking. While no one is enamoured of Nama, it has, says Brian Lenihan, the finance minister, “let us go in and make a real evaluation of where the real holes are”. After the huge fiscal adjustment, the hope is that by crystallising the biggest losses of the banks and recapitalising them, they can resume lending and Ireland’s cost of borrowing will go down. Greater pain for the banks may drain off some of the resentment at what is widely seen as a political class coming to the aid of its business crony allies at the expense of the taxpayer. This was a very old-fashioned banking crisis, in which banks expanded recklessly by lending to often cowboy-ish developers, encouraged by a government keen to prolong the boom artificially, rake in property taxes and increase public spending. And all this with a banking regulator that saw its job as not to regulate but to build up the financial services industry. Anger at the cosy relationship between bankers, builders and politicians is not the least of the obstacles the government has to overcome. The aggregate hole in the banks’ balance sheets relative to the size of Ireland’s economy, while not Icelandic, was huge, as was the economy’s contraction. Last year, gross national product shrank by 11.3 per cent – a more indicative measure of activity than gross domestic product, which includes multinational profits booked in Ireland. Terrible though this all is, Ireland looks not only to be managing it but doing so with an informed public debate. So far, there is a scattering of go-slows rather than strikes; government and unions on Tuesday reached a deal on public sector pay and reform. Ireland is starting to claw back lost competitiveness. There is no sign of a backlash against the euro or the European Union, nor any discernible polarisation. Fianna Fáil and Fine Gael (the main opposition party), the Tweedledum and Tweedledee of Irish politics, have made populism mainstream, weakening the force of radical tributaries. Targets for pent-up anger, moreover, have appeared right on cue, with two chiefs of the now nationalised Anglo Irish Bank arrested and questioned this month in a local depiction of the perp walk. It is becoming apparent that Ireland’s modern economy – based on exports of processed and fresh food, IT services and software, pharmaceuticals and medical equipment – is holding up well. New jobs are starting to come in. The pre-property bubble boom, from about 1993 to 2001, was in tradable goods and services. Most of the positive fundamentals of that period are still in place: a small, open, low-tax economy with an educated workforce; strong European and Atlantic links; and an Irish diaspora acting as an enabling network. “The core resource Ireland has to offer is an English-speaking, highly adaptable, well-educated and young workforce,” says Neil O’Leary, chairman of Ion Equity, a private equity house. Taken together, and with the right policy tweaks, this could offer Ireland a route back to the authentically Tigerish 1990s rather than the long recession of the 1980s. Thanks for the link to the Dept of Finance document, to my non-expert eyes it appears to have a clarity that is lacking in so many government documents. A few things struck me after a quick glance through it. AIB and BOI have to provide 3 billion of lending each in 2010 and 2011 – is this enough? How will this requirement affect capital requirements and costs to the consumer in mortgage and interest rates? A Credit Reviewer is to be set up for appeals where lending is not provided. Will the Credit Reviewer be made up of internal bank employees, how much confidence can we have in their reviews? Will these measures, make our borrowing cheaper? Apart from these initial comments, I am gobsmacked at the figures involved as I’m sure the rest of the country is. I should also have said that I still have concerns re the valuation process. I fear the valuers may have little planning experience and may not be marking down the loans sufficiently. They may still think that certain land is suitable for development when it will not be due to a new planning regime that will take more consideration of local development plans, flood plains and the national spatial strategy. Will we get to see valuations of individual loans so we can judge ourselves? Eamon Ryan is digging himself deeper on the leaving the Euro remark …. it’s not pretty. @ Frank G Any link to where the young minister is digging. Shame on him Was just watching him on Oireachtas live. His argument amounted to Opposition = David McWilliams, therefore he was free to discuss whatever David McWilliams was proposing. He pulls the same trick when nuclear power is debated. Olivia O Leary took strips off him on drivetime today Well worth a listen So….we issue 1 year bonds, at 6m resets, at the bottom of the interest rate cycle. And we have to roll them over for a decade. Every year. Well done lads… Lads http://www.rte.ie/live/ Debate, if you could call it that, from the dail. Gogarty speaking now….. So the vast amount of work at NAMA has given us a good pointer as to overall recap requirements after losses on Land and Development loans (€81bn gross). Our residential mortgages are €110bn – are the 2-3% bank bad debt provisions adequate to cover default? @Al Only about 5 TDs there – 4 on the opposition side and 1 on Government benches. What a joke! @ Brian These guys should have to attend a mandatory oratory/rhetoric course prior to joining the Dail!! For national pride!! Like single farmers trying to chat up cattle @Brian That is truly, truly, truly outrageous. This is bigger than a budget speech. aaaaaaaagh! @ Brian and Sarah Dail debates are terrible for the most part – but does it really matter how many people are in the chamber? does it make more sense to have them in their offices, or elsewhere doing some useful work and listen and view the speeches on a tv rather than sit their and waste their time listening to the same arguments again and again. @Holbrook I’ve been saying that for years, but surely this is different? What accountability is there if the government won’t sit there and at least listen to questions. What can be more useful than Burton/Bruton looking Lenihan in the eye and saying WHO ARE ANGLO’S BONDHOLDERS? He probably won’t tell them but jesus, if we give up asking, then what hope is there? @sarah i’m not an expert in dail procedures but i think tonight’s “debate” was a series of statements by TDs, i watched a bit of Michael Martin’s speech and when the opposition shouted across comments or questions they were told to desist by the Ceann Comhairle and Martin was reminded to direct his comments to the Ceann Comhairle – another justification for more committees with teeth to have the power to sit ministers down and cross examine them on detail rather than have TDs spend time in the dail chamber spouting a lot of useless commentary. let’s hope, strike that, let’s not hope, let’s demand that we get some genuine political reform out of this mess. Bottom Line – every gvt td and near govt TD thinks that pouring more and more and more into the black hole of anglo is a good idea. Things to remember… @Sarah “WHO ARE ANGLO’S BONDHOLDERS?” Yes, analysed by value, type of investor, location etc. if specific names cannot be given. Also, the alternative scenarios for Anglo should be published. Cannot help thinking but that we are being treated like mushrooms. Not one piece of paper has been circulated regarding a single €20+ billion expenditure. That is equivalent to 25 LUAS. Maybe that is a bad example as the late Seamus Brennan said that it was costed on the back of an envelope. @Brian Flanagan Anglo is systemically important now, sure as hell! Anything that can swallow 22b (9m tax take) is really really really important. @brian another thing to remember, corporate donations contributed to cronyism and cosy relationships with developers and banks – reform on corporate donations is crucial to prevent this happening again. NAMA has “let us go in and make a real evaluation of where the real holes are” Well worth the c.100,000,000,000 Euro! (Currently rounded up) Finding out the real holes has only started. The bad news will continue to dribble out, year by year. By year. If we actually wanted to find all the “real holes” we would. But who would benefit from that? Sure no one likes bad news and the voters would go berserk! The future of the Irish banking system is grim indeed. No profits, no dividends. Massive sell offs into a deflated market. Capital injections. Swapping debt from the banks into the taxpayers. Tell me why are we doing this, again? Ah yes, so we can borrow more money, which we will have to repay even if we waste it. At a time when real interest rates have never been higher. Not even 18% which only lasted a short while. Asset prices are dropping so fast. Time to stop digging this particular hole, I think! The government through NAMA is not planning on supplementing private bank credit but supplanting it. Historically the government has never made a good showing as a market maker. It is hard to be optimistic that it can do any better with the banking ‘system’. Vibrant banks in one of the highest leveraged EU countries??? The principle that to only way back to health is through ever increasing borrowing is reliant on the misunderstanding that credit is wealth. I don’t know of any business that lavishly borrowed its way into financial soundness. Ironically many of the Ozymandias-like dot com companies did just that. Borrow, borrow, borrow and everything will work out in the end. I am not an economist and I don’t have the figures but a bit of naive reasoning tells me that if Anglo had collapsed (a loose emotive term) and if bondholders had demanded that the government pay a few points more on its sovereign debt, the extra costs would still be much less than than 20bn+ now required by Anglo. Rather than distance the private banks from the state’s sovereign debt, the foolish reckless guarantee made them part of it. If there is any innovation fallout from NAMA it perhaps ‘backward innovation’ requiring a low wage labour force on standby to service FDI enterprises. The EU Competition Commissioner has granted permission for the recapitalization of Anglo to the tune of 10bn but the limits the government intervention for six months initially pending an inquiry. Why 10bn now? Why not a must lesser sum and let us wait six months for the inquiry? It seems to me that Almunia is tacitly admitting that government funding is in effect wind down support by another name as the bank as no commercial future. The situation just gets crazier by the day if not the hour. http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/400&format=HTML&aged=0&language=EN&guiLanguage=en I should have mentioned that the six month interval ends on June 22. I wrote this blog entry for my own benefit mostly this evening. Enjoy. BOH. http://designcomment.blogspot.com/2010/03/town-hall-meeting.html http://www.theaustralian.com.au/business/property/housing-shortfall-likely-to-worsen/story-e6frg9gx-1225846623918 The MSM will print anything that promotes their advertizing revenue. Australia has the highest cost housing, relative to income in the world. Interest rates have begun to rise again from their lowest ever. This could have been the same story for Ireland, if the government had increased taxation in 2000. Taxation, you know it makes sense. Compared to the alternative. Oh yes, taxes are going to rise anyway!!!! So much better this way. Yeah? Comments are closed.