The Irish Economy

As EU decision-makers grapple with their response to an imminent Greek debt default or bailout, they need to consider not only their current decisions but also their likely future decisions. It is critically important that they not deceive themselves into thinking that they (or the Greek government) can commit to making all their future decisions now. There are strong grounds for positing time-inconsistency in EU and Greek government decision-making concerning the Greek bailout. This is a simple point, but critically important to good policy planning in this situation. Acknowledging time-inconsistency does not proscribe any particular policy choice, but it encourages policy makers to act cautiously.

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The AIB Chairman apologised today at the bank’s AGM for the self-inflicted problems caused by excessive lending to the property and construction sectors. At least, AIB avoided major losses in the US toxic securities sector  - as revealed in the Congressional hearings on Goldman Sachs, the GS view was that AIB was “too smart to buy this junk”.

See this report on the hearings and this extract featruing the committee chair Senator Carl Levin:

Levin chides Sparks for selling “junk”: In his second jousting session with Sparks, Sen. Levin questioned the former executive about the bank’s Hudson Mezzanine deal, reading an email from a Goldman salesperson in which she said that the client, Allied Irish Bank, was “too smart to buy this junk.”

“I didn’t believe it was junk. We didn’t believe it was a junk. A sales person said that,” Sparks said.

“Yes, if a sales person believed it was junk, you were selling junk,” Levin replied.

Given all the worries concerning the Eurozone right now, I thought it might be appropriate to post a link to this.

Via Michael Hennigan:

Philip is quoted in Europeans Fear Greek Debt Crisis Will Spread from today’s New York Times:

  “It’s like Lehman Brothers and Bear Stearns,” said Philip Lane, a professor of international economics at Trinity College in Ireland, referring to the Wall Street failures that propelled the financial crisis of 2008. “It is not so much the fundamentals as it is the unwillingness of the market to fund you.”

Also noteworthy from the same article:

Officials from Standard & Poor’s said the main reason for downgrading the debt of Greece and Portugal was the prospect that forced austerity packages would be an even bigger drag on economic growth.

It is the most vicious of circles: stagnating economies are forced to cut back more, which reduces their ability to generate revenue and thus pay off their debts. As part of the euro zone, these countries do not have the ability to print their own money to stimulate growth and bolster exports, so increasing debt and an increasing prospect of default result.

S&P downgraded Greek government bonds to junk status today and also downgraded Portugal’s debt. Meanwhile, in Germany, there appears to be continued prevarication about whether\how to help Greece.  To be honest, I’m not willing to spend that much of my time following the whole Germany\Greece soap opera.

What’s more concerning, however, is that the yield on Irish government debt has jumped dramatically over the past week, with today being the worst day (chart here). The yield on ten year Irish government bond yields rose to 5.25% today with the spread relative to German bonds rising 42 basis points. At 2.3%, this spread is now not too far off the highs of about 2.5% seen last summer.

This blog has periodically featured posts on the role of visual devices to improve analytical understanding  -  this NYT article reports on how the US military has become a slave to Powerpoint (and features an interesting slide).

Economic history has lost two giants in the past month: first François Crouzet, and now Angus Maddison. Maddison was a larger than life character and a committed Hibernophile who will be impossible to replace. Both men will be greatly missed.

The government will establish the European Energy Research Centre at the Tyndall National Institute, and provide initial support of 20 million euro. See here.

Tyndall has no prior experience with energy research, and I must admit that I was unaware of its existence until the 20 million euro rumour emerged a few months ago. Wikipedia has an interesting entry. Then again, sometimes it is good to start with a clean slate.

The Irish Times reports about Bank of Ireland’s capital raising plans here and provides links to all the relevant documentation so I don’t have to.

It is, of course, good news that there’s some sign that private investors are willing to invest in one of the Irish banks. Still (warning — malcontent comment alert) it’s perhaps best to put this in context. These private investors are now willing to do this because the Irish government is buying a portfolio of €12.2 billion in property and development loans from the bank, only €5.4 billion of which are performing, for €7.9 billion (assuming the initial 35% discount is applied to the whole book.)

The idea that private capital sources would renew their interest in investing in the Irish banks after loans had been transferred to an asset mangement agency was also an opinion offered last year by advocates of temporary nationalisation. Whether the route we’ve travelled to get to this juncture has been the right one is still an open question.

It is perhaps because there are still so many questions hanging over his approach to the banking crisis that Brian Lenihan persists with a rhetorical strategy in relation to the banks that largely depends on overstatements, half-truths and falsehoods such as his comments on Morning Ireland today about people who wanted to “nationalise the whole system”, about how temporary nationalisation would have lead to other banks becoming “just like Anglo” and how the bank guarantee scheme has been cost free, indeed how we’ve made a tidy profit out of it.

I received an email recently from someone who objected to my characterisation of NAMA’s goal of being cashflow positive as something of a loaves and fishes act.

The argument put to me was that while Brendan McDonagh says that only one third of NAMA’s loans are income producing and NAMA is projecting to pay a discount of 47% for these loans, the fact that the interest rate on NAMA’s income generating loans are higher than on its bonds means that it will still generate positive cash flow.

Specifically, NAMA’s bonds will pay six-month Euribor while, we are told, that its assets are generally Euribor plus two percent. In this case, NAMA would be cash flow positive as long as 0.33(i+2) is greater than 0.53 i. This requires i < 3.3. In other words, as long as six month Euribor is less than 3.3% (it’s currently about one percent) then NAMA would be cash flow positive.

I don’t disagree with the algebra of the above paragraph. But I do disagree with some of its underlying assumptions. I’m going to write a couple of posts on the various aspects of NAMA’s cash flows.

Here, I want to discuss the extent to which NAMA’s loan portfolio is generating cash.

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