European Commission Extends ELG Scheme

Today the European Commission announced that they are allowing the government’s new guarantee scheme, the Eligible Liability Guarantee, to be extended from including securities issued before June 1 (i.e. tomorrow) to securities issued up to the end of June.

Now the fact that the Commission had only allowed the scheme to cover bonds issued before June 1 seems pretty clear from this press release announcing its original approval on November 20 last year. It says “The instruments guaranteed under the scheme may be issued from 1 December 2009 until 1 June 2010.”

I have to admit that until now I had thought the ELG scheme covered securities issued up to the end of September. For instance, here’s the Department of Finance’s press release welcoming the November 20 decision from the Commission. It describes the new guarantee as follows: “It will apply to certain liabilities (including deposits) incurred by participating institutions during the period up to 29 September 2010.”

And here’s an FAQ about the scheme issued after it came into operation in December. It also mentions 29 September 2010 as the date up to which securities could be issued and covered by the scheme. On the face of it, this seems at odds with the European Commission’s statement about the scheme. It is possible that this statement from the FAQ reconciles the apparent contradiction:

The ELG Scheme is therefore scheduled for review by the European Commission in June 2010 and the references to 29 September 2010 below must therefore be read in that context.

But strictly speaking, this doesn’t seem enough to fully reconcile the two sets of statements. Realistically, it seems to me that the correct interpretation of the scheme was that it applied to debt issued up to June 1, at which point the Commission could assess the scheme and potentially extend it. (Of course, we’re into angels-on-pins legalistic territory here and there may be some complex sense in which government and Commission statements on the scheme were, in fact, consistent.)

In any case, it certainly seems as though September 29 is the government’s preferred end-date for the ELG. In that sense, today’s one month extension may be a disappointment to them. Perhaps there’s another extension coming next month. It will also be interesting to see if any debt securities get issued under the scheme during this month.

€2 Billion More for Anglo

From the Department of Finance:

The Minister for Finance, Mr. Brian Lenihan, TD has confirmed today that an additional €2 billion is being made available to Anglo Irish Bank to support the capital position of the bank. This capital injection is in line with the Minister’s statement to the Dáil on the 30th March 2010, when he pointed out that the bank would need further capital to cover future losses and accomplish the restructuring of the bank and its balance sheet. This capital contribution was also approved by the European Commission last March.

The capital requirement arises out of additional losses resulting from the level of the discount on the first tranche of Anglo’s loans transferred to NAMA and further impairments on the remaining loan book. The Minister has previously provided €4 billion in 2009 and €8.3 billion by way of a Promissory Note to the Bank on the 31st March 2010.

At that time the Minister indicated that additional capital could be of the order of a further €10 billion. The €2 billion announced today is part of that anticipated capital requirement. The amount of further capital that will be required is dependant on a number of factors including the discount applicable to future tranches of assets transferred to NAMA and further losses on the bank’s non-NAMA loan book

The capital support is being provided by the State in the form of a promissory note, payable over a number of years into the future. In essence this means the amount will be paid over a period of 10 to 15 years, thereby reducing the impact on the Exchequer this year and stretching the payments into the future.

Anglo’s restructuring plan is being submitted to the European Commission today. Discussions between the Commission, the Department and the Bank on the restructuring plan will continue and the future of the bank will be determined by those discussions. As the Minister stated last March the overriding objective of the Government is to minimise the cost to the taxpayer of the restructuring of Anglo Irish Bank.

In relation to the wonder of promissory notes (about which I’ll bet you’ll be reading in the business section of your newspapers tomorrow) I’m pretty sure this stuff about minimising impact on the Exchequer won’t fit in with the Eurostat people’s worldview. Most likely, this and any other promissory notes issued to Anglo, INBS or EBS will count towards this year’s General Government deficit.

This stuff suggests though that the NTMA, lacking the Department’s gift for PR, have been missing a few tricks in relation to promoting their activities. I suggest the following as a press release the next time they issue a ten-year bond:

The NTMA has today issued a new bond. To reduce the impact on the Exchequer, the state will only have to pay out about 5% of the face value of this bond over each of the next few years and the rest of the payment is stretched out way into the future. In fact, apart from that little interest payment, we don’t have to pay a cent back until 2020. We are exploring the idea of further helping the Exchequer by issuing lots more of these wonderful bonds.

Beyond the promissory note silliness, what else can you say at this point? Will the usual suspects be along tomorrow to explain to us how, in fact, there is no connection between the banking and budgetary crises, or have even the most hardcore loyalists thrown in the towel on that particular denial of reality?

Spiegel Online Calculations of Irish Debt

A few weeks ago I posted a link to a presentation put together by Spiegel Online showing the maturity profile of the debt of Ireland and other European sovereigns with high deficits. The exact nature of the calculations for Ireland were questioned at the time in the comments. Last week, I received an email from someone who clarified two points for me in relation to the Irish information in this presentation.

First, the €8.6 billion shown as Irish bonds due this year are almost all Treasury bills even though the chart is labelled “When Irish bonds are due”.  Second, the Spiegel people  selected “Republic of Ireland” as opposed to “Ireland Government Bond” when performing their Bloomberg search. This means that their numbers for future years include, for example, the Dublin Airport Authority and the Housing Finance Agency.

Department of Finance’s Strong Responses?

Shane Coleman of the Sunday Tribune reckons that

It was extraordinary to hear commentators’ reaction to the spat between UCD’s Morgan Kelly and the Department of Finance. The latter was roundly criticised in some quarters for having the audacity to put up a strong opposing case to Kelly’s thesis that it was a matter of when, and not if, Ireland went bust.

I recall offering a pretty negative opinion on the media stories about the government’s reaction to Morgan Kelly’s piece last Sunday while on RTE radio last week. I’m not sure what others said but my negative reaction was not about people having the “audacity” to oppose Morgan Kelly. Rather my criticism was that the response did not at all put up “a strong opposing case”. Let’s look at one example from the many of these stories that were reported, the one reported by Coleman himself.

Let me point out three problems with this response.

First, it relies on anonymous sources. Frankly, my stomach churns every time I see people who have been brave enough to step up in public to say their piece being attacked by anonymous government sources. Let’s be honest here. This is a political game. If Minister Lenihan or other people in the government wish to respond to an opinion piece, they should do so in their own name rather than using the civil service.

Second, the “strong opposing case” includes stuff like this:

“Professor Kelly cites Uruguay as an example of how his policy works. Would Irish citizens, public servants and social welfare recipients be satisfied with Uruguayan levels of public services, pay and social welfare? I think not.”

Frankly, that’s not strong, it’s pathetic.

Third, the anonymous DoF source said the following:

The vast majority of bonds were so-called senior bonds – equivalent to deposits and on which no risk premium was paid.

Despite all the confusion about pari passu on windup, it is patently false to say that senior bonds are equivalent to deposits. Prior to September 2008, Irish bank deposits were insured up to a €20,000. Senior bonds had no such insurance offered by the government.

A carefully considered public response, authored by a named individual associated with the government, would have been a good idea. That is not what we got.

Morgan Kelly’s Bank Loss Calculations

There has been some debate on this website and elsewhere about the calculations underlying Morgan Kelly’s recent Irish Times article. Morgan has kindly agreed to provide a spreadsheet illustrating his calculations. You can find the spreadsheet here.

From Morgan’s email to me: “As you can see, my optimistic scenario is for a loss of 75 bn, offset by 25 bn equity, leaving the Irish Times figure of a 50 bn bill for John Taxpayer. My realistic scenario is for a loss of 105 Bn.

I also include a brief calculation of the post-nationalization value of AIB and BofI. Given their extraordinary operating costs of 4.5 Bn, the taxpayer is looking at an annual loss of 1.5 Bn, and that is before including the cost of tracker mortgages.”

Update: Note this is a slightly updated version of the spreadsheet put up Sunday night, fixing a typo. The “realistic loss” scenario should have been 105bn not 115bn.