FT: Pluck of the Irish

The international media are gradually noticing that our plethora of banking sector policies have not worked to restore the Irish banking sector to health but are threatening the health of the public finances. An editorial piece from the Financial Times is highly critical. It concludes:

It is time to staunch the bleeding. As Irish state guarantees near their expiry date, some banks will not be able to refinance their balances. The government should prepare insolvent banks for forced debt-for-equity swaps, which would instantly recapitalise the banks in question and cap the government’s exposure. This cannot be done frivolously; European institutions are exposed and EU partners must be consulted. But someone must put an end to the practice of handing banks blank cheques. Some Irish pluckiness would benefit us all.

I take it the FT will now be dropped from the long list of august international institutions that the government rolls out to claim support its banking policies.

161 replies on “FT: Pluck of the Irish”

and theres this
It gets more and more damning and more and more worrying. Where is the dail? on its bloody holidays? Where is the government? See above….
Holy sweet….

“So what was really behind Ireland’s furious reaction to this week’s S&P downgrade?

Did a looming refinancing of government guaranteed bank debt play a part?

We know that a big chunk of government-guaranteed Irish bank debt is set to expire in September. According to Citigroup, the figure is some €13bn — and over half of this on just two days. Over half of this matures on just two days: over a quarter matures on 09 September and one week later, on 16 September, another third matures”
“Given that Ireland needs all the help it can get in getting this refinancing away, the timing of Standard & Poor’s move is unfortunate to say the least.

That said, it’s not so much S&P’s decision to downgrade that’s unhelpful — after all Ireland was trading much wider than an AA- credit anyway — but the fact that it has placed a negative outlook on the country’s debt, says RBS”

and then the kicker from some crowd called CitiBank (never heard of em…)
“Even with the European Stability Fund ultimately standing behind the cohesion of the Euro area, the current bout of risk aversion and uncertainty surrounding the total cost of the bank bailouts makes buying Ireland outright (or selling it versus Spain) a trade best left to the very brave, in our view. Although Irish spreads to Germany have surpassed the levels seen in the midst of the sovereign debt crisis, yields have not but could easily do so. Bottom picking requires deep pockets and we would rather respect the current price action.”

so, over now to Green Jersey Money And Capital Managers (Prop Eoin Bond) for a comment…..

This too will be at taxpayers’ expense – as the recent plan to inject more capital into Anglo Irish Bank proved

They talk about the prospect of having to inject more capital into Anglo as being a”plan” surely it is just a Pavlovian response. And the line about “handing blank cheques to banks”….. and who exactly would be writing those cheques on behalf of the Irish people?

What is happening here is that the penny has dropped as regards the continuing appalling mismanagement of state finances. The cheer leaders are starting to realse that this sucker could actually go down they are also starting to realise that NAMA is not fit for purpose and never was. Imagine the FT having to tell the state to grow some back bone.

This article captures the bind we are in. IMHO the end is in sight. Will the extension of the guarantee be bounced in by the dail in September (with a view to the IMF stepping in QTR 1 2011) or will they let it lapse and let the market work? I’d like to think the latter.

And Dan Boyle (GP spokes person on finance remember) is tweeting about a piece in the examiner saying “ah, sure the GP arent to blame for everything”. Pollyanna is now our leader it seems.
Time to despair?

It looks like we are entering end-game with the banks. The market jitters must be making the Govt consider bringing an end to the guarantee rather than forcing the Govt into extending the guarantee as the banks may have hoped.

One would like to think that bank resolution legislation is ready to go. This is a difficult and complex situation. However, it appears that the markets are sick of Anglo and sick of the banks.

When Patrick Honohan last week said that Anglo will cost us a *net* of €22-25bn was he including in that the €1.5bn of LEV total premium on NAMA loans?

To be clear, long term economic value is a premium above the existing market value of the loans that the State (we) are *gifting* Anglo. There is an estimated €1bn left in LEV to pay Anglo on future tranches (€20bn face value loans at 55% discount to give current market value and then 11% this as LEV premium). Should NAMA stop transferring these tranches now, pending clarification of Anglo’s true costs?

The slow-motion response to the banking crisis was bound to have an impact at some point.

NAMA was first announced in April 2009 and it’s only in recent months that the State has become aware of the ‘show-box’ sole trader standard documentation supporting huge loan advances, even in the bank it has owned since early 2009..

Slow-motion government comes at a cost.

An FT report today says international banks have used a record amount of Spanish government bonds as collateral to borrow money in the markets this week, sparking hopes that credit problems in the troubled eurozone are easing.

The use of Spanish government bonds shows that confidence in Madrid has risen in recent weeks as fears recede that the country’s sluggish economy will trigger defaults on bonds and loans. Short-term loans, backed by Spanish bonds in repurchase agreements – the key area for bank funding in Europe – had hit €160bn by Wednesday this week, according to Icap’s BrokerTec, a key platform for raising money in Europe

I agree completely Robert. I do think the foreign media acclaim we have been getting is finally starting to abate as they begin to look a little deeper. I always wondered, over the last 2 years, when our government has been getting all this international kudos for being the first to bring in austerity measures why did none of these commentators ever ask why was ireland the first to do this. The answer is simply because we royally f**ked things up worse than any other country (apart maybe from iceland), so we had to bring these measures in or else sink without trace. Abroad they saw ireland cutting public wages by x% and said its the right thing to do and how wise we were to do it, but they never really looked at how high those wages had been allowed to get to in the first place. Our banks clearly behaved worse than any others in the developed world, probably since banking was invented. The combination of these 2 grossly mismanaged, vitally important areas meant ireland had no alternative but to make cuts starting from 08 onwards. So the praise we got for being the first movers on this approach missed the key fact of why we were the first one’s to act. Which was basically because we destroyed ourselves faster and more spectacularly than any other developed nation. Hard to praise that though when you’re trying to sell the same measures in your own country.

It’s interesting that a government and its agencies, addicted to spin, which lapped up the often ill-informed commentary during the boomtime and more recent times, overreacted to a negative report that had at least some basis for the presented arguments.

NTMA will look stupid if Anglo hemorrhages more than €24bn.


The NTMA should never have been put in the position of having to defend Ireland after the S&P report. It damages their credibility. Unfortunately, as Brian Lucey says above, our overpaid useless politicians are off on holidays somewhere and couldn’t be bothered dealing with it. I have not heard from one senior minister apart from Gormley going on about how he is being picked on or something. Idiots.

A bit of a shock to hear this from the FT. But the advice seems a little mixed. The second last para talks of torching subbies and we will all drink to that but is the last para really saying we should default on seniors?

We have had this debate before. The seniors are entitled to have the depositors share their pain and the Government and everybody else seems to believe that the taxpayer should suffer the depositors’ pain so where is the silver bullet? Are depositors also to be offered Anglo shares in return for their deposits?

I’m a labour economist, not a financial expert, so please correct me if I’m wrong.

1) Governemt guarantees banks with supposed aim to get lending going in economy

2) Bank bonds take on characteristics of Govt bonds

3) Because of all this bank debt, interest rates on govt debt increase.

4) Govt bond rates go up, bank bond rates go up.

5) Directly as a result of govt policy bank lending rates are increasing.

The alternative would be to do the humane thing and put the banks out of their misery (after doing a cut and paste job of UK law regarding winding up banks). This would wipe out a huge portion of debt backed by govt reducing govt bond rates. Also, the banks get a fresh start so they can now borrow at lower rates too. This gets passed on to the public, boosting investment and so on.

Is this essentially correct?

So the FT is recommending debt for equity swaps in the banks. Isn’t this what Morgan Kelly recommended in May? Can someone please explain what the downsides are to this approach?

@ Brian Woods II

Can we torch the seniors? As a country we can give money to whoever we want, so why not torch the seniors and then give money for free to the depositors.

Thats if we think depositors deserve it.

“European institutions are exposed and EU partners must be consulted.”

I think the FT leader-writer – presumably writing in a country which retains some measure of sovereignty over monetary, fiscal and bank system matters – is underestimating the challenge facing the Government.

Consultation with EU partners is probably the least of it. Any move to wind-down the insolvent banks will require the full sign-off of the institutional EU – and that includes the Commission, Council, probably a Parliament Cttee, the ECB, the Stability Fund and the Ctte of Bank Supervisors (which conducted the stress tests).

Zhou has consistently bemoaned the lack of any evidence of work on a bank resolution process, but I don’t think there’s any possibility of one being developed and applied unilaterally. The BIS is developing a blueprint which will probably be adopted by the EU, but that is some way off.

I remain convinced that the markets are using Ireland to force the institutional EU to get the finger out.

@Brian Woods II
“The seniors are entitled to have the depositors share their pain and the Government and everybody else seems to believe that the taxpayer should suffer the depositors’ pain so where is the silver bullet? Are depositors also to be offered Anglo shares in return for their deposits?”

I know we have had this debate before but what do you think it preventing the government from giving a guarantee to depositors but not one to senior bondholders?

If we wind the bank down everyone gets 50c in the € (including depositors) but the government tops up the depositors so they get 100c in €


would we have to give those depositors the extra 50c in the euro the minute we announced the decision?

would these deposits attempt to leave en masse and need to be insta paid?

Its surely not a great vote of confidence when your own primary bond dealers are saying that they are a trade “best left to the very brave” ?
Bond spreads continue to rise to ever more glorious heights…


Nothing at all wrong with that except that it crystallises the guarantee at a very high immediate cost.

I think the FT and others pushing this course have in mind that Seniors can be forced to be next in line after Subbies but before Depositors. Faced with this meltdown Seniors will be prepared to negotiate and accept a DE (pardon the pun) swap. But whilst the Seniors are holding Depositors hostage why should they negotiate?

I don’t see why they would all leave en mass if they had a 100% state backed guarantee for their money whenever they want it.

well it adds an extra element of uncertainty – one that is hard to quantify

i suppose they have not only the state guarantee but also the stabilisation fund to fall back on.

i take your point

How ironic it would be if Anglo ended up being really well capitalised and in a position to enter the residential mortgage market, perhaps buying a few branches from existing players, and cherry pick the best variable rate mortgages from the big two

I have extensive experience in credit control in manufacturing and distribution environments, but no experience in a financial environment. So I would be interested to hear how a financial environment is different.

In the business world that I live in if people/companies extend credit they expect to get paid. If a company can’t pay that is a very serious situation. It might ask for a discount on its debt. But that company is announcing to the world that it cannot pay its bills. Nobody in their right mind would extend credit to that company again or at least until a couple of years.

Let’s assume that an Anglo default is not the same as a sovereign default (an arguable assumption). In my view the announcement that Anglo would default on its senior debt could only be done as a precursor to a liquidation of the bank. I don’t believe that any investor would buy Anglo bonds in future (even if there is a government guarantee). Why should they support a company that has in the past defaulted on its debts?

If you are heading into a liquidation situation the 24.5 billion that the State has committed is gone. The 11.5 billion Irish Central bank loan is gone. The State will have to pay up front the 27 billion in customer deposits. And then you have the Bank deposits (European and other Central Bank).

My conclusion is that it is less expensive to keep Anglo going than to wind it down. If this is the case I don’t think it is feasible to default on senior debt most of which is covered by the State guarantee and such a default, in my view, would be tantamount to a sovereign default.

@John Martin

A couple of points

Why are the €24.5bn & €11.5bn gone?
If the bondholders accept a discount or debt for equity swap then the bank would need far less money from the state. Whatever losses they accept reduce the losses that have to be borne by the state.

Why do you think the state would have to pay the depositors off up front?
The deposits (with corresponding assets) could be transferred to another bank.
I see no reason why the depositors would all leave en masse, they have a 100% state backed guarantee and access to their cash on demand.

@Brian Woods
“50% of 27Bn = 13.5Bn”

Can you explain that calculation in a little more detail. It is Friday and I am a little slow

A thought-provoking soundbite from Krugman:

“Ireland looks as if it is entering a runaway debt spiral”

This is taken a bit out of context (see the link above for the full quote) since Krugman can be interpreted here as referring only to the trend of recent yield spreads, rather than to the full body of evidence. Nonetheless, it is a thought-provoking comment by him.

Its a shiver inducing comment. I spoke to someone close to govt a number of weeks ago and they noted that things would be ok so long as we stayed below 5.5%…..


Just your hypothesis, depositors get 50c in the €. Depositors= 27Bn. Call on guarantee = 50% of 27 = 13.5. Even for Friday afternoon that is relatively straightforward.

You say that deposits and backing assets could be transferred to another bank (sold!!?); yes but 50% of those assets would come from a call on the State guarantee.

@Gregory Connor

Don’t worry, taking things out of context is Krugman’s thing – he’ll probably applaud you for it.

Not that he’s wrong, mind, but it’s telling that he just uses it as a stick to beat austerity with and mentions nothing about the fact we’ve taken all the money saved by making cuts and thrown it at zombie banks that have no hope of ever making it back (and then thrown more imaginary money at them for good measure).

@ John Martin

That all makes a lot of sense. But what I think the more considered torchers are suggesting is that you bluff that you are going into liquidation. The Seniors, being ladies of the world, will do their sums and say, hey Anglo shares are better than nothing.

Liquidation itself would be every bit as disastrous as you describe but if the bluff worked, there would be no liquidation of assets and the taxpayer would get substantially off the hook and we would all live happily ever after.

If metaphors help, it is like being on a plane with a bomb and asking the pilot to give you a few quid or else.

@Brian Woods II

Just your hypothesis, depositors get 50c in the €. Depositors= 27Bn. Call on guarantee = 50% of 27 = 13.5. Even for Friday afternoon that is relatively straightforward.
You say that deposits and backing assets could be transferred to another bank (sold!!?); yes but 50% of those assets would come from a call on the State guarantee.”

Are you making the assumption that all depositors would demand all if their money immediately?

At end of the day the cost to the state from Anglo is the amount that the liabilities are greater than its assets. The state has agreed to cover 100% of this, if you reduce the amount of liabilities by repaying less, the gap is less therefore the cost to the state is less


Yes, if you can get away with keeping Anglo open and reducing its liabilities then clearly that is a win. But as I separately have discussed, the Seniors’ trump card is that the threat of liquidation is a suicide bluff which they know won’t be played. So the option of keeping Anglo open with the acceptance of Seniors of a DE swap is a fantasy. Even Richard Bruton has got off that trip, though maybe the FT will cause him to rethink.

I am saying that the receiving bank will want real assets to back its deposits even if the depositors themselves are in hibernation. Maybe the ECB would let the government print more NAMA bonds.

“I spoke to someone close to govt a number of weeks ago and they noted that things would be ok so long as we stayed below 5.5%…..”

Must be a young fella. I remember the early 1990s when Debt/GNP was over 100% and yields at EVERY duration were in the teens. We survived. And please don’t talk about real yields, the borrowing in the early 1990s has turned out to be at very significant real as well as nominal yields.

@BW “I remember the early 1990s when Debt/GNP was over 100% and yields at EVERY duration were in the teens.”

Wasn’t the budget balanced back then ?

I remember the 80’s….the 90’s were fine and dandy by comparison.
And with deflation now we are at goodly high real levels
This person I spoke to remembers the 50’s…

Its Friday afternoon and this broken down selling plater called “debt equity swap” is taken out for a gallop. The senior bonds and indeed the sovereign debt is largely owned by core European insurance companies and banks on behalf of German French and Dutch savers. In many cases these individuals are paid less than Irish public servants. German Hospital consultants earn less than their irish counterparts, German teachers earn less than Irish teachers especially at third level.

IF you expect the Chancellor to go to the german voter and ask for a sacrifice for little old Ireland the least you can expect is a furthe haircut of some of the other state obligations. Another 20% off public service salaries…anyone!!!

This week an analyst at US investment bank Morgan Stanley predicted increasing sovereign defaults because of the inability of governments to fund ageing burdens.

He didn’t consider the implications for interest rates as there is seldom a free lunch, but in recent times economists at MS’s rival Goldman Sachs say that interest rates will remain low for at least 20 more years.

Investors face defaults on government bonds given burden of ageing populations; Ireland’s debt to government revenue ratio high but lower than US

@ tull mcadoo

Excellent point.

When a politician can claim €200,000 in tax-free expenses, mainly to reimburse him for cycling to work from Ringsend to Kildare Street, one has to ask what planet are a lot of the Irish still inhabiting?

Maybe Planet Bertie!


Thank you. Nothing will happen until the instutional EU has some sense that enough voters in the core EZ countries have come to conclusion that the PIGS have suffered enough and might deserve some assistance.

I was wondering what planet I was on yesterday with RTE spinning furiously while they announced the collapse of two major companies.
the good news today is that as of 2.30pm our ten year yield has only increased a little to 5.737.
Paying 5 times what the Germans pay for 6 month money makes me wonder if the markets are factoring in a near term event as the 10 years differential is not as bad.
Eoin is needed. He must be on holiday with the Gov.

@ Paul, Michael

We are doing ourselves no favours with such insider deals as Croke Park Agreement, keeping useless quangos open, having the highest paid officials in the western world, having govt ministers fly around to emote at summer schools etc.

@ Brian

“so, over now to Green Jersey Money And Capital Managers (Prop Eoin Bond) for a comment…..”

So you call JtO out on another thread, and me out on this one? I know its late August and the Pav isn’t exactly kicking, but are you really that bored?

On the actual issue at hand, market yields on Irish debt are not the issue, nor are nominal coupons on the debt. EVen debt/gdp is somewhat meaningless if you completely ignore the asset side of the balance sheet. Ultimately ability to pay is what matters, and so metrics like debt servicing costs as a % of GDP, or the average weighted coupon and duration of Irish government debt, or the net debt/gdp of the Irish sovereign are the more important things to consider. The inflation outlook is also important to understand the relative ‘expensiveness’ of the current yields.

Obviously the cost of servicing our debt is creeping up everytime we issues at a more expensive level than the average, but if this ends up being a short term issue, then we wont necessarily have a problem. At the moment its simply our turn in front of the market crosshairs, and we have to find our way out of them. Greece got stuck in them in the early Spring, Spain had a tense month or so in May but managed to re-assure them, and so Ireland needs to address the markets concerns between now and the end of September. We’re not going to run out of money, nor have any redemptions to worrry about in that timeframe (which was part of the problems facing both Greece and Spain previously), but clearly the issues of bank funding and the ultimate bill for Anglo are spooking the markets. A clear line in the sand needs to be drawn on Anglo, where the Minister and Central Bank have a number that simply will not be increased upon again. Some signs of progress that NAMA is actually doing some management of the loan portfolio (rather than just building it up) would also go some lengths to disuage fears over its ultimate usefulness and cost. And an upping of the austerity rhetoric ahead of the budget would also help out in convincing the markets that we still have that under some sort of (relative) control as well.

And as BW/Tull/Paul Hunt have noted, inflicting losses on senior bondholders is simply not a runner at the moment, and is distracting the argument away from the reality of the situation.

@ Brian Lucey (again) or indeed Peter Mattews

re 35bn for Anglo – given that the CB Governor has come up with a net figure of 23-24bn for them (i’ve been away a bit recently so cant remember his exact number), are you calling him stupid or a liar? Clearly he has to be one or the other in your eyes if there is such a big gap in your estimates vs his.

@Eoin Bond

“Inflicting Losses on senior bondholders is distracting the argument away from the reality of the situation”

And the reality is what exactly? Is anyone in a position of power actually acting in a realistic manner. For example P Honahahn’s weekly moving targets on his recent jaunt. It seems they all still inhabit the state of denial. The approach is that of it will be alright on the night. The numbers don’t stack and when the end game approaches, the numbers don’t lie.

BTW do you think that when it all blows, there will be enough shrapnel and subterfuge created for the non recourses etc of this world to dust them selves down jaunty onward and upward. Now there is a plan.

@ George

my question was specifically about their view (and so Constantins as well) on Prof Honohan. It’s a hell of a claim to say that the central bank governor is either stupid or lying, so i think it deserves clarification.


the reaity of the situation is that improsing losses on the ultimate owners of these intruments …the German voter… is a bit problematic until they see a quid po quo from the fecless and the reckless. It is a tad unfair to ask the German worker to work longer so that his Greek counterpart can retire 12 years earlier. Ditto with asing the German teacher to take a hit to theiir wallet so that the Irish teacher enjoys more pay and a shorter working year.


I agree. It has to be a holding job until the institutional EU gets its act together. The markets need some clarity on Anglo and on the bank funding rollover/extension of the guarantee, but do you sense that they are also using Ireland to put pressure on the institutional EU?

Jackie Ashley in the Guardian a while back talking about Iraq

The system is now falling apart, just as the naive optimism of America’s Iraq hawks fell apart when that country descended into chaos. Eventually, reality intrudes. Then the backlash comes. The “experts” are upended. We see the cost of not having an honest, open argument, whether about Pentagon strategy or about how the banking system really works, and the media feel embarrassed: “How did we miss that?” In Washington, and elsewhere, the answers are often the same. It comes down to unspoken deals between powerful people, and smiling faces telling fairytales.

from RTE
This lunchtime, the yield – or interest rate demanded by investors – on 10-year Irish bonds was 5.78%. This was 3.66 points above the equivalent German rate, just above the levels at the height of the euro zone debt crisis in May.
are we back to crisis time Eoin?

@Eoin Bond

“are you calling him [Patrick Honohan] stupid or a liar? ”

Patrick Honohan 11th May, 2010 address to the Small Firms Association
“INBS accounts for about €2½ billion in net budgetary costs. With the NAMA purchases not yet completed, I can’t quite narrow the Anglo figure down precisely. However, rounding up recent estimates to be on the safe side, it would be a pessimist who would put the taxpayer’s net cost above €25 billion”

Patrick Honohan 17th August, 2010 speech in Beijing
“Thus, Anglo may impose a net cost to the Government of about €22-€25 billion, to which can be added about €4 billion mainly to cover one small building society.”

To get INBS wrong to the tune of 30% in 3 months [and that assumes the €4bn includes €800m for EBS and I don’t think that’s a safe assumption]? What if in 3 months he gets Anglo wrong by 30%?

My own view on Patrick Honohan is that he is caught in the Zizek trilemma.


Do not ask that question of an academic. On the one hand most academics like Dr H because he is one of them and his appointment as Governor shows that they can aspire to a position of real influence. On the other hand, certain parties fear he has gone to the Dark Side and possibly no longer reads the Guardian.

By posing your question you could cause systems failure.

@ Paul

its an interesting idea, and the peripherals are so easy to push the price around, you can bully the entire EU/ECB with relatively small amounts of volume, though at the moment i’d say its an unconcious pressure rather than something more overt. It needs to be noted that there’s likely to be very few people selling Irish ten year bonds at 5.78%, but simply that there’s even fewer buyers, so thats where the price is. There’s some seasonal factors going on, but simply the markets have started to re-freeze after the June thawing. That’s why the ECB bond buying program was supposed to be a tool of stability while everyone got their house in order. Whether they are waiting for the kids to go back to school and the markets to normalise, its clear that their needs to be some sort of even mild intervention to get things back on an even keel.

@ George

we’re not at a crisis yet because we dont need to physically fund very much right now. The sovereign is fully funded so some time to come, and the banks can access more ECB funds if they really need to get them through to year end and even beyond. However, we are definitely moving down the road to full on crisis either towards the end of this year or the start of next if the sentiment cannot be turned around materially. Thats not to say that i agree with the market’s viewpoint right now (i think its hugely overdone), but its accepting of the reality that Ireland, which in H1 2010 had been the recovery trade to be in on, has fallen far short of expectations (in that there has been almost no ‘positive’ surprises to latch on to on either govt revenues, unemployment or property prices), and is now the tail risk for 2011 in much the same way that Greece was viewed for 2010. I’m guessing that the NTMA would like to be able to do a big chunky (5bn+) syndicated deal either in Nov or early Jan, and that a failure to come to the market with such will indicate real problems coming to the fore.

@Eoin Bond

I remember a certain central bank head claiming in the sumer of 2007 that the “subprime mortgage crisis was contained”. Now was he stupid or lying? Riddle me that, Mr. Bond!

@ Garo

well actually, to be clear, he said that the impact on the broader economy from the subprime crisis was “likely contained”. But yes, he quite clearly got it very wrong and massively underestimated the impact it would ultimately have (though the subprime crisis was just the catalyst for many other problems relating to general leverage etc). But calling him stupid would be a bit OTT. So, re Honohoan, are people claiming he is being massively myopic over the Anglo losses, or is he just lying about them? I’m just asking people who are looking for such big losses at Anglo to explain why the Governor of the Central Bank, and honourable and extremely smart and able man, is coming up with a much much lower figure?

@Eoin Bond
“However, we are definitely moving down the road to full on crisis either towards the end of this year or the start of next if the sentiment cannot be turned around materially. Thats not to say that i agree with the market’s viewpoint right now (i think its hugely overdone),” .
I am not so sure about the lack of trade. Is it not the case that the ECB were back buying last week and are likely to be buying this week. So the question is what price/yield without the ECB. The Greek implosion started in a remarkbly similar fashion and if memory serves me right once they hit 6% it was game up.
As Brian Lucey stated when one of the Gov, primary bond dealers is saying our bonds are only for the brave, it looks like its time to head for the exits.

As pointed out by Jagdip Singh, hasn’t PH’s estimates been a little on the low side from a few months ago.

I don’t think he is dishonest or stupid but nor do i think he is infallible

Could the esteemed prfessor H simply be making a mistake? Does happen you know.
Current Fed governor (minnapolis Fed i think) has just proposed raising the fed funds rate 200bp to ensure a rise in inflation expectations (i kid you not). Mad, bad or just making a mistake?
It’s a nice trick to shift the debate on to what name we call the CB governor. Means we stop talking about the issues: the Anglo number is going up, to where we know not. The bank guarantee is infecting the sovereign so, pace the FT, we have to find a way to stop this. Forced DE swaps are their choice. As a large bond holder i wouldn’t expect you to be happy.
But zhou has got it right: this is the end game. It’s all over bar the shouting. Yes, Tull, the loudest yells will come from the bond holders (the german ones, not just Eoin) and there will be a large price to pay.

@ podubhlain

the ECB bond buying in recent weeks has been tiny, it seems to only have been a very brief shot across the bows. Its amounted to a grand total of 500mn in the last 6 weeks, and thats going to have a big chunk of Greek debt in there too, though i wasnt in the office this week so not sure if they have been more active. And the Greek yields hit more like double digits before the ECB intervened. We also have 16 or 17 primary dealers, encompassing all the major bond houses. Primary dealers have previously issued very downbeat assessments of Irish debt, so i don’t see why this should be so noteworthy. At the moment a lot of people are just saying that holding Irish debt is not worth the hassle until the picutre clears up and liquidity returns.

@ Simpleton

i own bonds where now? For the record, i do not. Would appreciate if you didn’t go making stuff up about me. I only care what the reaction of the markets to any actions by Ireland and her banks will be, as it will have very real impact on the entire economy, which will impact on every one of her citizens. I dont “want” to protect bondholders, i simply see it as in our national interest to do so in this situation given the potential result of not doing so. As Tull has said repeatedly, defaulting will likely mean cutting government expenditure by 15bn or so next year, or roughly one third of ALL government current spending (and probably more like 40-50% when you consider the impact on tax revenues).

@ Bond

Dr. Honohan seems to be the real thing, but it has always bothered me that if he is this world expert on banking , how did he miss the Anglo-Irish thing? I know he was abroad for much of the time, but you’d think he’d have kept an eye on the ould country? What’s the use of experts who stay silent until after the damage is done?

@Eoin Bond
thanks Eoin. I’m not so sure about there being nothing noteworthy about one of our primary bond dealers asserting the our bonds are only for the brave.
In business such an advisor would be promptly fired – even if different divisions were involved.
Those comments are doing enormous damage.

Sorry, thought your nom de guerre hinted at your day job. My own title, as you are no doubt aware, is completely appropriate.
As i suspect you well know, defualting can take many forms. Not all of which would lead to the expenditure cuts you describe; special borrowing facilities can easily be imagined at EU/IMF level.

In getting so upset about the suggestion that you own a bond or two, you repeat the bait and switch tactic, dodging the fundamental question: do you agree that the bank guarantee is infecting the sovereign; that the taxable capacity of this economy is not up to meeting the guarantee, if called; that the guarantee loses credibility by the day? This, it seems to me, is a largely uncontroversial set of propositions (but i dare say some controversy can be conjured up). What do we do about this? Nobody (sane) ‘wants’ to do anything to bondholders; nobody (sane) ‘wants’ the state to renege on any of its promises.

Here’s the thing Eoin, we simply have to. It’s now about having the maturity to face up to this and having an adult converstaion about our least worst options. Pretending that all choices have been for the best and that we can stay stuck in denial – that way lies utter madness.


I also think Anglo will cost in the region of €33bn.

Does that mean I think Honnhan is stupid? Certainly not.

If if I was the governor of the CB at the moment, I certainly would not be turning to the market and telling them that we may need another €8-€10bn to plug a hole in a bank that is totally useless to the economy. That, in my opinion would be the height of stupidity. S&P included an extra €10bn for the bank bailout in their costings that has received zero reaction from officialdom, as far as I can tell.

Does that make him a liar? A white liar, perhaps. And I’m sure we can all forgive him that.

Im away off for the weekend ( celebrating my research being lauded in the wsj) but yeah, I think ph is wrong on this. Hey, it happens. Eoin clearly thinks Irish yields are too high so we know he has a trade that theyll drop. Hemmay be wrong also. 35b puts the mlra in play and it’d be nice to hear what’s that plan.

RTE are reporting-
This evening, the yield – or interest rate demanded by investors – on 10-year Irish bonds was 5.86%. This was 3.66 points above the equivalent German rate, just above the levels at the height of the euro zone debt crisis in May.

The economics commentator said this was significantly worse than Iceland.
we need action now.

Remember how the government said how biast and murdoch-owned the WSJ was when they pointed out we should reject Lisbon and then heaped praise on the WSJ when they praised our economic leadership!

The master spinner Lenihan has got himself caught in a trap from which he cannot escape and must go.

Brian: “Where is the dail? on its bloody holidays?”

I know, it’s awful. A mob of brainless hacks isn’t around to moo their way through whatever lobby they’re told to in order to decide issues they don’t understand or care about. In any time of crisis, I always wish there were more Fianna Fail TDs around to save the day.


I will have a crack at answering your question. Of course the bank guaratee is infecting the sovereign. Equally, the on going 10bn plus primary deficit for next year is infecting the sovereign. But here is the conundrum.

There is a lump of GG Paper maturing in Sept. From memory 14bn of it resides in Anglo. You could in theory default on that. Do you think it is feasible. That constitutes a sovereign default in my book. What implications do you think this has for funding next yea’s projected deficit of 15bn euros or so. How do you get round that little issue?

By the way, there is also the small matter of the GG paper maturing in BOI and AIB in addition to the need to term out their funding. Post NAMA the loan to deposit ratio of these institutions is over 120%.

So Simpleton there are two non trivial risks
*you can’t fund next year’s exchequer deficit
*you have an immediate 20% contraction in the AIB/BOI balance sheet.

In hindsight, the blanket guarantee was an act of bravado, the consequences of which are now playing out. It compounded the folly of running an unregulated banking system and for making long term spending commitments based on bubble receipts.

To me,we have but one set of options
*go to the IMF and get away from the bond markets for 3 yerars nad buys time to see if the debt has to be restructured
*bring forward the budget
*complete the NAMA tranfers in 30 days-this puts a number on Anglo
*nationalise AIB by end Sept and sell it off lock stock etc to Santander for Santander stock.

Quite frankly, the FT editorial is interesting but for reasons stated above we are not going to get away with protecting our lifestyles and stuffing the Germans.

@ Paul Hunt “Any move to wind-down the insolvent banks will require the full sign-off of the institutional EU”
Oh really? We don’t have good examples. But how about DSB? Did bankruptcy there entail “full sign-off of the institutional EU” in that case? And how does each institution “sign off”. By hanging up the phone, or writing a letter? It is important that we speak from knowledge, given the gravity of the subject.
In the case of Anglo, the EC has given a provisional ruling on the specific rescue package put together by the government, but has yet to give its final opinion on that particular scheme (as far as I know), not that there couldn’t be another one.
Just an anecdote – but DSB sponsored the American speedskating team. So its bankruptcy left them with no sponsor ahead of the Winter Olympics in Vancouver. Why a European bank sponsored a US team beats me. But the DSB trauma didn’t prevent the USA picking up 1 gold, 1 silver and 1 bronze (but hey, less than Turin!).
Just another anecdote –interesting to note that in the DSB bankruptcy, some 4,500 savers seemed to have “subordinated deposits” that got a higher interest rate in return for giving up the state savings guarantee scheme. Regular savers got their money back a little later than expected. But they got it back (up to 100k).
@ Bond. Eoin Bond… “Ireland needs to address the markets concerns between now and the end of September.”
Bang on Eoin. Measures to limit public debt (and contingent liabilities) are needed. There are many ways of doing it. Some would hurt incentives far less than others. Some can be redistributive. Some involve banks. But don’t be so quick to exclude possibilities, as there need to be large and significant measures very shortly. “Cutting government expenditure by 15bn”, as you suggest, sounds like an excellent start. But I‘d prefer to stay reasonable and realistic. And I do think there are more worthwhile, if still very difficult, ways of limiting public debt and liability.
@ simpleton
Yes the CIFS guarantee was a disaster. The CIFS expiry is on 29 Sep 2010, so in just over 4 weeks (can compare to the ELG guarantee expiry at date of the maturity of bond, but there is far less of this paper around). There is absolutely no question of defaulting on CIFS paper before the guarantee expires. I think everyone can agree on that. (And any ELG guarantees must be fully respected as well).

@ podubhlain

well a primary dealer is different to an advisor, they only get paid for the bonds they manage to sell. There’s similarities and i understand where you’re coming from, but primary dealers are expected to be independent on the research side of things. Now if Citi was aggressively shorting Irish bonds there’d obviously be a problem, but this is a different issue.

@ Brian Lucey

“so we know he has a trade that theyll drop”

i see you’ve fallen for the same trap as well as Simpleton, believing that i only want Irish bond yields to go lower to serve a position i have on. I could never just honestly believe it, right? Do you issue your research or opinions with wild-eyed headlines purely to serve your career, both in academia as well as your more well known media one? Wait, don’t answer that…

@ Lorcan

i appreciate the honesty. Everyone else just seems to be ignoring the fact that Honohan is the pre eminent Irish expert on banking crises and may know what he’s talking about. I think even calling a CB governor a “white liar” is a hell of a claim, but at least you’re willing to lay it on the table and explain why he’s doing it.

@ Simpleton

you made a claim, i clarified the actual positon, i don’t see how that is a bait and switch? I’m only clarifying it so the likes of Brian Lucey (above) don’t start getting yet further paranoid delusions about people posting on here. I’ll also note that people have routinely claimed i’m only in this for the money, so i like to nip it in the bud early doors. No offence intended by you, and not offence taken by me, i’m just clearing it up.

On the actual substance, i think a default on a lot of German and French banks/insurers would make EU/IMF damn near unworkable at this point, as we are nowhere near the point of no return. Even Greece, in a far far worse position than us, is still a long way from a physical default or restructure. We’re further out than they are by a good few years.

Gavin S, Eoin,

If we are throwing about accusations of talking one’s book. One could accuse certain academics and public sector luvvies of calling for default as the think it might protect their positions. The cash flow saved from debt service might go to giving them appropriate & well deserved salary increases.

However, that would be bad minded.

Bond. Eoin Bond

“Clearly he has to be one or the other in your eyes if there is such a big gap in your estimates vs his.”

Such harsh language. You should take lessons from Alan Clark.


I believe “economical with the actualité” was the expression you were looking for.

No need to thank me. Glad to be of help.

If the banks default on their external debt, mortgage interest will fall substantially relative to the base rate.
The working middleclass may accept a further pay cut if this was explained to them by a competent and workmanlike goverment.
This will make our workforce more competitive on the international market.

To suggest that we would go on another consumption binge after the banks default is incorrect in the extreme – it would however make a dramatic improvement on the unemployment figures even if we lost our corporate tax arbitrage model as these companies sustain only a limited but highly paid workforce.
A light manufacturing base with larger amounts of lower skilled workers is the future for this country if the goverment can get its finger out and at least give a impression of respect for itself in negotiations between France and Germany with regard to our debts.
Remember without these debts at least some of the spare capacity built during the boom can be utilised – if we have a decade or more of shielding the banks from losses on their balance sheets those apartments and industrial estates built in our city centres and inner suburbs will collapse and become shanty towns.
Houses and industrial units built in the sticks are lost any which way.
With industrial work these units are a valuable resourse for our future workforce as they do not have to commute vast distances to get to work.

@tull mcadoo if you check out the OECD website you’ll see that German primary teachers had less classroom hours than Irish ones, while German secondary teachers were paid 8-15% more than Irish ones, and this gap has probably grown since 2007. The public sector has its problems, but it alone should not take the rap for a nationalised private bank going bust because of reckless investments by private developers.

“In hindsight, the blanket guarantee was an act of bravado,..”

There was no need to wait for hindsight to tell us that a guarantee we could never afford was going to get us into trouble. The puzzling thing for me is how anybody ever seriously believed it was a good idea – maybe they believed that BL was a leprechaun – with a pot of gold somewhere sufficient to sort out all bondholders, depositors etc., should the need arise.
The world just stopped believing in leprechauns.

“Everybody knows the deal is rotten.

Old black Joe’s still pickin cotton.

For your ribbons and bows.”

Can someone explain to me why MacroEconomics is more valuable than Anglo Irish Bank?


‘My own view on Patrick Honohan is that he is caught in the Zizek trilemma’.

You, almost by definition (see below), cannot be ‘caugh’t in the ‘trilemma u mention. You can only occupy two positions simultaneously. PH sincerely supports the regime.

‘One cannot but recall here a witty formula of life under a hard Communist regime: Of the three features—personal honesty, sincere support of the regime and intelligence—it was possible to combine only two, never all three. If one was honest and supportive, one was not very bright; if one was bright and supportive, one was not honest; if one was honest and bright, one was not supportive.’


The Zizek trilemma is a construct which tries to explain personal survival in an autocratic regime. Given that, and the fact that you can get “caught” in the trilemma’s cousin, a dilemma, I’d have to disagree with you.

Now you might think that it’s a bit of an exaggeration to characterise Ireland today as having an autocratic regime – if that was really so wouldn’t Brian Lucey be having his door kicked in at 3am and wouldn’t he be hauled off to Upper Merrion Street for “re-education”. However we are spending unprecedented sums of money and when you consider the consultation, the debate not to mention the strikes and the Sunday supplements that deal with our annual Budget, then by comparison there has been precious little domestic examination or oversight of the cost of rescuing the financial system – which according to S&P and Constantin Gurdgiev is likely to cost us as much if not more than the US rescue ($89bn according to Reuters citing Treasury Dept officials in April 2010).

Now you say PH sincerely supports the regime. Unless that’s you Patrick masquerading under punter’s username, I’m not sure how you can know PH *sincerely* supports anything.

As to Patrick’s honesty, I’d love to ask him for an honest answer to the following:

1. Has he included in the €22-25bn net cost of Anglo, the Long Term Economic Value premium of €1.5bn that the State is gifting Anglo through NAMA. I’d guess not.
2. What is the *gross* cost of Anglo, the cost of seed capital for Anglo Newbank, additional capitalisation to cover any accounting shortfall from discounting NAMA bonds, the exposure on derivatives and more nebulously the additional cost to the State’s borrowing as a result of Anglo and indeed any other cost that he would expect for Anglo that might be recouped over time but which would involve us putting additional money in the short term at risk.
3. Why is it that after a NAMA Act, an LEV Regulation, an EU Decision approving NAMA (and changing the valuation methodology somewhat), a fixed Valuation Date of 30th November 2009 and the practical experience of valuing and transferring €16bn of Anglo loans to NAMA (not to mention €11bn from the other four institutions), why is it after all of this that we can not reliably project Anglo’s cost and not constantly add the caveat “of course it all depends on the NAMA haircut”

But the main thing I’d like to ask Patrick is this (and this looks a couple of moves ahead on the resolving-the-financial-crisis chessboard).

Given that commercial property in the State has fallen by 60% (JLL and IPD) from peak with no end in sight and given that our economy has contracted by 17% and that growth is coming from MNCs that probably wouldn’t have been lending customers of Anglo, on what planet is a €4.9bn provision for losses on the €36bn of residual non-NAMA loans that will be left with Anglo after NAMA completes its transfers, on what planet is that €4.9bn a reasonable provision. Isn’t the truth that it should be closer to €18bn, and that consequently S&P’s estimate of €35bn of a cost for Anglo is (a) an underestimate and (b) should explicitly be a net cost and not a gross cost. (€4.9bn is the cumulative provision in the 2009 Anglo accounts against the €36.5bn of non-NAMA loans).

And last point from me – I understand that the State is facing a crisis, and that stopping to explain, consult and get consensus may impede action to the extent that we fall. I also understand that there is a fear that if our banking system collapses our usual means of transport will be reduced to the back end of a Ford Anglia pulled by a donkey, like something out of Borat’s imaginings of Kazakhstan. But for all of that I don’t understand why there cannot be a frank exchange between the Irish people so that we can collectively own whatever solution and cost this crisis is to impose on us for years to come.

@ dearg doom

We have unreformed boom-era systems in the public sector and protected private sector.

Yes German second level teachers earn more than Irish counterparts but it’s not the case in German primary.

Besides, French. British and Finnish primary teachers earned about 30% less than Irish counterparts in 2007.

These of course are gross figures.

Despite the pension levy, the net funding cost for the State of the current system is about 15% of salary.

While pay increased 11% in the period 20015-2010, the pensions bill has risen by 66% to €2.23bn since 2005, while pensioner numbers have increased by 31,000 or 43% to 103,400.

The very high incomes earned by GPs in Ireland is partly due to the fact that the number of them per 1,000 population in Ireland is only 60% of that in most other European countries.

@ Jagdip Singh

“…I don’t understand why there cannot be a frank exchange between the Irish people so that we can collectively own whatever solution and cost this crisis is to impose on us for years to come.”

Wonder why despite the crash and tens of thousands of unemployed, the ‘system’ still tolerates the gombeenism/nimbyism and confusion as to what is national waste management policy?

The policymakers on guaranteed mealtickets for life, don’t seem to have a sense of urgency; after the bank guarantee was issued, they did the predictable by commissioning a consultant’s report; months later Peter Bacon was asked to examine the banks and on it slowly went.

They also appeared to have lacked basic cop-on; in the frenzied competition for prime sites in 2005/06, it was laughable to believe that developers were able to produce 25% cash deposits from existing cash flow.

As regards responding to critics, it seems like they operate in a parallel universe.

@Jagdip Singh

why is it after all of this that we can not reliably project Anglo’s cost and not constantly add the caveat “of course it all depends on the NAMA haircut”

Because the property market has not bottomed out. The paradox of NAMA is that its very presence in the market has distorted it while at the same time NAMA has to operate LTEV ‘criteria’ in deciding valuations. Not quite Alice in Wonderland but not too distant from it. If NAMA buys assets that ‘can’t’ be sold at current market prices , who buys NAMA assets? I am sure there is a political rather than logical solution.


Fully agree – if we can’t dissect the lies or stupidity coming out of Patrick Honohan’s mouth, how can we have a frank discussion at all? The problem is Patrick sold his integrity for power, and now he is going to sink under this. His recent comment that interest rates on Irish debt are “ridiculous” clearly show a man out of his depth or dishonest (plus all the other comments above). What we need is leadership that is prepred to admit there is a reasonable risk of a terrible default. Then we need to get rid of that risk. That might mean through the default itself, in as orderly a manner as possible (IMF money, EU help, and targetted at creditors to banks rather than the sovereign?), or it could mean a draconian fiscal adjustment like nothing anyone else has done without a default.

In any case, Patrick has proven the wrong man for this job and his credibility will be finished if markets continue to deteriorate for us. Markets probably will deteriorate, because a small probability of default makes for high interest rates and capital flight. That strangles the economy and prevents recovery. Our leadership has failed to deal with that real risk of default – they hope somehow it just magically goes away. But Patrick is only part of the failed leadership – the government has to go too of course.


what is your view on anglo’s non nama bound loan book?

this seems to be the source of the difference in estimates for banking losses

AM mcGrath

fair point. Even the Minister’s advisers may not have agreed that the “blanket guarantee” was not that smart at the time. It appears same advisers may also have believed than Anglo was insolvent. The MOF might even have had draft legislation prepared to nationalise Anglo and put it through a resolution process. We only have clues.

@ Jagdip/Christy

re non-NAMA loan book at Anglo (and Anglo in general).

Of the 36bn non-NAMA loan book, i think 7bn is for interbank assets which will likely be repaid in full. So we’re down to 29bn in customer loans, of which we will have Anglo’s entire non-commerical/non-development property loan book (ie real corporate/business lending) which i assume will not need to be impaired anywhere near as aggressively as the NAMA-bound stuff?

So of the 29bn in customer lending, should we not be impairing it by maybe more like 35%, ie 10bn or so? And do we not get to set off against this all the original equity and shareholders funds (not sure what that amounted to, but lets assume off a 72bn balance sheet it was 6bn or so)? As such, i see total losses at Anglo as more like this (and please correct where you think it is required):

21bn (nama) + 10bn (non nama) – 6bn (equity/capital) = 25bn?

Even if we very aggressively discounted the non-nama loan book (given that its not all commercial property) by 50% (of 29bn), we’d still only change the above equation to 21+14-6=29.

To get to a 35bn loss, dont we have to actually impair the non-nama loan book by almost 70% (ie 20bn/29bn)?

@Michael Hennigan – the point about teachers is that their salaries are not out of the ordinary for prosperous countries while their class size is among the largest. FInnish teachers teach less hours and have smaller classes. Total pay spending per student hour in Ireland is not particularly out of line and total education spending per student is probably below average. I question whether education has caused over spending by the Irish government. The German voter might be more outraged by the salary of an Irish doctor than that of an Irish teacher.

My general point is that public discussion of the deficit has seen little attempt at detailed analysis of where expenditure exceeds the norm in other countries and where the extra expenditure has been added in the boom. Public expenditure didn’t just grow, it grew in specific programmes and in specific sectors and this specific growth needs to be examined whether it was needed or not.

@ Bond..Eoin Bond

‘So we’re down to 29bn in customer loans, of which we will have Anglo’s entire non-commerical/non-development property loan book (ie real corporate/business lending) which i assume will not need to be impaired anywhere near as aggressively as the NAMA-bound stuff?’

Gven what we know about the shenanigans in Anglo, and the trajectory of the economy more generally, why would one make positive assumptions about any branch of its activities ?

@ Jagdip

‘I understand that the State is facing a crisis, and that stopping to explain, consult and get consensus may impede action to the extent that we fall. I also understand that there is a fear that if our banking system collapses our usual means of transport will be reduced to the back end of a Ford Anglia pulled by a donkey, like something out of Borat’s imaginings of Kazakhstan. But for all of that I don’t understand why there cannot be a frank exchange between the Irish people so that we can collectively own whatever solution and cost this crisis is to impose on us for years to come’

What crisis ? The Dail took its usual recess. The MoF would have us believe that we are simply passing through a zone of turbulence. The opposition has no compass either. Whatever it is that is amiss with our economy, the reality is that our polity, and our capacity for serious analysis, is equally debilitated.

@paul q
I was going to ask the same question .. but my guess is because non nama loans are smaller (isn’t nama only concerned with loans exceeding 5m?) they are thus more likely to be repaid.

Debt for equity would have been a good idea at the start, but at this stage what will it achieve?

BOI is pretty much recovered and probably won’t need any revised banking guarantee.

AIB has a good bit further to go, but should with sell-offs be able to emerge as an independent institution.

So the only bank that we really need to distance ourselves from is Anglo -but this is State owned, so it’s State debt that we would be restructuring. Not a very palatable option, especially as we are currently borrowing quite a bit.

I don’t see that we have had any options in any of our major economic decisions since the day the guarantee was approved. Everything we have done since has been more or less correct, but guided by this original, fatal mistake.

If you believe that the real average price of a apartment in the Cork , Dublin area is in the area of 50,000 euros and detached suburban house in the region of 75,000 to 100,000 then the banks have a way to go before their balance sheets balance.
The Goverment are taxing the populace to bail out the banks – this will reduce the banks ability to tax the populace via mortgages and further reduce the asking price of property.
The bank/state matrix is now a holistic mutant.
The only way the banks can survive is to destroy the productive elements of society which they are doing a pretty good job at – but without even more socialising from the stronger core Europe via direct purchases by the ECB to expand the base enormously we are doomed to default on the sovergin if we continue to pay external banks our accumulated savings.
(Buying gov debt by banks seems to have deflationary implications with predictable results for monetory debt in the micro economy)

If you doubt my ballpark figures which may be wide of the mark then lets sell all those houses and apartments that are empty.
Then we will get the true price.
Unfortunetly the plan is to pretend and extend and therefore destroy the potential ability of the economy to realise the genuine real capital spent over the years.
Those buildings cannot realise any return to the wider society when they have such huge spare capacity – the empty buildings only function now is to save the banks but unfortunetly for the banks but fortunetly for most of us the sovergin is too small for the banks.

Dearg doom says:

My general point is that public discussion of the deficit has seen little attempt at detailed analysis of where expenditure exceeds the norm in other countries and where the extra expenditure has been added in the boom. Public expenditure didn’t just grow, it grew in specific programmes and in specific sectors and this specific growth needs to be examined whether it was needed or not.

I had an interesting discussion (which unfortunately ended in bad terms) with a student loan officer in my local authority the other day. I had difficulty proving my independent mature status for a miserable bit of state assistance for a local authority grant. I decided to return to third level to do a degree in construction economics. It appears as though, unless everyone in Ireland hadn’t got an ESB and Gas bill in their name, they were not indpendent or mature.

I couldn’t help think of a recent Irish Economy blog post by Kevin O’Rourke in which we discussed this idea of a regional boom. That is, an economy in which growth is driven by influx of people and capital to a particular region. It appears to me, as though our policy and direction was built very much around this notion of accomodation of influx of people. Who would all afford these new housing units we kept adding up until 2006/07, and all pay their own separate utility bills etc.

The fact is now, we have hundreds of thousands of housing units, many of which are surplus to requirement. The government is in a panic now to try and simulate some kind of ‘demand’ for the same, through public housing programs etc, to try and occupy them. Except we are borrowing more than we can re-pay. It also struck me as interesting, that the local authority I was dealing with, would not accept a written, stamped, signed document from my social welfare office as prove of residence for 2009. I.e. Petty inter-departmental competition within the state. I assume this is the kind of stuff that brought communism to its knees in massive state driven economies in the past. It starts to go rotten from within. BOH.


@ dearg doom,

It is interesting the areas in which silly false economies were achieved, which will simply lead to much larger expenditures, and much large social problems further down the road. It is interesting to note, if you look at a list of Garda stations for the county of Limerick, there are stations all over the county in very small villages. But an entire new town on the edge of Limerick, Raheen, which was built mostly in the last couple of decades has none at all. It seems as though the Progressive Democrat ethos was an interesting political experiment, but one which a few politicians were enabled to partake in, without much informed observation. The net result, is saving in areas, which result in big liabilities overall. BOH.


@ All,

Deputy Pat Rabbitte, interviewed by George Hook for Newstalk 106 radio in early March 2010.

It appears as though we sold Eircom, which owned the basic communications infrastructure in this country, before we remember to hook up our Garda stations with e-mail.

More evidence to ‘the markets’, that the grand Progressive Democratic political experiment is a complete busted flush? (Apologises for repeated comment, I’m finished for now) BOH.

@Eoin Bond

I basically agree with your approach, though not your figures.

I recommend you read the Anglo 2009 report and accounts available here.


Given that it is Anglo that is breaking our backs I would recommend everyone take the 4 hours or so to study the report from top to bottom. There will be some banking and accounting terms in there that might fox some but there should be some decent folk on here that might help explain terms that are not understood.

But if you don’t have the time then here are what I think are the relevant numbers (all financial values in €bns):

Page 40
Capital at 31 Dec 2009 (before recap) – (calculated) minus 8.13
Recap – 12.3
Capital after recap – 4.17

Page 8
NAMA loans at 31 Dec 2009 (before provn) 35.6
NAMA Provn 10.1
NAMA net loans 25.5

Page page 90 – note 27 to the accounts – for the breakdown of non-NAMA lending
Non-NAMA loans at 31 Dec 2009 (before provn) 36.5
Non-NAMA provn 4.9
Non-NAMA net loans 31.6

As to our differences which are really to do with the losses on the non-NAMA loans

The breakdown of the non-NAMA loans is shown on page 90. Now I’m interpreting these figures to be (at gross values before provisions) 26.7 for commercial property (that’s the big assumption that commercial = commercial property), 5.3 for commercial non-property 2.5 for residential property and 2 for personal lending. I can’t see interbank lending here at all. However I would welcome your own observations on my interpretation which involves making assumptions.

There seems to be a widespread misapprehension that NAMA is taking over all property loans. It isn’t. there are plenty of companies out there that buy “investment property” only – shopping centres, offices, warehouses, student accommodation, hotels because they figure the return they can get from managing the asset (together with some capital appreciation hopefully) makes their investment worthwhile. Unless these properties are associated with development loans then they’re not going to NAMA. The reason I made reference to a fall from peak in commercial property of 60% with no end in sight is because that steep decline in values would place many investment property loans at risk in my opinion.

Anglo’s sub €5m development loans are also not going to NAMA and I would assume these will suffer 50-65% writedowns.

So my assertion is that the losses on non-NAMA loans which include investment property and sub €5m development, will be 50%+. And even deducting the capital will still leave you with Anglo needing a net bailout in the €30-40bn region, certainly above the €22-25bn net that Patrick Honohan is hawking around the Far East. If I have interpreted the accounts correctly then I would say that I was a realist at a €30bn bail-out and that €25bn (Patrick’s upper limit) was at the very top end of optimism. S&P’s €35bn on the basis of gross cost which will include seed capital and other supposedly recoupable costs would also be realistic and not at all extreme in my view – in fact if they said €35-40bn that would have been nearer the mark in my view.


I wouldn’t agree with your comments on Patrick Honohan. From a distance he seems to be a capable, erudite, pragmatic operator and the fact that he is effectively drumming up investment in Ireland from China and Japan in a month when others are caravanning around the place should also be recognised. From what I can gather from others his reputation is formidable and he is the right person for the job. We are all adults here and can offer comments and debate, but I would certainly not be calling for the man’s scalp.


the 7bn in interbank loans is a Peter Mattews figure, which he has repeatedly used in his trojan copy and pasting exercises on here, but having looked at the report there, its on top of the 35.5bn loan book, not part of it. Apologies. It’s 7.7bn or so, for clarity.

Glancing at the Anglo report (i promise i’ll set aside 4hrs later on!), and the “business banking” figure is 5.3bn by itself, so this will not be as heavily impacted as the property stuff. Also, of the non-NAMA loan book, around 55% would appear to be non-Ireland, so we can also conclude that it does not need to be anywhere near as heavily provisioned as the Irish stuff, right? As such, to just impair the book by 55% or so (based on Irish property prices) seems a bit blunt? A lot of the UK and US stuff could be trading near par (or even with positive equity). If you provisioned 60% against the Irish loans, 20% against US and 10% against UK (which i think is actually fairly agressive for UK and US), you’d end up with around 35% in total losses before provisions.

@ Jagdip

Some questions?
Do your numbers include reversing the provisions on both the NAMA and non NAMA?
What about the 2bn subbies? Are you netting them off against the loss? Nothing has been said about these, I would assume they are toast?

Regarding what Brian Woods 11 has said in response to my post: I can see the benefit of Anglo threatening to go bankrupt to obtain a discount from bondholders. But the problem is that other people might be watching. A threat of going bankrupt might affect the yield that new bondholders might demand from Anglo. Secondly, it might affect bond yields demanded from other Irish banks. I think that it would be better to bluff the other way: to emphasise the positive features of the economy in order to reduce the risk premium demanded by potential investors.

Regarding Dreaded Estate’s points. The problem is that on a liquidation the liabilities crystallize sooner than on a going concern basis. Secondly there is pressure to turn the assets into cash. This, in my opinion, would require a greater discount to be given to Ango’s debtors than would be the case on a going concern basis. So whatever chance that there is of getting back the 24.5 billion capital injection plus 11.5 loan from the central bank on a going concern basis this possibility is eliminated on a liquidation. And I repeat torching the bondholders only makes sense as part of a liquidation.

I think Dreaded Estate is being a bit cavalier re: transferring customer deposits. As he knows this has been discussed elsewhere. If a commercial bank is going to accept this liability it will have to be compensated by an asset (a cash injection). Transferring customer deposits (the bank’s liability) to another entity does not solve the problem of liabilities crystallizing on a liquidation.

As I’ve indicated the world of bond markets is not something I’m familiar with. Some posters on this thread seem to be unimpressed by the government’s success in obtaining short term finance in the form of treasury bills (demand 6 times greater than supply and interest rates just over 2 percent). Does it really matter that long term finance is expensive if the NTMA can obtain cheaper short term finance on a consistent basis?

Why did Anglo senior debt pre-crisis travel at higher yields than either those of the two main clearers, or government debt?

Was it merely liquidity, due to smaller size, or could the holders have known that it wasn’t quite as secure as the other alternatives?

The guarantee expires at the end of September. Whatever (slim) case exists for honouring the seniors in full expires with it.

I would suspect that the September 2008 register of holders is very different to the current register. In fact the September 2007 register would be even more different again – Anglo debt generally has been trading as a bet on the stupidity of the Irish government, and not on a recovery basis.

@John Martin
“Does it really matter that long term finance is expensive if the NTMA can obtain cheaper short term finance on a consistent basis?”
Ask Northern Rock… or indeed Anglo/AIB – they could still get cheap overnight money. I don’t know what they were crying about.

Okay I take that as a “yes”. But the Bloomberg comment was impressed that despite the fact that it was 6 times oversubscribed it was not interested in obtaining more finance. In short, the NTMA does not seem to be panicking.

Get used to it!

The downgrades will continue as will the rate increases. When will people start to investigate what actually happened? Whe precipitate action enables some to loot what is left!

A bubble, but heavily supplied (by whom?) with credit that is now becoming a sovereign liability. Sovereign being moot.

Time to return to first principles. You do remember principles?

Economists are the Vaseline of of monetary rape?

@John Martin

I am very much aware that assets would have to be transferred along with the deposits.
But the NAMA bonds would be perfect for this purpose, they are guaranteed and liquid.

Why does a liquidation have to involve a fire sale of Anglo assets. The bondholders would be in charge of the process but are only entitled to the proceeds of any sale why would they push through the sale quickly?

Dreaded Estate,

NAMA bonds have only a value because they are backed by the ECB (as Frank Fahey correctly identified). Would the ECB support the liquidation of Anglo? My understanding is NO.

The bond holders have an interest in obtaining cash as quickly as possible. They are more amenable to discounts because their time horizon is shorter than the State. A bond holder who was expecting his bond to mature in September 2010 is unlikely to be happy to wait another 10 years for Anglo’s loans to be realised.

@Eoin Bond

1. The total Anglo non-NAMA loan book before provisions is €36.5bn (page 8 and note 27 bottom on page 90 and also that’s the figure they include in their balance sheet). I’m not sure why the top of note 27 says only €35.5bn.

2. The reason I drew attention to the 17% contraction in GNP to the end of 2009 and that Anglo’s lending customers were unlikely to be MNCs which are now growing again, is that I think vanilla business lending is also high risk. Anecdotally vast amounts of machinery have been repossessed and sold overseas. There were 917 corporate insolvencies in the first seven months of 2010 (compared with 1,406 for the full year 2009 and 773 for the full year 2008 – does anyone have statistics pre 2008?).

3. You are right that Anglo’s lending is geograghically dispersed but I would draw your attention to NAMA’s tranche 1 and 2. Almost 75% of the loans taken over were non-land and development and 41% were not in Ireland, yet the average haircut was 52% and that includes the “good” BoI and AIB. And although the UK has had a rebound in property prices since last Nov 30th (9% commercial, 4% residential) prices are still off their peaks (24% commercial, 9% residential).

So I’m sticking with a 50% loss on Anglo’s non-NAMA which would mean the losses are an additional €13bn on the existing provision and would place Anglo’s bailout needs in the 30s (€bns).


“Do your numbers include reversing the provisions on both the NAMA and non NAMA?”

Depends on what you mean by that but if you mean does a mid-30s bailout take account of the provision against losses booked in 2009 and the capital at the end of 2009, then yes. Remember at the end of 2009 Anglo had received 12.3bn capital from us and had booked €15bn of cumulative provisions against both NAMA and non-NAMA. And after all of that had a capital base of 4.17bn. So if the total losses on all Anglo loans are in the €40bn range then that implies a net bailout of €33bn. (€40bn – provision in 2009 €15bn – capital in 2009 €4bn plus capital injected in 2009 €12.3bn)

“What about the 2bn subbies? Are you netting them off against the loss? Nothing has been said about these, I would assume they are toast?”

I have assumed that beyond the losses on the loans all other values in the books are realised at their value shown in 2009.

There must be something I missed in this BOP.

Is the suggestion/theory that money now in private hands will transfer over to the state?

If it is, what is the process? Higher taxes and lower expenditure by the state or are we to expect that the state will declare “The needs of the many outweighs the need of the few” and simply introduce legislation and take the cash it needs from what is available in the country?

I suppose higher taxes and lower expenditure is what is going to happen & that will probably slow down the domestic economy. & I seem to remember that the slowdown in the domestic economy was a big problem. Deflation and so on.

@John Martin
“NAMA bonds have only a value because they are backed by the ECB (as Frank Fahey correctly identified). Would the ECB support the liquidation of Anglo? My understanding is NO.”

The NAMA bonds are not backed in by the ECB they are backed by the Irish state.
They a repoable with the ECB because they have an Irish state backing no other reason.
Why exactly can they not be transferred to back deposits?


Does the total Anglo loss come down to an assessment of the remaining 35bn or so loan book?
Losses on the NAMA bound book are going to be about 20-25bn. If the loss on the remaining 35bn or so is at the same 60% then the total loss is going to be over 40bn from which one presumes on can subtract the pre crisis equity and remaining subbies (4bn and 2bn) so giving 35-40bn total.

If however, Eoin Bond is correct then the losses on the Non NAMA book are half that of the NAMA bound stuff then PH may still be broadly correct.


Funny how the same arguments keep coming round. You appear to agree with Karl Whelan that issuing NAMA bonds is our legal right and ECB has no choice to accept them.

Please tell me why we go through the pallaver of these regular auctions biting our fingers in case yields go higher than 5.5% or worse still in case nobody turns up. Why not simply issue 1.5% NAMA bonds to AIB/BoI in return for a credit to the Government’s current accounts with these institutions.

The fact is that the magic of NAMA bonds is absolutely at the discretion of the ECB and they will control exactly how much and for what purpose we are allowed this very cosy facility.

@Paul Q
I’m not sure that having our central bank head prancing around Asia as investors sell off Irish bonds once again does much for our nation. However, since he has proven completely wrong in his outlook the last year, when inviting savers and investors to buy Irish bank bonds, perhaps he needs to hide from all the people that have suffered real harm when they acted on his respected prognosis? First things first – we need someone in his position who is able to sort out the clear risk of default that is embedded in our current banking and sovereign debt policy trajectory.


Agree with you there – it comes down to the assessment of losses on non-NAMA loans. I just hope that PH is not “tempering” his words or estimates – this is from the Irish Times today reporting on how the DoF tried to influence the IMF’s assessment of Anglo’s needs.

“I’m not sure that it would be helpful to have Anglo talk up their capital requirements. Perhaps a word with DOC [Anglo’s then chairman Donal O’Connor] could temper this”


@ BW2

“Why not simply issue 1.5% NAMA bonds to AIB/BoI in return for a credit to the Government’s current accounts with these institutions.

The fact is that the magic of NAMA bonds is absolutely at the discretion of the ECB and they will control exactly how much and for what purpose we are allowed this very cosy facility.”

1. NAMA is state aid to the banks. The amount of NAMA bonds issued is not simply at the govenment’s discretion. It is being closely monitored by the ECB.

2. The ECB play no role in determining how much will be issued by way of NAMA bonds.

Ok say the ECB didn’t accept the NAMA bonds, couldn’t the banks use the bonds as collateral in private repos?

I think this argument is missing the point. The EU has already agreed to accept the bonds for repo. All this transaction does is move the bonds from one participating organization to another.

On the Anglo losses, Alan Dukes said the estimate of €24.5bn was based on the current property price falls.(obvious really I suppose)

But the inference was it was based on falls to date, and further falls would result in greater losses. The losses are only limited to 24.5bn if you think we are at the bottom of the market


“The losses are only limited to 24.5bn if you think we are at the bottom of the market”

I guess what *we* all think don’t amount to a hill full of beans but the EU’s recent base scenario for Ireland in 2010 in its banks’ stress tests was Commercial -14% Residential – 13%. Its adverse scenario was worse.

To the end of June 2010, we were actually off Commercial – 7% Residential -6%.

And in support of the EU’s projection that we continue to fall is every commentator and economist besides Frank Fahey and the DoF (though that doesn’t necessarily mean they’re wrong) on residential and a few of the property companies with vested interests on commercial.

Further I really don’t think Anglo’s non-NAMA loans are adequately provisioned even with current falls.


Are we in agreement at least on your point (1)?

I was really addressing DE who doesn’t seem to think ECB has any discretion over our issue of NAMA bonds.

@ BW2

Arrggh. Just read what I wrote and it wasn’t at all what I meant!

I meant to write

1. NAMA is state aid to the banks. The amount of NAMA bonds issued is not simply at the govenment’s discretion. It is being closely monitored by the European Commission.

The bond markets are also arbitrating on the level of NAMA bonds issued. As Ciaran O’Hagan on here in an earlier comment and now S&P have said, nobody* really takes seriously the SIV slight of hand in keeping them off the national debt. The debt is counted as an obligation on the government.

In the same way, Anglo and other bank bailouts are an obligation on the government within the S&P timeframe for the quality of government debt (5 years). As NAMA does not intend to dispose of assets in the short-term, the bond markets naturally enough consider mainly the debt and not the assets.

So the government does not have a free hand in issuing NAMA bonds in the same way it doesn’t have a free hand in issuing sovereign debt.

* by ‘nobody’ I of course mean excluding the usual suspects…


Took a while to see what you had corrected. You have replaced ECB with European Commission. Has our dispute all along then revolved around our interpreation of the authority of the ECB. When I use ECB in this context I meant our European masters be that the Commission or Angela Merkel or whoever. My main point is that this NAMA trick is not freely available to our government to solve all our financial ills.

@DE & KW

Ever tried to put a market value on NAMA bonds? We know 10 year irish paper command a risk premium of c. 3.5% p.a. NAMA bonds are in effect loans of a similar duration with a 0.5% risk premium. That suggests a market vaue of about 70%, not great for private repo.

Just to be clear I wasn’t suggesting we issue any new NAMA bonds
The existing bonds sitting on Anglo’s balance sheet could just be transferred from Anglo to one of the other banks along with the remaining deposit book.

The NAMA bonds have a 6 month term so the 3.5% isn’t the correct spread to use.
Plus they are linked to euribor not the ECB rate


I still think the funding for NAMA comes from Europe. The paper that NAMA/the Irish State issues to the banks for their development loans is used by them (the banks) to access funds from Europe. Of course, the funds are not free. NAMA/the Irish State will ultimately have to repay the funds provided by Europe. The happens when the loans bought by NAMA are redeemed.

Using NAMA bonds to transfer the deposits to another bank is an interesting idea. Assuming no legal impediments it might prevent part of the deposits from crystallizing. But if BWII is right the value of the NAMA bonds will be about 11 billion (45% of 36 bn multiply by 70%). So 11 billion of NAMA bonds will only enable a transfer of 11 billion in customer deposits to another bank. What about the other liabilities? As you know at 31/12/09 the liabilities of Anglo were:

Customer accounts 27.2bn
Deposits from banks 33.0bn
Bonds 15.1 bn
Subs 2.4bn
Others 3.3bn

Total 81.0

@ DE

the maturity of the NAMA bonds is highly debateable. Technically they are actually closer to 1yr in duration (maturity per Bloomberg on them is 01/03/11, with 6mth coupon resets), but in reality we know they they will not be redeemed at this point and will simply be rolled over for another 6mth/12mth period. Implicitly they have a maturity profile over 5yrs+. It would be interesting to see how they show up in cashflow analysis of the Irish bank balance sheets.

Indeed, really they are perpetual callable FRNs (callable at six monthly or annual?) with a six month reset, pegged to euribor.

I think the spread on such a FRN bond would be far more closely linked to the spread on existing short term bonds and not on the spread of the longer 5 or 10 year bonds.

If traded on the market they would definitely be trading below par but not nearly the extent indicated by Brian Woods II.


Eoin and Hog have given my answer on the effective duration of these NAMA bonds. It would be totally unworkable if every six months NAMA had to go to market to refinance 40Bn of loans. This is one of the wonders of NAMA bonds as is the fact that they only carry a risk permium of 50bp. I have said it on many occasions NAMA is an absolutely wonderful facility allowed to us in our hour of peril by our European masters.

I do agree with you that Anglo’s NAMA bonds could be transferred at face value to another bank as the accountants and regulators seem to have no problem with recognising them at face value.

The shareholders of the receiving banks would be none to pleased as they are receiving paper only worth 70% of its face value but these days the banks are so in the thrall of the State that they would have no choice.

@ DE

a 10yr FRN and a 10yr fixed rate bond should both have similar spread levels, the FRN doesn’t trade at the same level as a 3mth or 6mth t-bill. The fact is that the NAMA bonds are considered to be at a minimum 5yr in duration, and potentially much longer, yet they only pay a coupon of Euribor flat, where as to be trading at par they should probably trade more like +370bps (6mth euribor = 1.137%, 6yr Irish bond = 4.83%). At the moment, based purely on a technical maturity of 1/3/10, they should be worth 98.87 cents, but based on a maturity of 1/9/16, paying 6mth euribor flat, i reckon they’d be worth around 84 cents or so **(not 100% on this, but the 2016’s trade at 98.8 cents right now, and if you make the spread on them zero relative to 6mth semi annual swap, it gives you an imputed price of 114.7, ie 16.1% difference?).**

Fair enough Eoin, I would have been of the opinion that the spread would have been significantly lower than that.
But even at 85% the Anglo NAMA bonds could very effectively be used as assets on a transfer of Anglo deposits.

“This is one of the wonders of NAMA bonds as is the fact that they only carry a risk permium of 50bp.”

Where are you getting the 50bps risk premium from?

@ DE

re BW 50bps risk premium – i think that was the original belief/rumour on the pricing of these (way back), but which has subsequently been changed to just euribor flat.


Thanks for defending my honour. Yep I thought it was ECB+50bp, I suppose with ECB potentially so out of kilter with Euribor a switch was made to the latter.

I’ll buy your 85%. Is Gene Kerrigan watching? So these 40bn bonds are really worth 6bn less. And what about the subbies? What would they trade at? 50%? Another 1bn saved, that’s 7bn less than their face value, easily making up for that 15% LTEV/MV mark up.

I say it again NAMA is Wonderful!

Ah, that’s 6 bn less to the banks, the state still has to fork out the full amount for them (hence the ability to force transfer than at par to one of the other state-owned banks as per D_E’s suggestion).

Given that a part-purpose of NAMA is to get capital flowing again, giving the banks dud assets is a poor idea (and the reason that Mr. Bacon wanted market interest rates to be payable on the instruments).

The subbies are on the other side of the bank balance sheet (liabilities of the banks), unless you are talking about NAMA subordinate bonds? Which also can be carried at par by the banks if NAMA looks like breaking even and which anyway attract a coupon.

You really should get some of these things straight before you claim that NAMA is great…

@ Hogan

i think what BWII is saying is that NAMA, from the State’s point of view, is an incredibly cheap and innovative way to issue a massive amount of debt (notwithstanding question marks over the assets which is a seperate debate). Further, via interaction with the ECB, NAMA also allows for huge amounts of liquidity to be injected into the Irish banks should they need it (notwithstanding that this won’t necessarily get ‘credit flowing’ again by itself, but it at least solves one problem for the banks if they wanted to), even though you refer to the NAMA bonds as “dud assets”. I’m not going to start the whole “ECB is funding NAMA” debate again, but if the NAMA bonds are intrinscicly worth less than the liquidity being granted against them (ie 97 cents for a bond worth 84), than clearly its the ECB that is taking the hit in terms of the credit quality it has in terms of collateral.

Regardless of whether you think the entire concept of NAMA is a good idea, or whether you have question marks over NAMA’s pricing of assets etc, i think unquestionably the structure and set up of NAMA is incredibly innovative and sharp, and designed incredibly smartly, with acquiescence from the ECB/EU, to help out the liquidity position of the Irish banks.


Of course, I meant NAMA subbies, did you think I was having a BL moment?

If NAMA was run on strictly commercial lines it would have cost us coupons which in NPV terms would be 7bn more onerous than the magic that we have been allowed.

Think of the alchemy – a bond which is 6 months duration to the banks but perpetual to the taxpayer, a bond which costs at least 300bp less than market rates to the taxpayer, a bond which would have a market value 7bn less than what the analysts/accountants/regulators deem it to be worth in the banks’ balance sheets, a bond which the taxpayer can simply print without all the pallaver of market auctions and wondering will they won’t they?

I say it again and with things pretty straight that Nama is Wonderful.

@ Eoin

” …. to help out the liquidity position of the Irish banks.”

A bit late on this thread to be asking questions and stirring things up again. Still, here goes.

NAMA supporters these days tend to admit that it’s not getting credit flowing and they prefer to bang on and on about liquidity.

However, do you think the Irish banks would have a “liquidity problem” had they been properly recapitalised by now? Those who opposed the govenment’s way of implementing NAMA tended to favour a quick and substantial recapitalisation program.

Fair enough.

Mind you, an SLS using NAMA bonds and charging the banks for its use would have been cost beneficial for the state and allowed the zombie banks to unzombie themselves over time. Probably maybe.


Can you arrange for me to make a guest appearance? My theme would be “NAMA is wonderful, clever and sexy”?

Comments are closed.