The Irish Economy
Commentary, information, and intelligent discourse about the Irish economy
The statement by Brian Lenihan is here.
This statement didn’t show up until well after the FT coverage began appearing, from before 7:30pm on the 29th.
What a bunch of cautious Marys S&P are
Anglo – €29.3-€34.3bn
AIB – €3.5bn + €3bn + shortfall in €7.4bn = €6.5-11bn, est.
BoI – €3.5bn
EBS – €1bn
INBS – €5.4bn
Subtotal – €45.7-55.2bn
NAMA – €40bn
+ NAMA commercial paper – €5bn
Total – €90.7-100.2bn
Really S&P? Tsk, tsk, tsk.
Lenihan described the governments response to the banking crisis as the ‘text-book’ approach also used in other countries.
I wonder if he buys his economics text-books in the same place his brother gets his books on evolution?
in fairness, there was two complaints about the S&P figures:
1. they didnt take into account the asset side of this, both in terms of NAMA as well as the bank shareholdings.
2. they didnt describe the 35bn as a stress scenario, its was their base case, they in fact only said on RTE this week (though 10 days old) said that the cost could exceed 35bn.
Irish bonds opening higher/yields lower…tepid start, market still digesting..
Agreed on the asset side comment. Are the workings supporting the estimate now available and if so, could someone post a link?
An initial reaction is that statements like the one from the Minister “It is now possible for NAMA to forecast with confidence …” do not inspire confidence. Hopefully the detailed workings will boost confidence to the extent that these estimates are accepted as effectively final.
As I understand it, there is another €19bn yet to be moved from Anglo to NAMA and this is not included in the €29.3bn final cost estimate.
Given the way this has gone in the past and the fact the property prices are still falling, what are the chances that the haircuts on the remaining €19bn will be even higher than the average so far of 58%?
In particular, in the given stress scenario of 70% drop in prices, we could expect a haircut of at least 70% which would amount to about a further €2bn loss on the yet to be transferred NAMA loans.
Does anyone have any idea if this is already included in the “final estimates”? Is the stress scenario only applied to loans that would remain with Anglo or is it also applied to the haircut to be applied to NAMA bound loans?
@ Peter Mathews (if listening)
I have to hand it to you, you were not too far wrong in your sizings of this problem esp. in the case of AIB.
However, I still profoundly disagree with your proposed solution.
Indeed, to all those who have criticised the drip feed slide of government’s analysis of the problem, you too have been vindicated but again I accept Lenny’s statement that the path we have followed is substantially the correct one albeit in face of a problem which was grossly underestimated and misrepresented two years ago.
btw – loss estimates on banks do not include gains made/losses transferred to sub debtholders which it seems will be brought in via a resolution legislation. So losses will actually be smaller than published this morning.
Yeah, but as you’ve been telling us, there’s peanuts to be gained by forcing losses on bondholders.
Or higher if the property market turns out worse than predicted.
The problem with Peter Matthews analysis is that if you go by his figures, AIB still need another couple of billion on top of todays figures because from what I can see the extra capital is just required for the increased NAMA haircuts. Peter said the non-nama book needed another couple of billion which I still disagree with. Also BOI didn’t require anything extra.
Why this couldn’t have been done before now is beyond me.
Anyone else notice that 6.6 bn from BoI and AIB will not be going to NAMA? 650 borrowers in the 5-20 mn euro range.
The real shocker is AIB needing another 3b. They were stress tested a while ago and we were led to believe that 7.4 was it. What happened in the meantime?
never said it was peanuts, just said it didnt amount to a fantastical 14bn sum suggested on these pages my some more excitable people.
And the key is that the 29.3bn is therefore not a real “base” scenario after you subtract the subs, its more like 27bn.
this latest twist is going to leave uncertainty.More losses to be disclosed slowly
Quite the manifesto.
I’m still quite concerned about AIB’s path to recovery.
“Peter said the non-nama book needed another couple of billion which I still disagree with. Also BOI didn’t require anything extra.” I suppose so. But I recall Peter’s robust performance at the AIB agm. I wouldn’t be surprised if there was worse to come on non-NAMA and the BoI situation is one of those where the government/FR daren’t now state that it is still broken.
Does anyone know the net estimated cost of Anglo to the State. Having now read the statements, the estimate of €29.3bn – €34.3bn appears to refer to the amount of capital the State will inject into Anglo to cover losses and ensure it has an adequate capital base.
Presumably when Anglo is wound up, the capital will revert to the State. Capital at the end of 2009 was €4bn and was €6bn at the half-year mark 2010. So should €6bn be deducted from the estimates issued this morning to give a “net” cost of Anglo.
Does anyone know the identity of the “independent third party” on which the Central Bank to quick to stress it has relied for the estimates? It wasn’t the folk that looked at Anglo’s loan book in 2008 was it?
Peter Matthews calculations were very simple really, he said so himself on Prime Time. So why make it any more difficult than it is.
Great to hear Olli saying he has confidence in the Irish people. (to keep picking up the losses)
I’m feeling full of optimism.
Reasons to offer the IMF a Bed and Breakfast with a full Irish for a few months.
1. Destroy Fianna Fail for good.
2. Get rid of all the quangos
3. Reduce Public sector pay for the top end of the public service. I mean individuals like somers earning over 1million is absolute madness.
4. Bring in Property tax. this will free up the movement of people and bring in much needed cash. We have all paid our the odds stamp duty, but we all need to get over it and move on and deal with the future.
5. Bring in water charges
6.Third level fees
I could go on but I won,t. There are so many avenues to go down to get money. The problem is Fianna Fail are still playing politics, they won,t bring in property tax, want to leave it to the next govt and use it against them in oppostion. Not bringing in college fees is a joke. There are alot of double income families out there still doing very nicely thank you. Middle class can well afford it. its just everyone looking after their own little patch. Cuba are lettting several thousand state employees go and loosening the strings on the private sector. This should be a wake up call for college fee deniers. Finally sports partnerships in every county are a complete waste of time. Let every club look after them selves, they did it in the past and club scene thrived. Sports partnerships led by John Treacy was just an excuse to help over weight individuals to get out and be active. Let them make up theri minds and leave state money to more needy causes.
White Flag Thursday.
The news that we are withdrawing from the bond markets shows that the game is up.
Adapting the words of Foreign Secretary Grey in August 1914: Ireland has
lost access to the bond markets – we shall not return to them again in our
FF have also indicated that the by-elections will be in March April.
They will decide then to have a general election instead.
Because we run out of money in June 2011.
Does anyone know what the CB mean by “CEBS base case loss rates” – the CEBS is the Committee of European Bank Supervisors who oversaw the stress testing of 91 banks over the summer. When the CB refer to their “base case loss rates” does anyone know what they mean? Is there a formula where you stick in average LTVs and decline in asset values and the CEBS oracle tells you what losses to expect?
@ David Burke: David, please be careful what you wish for!
Property Tax: Paid out of what …. diminishing income? What about those in Neg Eq? They get a rebate, right? Those without earned incomes?
Water Charges: Ditto.
Third-level Fees: Good idea – but you need drastic reforms, or the income will be splurged. Must consider the equity of this. Very contentious.
Please reflect very carefully on your economic model. If its a Permagrowth species: these are set for extinction – like them pesky Dinosaurs.
We need a new economic model David!
At this stage, there’s no sense worrying about Anglo. There really is almost nothing more that can go wrong with it. We have taken upon ourselves to fund every commitment and have written off every asset. There are no further downside risks, we may yet get something back from it.
While there is scepticism about BOI, I don’t share it. While, it may or may not be an active lender in coming years, I take their assessment at face value and believe them when they say they don’t need further supports. I am expecting them to make good on their plan to leave the guarantee.
However, AIB remains something of a mystery to me. If there is still uncertainty about Ireland, it is here. Their funding plan is very slow to progress, they don’t have much chance IMHO of raising substantial money from shareholders and the state of the non-NAMA loanbook is unknown. I’m not saying that things will get worse for AIB, just that there’s less information about it than the other banks, and real downside risks remain.
While I do (genuinely) think we can manage the level of debts outlined in the Minister’s manifesto, I don’t think anyone should relax until it’s certain that AIB is satiated.
“There are no further downside risks”
“There are no further downside risks, we may yet get something back from it.”
If you can tell us Ger how the non-NAMA losses in Anglo were estimated, then that might help in concluding there is certainty at Anglo but what I am reading in terms of the source of the estimates (unnamed third party, Anglo management – they of the laughable Nov 09 restructuring plan and the estimate of Anglo total costs in March 2010 of €10-13bn) and “CEBS base case losses” is concerning.
Alan Dukes didn’t deny €39bn of losses. And others have also drawn attention to the non-NAMA loss provisions. Until the detail emerges I don’t think you can claim certainty at all.
Totally unspoken. The trading derivative book at Anglo is rising again. It is now 90% of their derivative book. Even a small loss on the book is a large number.
Four year plan by early December.
Howls of anguish across the country.
The Greens finally leave government.
Election followed by EU/IMF in January.
Probability? I’d say 0.5.
Given the credit quality and outllook of the Irish state, for bank capital requirements is it reasonable to value NAMA bonds at face value? Should they mark these to market? (I’m thinking in terms of the spread between Ir Gov 10yr and NAMA at 6m euribor).
I know this is behind the curve, but …! Once the guaranteee lapses, could someonone quickly explain why can’t we impose losses on senior debt hodlers and protect depositers with new ligislation like with Bradford & Bingley in the UK?
Anglo discounted NAMA bonds by 9% in their half year report. They discounted NAMA sub debt (you know the 5% of consideration which is dependent on NAMA breaking even by 50%).
What assumption has the CB made in arriving at the €29.3bn? No idea. But it’s a relevant question and if the market has no idea either then doesn’t that tip the uncertainty on a bit further?
Brad & Bing seniors never took a hit, only subordinated debtholders.
@ Maurice O’Leary,
Withdrawing from the markets until after the budget could be a strategic move. If the budget is severe on the spending side then money could be cheaper to borrow in 2011 than 2010. Market sentiment might be different in 2011 (at least I hope so).
I am not too sure about 3rd level fees. Perhaps if the student entered into a arrangement to pay back 10K over 10 years after successful graduation and employment. It would help to focus the mind of the young adult that making a career choice is a serious decision. Maybe if a mechanism was formed for ex graduates to be able to sponsor undergraduates?
My understanding of 3rd level with no fees is that it provides a opportunity to all young adults to persue a career choice regardless of the financial background of the family. Provided the student has the LC grades then equality of opportunity is there for all students regardless of social class.
I don’t subscribe to the theory of Equality of Outcome, but equality of opportunity is I believe to be fair.
I liked Minister Lenihan’s comment..
“There are some personalities that stand up in the Dáil and talk about jobs all the time but have no realistic proposals for how we actually obtain them,”
This is something the opposition parties still have not figured out yet. What a pity for us as the day is coming when the opposition will become the Govt. The more things change, the more they stay the same….
@ David Burke
This is a good menu for a start and as you mentioned breakfast, one of our Marie Antoinettes could manage to charge Joe Sixpack $200 for breakfast with her retired consort, also on a State travel allowance given teh number of tax-funded foreign trips he has availed of.
As lawyer Joseph Welch said to Tailgunner Joe, the Irish bully, on Capitol Hill in 1954: “You’ve done enough. Have you no sense of decency, sir? At long last, have you left no sense of decency?”
I was thinking more about BOI (and AIB) in the forlorn hope that any bank could survive independently of the state.
On a seperate note: Given the position the DoF has put us in, I think we’d be better off if NAMA overpaid to Anglo and INBS loans.
Interesting comment from BNP Paribas-
“Mr Redeker said the main buyers of bonds in Southern Europe and Ireland are banks playing an internal “carry trade” where they borrow from the ECB and purchase the debt of their own governments at a higher yield, so the ECB is propping up sovereign states as well.
Lenders from Greece, Ireland, Portugal, and Spain have borrowed €361bn from the ECB, or 60pc of the total. EU officials describe them privately as “addict banks”.
Ah.. ok! Cheers Eoin.
what i actually don’t understand is why Irish banks aren’t playing this carry trade more? (well actually i do understand – they want to reduce their headline reliance on ECB…) It seems like a no brainer to me – if Irish state has to go to IMF or EFSF the Irish banks are going to be in more trouble on the funding and capital side anyway, so why not play the game and make a great carry and help recap anyway? The credit risk on Ireland is irrelevant – in the unlikely event that Ireland did go bust, the banks would be toast too anyway.
Its hard to understand why they did not intervene aggressively on tuesday when we were in freefall- quite apart from the carry trade, protecting their existing holdings would seem a good enough reason. As you say it is a no brainer and in fact protects the State as the more the ECB buy/repo the less likely they are to withdraw support. The Quid pro quo for protecting European banks.
More misreporting from story on Yahoo
“Ireland’s government has bailed out Anglo Irish Bank on fears its failure would “bring down” the country.
Irish Bank Nationalised Over Collapse Fear
“The state will become a majority stakeholder in this bank,” Finance Minister Brian Lenihan said.
“The bank is unable to attract private capital.”
Mr Lenihan said the bail out was necessary because of the bank’s sheer size in comparison to the economy could “bring down” the country.
“Because of its size relative to the national balance sheet… no country could contemplate the failure of such an institution,” he said.
Shares in the bank dropped 22% after news emerged that the government would make up the capital shortfall.
The government put a 34 billion euros (£29 billion) price on bailing out the stricken bank under a worst case scenario, prompting a promise to reveal a new four-year budget plan in November.”
Thisbeside a photo of AIB branch
The latest INBS figures I can find are for 2009 but am I correct in my interpretation that they only have @200m worth of subordinated debt?
“As lawyer Joseph Welch said to Tailgunner Joe, the Irish bully, on Capitol Hill in 1954”
Tailgunner Joe McCarthy?? He wasnt irish was he?? He was born and bred in the USA. We’ve got enough blustering idiots in Ireland wihtout associating ourselves with the likes of Senator Joe McCarthy!!
Pedantic I know !!
(i) not sure that postponing sov bond auctions a good idea ……….
(ii) on Allied Irish Bank, and march 2011 – WHY NOT Nationalise NOW? this is guaranteeing ‘uncertainty’ into 2011 – not supposed to be the purpose of the exercise
(iii) the tyranny of that 3 percent & 2014 – optics or real ….
(iv) ……….. …….. I’m trying to think of something positive to say ………. i’m stlll thinking ……….
correct. They bought (actually more of a swap) back a load of it last year.
We’re still in kicking the can down the road mode. The withdrawal of the NTMA from the bond market until early 2011 is the key part for me. And the hope/expectation that fear of the IMF will be enough to shore up Dail numbers to enact a savage budget in Dec. and that this will be enough to bring back bond spreads in the Spring. It’s impossible to see how the 3 by-elections may be postponed beyond that point, so the current political cycle will come to an end. FF/Greens will take their lumps and the bond market will be sizing up an FG/Lab combo (with, possibly, Labour in the driving seat). Would I be alone in thinking the bond market would not greet this prospect with great joy when the NTMA is finally forced to re-enter with a sizeable issue?
“Does anyone know the net estimated cost of Anglo to the State. Having now read the statements, the estimate of €29.3bn – €34.3bn appears to refer to the amount of capital the State will inject into Anglo to cover losses and ensure it has an adequate capital base.”
I’m struggling with this as well. FB will have capital of 250M that’s the .3 of the 29.3bn, so that at least should revert to the state. ARB is being capitalised with a regulatory cushion of 8% of RWA. Let’s say that’s 3bn. Normally I would read this as meaning that the NAV of the company would be 3bn i.e. that would count as an investment. However, I suspect that ARB is being capitalised based on the current carrying value of the assets but that the expectation is that this capital cushion will be swallowed up by expected future losses. This is teh only interpretation which is consistent with the stated position that 29.3-34.3 is the range of the expected losses to the state.
Doesn’t the new single tranche approach to the NAMA loans just dump more residual risk into NAMA? NAMA takes all the remaining loans above 20m without having done the detailed valuation, applies some estimated discount, and then in 3 months when the valuation shows the loans worse than expected due to the rushed transfer, they …. ?
How can the CBs negative outlook for the property market be reconciled with Nama’s use of a November 2009 price base?
you can subtract at least 1.5bn for subordinated buybacks off the 29.3-34.3bn Anglo figures as well.
In light of the future discounts on tranches announced by the Minister this morning, it seems that NAMA will be spending less than €34bn buying loans (compared with €40bn in the June business plan).
Time for another (or indeed a first!) NAMA Business Plan?
I’m in the market for a bunch of savvy and ruthless Paddy_Bond-dealers to invade and take over a group of islands off the west-coast: funding to be provided by The International Brigade SPV and Paddy the Sovereign to take up residence in exile – and the mission: take on global markets and buy back the Island of Ireland by 2014, or preferably earlier, and set all those poor serfs free from their conflationist chains.
What about the heads rolling at AIB ?!?
NO-ONE is saying anything about that.
But, it must be that, they were telling porkies about loan levels and asset values AND were found out – By NAMA !!!
I wonder how many weeks it will take for the announcement about how they are going to merge the good parts of Anglo and AIB?
I had assumed the whole point of getting ourselves funded so we don’t need to go back to the markets until 2011 was precisely because they knew there would be a shedload of bad news coming from Sept 30th to 24th December. Probably includes ‘Christmas is cancelled’.
When I talked about ‘other rumours’ damaging bond prices, it was rumours of AIB liquidity problems that I was referring to. It would appear that AIB has had another September 29 to remember. I presume they were more discreet this time than wandering into the Finance ministry…
So I think there is a combination of NAMA haircuts prompting counterparties to look closely at what AIB say compared to the evidence.
Yep. The can is being kicked further down the road.
We were the world leaders in austerity and as Paul Krugman noted the bond markets punished us. So will austerity+++lead to less punishment.
There in nothing here to change the view that the fate of our state and our state and our banks is the same. They say that the first casualty of battle is the plan, and that has been the case for all the ‘recovery’ plans to date.
Insofar as a multi year programme of specific named cuts may calm the capital markets, it’s liable to bring about an equivalent degree of panic and dislocation domestically. The absence of any light at the end of the tunnel will do the most harm.
The repo game is old if underreported news; it’s been disclosed in the mainstream press for years now, never mind specialist financial coverage. Part of the entertainment value of the Greek “rescue” was watching the ECB squirm as it had to bend, then break the capital eligibility rules of the repo program so that Greece could keep getting its fix – something the ECB had of course indignantly asserted it would never do, and which exposed its pretence of not supporting sovereigns and financing public deficits. (It is more or less required not to do so by law.)
(By the way, the fact that the ECB maintains published eligibility/haircut standards for repos of sovereign and other debt is part of the reason why the Europe-won’t-let-us argument is not particularly convincing.)
Under the UK’s current Banking Act (2009), the British government is entitled to impose haircuts on senior unsecured creditors in a resolution. They haven’t done so yet as a matter of policy, not of law. There is a “no-creditor-worse-off” provision in the Act which effectively means that the government can’t simply reorder seniors below depositors – any top-up money to make depositors whole after a haircut for seniors and depositors would probably have to come from outside the bank, in other words from Joe Taxpayer.
The markets only really punished us in the last couple of auctions. The MoF has decided to hold the NTMA back from inviting more – or even worse – punishment. There is money to be made by bond traders playing with Irish sovs – and it allows some holders to re-balance their portfolios. My view is – and I would welcome the views of our erudite bond people here – that the market has broadly decided – insofar as it may be seen as forming a consensus view – that the EC/ECB/IMF will be required eventually – and some traders might actively welcome testing the EU’s resolve. FF/Greens are determined this won’t happen on their watch.
The odds are on a general election before the NTMA has to hit the market with a big syndicated issue. Any takers?
However, AIB remains something of a mystery to me. If there is still uncertainty about Ireland, it is here.
Don’t worry, as soon as it’s nationalised I’m sure the new State-appointed directors will swiftly move to clarify … oh dear.
The bond traders effectively shut us out of the market on Tuesday when the rate hit 6.95%. Getting back in will be tough as no matter how deep the cuts, as undoubtdly, ability to follow through and affordability will arise. It was already being questioned by heavy hitters such as the FT when the numbers were much smaller. The consequences seem inevitable regardless of the political outcome.
Correct me if I am wrong, but Allied Irish has already received €7 bn in recapitalization. If so, the addition of €3 bn lacks and sense without 100% nationalization. The reticence in wiping out the shareholders in AIB contrasts strongly with the treatment meted out to Anglo shareholders. Wonder why?
@ Paul H/Podubhlain
there’s actually a bizarre logic here that spreads could come in as a result of auctions being cancelled (and we’ve already seen it this morning):
1. at the moment with the sovereign suffering from weak sentiment, we have typcially seen a good bit of selling in the days leading up to an auction, as the primary dealers sell ahead of it and then buy at auction to (a) generate “flow” and (b) create a ‘concession’ via the auction (ie you know regardless of yields/spreads the NTMA will still issue, so you push the market higher into it)
2. lack of supply of more tbills has already seen a short cover and tbill yields fell by around 30bps today.
Its obviously uncertain whether this can be pushed anymore than the initial move, but what it will do is take the whole issue of auction speculation on yields/bid-to-covers etc off the headlines for the next 3 months, and the secondary market pricing is now somewhat less important in the short term. Greece, in similar situations, has started to see massive drops in their bond yields this month and the market is very stable, albeit still at a distressed level.
The AIB shareholders should be converted to deeply subordinated debt if they are not going to be wiped out completely.
I agree that the consequences seem inevitable, but the over-riding political desire is to extend the life of the current Government until just before they become so. The fingers are crossed that a draconian budget will bring down spreads and allow the NTMA to re-enter the market. If that doesn’t materialise – which, from this vantage is extremely unlikely, the towel will be thrown in (using the 3 by-elections as cover). If – more likely when – they are defeated, they will be able to claim from the opposition benches that the inevitable would not have happened if they had been allowed to continue in office or had been re-elected. That is the key link between the economic and political cycle.
Any attempt to avoid the inevitable requires a major re-configuration of the existing politcial factions – but who would consider putting the national and public interest before that of the tribe?
“The AIB shareholders should be converted to deeply subordinated debt if they are not going to be wiped out completely.”
Eh, that would be a step up… admittedly from the bottom of the shoe to the stick scraping it, but nonetheless a step up. AIB needs more steps down…
Thank you for this input. I’m actually not surprised. If there’s no real blood to be drawn with auctions cancelled/postponed, action in the secondary market becomes more like shadow-boxing. I think you’ve pointed out previously that the can has been kicked down the road until the early spring when the NTMA will have to try and get a big syndicated issue away.
Is it safe to switch off until then and let the usual suspects argue the toss about the entrials of our zombie banks?
i have no idea how the non-NAMA loans were assessed, however the writedowns are coming close to 100% (34bn out of a total of 38bn). Therefore, there’s not much scope for Anglo to disappoint. The bar is being set so low, there’s nowhere for them to fall. It’s a total disaster, so total, there’s no longer any value left vulnerable to further substantial writedowns. Ergo certainty is achieved -certainty that Anglo has almost nothing of any value.
The €34 billion is worst case. As far as I can remember the non-nama book was stressed with 60-70% losses to reach that figure which in my opinion is an acceptable worst case stress test.
Sorry that should be 50-70% losses
@ Judge John Deedes
“Tailgunner Joe McCarthy?? He wasnt irish was he??”
McCarthy was raised in a farming area of Irish and German settlers in Wisconsin.
American historian William Manchester has written that McCarthy was ‘a prime specimen of what has been called the Black Irish: the thickset, bull-shouldered, beetle-browed type found on Boston’s Pier Eight and in the tenements of South Chicago.’ McCarthy’s ‘Irishness’ and anticommunism had endeared him to the Kennedy family. John Kennedy had called him ‘a great American patriot’ and his brother Bobby had chosen him as godfather for his first child and had worked as a counsel on McCarthy’s Congressional investigations’ committee.
Just in case anyone takes offense to the foregoing, some of my best friends are Irish!
Where does the logic fail then that topping up depositiers with taxpers money is better than Joe public paying up for everything? (Assuming you can prevent a bank run before restoring deposits!!) I mean surely Senior Secured get paid a higher yield than soverign debt for a reason?
See my 10.30 am.
They have to hold the general election before the money runs out in June.
They could cash in the remainder of the pension fund and put off the evil day but that would require legislation and I think even the Greens would draw a line at that stage.
When Alan Dukes got ambushed on the Vincent Browne programme a few weeks ago, the losses were proposed at 60% of €40bn for NAMA and 50% of €30bn for non-NAMA and that’s how they got to €39bn.
Unless you have information outside of the statements today I don’t think you can say what the writedown is on non-NAMA but I would say it looks far less than 50%, and that begs questions about the adequacy of the writedowns.
Did Senator Joe McCarthy not have thick lips and a predilection to being hoarse in the morning?
@ Paul Hunt,
re “erudite bond people”
Be a little wary of some of the commentary here about the view of the bond market. It doesn’t reflect all investors. The comments often fail to appreciate the diverse appetite of investors. Sometimes the impression is created that investors are a homogeneous group with all actively looking at new Irish debt. This isn’t true for everyone (and I would have felt the majority but don’t claim to represent the market!). Buyers of AAA government debt aren’t sexy; they mostly want their money safe. The idea of seriously evaluating ‘loss given default’ isn’t the space they want to operate in. The same is mostly true for stable AA rated. If this is your territory, you still wouldn’t want to buy a country that’s passing through ;). It’s reasonable to view the tightening of German spreads as evidence to a flight to safety.
AFter today,s announcements from our Minister of Finance, what the Hell was the point of NAMA. Why did,nt we just Nationalise all the banks and work them through and save huge money on legal fees from the parasities. I see our MR Insider Peter Bacon is calling low growth. Correct me if I am wrong but did,nt Bacon say that Nama would be a success when growth resumes again in the economy. Hey, who cares about the truth when your getting a fat cheque from the Govt. He probably ate all in Roly,s. This country is truly a banna republic, its not what you know its who you know. Bacon is a great fan of the Free Market, so why socialize the looses. Can,t have that naught word Nationalise floating around, those pesky revolutionaires.
Lenihan has just stated that he is always open to senior bondholders to discuss arrangements.
My understanding is they did not include the core portfolio of fully perfoming loans. They only stress tested any loans that were showing signs of stress so the haircut was greater than 50%. I am open to correction on this.
I think a total cost of €35bn would equate to approximately 35% losses on the non-NAMA loans.
Thank you. I think you have confirmed my sense that, once yields in the secondary market reach a certain point and new paper has to be issued, only a subset of non risk-averse players will be interested, while ‘good money’ in pension and insurance funds will run for cover. The higher the yields go, the smaller is this subset – and the inevitable happens.
But I remain convinced that every sinew will be strained in Dublin, Brussels and Frankfurt to postpone the inevitable.
“My understanding is they did not include the core portfolio of fully perfoming loans. They only stress tested any loans that were showing signs of stress so the haircut was greater than 50%. I am open to correction on this.”
That sounds about right, 50% on the non-good loans would generate the €35bn total loss.
The question is 50% sufficient on this portfolio for a stress test.
I take your point.We are in about 13bp as of now. Of course this could be as a result of concerted ECB action as it looks like the EU were fully informed in advance.
Agree some bond buyers obviously want security otherwise why would they buy Bunds at 2.24
“Is it safe to switch off..”
Not if you want your dosh safely invested.
@ Paul Hunt,
“The higher the yields go, the smaller is this subset – and the inevitable happens.”
I agree with your first two elements, but not necessarily the “inevitable” bit. Unless the current investors are otherwise motivated, you have to assume they see an attractive investment opportunity. It’s important to remember that an initial EU/IMF intervention is very unlikely to result in losses to bondholders. Such an intervention should delay any default. So an investor might look at a 10yr bond and assume 5 years of interest payments and x% recoveries as a min return. Shorter term investors may expect that their debt is rolled into the EFSF. Personally, I wouldn’t assume the terms of accessing the EFSF won’t be subject to change. The only people I’d currently advise to buy 10yr Irish bonds are those thinking of buying National Solidarity Bonds 😉
I pointed out some time ago that NAMA was just a Fas course for distressed auctioneers, estate agents, surveyors and lawyers.
“McCarthy was raised in a farming area of Irish and German settlers in Wisconsin.”
Ah…Wisconsin…thats in West Cork isnt it? Definately makes him Irish so. Thanks for clearing that up.
Sorry to hassle one of the best posters on this site, but stick to the economics.
Lenihan spent some time in the Dail today saying there would be no default on seniors as they rank equally with depositors. He then went on at some length about “discussions” with the very same seniors but not holding a gun to their head. If these discussions start with the bondholders saying “I want all my money back on the agreed date” what is there to discuss? Why would any bondholder accept anything less than full value after being assured (repeatedly) there will be no default? Wouldn’t they have a fiduciary duty to their investment fund to maximise the return?
Where does the logic fail then that topping up depositiers with taxpers money is better than Joe public paying up for everything?
I very much agree. One problem, unfortunately, is that people who advocate protecting bondholders are often very unclear on the distinction between a no-creditor-left-behind restructuring in which public money goes in to restore depositors (but not creditors), and a restructuring in which depositors are reordered to put them ahead of all bondholders. You’ll notice that Minister Lenihan never betrays any awareness of this possible distinction when defending the decision to subsidise senior bondholders, just as until recently he never troubled making fine distinctions between subordinated and senior bondholders. But he’s hardly the only one. Sometimes they tend to lose sight of the distinction even after it has been clearly explained to them a few times.
But there are other arguments for not restructuring the seniors on a no-creditors-left-behind basis. One is that we’d need to introduce a resolution law (like the UK’s Banking Act 2009) that
(as I was saying before I so rudely interrupted myself)
would bring into law a new “Special Resolution Regime” bankruptcy-for-banks procedure if we want to actually wind up or restructure a bank without unleashing chaos. The counterargument to this used to be “okay, let’s do that then”. Now, of course, the counterargument is just to point out that we’re going to be introducing a resolution law anyway.
Similarly, another argument against is that the markets will have a fit, and that either the Irish state or BoI and AIB will be unable to borrow again. This touches on two other arguments against: that a no-creditor-left-behind restructuring would be illegal or immoral, and that Europe Won’t Let Us. Assume for the moment that both of those other arguments against fail. Then a thorough no-creditor-left-behind restructuring of all the Irish banks, leaving behind institutions with obviously sound balance sheets, should make the Irish banks more attractive to future investors; they would be investing in obviously sound banks which won’t need bailouts in the foreseeable future, instead of putting their money into half-dead, tottering banks and crossing their fingers in hope of being bailed out directly or indirectly. It should also make Irish government debt more attractive, as it would take much of the cost of bailouts off the back of the government and eliminate the risk of future bank bailouts, as well as leaving the government with a healthier economy to tax. It should, but it might not: there’s serious reason to fear that foreign investors, driven by legitimate uncertainty about what the government is actually proposing and what it really intends, as well as by the kind of short attention spans and (more understandable) ignorance that leads a fellow to confuse Anglo and Allied, could react with a headless-chicken lending panic that would become a self-fulfilling prophecy.
Before yesterday evening, the obvious counterargument was: well, as we’re so often reminded, we have several months worth of cash in our pockets. Let’s swiftly pass the resolution law and restructure, and step out of the sovereign debt market for a few months if necessary. We can then use the breathing space to make completely clear what it is we’ve done and what we intend to do, and to drive home again and again to world audiences the clear message that the government hasn’t defaulted on any debt or oppressed any private creditors, that it has no plans and no need to do so in the future, and that our banks are now fundamentally sound. At the same time we can announce and start enacting serious measures to control our deficit. During this time the Irish banks can borrow from the government as necessary. After all, this is exactly how you’re supposed to respond to a liquidity crisis, where fundamentally sound institutions can’t borrow due to transient external problems. Wouldn’t it be nice to try applying the liquidity-crisis approach to an actual liquidity crisis, rather than a hopelessly-disguised solvency problem? Besides, what is the alternative? Steady-as-she-goes is the path of least resistance, not actually a safe course of action. Likely we will find ourselves forced into a similar or in fact worse position at some point not of our choosing. That’s what I would have told you yesterday afternoon. And now, behold! The government tried to hold it steady as she goes, and instead we find ourselves in a similar or in fact worse position, at a time largely not of our choosing. In response the government is now attempting pretty much the strategy suggested above – with a few differences. And the worst difference is that, because we won’t scratch the existing senior bondholders, what we’ll need to sell to new investors in the coming months is a more indebted sovereign and, fatally, banks that are still sick and possibly dying instead of obviously sound and profitable. That’s a fatally compromised strategy, and when we come to the end of it we will have used up our only remaining ace. So even at this late point – especially at this point! – the government should turn around right quick and immediately prepare for a proper restructuring of all our banks, including hits to the senior creditors if necessary.
well, as we’re so often reminded, we have several months worth of cash in our pockets. Let’s swiftly pass the resolution law and restructure, and step out of the sovereign debt market for a few months if necessary. We can then use the breathing space to make completely clear what it is we’ve done and what we intend to do, and to drive home again and again to world audiences the clear message that the government hasn’t defaulted on any debt or oppressed any private creditors, that it has no plans and no need to do so in the future, and that our banks are now fundamentally sound. At the same time we can announce and start enacting serious measures to control our deficit. During this time the Irish banks can borrow from the government as necessary. After all, this is exactly how you’re supposed to respond to a liquidity crisis, where fundamentally sound institutions can’t borrow due to transient external problems. Wouldn’t it be nice to try applying the liquidity-crisis approach to an actual liquidity crisis, rather than a hopelessly-disguised solvency problem? Besides, what is the alternative? Steady-as-she-goes is the path of least resistance, not actually a safe course of action. Likely we will find ourselves forced into a similar or in fact worse position at some point not of our choosing.
Well it looks like the sub-debt holders don’t want to go quietly:
At least some lawyers will make money. Looks like legally for the subs to take a hit, the bank must be in default, which the Irish gov. want to avoid, so the subs want a premium over the current market value to voluntarily accept a buy-out.
This is exactly how I would have thought bondholders would act – play hardball to get every penny possible. And which is why I just don’t get the fact that Minister Lenihan was rambling on about “discussions” with bondholders in the Dail today. What is there to discuss?
I’d guess that this is why the chatter about negotiating with the subs has turned into a plan to pass a resolution regime. Consider
The legislation will be consistent with the requirements for the measures to be recognised as a re-organisation under the relevant EU Directive in other EU Member States.
in the light of
The dispute centres on £2bn of Tier 2 bonds sold by Anglo, which the hedge funds argue are governed by English law. They claim that for investors to be legally obliged to accept a lower than face value payout, the bank’s senior debt – which the government has said it will pay back in full – must already be in default.
and the UK’s Banking Act 2009. Since war is just diplomacy by other means, I’m sure that many of these subs will actually end up selling to the government if the government is still buying. But it seems that the government pulled out the restructuring bazooka, and (predictably, I agree) not enough subs surrendered that the government could avoid having to fire it.
It may be that the talks with the seniors are just another round of Bazooka, this time with new opponents and (maybe!) no willingness to really shoot this time. There’s possibly something else going on as well though. Banking is a sleazy business everywhere, it seems, but they do it differently on the Continent:
German banks […] have made a voluntary commitment to Finance Minister Wolfgang Schäuble to hold their Greek bonds until May 2013.
(But the French didn’t follow suit, ho ho ho – there’s a second, related moral there.) So if the French or German government has finally agreed to throw us a bone on Anglo, then we could see their (like, seriously private-sector) banks “volunteering” to take a haircut on Anglo senior debt. This would effectively move a chunk of the Anglo carrion into (in the German case) SoFFin where it belongs. After all, it would be a much less bitter pill for Germany than an Irish sovereign default, right? For that matter, what’s happening to what Anglo owes the ECB/Eurosystem?
(This touches on one of the core problems with Europe-won’t-let-us. It’s one thing to go along with the objective of having of a pan-European TBTF policy, for as long as Europe as a whole can afford the folly. It’s another to accept a payment structure for the policy which makes us a such a huge net contributor that it threatens to ruin us and even to bring the tent down on everyone’s heads. We’ve menaced world trade deals, never mind CAP negotiations, over net benefits that were small compared to what we’ve been paying to support banks in France and Germany.)
Very interesting analysis. The DoF statement includes the following
There is, therefore, no question of seeking to impose losses on holders of such senior debt in Anglo […] through any legislative measures
which is consistent with the Dail debate – i.e. that there could be losses imposed in a non-legislative/voluntary manner. If some EU banks were directed to take the hit further down the line, then maybe the 4-year budget with specifics was a quid pro quo for this.
@ Bryan G
Telegraph article looks like a plant from the HF’s to try and scare the govt into overpaying. I’m well known round these parts for sticking up for seniors, but i fully hope and expect the govt to wipe the floor with the subbies via either legislative loss transferring or a deeply discounted buyback BELOW current prices with the spectre of legislative loss transfer hanging over them. Some people are treating the Telegraph article seriously this morning, but a lot are saying that at the end of the day no one (ie EU/ECB) is going to support subbies on this course of action.
looks like a plant from the HF’s
The Telegragh is reporting that Lenihan was openly ridiculed about the Irish position by traders in London during a telephone call that was over heard by between 200 and 500 traders.
The call with Brian Lenihan and hundreds of investors rapidly descended into farce, forcing Citigroup, which staged the event, to pull the plug.
The treatment of the minister, which comes as Ireland faces a standoff with a group of hedge funds over its rescue plan for Anglo Irish Bank, will increase tensions between the country and the debt markets.
Ireland’s finance minister Brian Lenihan ridiculed by City investors
Ireland’s finance minister was publicly ridiculed on an investor call intended to calm fear over the country’s economic woes.
Mr Lenihan had been speaking for less than two minutes on Friday before a mistake by Citigroup meant that the bank’s clients were all able to be heard on the line.
Between 200 and 500 investors are understood to have been on the call, and as they realised their lines were not muted many began to heckle Mr Lenihan.
Some traders began making what one banker on the call described as “chimp sounds”, while another cried out “dive, dive”. A third man said “short Ireland” before adding “why not short Citi too?”
As the call descended into chaos, with one participant heard to say “this is the worst conference call ever”, Citigroup officials shut down the line.
Host Philip Brown, head of public sector debt at Citigroup, restarted the call 20 minutes later, allowing Mr Lenihan to make his address, before answering investors’ questions.
A spokeswoman for Citigroup said there had been some “technical problems” with the call.
The bungled call comes at a tense time for relations between the Irish government and investors, some of whom have been dismayed at what they see as the country’s attempts to dodge its commitment to guarantee the debt of the country’s banking system.
On Friday it emerged that a small group of hedge fund debt investors were threatening to take Ireland to court if it pushed ahead with moves to impose so-called “haircuts” – or writedowns – on the value of their holdings in Anglo debt.
The group, which is thought to number no more than six funds, say they could force a default of Anglo, which would have catastrophic consequences for Ireland’s already hugely stretched public finances.
On the call, Mr Lenihan is understood to have offered some concessions to bond investors, saying the government had not “ruled out” making a market offer for their debt in Anglo, as well as other banks.
In what would be a hardening of Ireland’s stance, Mr Lenihan is understood to have said the authorities would consider “market suspensions” in future, meaning the government could order the closure of bond and equity trading if it thought the market was threatening the country’s financial stability.
Mr Lenihan’s call with investors was intended to begin the process of calming their fears over how this will be cut, however it is unclear how many were convinced by what he had to say.
“The call was a farce and as far as I’m concerned this is just another part of the mess Ireland has got itself into,” said one participant in the call.
On Thursday, Ireland announced a new series of bail-out measures for its largest banks and said it would present a four-year budget plan in November to lay out how the budget deficit will be cut
I’m sure Citi’s PR gurus will soon have us believe it was Citi being heckled for the ‘technical problems’ on the call, and not our dear sainted minister being got at. That’s what PR gurus are paid for – to make us believe one thing when something totally different happened in reality.
Well I’m not sure if Citi’s PR Guru’s want us to belive that it was a glitch in the conference call.
When something as embarrassing as this happens something has to be said to explain it, calm the waters so to speak.
It was a bit stupid of Citi to arrange a conference call which was two way instead of 1 way communication.
As we both know what Citi’s PR gurus actually say is irrelevant.
What is relevant is the hostility which was present against our Minister for Finance by some of these people. When it comes down to money, Ireland may find that it has very few friends in the world.
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