BARCAP: An EU/IMF Programme Could End the Irish Crisis

I hate to sound like a curmudgeon, but
“We consider that a prompt resolution of problem banks is a sine qua non for the recovery of the Irish economy. Unresolved banking sector problems could generate a negative feed-back loop, driving Ireland into a path of low-growth dynamics for several reasons: 1) uncertainty about the health of the financial sector, including the quality of the non-NAMA portfolios; 2) anaemic medium-term growth prospects under prolonged credit-less conditions (ie, a financial “decelerator”); and 3) elevated sovereign yields, as the stabilisation of the debt-to-GDP ratio may need a greater fiscal effort than anticipated.”

2008 has called, it wants its plan back…

Anyway, to the meat. Under their plausible, but not extreme scenarion, they see AIB having a net loss (after provisions) of 9.1 bn and BoI a net loss of 8.1 bn in 2011.

My sums are a bit poor too, but, eh, wouldn’t this wipe out the capital of the two banks? Wouldn’t they need to be recapitalised by almost that amount to get their capital ratios back up?

So that’s another 15 bn at least of capital required by just BoI and AIB and that on their baseline scenario?

@hoganmahew

re the bank capital, these losses have already been fully provided for and are excluded from current capital
The Irish banks have collectively provisioned ( and reduced their capital) by c.37 bio. That’s for losses against loans yet to go bad.

@MPLT
“re the bank capital, these losses have already been fully provided for and are excluded from current capital
The Irish banks have collectively provisioned ( and reduced their capital) by c.37 bio. That’s for losses against loans yet to go bad.”
That appears to be taken into consideration – see Figure 2, heading “Provisions” followed by heading “Net Loss”, that’s the figure I used.

@Holbrook
“Of the EUR95bn relating to domestic banks, EUR60bn is in the weekly MRO”
😯

“The direct liquidity support provided by the Central Bank of Ireland, outside of ECB operations, which has increased by about EUR20bn in the past few months, is likely related mainly to Anglo Irish Bank, representing bilateral repos on the promissory notes received by the bank”
I believe this is mistaken. I think it is far more likely it is emergency funding for deposit flight.

The promissory notes, having been needed to provide funding at the time they were issued, are far more likely to be using the non-emergency repo rate.

The logic of the study is impeccable. The only snag lies in the premises.

The chief premises are the three allegedly ‘plausible’ annual GDP growth scenarios for the 2015-50 period: – low growth (3.5%); baseline (4%) and high growth (4.5%).

Where is it carved in stone that there will be any growth at all during this 35-year period?

Why not add a few more pessimistic possibilities — such as 1% growth, or 0% growth, or -3% growth? These more dismal growth scenarios seem equally ‘plausible’ to many experts, in particular among energy analysts.

By their scenarios shall ye know them.

@tull mcadoo

I like your succinct analysis. Are you sure there is no possibility of (c) and (d) coming into play because the EU wants to avoid (a) and (b) ?

Well, all I have to go on is what Axel tells me. I cannot see the German govt standing up and announcing that they were giving not lending us cash in the run up to an election.

Actually a default could be more politically acceptable in Germany. It would damage the financial system and the savings and investments of the ordinary German. It might be easier for Mother Merkel to blame Paddy and bail out their own savers.

Schaubele has been muttering about debt restructuring and exit form the euro for the PIGS. I cannot for the life of me see why we should not have a chat about it or in Batt O’Keefe language “call his bluff”.

And now for completely a different scenario:
Thus spake Roubin on Friday, 19 November 2010:

“We have too much private debt in the case of Ireland,” according to Nouriel Roubini.
But the nub of the crisis is this: “We have decided to socialize the private losses of the banking system. Now you have a huge increase in public debt—going from 7 percent to 100 percent of GDP. Soon it will be 120 percent.”

And, turning more broadly to the rest of Europe, “Greece is already at 120 percent.”

Roubini believes that further attempts at intervention have only increased the magnitude of the problems with sovereign debt. He says, “Now you have a bunch of super sovereigns— the IMF, the EU, the eurozone—bailing out these sovereigns.”

[…]
Full text here:
http://www.cnbc.com/id/40271476

@Carolus

Yep, sounds plausible, probable even, and what Roubini says it that with the scale of the bailouts increasing and becoming more concentrated restructuring will have to take place, which rings true with me. It would have be difficult for Ireland to force restructuring, but when our debt gets bundled up with a whole lot of other debt then the EU/IMF will have to face the music of restructuring. What happens then?

What is at issue here is not is not whether very credentialed people have reached a judgment but whether they know money. It is all very well and interesting to comment but have these people stuck the odd hundred grand or so or million (or more) into equities. When some of the ‘big’ banks took over Dublin stockbroker firms they replaced commission with salaries. An unhappy marriage.

PS I would like to see The post office accounts and the sovergin remain in Euros if the above scenario was played out.
It would teach the banks a very memorable lesson.

Anyhow it looks unlikely – they will kick the can down the road one more time.

@tull mcadoo

With some pixie dust might it be possible to make option c) a bit more palatable to German voters, though not exactly delightful? Here’s a strawman idea. For simplicity, pretend that AIB has only one class of bondholder. Suppose that AIB is resolved into a good bank and 30-ish bad banks, one for each EU member state, one for each non-EU country where there are significant claims on AIB, and one for Rest of World. Instead of being given claims on a single bad bank, each bondholder is assigned to her own country’s Bad AIB (in addition to whatever claims she gets on the single Good AIB, of course). The bad-bank assets are divided out proportionately. Each country’s sovereign then buys its own Bad AIB for €1 and puts it under its own regulatory system. Then even if the German government does end up putting German taxpayer money into Bad AIB Deutschland, what’s going on is a little more transparent and easy to defend than just sending free money to the Irish government, even if the outcome is the same. Also, each country can manage its own Bad AIB: it is free to extend-and-pretend, bail out or impose haircuts as and when it wishes.

Doable? Worthwhile? Obviously the other EU countries wouldn’t accept the idea if they’re dead-set on squeezing every last drop from Ireland and/or putting the whole question of bank resolutions aside for another little while. But if they’re willing to consider some better approach that’s feasible for them politically, might something like this be a runner?

Personally I’d rather see option a) than c), but that’s because I’m a Mellonite firebug as much as because a) might be easier to sell to French and German voters. Again, though, this approach should be compatible with a) or c) or a combination thereof. (In fact, I’d suggest that it’s something the Irish government could sensibly have done some time ago, even well before ending the guarantee, in order to clarify our situation for world audiences.)

@Bryan G

I don’t accept that it’s futile to demand restructurings (or anything other than Plan E) at this time. In the first place, I don’t think it’s completely inevitable yet that Plan E is going to be finalised. The EU can decide to lump us with the bank debt as firmly and as publicly as it likes, but afaics it doesn’t actually have the authority to do so. It can threaten us with awful consequences if we don’t comply, but this amounts to trying to mug us with a hand grenade. In these conditions a clever, assertive and bloody-minded Irish government would have quite a good hand. We don’t have one of those, but a week or two is a long time in politics. If domestic and international opinion comes together against Plan E – and it’s by no means just the FT calling for haircuts from outside Ireland – then we might see markets, TDs or foreign politicians getting nervous. Many a slip ‘twixt cup and lip. In the second place, while it’s more likely that Plan E will indeed pass, strong and clear opposition to it now will be important in laying the groundwork for overthrowing it later when the opportunity arises.

Default on the entire thing is a no Brainer for the Irish governemnt .
Its clear that the irish banks worked close in habds with larger European banks to implode Irish economy through finacial terrorism .
The banks have continued for two years to lie about thier assets value or lack of value so we owe them nothing throw them to the dogs
The blanket bank garantee covered up the fire storm for a while but the smoldering fire has burn big holes in the fire blanket cover.
The EU IMF solution create a fire around the fire to stop the fire spreading to them leaving the irish people stuck to stew in the feild of fire isnt a runner for the Irish people. If we borrow 90 Billion that will later become ~200 billion to repay and later a ~trilllion to repay
So Iriland Inc will anyway still go bust some time later
Simple stupid No to IMF EU bailouts print up a punt and cut lose from the EU Euro
The Euro is going to go south anyway when Spain climbs onto the EU bailout wagon and de-rails the entire Euro currency .
The push the nuclear button option is the only option Ireland has to stop digging a deeper hole and start the digging up

Diarmaid

@anonym

I think my option (e) was poorly phrased and would be written better as

(e) Irish state pays the money back that it owes.

The bank liabilities were assumed back in 2008, without EU involvement. I don’t think the EU are trying to lump us with any new liabilities, they just want to put the burden of paying them back on the Irish state.

On the restructuring issue there are two main classes of creditors – ECB and bondholders. I don’t really see a restructuring taking place with the outstanding loans/repo/bond purchases made by the ECB. This is the first non-panic mode bailout in the EU, so I doubt precedents would be set that would go against both the ECB’s charter and current strategy, which would then apply to Portugal and others.

The bondholders are not at the table, so there can be no agreement with them, only a statement of intent. There are a number of possible outcomes:

(i) an agreement with an intent to default/restructure expressly included as part of the conditions
(ii) an agreement where any default/restructuring is expressly prohibited as part of the conditions
(iii) an agreement that is silent on any matters of default/restructuring
(iv) no agreement

Given all the highly visible statements made in recent days I would discount (i). Outcome (ii) would prevent the government reneging on its own bank guarantee, but I don’t think they are planning to renege on this guarantee anyway. (I think there is a small amount of unguaranteed senior debt, but I don’t think defaulting on that would materially change the debt burden). Outcomes (iii) and (iv) are the status quo as regards restructuring. However (iv) would most likely mean going back in a few months time with a weakened bargaining position on conditionality in general (e.g. target setting etc.). At the end of the day restructuring of debt is a matter between the government and the bondholders, not something to be agreed between the government and the EU.

I would be happy to be proven wrong. Maybe there is some room for manoeuvre in a negotiated takeover of AIB. While I see option (e) as by far the most likely outcome it is possible that our card players have an ace up their sleeve that I cannot see. I have no doubt that if I was playing poker with all the individuals sitting around the negotiating table I woud leave with less money in my pocket than when I walked in.