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

Antonio Garcia Pascual and Piero Ghezzi explain how a combination of a bank restructuring/recapitalisation fund and a line of credit for the sovereign can stabilise the Irish situation in this report.

Note:  In relation to the discussion of the Goldman Sachs report (and presumably similar comments can be made about this report from Barclays Capital), it is certainly sensible to be aware of potential institutional biases. However, the individual economists working at these types of institutions are typically top quality (PhDs from top-level universities, strong academic publication records and/or experience in policy organisations) and, beyond any institutional pressures, have powerful individual career incentives to maintain a reputation for high-quality macroeconomic analysis.

33 thoughts on “BARCAP: An EU/IMF Programme Could End the Irish Crisis”

  1. 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…

  2. They may be PhDs, but they can’t do sums
    “we evaluate the impact on the non-NAMA portfolios of a stress scenario similar to the one designed by the Central Bank, ie, consistent with a 65%-70% drop in commercial real estate prices from peak levels. Commercial real estate prices have already dropped by about 50-55% from their peak; thus, we consider that while an additional 15% drop in prices from current levels might not be a baseline, it is likely a plausible scenario by end-2011.”

    To go from 50% drop from peak to 65% drop from peak is a 30% decline from current levels, not a 15% decline…

  3. 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?

  4. “On the positive side, in the baseline scenario and in the highgrowth
    scenario, debt would follow a downward path even when assuming losses from NAMA. Public debt would decrease from a peak of c.132% to 74% (baseline) and 30% (high-growth scenario) by 2050.”

    2050 to hit Maastricht debt to GDP criteria? With no borrowing in between? 40 years of investment drought? Are they kidding?

  5. @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.

  6. @hoganmahew

    ‘… a prompt resolution of problem banks is a sine qua non for the recovery of the Irish economy’. Yes back to 2008 and the .. er .. Plan!

    @all

    Just read it – not sure I can get me head around 2050 at the mo ……….. but another 22 to 37 billion for banks ………… frightening ……….. one can only hope that the IMF/EC/ECB can figure out a way out of this morass …………. and take banking out of the hands of the Irish. Barclays or China for AIB ……….. and, times that are in it, Herr Ackermann might express an interest in BOI; (is Spectacles still around?) we need our own small biz development bank with a majority of non-Irish non-execs on the board (including Angela of course; and Christine, who ‘trusts’ Ireland) and Ghensis Khan as CEO.

    Credit to Antonio Garcia Pascual and Piero Ghezzi for this. Gives poor ol Pat Carey and Dick_een a break, and gives the rest of us a break from all the waffle – Minister Harney really takes the biscuit …

    Big picture – The Goths remain on the rampage … Portugal next week …….. and if Spain, then all bets are off (and I’d keep a close eye on the kitty …) The Big Big Black Hole is not in Ireland; the Irish, it appears, are expendable for the greater good of the 99% Zone.

  7. @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.

  8. I thought the commentary below was interesting – it gets behind the headline figure of 130bn of borrowing from the ECB and calls for prompt resolution of Anglo, INBS and EBS:

    “Currently, Irish banks are the biggest borrowers at the ECB, although
    one has to be careful when examining the numbers. Of the EUR130bn headline borrowingnumber at the ECB, only EUR95bn relates to domestic Irish banks. Indeed, EUR35bn is linked to non ‘domestic’ Irish banks, which is almost entirely accounted for by the Hypo Re/Depfa group. These borrowings will likely disappear (or be transferred to Germany) on Dec23, when the 1y Dec09 LTRO matures. Of the EUR95bn relating to domestic banks, EUR60bn is in the weekly MRO (the remainder is in the 1m or 3m LRTO), which could decline quickly if there are alternative sources of funding or market conditions improve (as seen in other
    markets). 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. In our view, ECB’s task would be alleviated by the prompt resolution of nonviable institutions (Anglo Irish Bank, INBS and EBS) and the adequate recapitalization of undercapitalized but viable institutions.”

  9. @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.

  10. Hogan,

    I think you are boradly right. I would say though that on balance BOI may be slightly lower due to its UK exposure and AIB 2bn higher due to it bad underwriting.

    So it might be AIB 10bn BOI 7bn. You ccould knock a couple billion off each number due to the pre impairment profits and another billion off BOI due to a recovery in it AFS reserve. So BOI needs about 4bn in equity to be well capitalised.

    AIB probably needs closer to 10bn+ not the 7bn being pumped in. Why this is deemed a good investment for the NPRF, I do not know.

  11. 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.

  12. Is the only way out of this morass some combo of the following
    a) debt restructuring and/or
    b) exit from the euro
    c) fiscal transfers from the centre with greater oversight
    d) monetisation of the debt QE-inflation

    Since the Franco/Germans have taken c and d off the table and curbed the ability of the economy to grow its way out through pressuring for a CT rate increase on top of the neccessary austerity-a naked protectionist measure if ever there was one, it seem like default and exit from the euro should at least be considered.

  13. @tull
    I will retain my position – just default. We’ll keep the euro, thanks very much, the exporters who come here like it.

    Seriously, though, some form of d) is my favoured option, but it won’t happen until the banks in one of the big economies fail and there is a VERY LARGE bad bank that can be put on the never-never at near zero rates.

  14. 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”.

  15. 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

  16. @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?

  17. @Carolus
    I agree. I don’t see that 3 year money at 5% a year can be deployed at a profit to the state.

    In 2009, the NTMA was paying the national debt at 2.5% which amounted to 7.7 of tax revenue. A move to double that cost…

  18. 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.

  19. @Hoganmahew

    I like it but what about external debts ? – it was workable when the debts of the banks were internal although external if you know what I mean but now that the ECB holds 130 billion they would have to be persuaded to take a lets say 80% loss on their investment if they gave it back to the banks expressed in punts
    On the weekend they do it they could keep the checking accounts in euros and convert the term deposits into punts – this would give time to print the internal punt without too much dislocation.
    Although I say my solution of monetizing Gold is more elegant and the Germans can keep their wealth although not necessarily in their devalued euro deposits.
    No perhaps not – you would have a lot of very pissed off Germans again.

    Anyway it is possible to use punts as a medium of exchange and Euros as a store of value.

  20. 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.

  21. Tull et al.

    The endgame has been reached, but it does not involve (a), (b), (c), (d). Instead it involves

    (e) Irish State assumes all the losses and pays the money back

    It was very clear from the Eurogroup press conference a few days ago that any default before 2013 is just not on. They said it half a dozen times in different ways. It is odd that after this political decision was re-affirmed yet again everybody from the FT to Michael Noonan starts calling for a default/restructuring. However this is not going to happen since an EU-wide political decision has been made that it won’t happen – they don’t want a cascade effect of bank defaults. Each banking/fiscal crisis will be ringfenced to the member state in which it occurs, and paid for by that member state and not the ECB or EU as a whole.

    A number of recent reports (e.g. the NCB one last week) have declared that Ireland is ‘solvent’. This is code for ‘is able to pay the money back, if taxpayer squeezed hard enough’. There is still a fair amount of wealth in the country, and €20bn or so in the NPRF.

    The medium term goal is to stabilize the debt/GDP ratio, which would bring Ireland to where Italy and Belgium are today – i.e. high debt level, but relatively stable. The longer term 60% debt target is just a fiction. I can imagine dozens of EU Commission workgroup members diligently crating the language for penalties on countries that don’t meet the target, knowing it is all nonsense.

    There’ll be a €15bn adjustment, maybe even a little more. This understates the overall impact, since it does not take into account the impact of increasing interest payments (and hence a reduction in ‘useful’ spending). Interest payments will likely rise to €10bn a year by 2014 from a bit under €5bn this year. So the overall adjustment is more like €20bn.

    Can and will Irish citizens pay for this via extra taxes and reduced government spending? Yes.

    Will there be a high level of unemployment, increased emigration, and further concentration of wealth among a smaller number of people near the top of pyramid with static or lower standards of living for the bulk in the middle and bottom of the pyramid? Yes.

  22. @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.)

  23. So, an estimated the IMF-EU plan could involve €22bn-€37bn for restructuring and recapitalising Irish banks, plus about €60bn in contingency money to cover the Irish state’s funding needs between 2011 and 2013.

    That sounds to me like the banking crisis is approx. half the magnitude of the fiscal crisis, in terms of the funding requirement.

    Fiscal policy is less credible even than the banking policy.

  24. @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.

  25. 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

  26. @ anonym

    Mugging with a hand grenade. I love it. Let’s hope our boys know it is a hand grenade.

    Surely the only way out of the poo for everyone is our good old friend inflation. Proper QE. The German tax payer hears how much Paddy and others will pay and the can get’s lighter by the day.

    Obviously relatively high inflation isn’t enough. We need property prices to stablise. Drop stamp duty in the next budget and have more not less property based incentives. There are plenty of people out there, with money, waiting to call the bottom.

    Inflation on the highish side, stablization in property prices, a continuation in all the good stuff we’re hearing from John the Optimist and we should be able to pay of Seany Fitzpatrick debts.

    Granted it’s a big price to pay for listening to and electing the likes of Bertie Ahearne. Though it shouldn’t have to turn the country in to an economic waste land or scene from Mad Max.

  27. @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.

  28. @Brian G

    ‘(e) Irish State assumes all the losses and pays the money back.’

    Yes. This is the present plan – socialize ALL Irish Debt on the irish citizen serfs and their offspring – in place since Sept 2008 and probably earlier. And the next Irish Government of Fine Gael/Fianna Fail to implement it – and we might get a rerun of 1916 with a citizen-army focus in 2016.

    The real irony here is that socialist/social democratic Govs are ‘pressurised’ into such rapine austerity policies in the periphery [Greece, Portugal, Spain ] while the right of centre in the core [Germany, France, UK] lead the neo-liberal charge.

    Are Labour really serious about entering Gov to implement such policies? Policies that an honest capitalist would absolutely default on.

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