Year: 2010

It’s still 20%

The European Union aims to reduce its greenhouse gas emissions to 80% of their 1990 levels by 2020, and to 70% if there is a meaningful international treaty on climate policy.

These targets were set well in advance of Copenhagen, and the EU thus excluded itself from the negotiations. If you know what someone is going to say, why talk to them?

So as to underline the point that environmentalists do not understand much about negotiations, there is now a push for the 30% reduction target anyway. It’s as if someone walks into your shop, sees something they like but decide it’s too expensive, and then you decide to give it away for free! What a brilliant strategy to further undermine Europe’s standing in the world.

Fortunately, the 30% plan has been shelved again — for the time being.

Ants, grasshoppers and the London Underground

Martin Wolf has a really nice column here. For those of you who can’t access the article, the bottom line is that German and Asian savers have (via their banks) invested their savings in an exceptionally foolish manner — that is, by lending to the likes of us, to finance our excessive consumption habits. There is a clear possibility that they are, sooner or later, going to lose a lot of money as a result.

This brings to mind Keynes’ famous line that

“If the Grand Trunk Railway of Canada fails its shareholders by reason of legal restriction of the rates chargeable or for any other cause, we have nothing. If the underground system of London fails its shareholders, Londoners still have their underground system.”

At least 19th century Britain was investing in overseas railways, rather than in overseas housing bubbles!

One wonders whether the threat of ‘restructuring’ will eventually prompt the ants of Germany and Asia to start investing more of their savings in domestic investment projects, which might provide them with the foundations of sustainable growth.

TARP Costs

Morgan Kelly’s recent Irish Times article covers a lot of ground; this post is just about a single dimension of his contribution.

One point he makes is to look at the US TARP:

We can gain a sobering perspective on the impossible disproportion between the bailout and our economic resources by looking at the US. The government there set aside $700 billion (€557 billion) to buy troubled bank assets, and the final cost to the American taxpayer is about $150 billion. These sound like, and are, astronomical numbers.

The estimated cost of TARP has fluctuated quite a bit over time  (the US Treasury helpfully releases valuation updates four times a year).   The most recent release is from last Friday, with the current estimated cost at $105.4 billion.  It is especially noteworthy that the TARP components related to the banking sector per se are projected to make a profit, while the main losses relate to AIG, assistance to homeowners and assistance to the US automobile industry.

The release is here (see also the links there to the underlying calculations).

Of course, the realised fiscal cost of TARP does not provide sufficient information to judge the overall effectiveness of TARP, since it is important to take into account the impact of early repayment of TARP funds on the behaviour of US banks, plus other broader factors.

Finally, the main point remains – the size of the Irish banking intervention (relative to the size of the economy) is much larger than the TARP, reflecting the much more generalised banking crisis here.

Maturity of Irish Bank Debt

Following on from John McHale’s post over the weekend, here‘s an expanded version of the document I sent to John. There seems to be some confusion out there about the extent of Irish bank bond debt, about the various types and about how much is covered by the September 2008 guarantee. The document draws together the relevant information on maturity of bank debt from the annual reports of Anglo, AIB, BoI, INBS and Irish Life and Permanent.

This information isn’t completely timely or perfect: A full Bloomberg trawl is perhaps the best way to do this. Importantly, none of the banks list September 2010, the end of the guarantee, as a maturity date in their tables. Instead, they list debt maturing up to the end of this year. It is well known, though, that the vast majority of the debt of Irish banks matures prior to the fourth quarter. An advantage of these calculations is that they come from publicly available sources and we can be clear about what it is we’re discussing.

The bottom line. By my calculations based on the annual reports showing the state of play at the end of last year—and feel free to correct me if I’ve got this wrong—these five banks had €71.7 billion in bonds due by December of this year with only €0.7 billion of this being subordinated. They then had a further €51.8 billion due after 2010, €14.4 billion of which are subordinated.

The very significant figure for bonds due this year shows that conjectures that the need to roll over bank debt could lead to a serious problem for the Irish government are essentially correct. Whether this scenario will actually happen, we don’t know, but one should be careful to dismiss those who say it could.

Update: The document had tables splitting debt securities into subordinated and senior debt. Because the total includes commercial paper and certificate of deposits, this might cause some confusion. I’ve edited the document to list the split as subordinated and other.

Learning to Say No

The IMF has released a new Staff Position Note that addresses the challenges in establishing a financial supervisory system that is capable of saying ‘No’.  You can download it here.