The Irish Economy
Commentary, information, and intelligent discourse about the Irish economy
The FT gives its view of the current state of play in this article.
“Regulators had initially planned to make swift progress, aiming to sell off a large part of the unwanted portfolios within months of Ireland’s €85bn bail-out announcement at the end of last year.
To ease the sale process the bail-out by the European Union and the International Monetary Fund included £25bn ($41bn) of contingent capital for the banks to soak up potential losses from selling assets at cut-down prices.
However, following a review of the banks’ portfolios there were fears that a firesale would wipe out this capital buffer by crystallising greater-than-expected losses for the banks”
Translation: we didn’t realise these assets were worth so little and our bizarre assumption that Nov 2009 valuations were not that far away from current because someone at the CBI mentioned that CRE was going up in the US and UK now seems to have been a bit naive. No, only joking what we actually think is that we have been right all along and if the market will not pay what we think they should it is obvious that we should just wait for the market to come to its senses – after all only dangerous malcontents think the property market could really continue to head South in Ireland.
Just admitting that NAMA is the reason we are in the hands of the IMF/EU bailout well it is too late most of the damage has been done. An average discount of 60% on loans transferring saw the state becoming insolvent. “Cheapest bailout” now measured in terms of the nations sovereignty gone out the window.
Learned posters, has there been a longer, messier, more expensive, more uninspiring, damaging or calamitous approach to a banking crisis at any time anywhere else in the world?
No Fire_Sales … as tinkled on primetime.
Ming the Turf-Cutting Mercyless Flanagan must be in town. Any vacancies on the board of the central bank at the mo? Needs a bit of lightin .. er … livening up.
How about Mick Wallace for the executive board of the ECB? Needs a bit of brightening up … pink, shocking pink, to represent the Irish aesthetic turn … who’s on a sticky wicket now then?
Celtic Phoenix, it still continues to be a Chinese puzzle.
The RBS route looks like a more prudent route to take.
The volume of commercial real estate transactions in Europe jumped by roughly 40% in 2010.
The recent NAMA sale to Google shows that there is even opportunity in the Irish market never mind prime properties in places like London.
The Central Bank should be forthcoming with detailed information on the stress tests.
There must also be attention to the large non-property commercial loans such as the the Quinns exposure of €3bn+
I would not view the google deal as indicative of a property resurgence in ire.
It is a once off by a cash rich company. Wait until the banks have to act on the under 20 b borrowings which the incoming pols do not want. Do you think the banks (or what’s left of them) will respond in a sane or business like manner. The jury is out on that.
@ Ceteris paribus
Dublin is a small market and there are other FDI companies with lots of cash but the main interest is that the main commercial markets in Europe have recovered and the Irish invested €60bn in the UK and mainland Europe over a decade.
The UK market has recently flatlined after a strong recovery but most of the Irish investments were in prime developments.
There must be some upside there?
The new Government needs to task a Revenue team to track ownership of some of these properties as some no doubt are in shelters.
All the wealth didn’t go up in smoke!
In the negotiations on the bailout, two of the four parties were in the position where the hand grenade strategy was the only one they could use to exercise leverage. The ECB used it. We didn’t. Calling their bluff in a measured way is an excellent move in the campaign to renegotiate.
The French response to the Great Depression is a good candidate. Sticking to the Gold Standard when everyone else went off it really hammered their competitiveness.
I’m feeling more optimistic. The new government has two things the old one didn’t:
1) From FG and Labour, some people who actually understand the basics of finance and economics
2) From Labour, some former trade union officials who actually understand how to bargain.
Of course, perhaps the EU negotiated a particularly bad deal so that anything would seem like an improvement.
They also have a mandate . It sounds like a good idea to shine some light on the NAMA machine.
@ Colm McCarthy
“To ease the sale process the bail-out by the European Union and the International Monetary Fund included £25bn ($41bn) of contingent capital for the banks to soak up potential losses from selling assets at cut-down prices.”
I guess this answers the question you were asking in your Sindo article a couple of weeks ago about the amount of write down Europe and were expecting us to have to take on the sale of 100 billion of Assets.
I didn’t know thats what that this 25 billion was for or have the FT got this wrong? Add another 25 bill to the national debt?
I’m beginning to think the FG strategy is to be shocked, shocked when the stress tests reveal a bigger bank balance sheet hole. Then, sort of stall with the EU on the basis that the new numbers make the bailout unworkable.
At that point you either get the new shiny reduced interest rate and some slippage on the timetable “renegotiation” that the Irish side accept proclaiming a great leap forward, or a Mexican stand off.
The former should bring sov yields in, but not fundamentally alter the country’s position as recapitalizer to the max extent possible, of EU banks. The second looks unlikely.
I agree. That was my take on an earlier thread (about ‘default nut’ I think). I also think it would be wise for the Irish team to take a good hard stare at the results of the stress tests for all European banks.
My suggestion is to be affably shocked by the generally fragile state of the whole system (who’d have thought it), then mutter about in the light of the new figures having to reconstruct unguaranteed debt in order to stay within the MoU.
“I’m beginning to think the FG strategy is to be shocked, shocked when the stress tests reveal a bigger bank balance sheet hole. Then, sort of stall with the EU on the basis that the new numbers make the bailout unworkable.”
Thats why I don’t understand why people are putting so much weight on these stress tests.
It is actually within the ECB’s short term interest to yet again low ball the losses.
They are as bad as FF for believing that “maintaining market confidence” is more important than telling the truth.
Fool me once….
The Irish strategy – for which the forthcoming St. Paddy’s Day dip[s]plomania will provide light relief – is that eventually the Germans will be prepared to keep them as pets.
BoI EGM 12 Jan 2010
The establishment of NAMA will provide a number of benefits to the Irish banking system:
• Firstly, it will restore confidence
• It will also reduce the loans on banks’ balance sheets, reducing risk-weighted assets
• And it will improve the liquidity and funding positions of the banks, facilitating the
ability of the banks to support the Irish economy on its road to recovery
Importantly, the Government has confirmed that NAMA is the only scheme that it will support to address the issues currently facing the Irish banks.
I think we will see a EurAMA emerging where NAMA assets and the dodgy/toxic stuff that has been ‘warehoused’ for other EZ banks will be assembled and wound down over an extended period. This will provide a basis for some netting out, some burden-sharing, a cap being placed on the national fiscal support for bank recap and an EZ (EU?)-wide bank resolution regime. This is the only way this mess will be sorted out to the satisfaction of taxpayers and the bond market – who have identical interests in this matter.
It will take a huge amount of effort (and the usual EU fudge) to get it up and running, but I would be surprised if efforts along these lines aren’t progressing behind the scenes. Meanwhile, at front of house, the senior EU politicians and officials are working on their compeittiveness pacts and systems of future fiscal governance to create the fiscal space required and to reassure the sovereign bond market.
NAMA was the most Ireland could manage and it wasn’t big enough.
So a wider EU vehicle would make sense. But it could and should have been done much, much earlier which would have saved an awful lot of money and prevented all that damage to bond yields.
What is the ECB doing ? I’m sure it doesn’t want any additional exposure to Irish bank debt.
seafóid! Hey man, think I could get some of that ‘confidence’ stuff. Bit low on the old octane for the motor. Would they accept ‘confidence’ tokens in exchange for a tankful? 😉
Btw, for all the McWilliams-following-defaultniks out there, Iceland’s economy shrank in Q4 2010, @ -1.5%. It’s a volatile figure to be sure, but i think we all know what would be the lead opinion piece in the SBP this week if it had printed at +2%. Unemployment also seems set to hit 8.9% this month, from 7.1% back in September…
I see this as a means of allowing the ECB to unwind its exposure to Irish bank debt over time without forcing fire-sales.
Is there any possibility for a moratorium on the expression “fire sale”. Any situation where there is a plot / plan from insiders to artificially / interventionally support the price of a traded asset above what the market would pay is a speculative hoarding exercise – whether by state or banks. It is seemingly not OK to describe it as that because up is “good” – down is “bad”.
“fire sale” is just the unwinding of said “hoarding exercise”. They are sales, thats all. It would be more accurate to say “we think the market is wrong about these prices, thats why we haven’t sold, and we continue to hold that view. If you manipulate prices by not selling in the first place you have artificially and temporarily inflated the price – preventing a bigger fall.
Everyone knows there is a stock overhang from extend-and-pretend and Nama – that has supported the price thus far. Why does one get subjected to name calling in official circles and in the press, but not the other?
Btw, Euronama will be obliged to over-pay presumably, otherwise what is the point?
A “firesale” of assets in early 2009 would probably have recovered more than cautious sales today.
I wonder whether the same holds true today
NAMA was some drug back in January 2010
There are significant benefits to Bank of Ireland arising from our participation in NAMA.
Firstly, the removal of those property related loans from our balance sheet which are giving rise to the greatest level of concern in the market will bring greater certainty to our remaining loan portfolio and reduce the residual risk of future impairments against those
loans transferring to NAMA.
Secondly, we will no longer have to hold capital against those particular loans.
Thirdly, this further progresses our objective of de-leveraging our balance sheet, thereby enhancing our liquidity and funding position.
Finally, it improves our prospects of raising capital in the future, should the Board deem it appropriate to do so.
@ christy: “A “firesale” of assets in early 2009 would probably have recovered more than cautious sales today.”
Yes, its known in the ‘trade’ as resolutely holding out for a lower price. Normal practice it appears. Values still at higher altitudes. Prices are descending toward sea-level.
@christy, Brian Woods
No trader or fund manager likes to sell anything at a loss – but it is something the skillful ones get to be ruthless about. Governments, central banks and the executive boards of banks always seem convinced there is an alternative.
Point taken. (We’ve had erudite interventions in previous discussions about LTEV. There is an issue about markets where the price is usually set by sales/purchases of a relatively small proportion of the total stock and the tendency of the market to overshoot on the downside (and to destroy/reallocate inefficiently a large share of the total market value) if a large proportion of the stock is off-loaded. In theory, vehicles such as NAMA should be designed to determine and sustain the real economic value of the stock.)
But we might be getting too far ahead of ourselves here. I’m merely speculating about the possibility of a EurAMA. I recognise what Colm McCarthy describes as the ‘insouciance’ of the EU authorities with their focus on ‘competitiveness pacts’ and fiscal governance and their apparent wilful ignoring of the underlying and continuing banking crisis, but I would be surprised if efforts aren’t made behind the scenes to address the latter.
I’m just interested to see if this speculation will evoke any response here.
You’ll have to join the admiring Q Paul … Angie is quite content with Nicky at the mo – simply sublime on the deauville tango apparently (-;
Is this what you think will lead to a NAMA Redux ?
“Investors will be looking for clarity on oil prices as well as closure to some of the political debates surrounding European fiscal stability and the structure of a eurozone bail-out fund, said Luke Stellini, a European equity analyst with Invesco. “There’s quite a lot of noise I would expect to get in the next four to six weeks in and around the whole question [of European agreements], and that I would think could lead to volatility,” Mr Stellini said.”
I’ll see your ‘pink ‘un’ and raise you a ‘grauniad’:
The bond market’s patience with the EU’s Grand Panjandrums’ ‘insouciance’ is wearing thin.
Day dats innit – a little teaser: how many billions will be transferred to nama today and announced at 10 past 5? Need to get a bet on with PaddyPower.com …
i certainly think you could argue for the tracker mortgage books to be transferred in at close to par into some sort of EurAMA vehicle, with funding provided by the ECB and the Irish govt/banks providing some level of start-up equity or first-loss capital guarantees. The ECB tracker mortgages were originally offered when the ECB had no issue with taking retained covered bonds as collateral and wasnt particularly worried about “addict” banks, two situations which are no longer true. As such, you could argue that they have created one of the largest structural problems currently faced by the Irish banks, the negative margin tracker mortgages, and that the ECB has to help to solve that problem going forward.
“Translation: we didn’t realise these assets were worth so little …”
Indeed. An acquaintance of mine paid €60m for a site in 2007. In a running tangle with the Irish version of a Soviet state property company, the site has recently been valued at somewhere between €4-€6m. The forthcoming mini-firesale of properties by Allsops (sp?) should be interesting. Doubtful though that ex-pat money can absorb the remaining 50,000 vacant properties not to mention commercial and industrial units. Moreover, if the current enormous and growing number of distressed mortgages were to disgorge their assets onto the market, where would property values end up ???
Sure who knows what Irish property or indeed any financial asset is really worth anyway ? Isn’t overpayment all relative ?
One of history’s greatest stock market rallies is two years old. Share prices have come a long way since the post-Lehman Brothers bottom on March 9, 2009. The FTSE-All World index has more than doubled, while emerging markets have gained some 145 per cent.
I see where you’re going, but I’m speculating about a much bigger vehicle separate from the ECB. Ireland has been forced to front-up on the losses – even if the banks had to be dragged kicking and screaming into the daylight. Other EZ members have been able to ‘warehouse’ theirs. The bond market knows they exist, but probably doesn’t have a handle on their size – and certainly doesn’t know what the national fiscal implications might be if these losses were exposed, written-down and taxpayer-funded bank recap were required. That’s the key uncertainty. And while that continues to exist I reckon the bond market won’t rest.
Go super-strategic for a mo and you glimpse part of the reason why the bond market is so sanguine about the banks/sovereign nexus in certain countries.
It is a big, big, liquid market and is to some extent blinkered by its own existence as the low risk asset market. Its OK for hedge funds at the margin to buy metals, fertilizer and sovereign cds etc, but the bond market basically has a mindset that there is nowhere else to go. That, I think, is part of the reason why it is not willing to obsess on German banks and Germany for example, in the same way it can afford to with certain other pipsqueak outfits.
Cant open that link, but the idea that when prices don’t suit – assume the prices are wrong, has been going on in Ireland since mid 2007. “These are fire sale prices and they won’t be around for long” was standard builder and auctioneer schpeel more than 3 years ago. There comes a point…
I’m usually the one encouraging people to stand back and look at the bigger picture. But, you’re right. I need to stand back a bit further.
But I still think the market will test the political commitment of Germany to shore up the Euro by signalling the continuing shut-out of Greece and Ireland and putting the squeeze on Portugal and Spain (and, possibly, Belgium). What it wants to know is how much hard cash from taxpayers the core is prepared to commit to keep all hands on board the ship – and how that might impact on future debt issue and debt service.
I think the bond markets are signalling that they are unhappy what the new boys are saying with the yield at a record 9.56% now on 10yr.
The reports today (Reuters) on the stress tests are interesting. They will not be disclosed until June and the liquidity element will not be disclosed.
Is it strange that Irish banks stress will be disclosed at the end of the month. The liquidity extension until end of June would seem to be a safeguard against Euro bank disclosures which might frighten the horses. Also interesting that it is reported that they know the problem banks. Cannot post the link on this thing.
Would certain traders not just be looking at the path to 9% over Bunds blazed by Greece and having Ireland follow it with a time lag ? In the absence of a game changer.
The documents, seen by Reuters, show that the adverse scenarios include:
● A 0.5 per cent economic contraction in the euro area in 2011 and a 15 per cent drop in European shares.
● A 75 basis point rise in long-term yields for eurozone government bonds and a sharp decline in the real estate market.
● Increased tensions in wholesale funding markets, leading to a 125 basis point increase in short-term interbank financing costs.
● A further 0.2 per cent contraction in the eurozone’s gross domestic product in 2012.
● A global demand shock emanating from the US and the effect of a 4 per cent dollar depreciation.
As expected, the test will not include assets held in the lenders’ bank books, allowing periphery sovereign bonds classified as held until maturity to escape the same writedowns under the test’s scenario.
Alan Ahearn gets the nod over Ming on appointment to The Central Bank Commission …..
I wish him well. ‘Spose he stays silent on the blog now … domage.
Breaking Newz – Rioters
Unconfirmed reports that Lorenzo making way for Mick Wallace on ECB Exec board … & Silvio making way for Mick on A/C Milan board … & Axel has been in touch with Mick re a non-exec on Deutsche Bank board with a little nixer with Franz B on the side re rejuvenating Bayern Munich … interesting times …
@ grumpy: “No trader or fund manager likes to sell anything at a loss – but it is something the skillful ones get to be ruthless about. Governments, central banks and the executive boards of banks always seem convinced there is an alternative.”
Yep. Its known as Loss Aversion. You buy fast on the way up: sell glacially on the way down. However, the longer you hold an asset which is deceasing in price the greater your probable loss. Or to put it more succintly, the less your likely gain. Gains good, losses – BAD!
Imagine what it must be like if your asset is already submerged and the bouyancy tanks are still flooding! There appears to be no end of dopey souls who believe we will ‘grow’ out of this. Very, very interesting times ahead on the domestic res property market.
Future values of res property (and other assets) were predicated upon promises that were mathematically impossible to sustain. If you were foolish enough to warn folk about this – you didn’t exactly get a ‘cool’ reception (vide M Kelly!). Looks like wer’e having a reprise with our debt predicament.
The only honest course of action is to come clean and say we cannot – hence, will not pay back the ECB debt. The political consequences of this are the equivalent of messing around with ‘sweaty gelly’ – but, won’t happen. So, what’s the alternative? Extend and pretend? Perhaps a repeal of the Law of Exponentials? Very dispiriting.
Just because the concept of long term economic value as set out in legislation is garbage does not mean that the concept of a fire sale is garbage too. Prices in the Irsh property market are artificially high because NAMA is choking off supply, and there’s an urgent need to get more product onto the market to bring prices more closely in line with what can be sustained over the long term. But there are limits to what is sensible. There is only so much product that can be pushed onto the market at once before prices will fall to a fraction of what even I (with a pretty negative view on prospects for prices) think can be sustained.
If we were going to stage a fire sale, the time to do it was when the banks first got into trouble, and the government had still not taken on their liabilites. If we do it now, it will destroy any remaining chance we have of avoiding default without being gifted a hundred billion euros.
Thing is, I think in Ireland “fire sale” has the meaning “the sale of anything that will result in a price that is inconvenient”. Its straightforward meaning is “the sale of all stock effectively in one go”.
Sales that are more than adequately advertised, with plenty of opportunity for buyers to do due diligence, raise finance etc have no business being described as fire sales. They are just sales at the market price. If the state is bust at a non-panicked market price, then it is bust – and requires its debt to be restructured, once it has reformed its cost structure.
Perhaps the Anglo share price support scheme offers a template for Euronama. EZ to offer funding with 80% repayable only in property assets and a convenient waiving of the option value for competition / subsidy purposes analogous to the way it was ignored for CAT purposes in the Anglo case.
Amongst the scenarios is a special one for Ireland
● Increased tensions in wholesale funding markets, leading to a massive row in which weapons such as iron bars, chains and slash hooks are produced
in fairness, we’re probably talking about 80-100bn of Irish banking assets being flogged here, on top of a similar amount already in NAMA. It’s a bit heroic to think that this can be absorbed by the market in one go without having a direct downward impact on prices. M&A in the European banking sector is still anaemic, despite some banks and assets clearly being up for sale for some time.
@grumpy, until they repeal the supply curve, for most products you’ll find the price going down as the supply goes up. Selling it all at once will produce the mother of all oversupply situations.
Now that this stuff is more or less all in public ownership, it makes sense to stretch out the sales over maybe 10 years. That’s one tenth each year starting now, not a wait of 5 years before deciding the 10 years should start in 2016.
That’s a pretty radical shift from the current approach, which appears to be to keep almost all the stuff off the market so that we can pretend it’s worth more than is really the case.
How about selling Irish Diaspora Bonds starting on Paddys day. Mary could Help launch them. Bloomberg reporting Greeks selling 3bn worth to their compatriots.
re article opening
The Irish authorities have suspended plans to force the country’s troubled banks to sell off huge portfolios of loans, in a move likely to inflame tensions with Europe.
When the “Irish banks” do manage to offload some assets (i.e. loans) at some value, in what order will liabilities be paid. Does the ICB come before the ECB? Will NAMA bonds get paid off first, if they have not yet been cashed by ECB?
Important matters in the deleveraging process. Far too important to let bankers or ECB officials with a vested interest to decide.
“Selling it all at once will produce the mother of all oversupply situations.”
“It’s a bit heroic to think that this can be absorbed by the market in one go without having a direct downward impact on prices”
“in Ireland “fire sale” has the meaning “the sale of anything that will result in a price that is inconvenient”. Its straightforward meaning is “the sale of all stock effectively in one go”.
So we all seem to agree that selling all the stock in one go would constitute a genuine “fire sale”.
My argument is that the term is being used to excuse any significant sales at all – really based on the idea that the market timing is wrong and the market price is wrong, but pretending that sales at this time by definition = “fire sales”.
It is a useful device for the manipulation of opinion because nobody would think a proper fire sale sensible, wheras many would think selling into the market generally, is and would have been, sensible.
@ Bee Cee Tee
‘Now that this stuff is more or less all in public ownership, it makes sense to stretch out the sales over maybe 10 years. That’s one tenth each year starting now, not a wait of 5 years before deciding the 10 years should start in 2016’
Suppose you are up at the top of a big cliff and you have to climb down it somehow to get home. No rope unfortunately, just your climbing skills versus the force of gravity.
That last ten feet isn’t any harder to climb down than the first ten feet, but it’s a lot nearer to the ground. The first ten feet is the real problem. It’s so much safer up on the cliff top, and the bottom is so far away. Seems easier to sit tight and wait for rescue. It’s just that the wait goes on and on…and on.
What happens to confidence in Irish property assets if (God forbid) the first NAMA auction bombs ? . It will be the brave soul who pulls the trigger.
Darn! Not a red cent went into NAMA today. What is the country comin to at all at all atall – no wonder paddy-power is makin profit (-;
Martin Wolf attacks the guarantee in the ft – ‘Why the Eurozone will survuve’:
‘I find it hard to believe that debt restructuring will be avoided everywhere. I find it unforgivable that the last Irish government guaranteed bank debt so insouciantly and that the rest of the European Union has supported this decision. For a sovereign to destroy its own credit, to save creditors of its banks, is plainly wrong. It does not make it better, but worse, that it is doing so largely to protect financial systems in other countries’
If we are serious about renegotiating the terms of the “bailout” deal we have to get away from extend and pretend. While we were still being funded by the market, the balance of advantage as perceived by the government lay in pretending things were far better than they actually were.
Now that we have no prospect of market funding, the advantage to us lies in getting the bad news about our national solvency out into the open so that our European partners can make the choice between a true bailout and leaving us to default.
Interesting article by Martin Wolf in today’s FT on ‘Why Eurozone will Survive’. This extract repeats many of the sentiments expressed on this site:
I find it hard to believe that debt restructuring will be avoided everywhere. I find it unforgivable that the last Irish government guaranteed bank debt so insouciantly and that the rest of the European Union has supported this decision. For a sovereign to destroy its own credit, to save creditors of its banks, is plainly wrong. It does not make it better, but worse, that it is doing so largely to protect financial systems in other countries.
sorry, previous post a repeat of an earlier contribution
@ Bee cee Tee
‘Now that we have no prospect of market funding, the advantage to us lies in getting the bad news about our national solvency out into the open so that our European partners can make the choice between a true bailout and leaving us to default’
Very rational, but the trouble with that is that our credibility as ‘partners’ is already in shreds. Revealing more of the the reality may extinguish all prospect of a return to the markets. Relegation to some sort of administered, rather than sovereign, status might well follow. Stranger things have happened.
Whatever the consequences for ordinary citizens, such a chain of events step would entail huge loss of power for Irish politicians and civil servants. Ergo they will continue to dissemble.
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