Anti-gloom on the stress tests

While having to put another €24 billion into the banks is hard to stomach, I am still surprised by the overwhelming negativity in the reaction to the release of the stress test results.    I think there were three big questions going into yesterday:  

(1)  Would we get the information necessary to reduce the large range of uncertainty about ultimate banks losses that has been weighing so heavily on the creditworthiness of both the banks and the state?  The detailed information on bank balance sheets and projection assumptions used allows anyone interested to reengineer the calculations as necessary, and is a step change from the kind of information analysts were working with before.   The bank balance sheets and loan loss projections are now far less of a black box. 

(2)  Would the banks end up sufficiently well-capitalised to overcome the difficult funding environment?   By my calculations, allowing for the capital buffers, Core Tier 1 is close to 10 percent under the stress scenario and close to 17 percent under the base scenario.   [Note that the stress scenario is binding for all four tested banks this time round; see Table 16]   We will have very well capitalised banks.  

(3)  Would the tests produce something close enough to a credible upper bound on bank losses?   Given the pessimism underlying the stress scenario and the additional prudential buffers, the tests have gone a long way to achieving this credible bound.   Yet many commentators prefer to stick to their own back of the envelope-type loss projections. 

Of course, the stress testing and associated recapitalisation is just one step – albeit a hugely significant – in the process of regaining creditworthiness.   Another is to have a reliable lender of last resort.   We got a strong signal from the ECB yesterday that liquidity support will continue, which is critical to the retention and expansion of deposits. 

Unfortunately, we continue to have a significant problem with state creditworthiness, which itself feeds back on the creditworthiness of the banks.   It is extremely difficult to have creditworthy banks if we don’t have a creditworthy state.  Even the existence of a reliable lender of last resort is hard to secure without a creditworthy state that can absorb losses over the longer term.  

I think the nature the state creditworthiness problem is being widely misdiagnosed, however.   While we are not out of the woods on perceived debt sustainability, the reduced uncertainty associated with yesterday’s tests is a big step forward.   Assuming we can see through the fiscal adjustment and get a half-decent outcome on growth, we should be able to stabilise the debt-GDP ratio somewhere around 120 percent.  

Another issue is market access at a high (if stable) debt ratio.   Understandably enough, the “renegotiations” over the bail out focused on the Ireland-specific elements, notably the interest rate and prohibitions on burden sharing with senior bank bondholders.   But I think the bigger problem is with the design of the post-summer 2013 permanent bailout mechanism (ESM).  Today’s potential investors worry that Ireland will not have market access given the burden-sharing and official creditor seniority features of the ESM.   They thus surmise that Ireland will need another programme.   Part of the conditionality of such a programme is likely to be a “bail-in” of existing bondholders, which could be brought forward in time as it comes to be viewed as inevitable.  No investor today – or a year from now – will want to get caught up in such a mechanism.   We thus get the kinds of risk premiums we see here.

So what do we do if European governments persist with this self-defeating design?   We may simply have to live with it, accepting that we will be out of the market – though receiving official support – for an extended period of time.   The hope is that as growth, bank losses and fiscal adjustment fall into place, we will be able to turn market sentiment around even with the ESM.   Philip Lane notes the outturn on the different elements will not be clear for some time, and wisely counsels to sit tight while meeting programme conditions.     

Of course, it is possible that debt restructuring is eventually required along the lines noted above.   Provided we are meeting our support conditions, such a restructuring should be more towards the “excusable” end of the spectrum in terms reputational damage.   (Karl Whelan takes an even more positive view of this bail-in scenario; see the exchanges on an earlier thread on the ESM.)

(If I understand him correctly, Colm McCarthy is arguing for a European-sanctioned solution that puts losses on bank bondholders, including potentially guaranteed bondholders.   Colm sees the reputational damage from defaulting on the state guarantees is less than the damage from defaulting on state bonds.   I am not so sure; and think the reputational damage of default – should it have to occur – is likely to be minimised if we stick to the process being prescribed by the official creditors.) 

66 replies on “Anti-gloom on the stress tests”

@John McHale
reWhile having to put another €24 billion into the banks is hard to stomach, I am still surprised by the overwhelming negativity in the reaction to the release of the stress test results. I think there were three big questions going into yesterday:

I am surprised that you are surprised. You may wish to add three more questions to the three that you posed above.

1. Who is going to pay the €24 billion that is being ‘put into the banks’.
2. Why are there bank directors and senior staff still getting massive salaries for monumental failure, while many are out of work or living hand to mouth.
3. Why do private lenders to banks have to get fully reimbursed by people who stood to make no gain whatever from the profits of banks.

If you answer those three questions truthfully, you may being to understand the overwhelming negativity in relation to stress tests.

@ John McHale

Good piece.

Bottom line – stick with this plan and if anything goes wrong (default) blame the ECB, IMF et al. ?

Do you think they will back us then (depending on election cycle of course)?

@ John McHale

I gather, the current direct cost of the banking disaster to the state is estimated at €70bn, and indirectly I expect it’s an awful lot more.

I think that if, as part of this discussion, a route could be shown by which this money is coming back to the state then perhaps people’s reaction might shift.

(a) This is how the state saves the banking system.
(b) This is how the state gets its cash back.

I did briefly ask you once about this and you pointed out that we have taken stakes in the banks, and presumably when the two left standing are sold off we get some of the money that way.

I also noted in the programme for government: “Once the banking sector has been restored and is functioning effectively, we will introduce a bank levy based on the size of a bank’s liabilities (other than shareholder capital).” Is this a way of getting payback, or am I misunderstanding? If it is, in your opinion, is it a practical proposition?

Do you have any further thoughts on this?

Not to be negative, but the fact that “We will have very well capitalised banks” is outweighed by the loss of credibility of Irish banks. Keeping stock market quotes for what are now “penny shares” seems pointless and are a grim reminder to those who lost vast amounts of money. Will serious investors ever buy bonds of these banks again?

Can our EU neighbours hear the clamour against their prescribed medicine?

So what, we follow it…default…and then?

So many threads; comments diffused and scattered. But it’s difficult to disagree with your take. The Government has done as much as it could – or was allowed to do. Sticking to the programme means structural reforms that will enhance economic performance. And some privatisation will open up a little fiscal space. Doing it, even if the scale and proceeds are limited, is likely to provide a very convincing signal to the international capital market.

The ball is now very much in the court of the players in Brussels, Frankfurt and Berlin. My comment here may be relevant:
http://www.irisheconomy.ie/index.php/2011/03/31/ecb-press-releases/#comment-136239

Assuming we can see through the fiscal adjustment and get a half-decent outcome on growth, we should be able to stabilise the debt-GDP ratio somewhere around 120 percent.

In other words, a debt-GNP ratio above 150%. I’m struggling to see the case for optimism here. But maybe we just differ as to what constitutes a good outcome. You seem to feel that if we get through with an excusable default, then we’re doing all right. If so, have no fear. Most defaults are excused pretty quickly once the markets sniff something that looks like a bargain.

I think that you have hit several nails on the head. The ESM is a structure dreamed up by German politicians and technicians to suit internal German political requirements. The quid pro quo for other euroarea countries in accepting it is that it copper fastens Germany’s commitment to the euro, a commitment which should never have been considered in doubt in the first place.

Issing’s interview with Der Spiegel is very informative in this respect.

http://www.spiegel.de/international/spiegel/0,1518,752591,00.html

“SPIEGEL: The question is whether this is even feasible. When the German government was thinking about the involvement of private creditors several months ago, investors, fearing losses, sold off their Greek and Portuguese bonds en masse. It’s like trying to extinguish a fire by pouring on more fuel. Can that be a permanent solution?

Issing: At the time, the German government didn’t make it sufficiently clear that the involvement of private creditors was only intended for the future. The investors feared losses on their existing investments and were anxious as a result. But this doesn’t have to happen if the government makes its plans sufficiently transparent”.

The problem is that the “plans” are not transparent. In other words, the articulation between the EFSF and the ESM is far from clear, especially given the fact that the ESM has to be adopted by way of international treaty (which will, presumably, require ratification according to the national procedures of 17 countries) AFTER all 27 countries of the EU have ratified an amendment to the treaties to allow an action OUTSIDE the treaties to ensure that the German constitutional court does not find it in breach of the treaties. You could not make it up. But they own the ball.

I do not think it makes one whit of a difference to Ireland’s situation one way or the other. Ireland will get back into the markets when the markets in question are convinced that the country will not default on its debts. D-day yesterday has, perhaps, stopped the rot in this respect and, with the S & P comments, may mark a turning point. But success will require not just implementing the financial parameters of the MoU but also showing by concrete action that the structural defaults in the Irish economy that need remedying are being remedied. The bank restructuring is a very good statement that the country is institutionally capable of carrying out this task. Time to put all shoulders to this particular wheel.

Gavin,

I take your point. Early on we did get a lot of focus on the importance to the economy of a properly functioning banking system for economic recovery — and indeed the seize up of the economy that would follow a banking collapse. It has gone on so long people don’t really bother to make the case; but you are right that it should be made.

Of course, a significant part of the cost does reflect the blunder of the original guarantee.

On the financial return, it does seem that most of the €46 billion going into yesterday is a real cost to the state, given that the capital stakes were worth relatively little given the market caps. One complaint I do have about yesterday’s release is that it is hard to calculate how much of the €24 billion relects additional identifed expected losses (under the base scenario), how much reflects addtitional capitialisation (a financial investment), and how much is a direct cost of the planned deleveraging. Patrick Hononhan did say in his interview on VB last night that it was roughly about one-third each, but I would like to see how this is calculated.

By Post Author

“Today’s potential investors worry that Ireland will not have market access given the burden-sharing and official creditor seniority features of the ESM. They thus surmise that Ireland will need another programme. Part of the conditionality of such a programme is likely to be a “bail-in” of existing bondholders, which could be brought forward in time as it comes to be viewed as inevitable.”

That might be one explanation. But if I was a bond investor, reading this blog, I would conclude the following:

What the hell about whether Irish public debt is sustainable or not. This is not an issue anymore of being able to pay, but of being willing to pay. Ireland is going to default, whether it is justified by ecnomic fundamentals or not.

That kind of thinking is all what is needed to justify about any level of bond yields.

Ireland is in a hole and keeps doing the difficult and painful, but right, things to get out of it.

But our friends in Europe keep deepening the hole by giving markets every reason not to lend to the Irish sovereign or banks – by repeatedly proposing steps that heighten the belief that any lending to Ireland will not be fully repaid. So why would anybody lend to us?

Ireland cannot solve these problems alone, no matter how hard we try. Unless Europe cops on, this will go on and on and on ….

@John

“The detailed information on bank balance sheets and projection assumptions used allows anyone interested to reengineer the calculations as necessary,”

Seriously John, if you even wanted to model the expected interest rate increase at the ECB next week, you wouldn’t be able to reengineer the calculations. Ditto if you wanted to factor in different property price projections. There is zero in the publications on the quantum of BlackRock’s Probability of Default and Losses Given Default (these get their own acronyms).

Even the statement that BlackRock is assuming a convergence with UK repossession rates is ambiguous. What does this mean. Repossession rates in the early 1990s or today?

Having studied the announcement from front to back, I was appalled by the lack of disclosure, particularly when compared with the UK stress test publication two weeks ago. In the end I gave us and assumed that BlackRock overseen by BCG, the Central Bank (and CB peers from France and Italy) would be competent enough to produce robust stress tests. Then I read the sole paragraph on derivatives and wasn’t so sure “In addition to forecasting loan losses, Black examined banks’ securities and derivatives portfolios. BlackRock analysed a portfolio of €59.8bn in securities in 1,597 individual positions. The majority of the securities at the institutions were used as liquidity instruments for cash management purposes. AIB and BOI also supplied data on small portfolios of more illiquid assets held on their corporate balance sheet. Pricing discrepancies for all positions spot-checked were not material. BlackRock also performed a high-level review of individual derivatives positions. These instruments were almost exclusively of the type generally used to support hedging and funding programmes, consistent with the institutions’ stated objectives. In the time available, the objective was not to conduct a full review of positions. Instead the intent was to provide comfort on the nature of the portfolios by assessing their size and shape and conducting non-statistical spot checks. Spot checks revealed no material differences”

@ John McHale

Many thanks for your reply.

The full eyes-bulging-out-on-stalks rage (negativity), comes when the meaning of an innocuous sentence such as: “it does seem that most of the €46 billion going into yesterday is a real cost to the state” hits home.

I remain interested in how the state gets payback for this.

I shall watch VB with interest. I would post a link but the system won’t let me.

@ John

Have you tried working out what the banks would be worth at end of 2013? I mean by that their net asset value and ignoring any Good(Bad)Will which might be achieved on sale.

My read of the FMP (Chart 1) is that in the stressed scenario the NAV would be €27.5bn and in the base scenario (from Table 1) would be 7.7bn higher at €35.2bn. The point is that the €24bn isn’t all down the tubes unlike the 35bn in Anglo/INBS.

On a point of detail, Section 3.4 describes the deleveraging calcs. Crucially it says for ILP that it has offset losses made on loan disposals by profits expected on disposal of non bank assets. Does that mean that any profit on the sale of Irish Life are already allowed for in these figures? Pretty bad for ILP if it does.

@John McH

The amounts involved are huge, but the percentage of these that will have to be completely written off is in the region of what 80%, 90%, 100%. Can someone answer this question please?

In addition, while the country is busy with self-immolation, citizens have yet to see once senior figures in banking made amenable to the law. I am familiar with the foot dragging that dogs the Italian system when wealthy people are accused of white collar crime, but it is not something to emulate.

How many developers are sunning themselves overseas courtesy of their spouses’ often recently acquired wealth?

The demoralized state of the nation and any resulting negativity can’t be that much of a surprise surely?

@John Mc Hale

Now I’m not being personal as we don’t know one another, I’m purely remarking on your writing above!

But I’m really getting tired of gombeen, gobshite, infantile, incompetent, unprofessional and amateur fantasy views such as

“I think the nature the state creditworthiness problem is being widely misdiagnosed, however. ”

And there we have it, a sad trite, throwaway remark, that sells it all. We have no analysis of ‘state credit worthiness problem’ , how the state will cut public services, jobs, how this will deflate the economy and accelerate the race to deflation and state asset stripping.

I commented this as cbweb over at davidmcwilliams.ie

“Here’s the biggest joke underlying the stress tests:

1. The stress tests were performed on the banks. But we know the banks are tied to the hip of the sovereign.

2. The mathematical algorithm of the stress tests are essentially simple. Perform a 2%/3% or similar adjustment to your figures either way and watch the parameters you decide measure performance of the bank loan book.

3. Decide if you’ve set aside enough to buffer and cover losses under the above scenario.

The joke is you’ve been measuring the radiation in the banks but have ignored the earthquake/tsunami within the sovereign economy.

The joke is we havn’t done the math to show the effects of burden sharing for citizens in Ireland, the loss of jobs, the huge extra burden in interest repayments, the loss of social services, the inevitability of default these measures entail going forward, the damage caused to our economy.

Its left to a few, Morgan Kelly, Gurdgiev, DmcW to picture this because our vassal Government have buried this information and sure as hell they wont give it to us.

Hopefully journalists will look at budgetary provisions outlook for the next five years and describe what’s in store for taxpayers, what this clown government, who’ve lied and misled the Irish public and not a few days in office, have in store to drag our economy even more underwater.

All the ingredients for an Irish meltdown are now in place.”

Last time in the eighties we fought out of huge debt to GDP ratios, the battle was waged by those who bought housing at 2.5times their gross wage over 25 years.

This time the battle will be fought by an army of mortgage defaulters sold
enormous negative equity loans at eight times gross salary over forty years.

That’s why the ECB is in favour of asset stripping the Pension Reserve Fund or any other assets, ESB, state forests, …………..

Welcome to meltdown, John

“structural reforms that will enhance economic performance”

historical precedent of this assertion actually working would be welcome.

“likely to provide a very convincing signal to the international capital market”

Yes. Keep the focus on international capital markets because that has been very successful in recent years. It is worrying how many intelligent and well trained people fail to see that it is the fundamentals of international capital which has led us here. The merry-go-round is still going around though, so lets just cling on a little longer shall we.

Funny stuff Colm. I amintrigued what you would say if you were being personal.

@Colm Brazel

Indeed. The underlying fragility of the economy seems to have disappeared off the government’s radar only to be replaced by a review fever. Another stark reality check is reported here.

” Assuming we can see through the fiscal adjustment and get a half-decent outcome on growth, we should be able to stabilise the debt-GDP ratio somewhere around 120 percent. ”

Not a good assumption there according to our latest growth projections and deflationary figures for GNP…..Sad really..

John, I think you’re a very sincere guy kind enough to put your views out these for public examination and discussion for which I’m grateful.

Have a good weekend, but think about my response above.

We’ll have to wait a year or 2 or maybe less to see who is right:)

My bark is worse than my bite

best

Colm

Excellent piece John.

@Grouser: Unless Europe cops on this will go on and on and on..”

IMHO waiting for Europe to “cop on” may be just too risky and spending time on persuasion may take up too much effort.

It would not surprise me if the Irish Government is forming the opinion that it is easier for Ireland as a nation to deal with London and Washington than burning up time, emotions and energy “bargaining” in Brussels and Frankfurt.

We may well be witnessing a gradual and polite severing of the European political umbilical chord as Ireland diplomatically distances itself from the “heart” of Europe to a level of relationship with Europe which suits our economy and society.

I am always mindful that the current cabinet is mainly made up of people who were previously in power when Irelandś relationship with Europe was not as formally binding as it is now. A Scandinavian or UK type of relationship with Europe may be looking increasingly enticing at the cabinet table in Dublin.

excuse my ignorance but;

why can’t we just securitise and then sell all the tracker mortgages to foreign banks, mutual funds, insurance companies or hedge funds. Their lower cost of capital would make these mortgages profitable.

It seems crazy to keep these mortgages when they are loss making.

Now i know buyers might have problems with defaulting mortgages – but conservatively structured tranches should solve that.

We could clean ILP’s balance sheet pretty quickly this way and the whole world is a potential buyer

@ Colm

“My bark is worse than my bite”

Or perhaps you’re just barking? Ridiculous comments, manners are the one thing we should still have plenty of in this country. Its a shame, you probably had a point somewhere in the midst of your rant, but damned if im gonna try and find it.

@ Christy

you still wouldnt get 100 cents back on them, even if they were zero defaults on the books, pricing has moved onto a different planet since there trackers were put in place (which Ivan Yeates, fair play to him, brought up during the week – a bailout of ILP is essentially a bailout of every tracker mortgage holder)

@Alchemist

Thx for that. A stress test review of our economy ‘fit for growth’ should take into account the high rentier legacy corruption of the economy through upward only rent reviews, another way the bubble legacy has strangle hold on our future well being! Need I mention Nama

There’ll be many more examples of that in the IT.

@Eoin

Fair enough – but it would allow us to shut the place down and impose losses at least on the subbies there (and maybe on seniors)!

Is ILP not a loss making bank attached to a profitable life insurance business thingy.

It would also avoid the need to put extra capital into the place.

Flog irish life – flog the mortgages – move the deposits – shut up shop – impose losses – avoid the need for more capital – boom

@Jagdip Singh

Then I read the sole paragraph on derivatives and wasn’t so sure “In addition to forecasting loan losses, Black examined banks’ securities and derivatives portfolios. BlackRock analysed a portfolio of €59.8bn in securities in 1,597 individual positions. The majority of the securities at the institutions were used as liquidity instruments for cash management purposes. AIB and BOI also supplied data on small portfolios of more illiquid assets held on their corporate balance sheet. Pricing discrepancies for all positions spot-checked were not material. BlackRock also performed a high-level review of individual derivatives positions. These instruments were almost exclusively of the type generally used to support hedging and funding programmes, consistent with the institutions’ stated objectives. In the time available, the objective was not to conduct a full review of positions. Instead the intent was to provide comfort on the nature of the portfolios by assessing their size and shape and conducting non-statistical spot checks. Spot checks revealed no material differences”

‘In the time available, the objective was not to conduct a full review of positions.’
What is the maximum potential downside on this ? Has that been quantitively priced into the capital requirement as a contingency?
Doesn’t sound like it.

‘Non-statistical spot checks’ – a coursory glance?

Think you might be onto the next round!

@Bond. Eoin Bond

No rant, simply made the point the stress test of the banks havn’t stress tested the economy, so they’re incomplete, if not invalid.

I’ll summarise the point for you:

“The joke is you’ve been measuring the radiation in the banks but have ignored the earthquake/tsunami within the sovereign economy.

The joke is we havn’t done the math to show the effects of burden sharing for citizens in Ireland, the loss of jobs, the huge extra burden in interest repayments, the loss of social services, the inevitability of default these measures entail going forward, the damage caused to our economy.”

Perhaps John’s comment trite dismissal of a stress test analysis of our economy needs further objective exploration and further analysis in a later article:

Hitherto this ability to grow our economy is being ignored, or indeed how our economy is to move from deflation, into inflation and growth while carrying the burden of the banks?

“I think the nature the state creditworthiness problem is being widely misdiagnosed, however.”

I’ve yet to read any of the supporters of bailout convince me or the markets of any evidence whatsoever that contravenes the default scenario?

@Bond. Eoin Bond Says:

“My bark is worse than my bite”

‘Or perhaps you’re just barking? Ridiculous comments, manners are the one thing we should still have plenty of in this country. Its a shame, you probably had a point somewhere in the midst of your rant, but damned if im gonna try and find it.’

Off thread.
I agree regarding manners and would also include personal name calling etc. as opposed to collective epithets. As I have said before, I believe we are all trying our collective best on this site from many points of view and aside from the odd humerous ‘dig’ at one another I think you are perfectly correct to challenge what might seem, but may not have been meant, as bad manners. Passionate arguement?

Would you include not answering simple direct questions in the above?

By they way on a similar request to one of your own – how do you do the smiley faces ? (-:

@Bond. Eoin Bond

Shite notebook – only 5 months old and can’t manage that!

Half of the post was cut :

ILPM say

“No forbearance, resulting in accelerated repossessions”

What will this mean in practice? Will people be thrown out of their homes à la the US (5 million foreclosed homes) ? Or is it just a spreadsheet effect?

@ Christy

true, but i think the subs will be hit pretty harshly anyway, and there’s some goodwill value in the brand (it has a lot of customers and is nowhere near the AIB/Anglo league of scorn). We’d still be on the hook for most of the losses anyways, very little senior or sub (and no covered oddly, ILP was a major issuer of securitisations instead thankfully) left in Irish life, so its depositors or the government which takes the hit.

@Ordinary man

Re “BlackRock also performed a high-level review of individual derivatives positions. These instruments were almost exclusively of the type generally used to support hedging and funding programmes, consistent with the institutions’ stated objectives. In the time available, the objective was not to conduct a full review of positions.”

Given the sensitivity of these positions, a full review and carte blanche given, should have been the least expected of the anaysis of derivative positions, you are right, we should worry about these. Some of us wondered these exposures rather than bondholders were the real target of the bondholder protectors:-)

@ MH

Yes, but if the name of the game is deleveraging and these loans are sold they won’t be bought by Teddy Bears international plc. . Presumably the conditions agreed between the regulator and the new owners will be adjustable for pounds of flesh.

@Bond. Eoin Bond

🙂

@Colm Brazel

Just strikes me that the phrase ‘Due Diligence’ was abandoned here – I don’t enjoy saying this.

I truely wish this was the end of this but two years down the line and these ‘bankers’ cannot give us an accurate picture of their positions – it is just incredible.

I would wager Eoin et al. could give you a breakdown and analysis of his positions in a coherant manner within a day

I sure as shooting would not buy a company or share on this level of examination – why should Eoin or anyone else.

Where was all this anger when annual credit growth was at 30% — ten times the inflation rate?

Led by populist commentators, including one who termed the State bank guarantee ‘a masterstroke,’ people appear to be fired up by the foreign element and I saw Richard Boyd Barrett TD in the Dáil last night announcing a planned demonstration to call for a referendum.

He said we should do what the Icelanders are doing but he didn’t say that the original demands of the British and Dutch are essentially intact and will be despite another referendum.

What is striking is that people are driven by emotion and few if any bother to consider the downsides or the facts.

A lot more is owed to the ECB than to senior bondholders and there is the apparent assumption that the ECB will take up the slack if of debt as well as liquidity funding.

As Colm McCarthy said last week, there is an annual budget deficit of €18bn; companies also need to have motivated staff out selling not immobilised by fear of the sky falling now.

There is a system of support in place; the country needs fundamental reform, which does not elicit the same interest as the obsession with bondholders – – of course there are many still comfortable with the status quo and are resistant to internal change.

As for fact, German policy is not motivated by its banks exposures to Irish domestic banks or to Irish sovereign debt as the total exposure is neglible.
French banks also have a very low exposure to Irish banks.

@ seafóid

Anything is possible if you believe the Central Bank is going to support mass evictions.

@Alchemist

The underlying fragility of the economy seems to have disappeared off the government’s radar

Oh no, I think it’s significantly worse than that. It seems the government’s preparing to get on top of all our problems through a dash for growth.

@ finfacts

I’ve written elsewhere: “Its the elephant in the room. How is the sovereign going to a:-) pay back the loans b:-) grow the economy of a grand national donkey with an elephant on its back c:-) exactly how is it going to Sheriff of Nottingham squeeze taxpayers and destroy their pubic social welfare services to achieve the above?”

Re bondholders, you can only smile at FG response to not burning bondholders and the math used eg there’s about €25 bn outstanding only.

Of course no questions asked as to why the ECB was exchanging short term loan facility to the Irish banks throughout 2010 since 2008, much of it used to pay off bondholders, so it was extending money to itself, and deepening at the same time its grip on broken Irish banks.

In fact I think on your website you have a rather elegant description of the figures involved here:

http://www.finfacts.ie/irishfinancenews/article_1021633.shtml

I in fact believe in burden sharing, debt for equity swap, bank closure for dead banks, burning bondholders and the creation of a new financial sector based on new public banks operated by eg The Bank of North Dakota

You might enjoy the following:

http://therealnews.com/t2/index.php?Itemid=74&id=31&jumival=6239&option=com_content&task=view

Our problems are no longer Irish problems. Last few days show we’re owned and run, lock, stock and barrel by the ECB. We’re out of the picture. Game over!

@MH

There is a system of support in place; ……….As for fact, German policy is not motivated by its banks exposures to Irish domestic banks or to Irish sovereign debt as the total exposure is neglible.
French banks also have a very low exposure to Irish banks.

I don’t think its the German or French banks that are being protected. It is the big insurance companies who would have to pay out in the event of default. Who are they? Munich re?, Allianz?

As for a system of support being in place. Maybe. But no support from Karl Lannoo who was on RTE News at one today. Listening to him made my blood boil. The tone was that Ireland must pay. It was a tone of reparations, not unlike Bini Smaghi. I looked up another contribution from this worthy. It just gives a flavour of what Ireland is up against.
Link: http://www.youtube.com/watch?v=AWfLoUe_NAc.

We might as well be listening to Clemenceau at Versailles:
‘When the goose is on the table, you don’t ask her how she would like to be plucked’.

Mr McHale, Ireland is bankrupt. Even before this additional €24 billion was heaped on, all commentators agreed that the country’s debts were leaving it on the brink of ruin. What position are we in now then?

Your questions are utterly irrelevant. The banks are insolvent and the state is too bankrupt to fix them. Praying to the god of the market to smile on the nation is not going to change the very simple sums involved here. The public knows this and that is why virtually no-one apart from well payed commentators agree with the government’s decision to throw more money at undead banks.

I am not so sure; and think the reputational damage of default – should it have to occur – is likely to be minimised if we stick to the process being prescribed by the official creditors.

This is the kind of thinking that is going to have us coming back to the banks every six months or so to chuck another few billion in until we’ve thrown in all €440 billion that was guaranteed—or more. This is not the thinking of anyone experienced with or properly educated in finance, banking or Realpolitik. Unfortunately, it appears to be the thinking of almost everyone making decisions in this country, which readily explains why all the decisions made have been so poor.

Think about this for a moment. You’re sitting there fretting over the nation’s “reputation” if we default; specifically what the effect will be on our “bund spread” over a country which used to kill millions in gas chambers. Get some perspective!!! In ten years, no-one’s going to care if Ireland defaulted on its banking debt. It will become, quite literally, an academic issue best fit for economic monographs and “Reeling in the Years” TV specials. But if the country spends the next 10, 15 or 20 years paying off the gambling debts of wasters in the banks, then we will be facing an emigration comparable to that during the famine—50,000 over 10 years. And the effects of that on Ireland will be anything but academic.

@Michael Hennigan – Finfacts Says:

April 1st, 2011 at 4:55 pm
Where was all this anger when annual credit growth was at 30% — ten times the inflation rate?

I just got bewildered when assets became commodities in 2006 and sold the lot !

Every one you spoke to was another Donald Trump in the making – even gave up golf in 2006 got tired of the conversation.

You are right in that some are not considering the consequences of their actions – not just the dissenters on this site or wider society.

To ignore the loss of actual cash in the real economy through job losses, wage reductions, reduced working capital to small business etc. (which is slowly choking any physicological positivity left in the economy to death) is like doing ‘spot checks’ on the derivitives etc. held the banks by Blackrock as mentioned above.

Inadequate

@FACT

“As for fact, German policy is not motivated by its banks exposures to Irish domestic banks or to Irish sovereign debt as the total exposure is neglible.
French banks also have a very low exposure to Irish banks.”

Even if you accept this, it doesn’t follow that their policy towards bondholders is not motivated by a fear for their own banks funding positions, (a fear that arises as a result of their failure to adequately re capitalize their banks)

Blackrock does not have a clue about the mortgage business in Ireland or anywhere in Europe … they are using the same experts/quants who created the sub-prime crises in USA… it is sophisticated and complicated analysis but totally flawed.. wall street quants caused the crises and will now kill the recovery as well… irish central bank/ECB are stupid to have allowed these results to have been disclosed without discussing with independent mortgage experts…

I do not expect losses anywhere close to Blackrock estimates on mortgages… but expect significantly higher cost on deleveraging.. results would have looked much more credible if mortgage losses were projected lower and deleveraging cost was much higher….

@Michael H

There will be no reform. The Minister for Public Sector Reform was on Pat Kenny and I didn’t get any sense that real public expenditure reform was top of the agenda. Croke Park still trundles on delivering nothing, not that it ever could have delivered anything given its official Ireland aegis. Irrespective of any comparatives, there are too many people in the civil and public service but since this is as plain as daylight, it must be ignored in favour of some OECD metric or other. And this in the week that saw Moriarty and its mini-bailout sized bills starting to come in.

My own opinion is that personal mortgage debt has to have some kind of ‘burden sharing’ applied to it in order to bring down public and private sector wages sensibly – though the private sector doesn’t have much left to give. This is not the 80s. Default begins at home. Next on the list must be welfare. Rates are simply too high to attract married men with families back into the workforce. Consequently setting up a low wage manufacturing operation is hobbled from the start. All this talk about banks and Frankfurt, what Trichet said or didn’t say, how many derivatives can be carved out of the head of pin, and so forth is a distraction, an epic example of projection while the real problems remain unresolved.

Zombie Banker Blues: Made it two years ago and it is still coming true.

“Scientists, troops and auditors arrive from abroad to investigate the total collapse of a small Republic. “

@ John McHale

‘I ……………think the reputational damage of default – should it have to occur – is likely to be minimised if we stick to the process being prescribed by the official creditors’

That is the line which has prevailed, and which will continue to prevail for some considerable time. I don’t doubt that the view is sincerely held in many quarters, including your own.

Given the firmness with which Stark et al are articulating the ‘core’ EZ agenda, however, the phrase about boiling the frog slowly comes to mind. Reputational damage might be the least of our problems in 2014.

It is a fiction to suggest that the effects of these bailouts will be either a properly functioning banking system or one that can make any positive contribution to growth. But then the bailouts have never been designed for either purpose- but simply to make whole investors who would otherwise be obliged to enjoy the fruits of the financial markets they have extolled so long.

I’m only surprised there remain such boosters for what would in any other circumstance be regarded as a fraud perpetrated on a state borrower and its taxpayers.

Blackrock identified a further €40bn in potential losses- but this may be an underestimate, with less than €1bn identified in British mortgage lending.

Yesterday the BoE expressed its ‘surprise’ at increasing default rates once more, both mortgages and small businesses- but the wonder is any central bank that is surprised at growing defaults when government spending cuts suck the life out of the economy, investment is being cut, and incomes are falling.

How easily are the neo-Thatcherites surprised at the effects of their own handiwork- both sides of the Irish Sea.

Don’t touch protected species. Rock and hard place come to mind in this report.

The best bit is midway down:

“It is widely accepted that the effect of rent on business viability in the latter sectors is nominal.

“We would suggest that the majority of large tenants (some international high street names) are in a position to bear the burden of the contractual rent due to the existence of other profitable stores located both within and outside the Irish jurisdiction,”

So if rent cannot be generated in the Republic, get a subsidy fromm abroad. Simple really unless…

The banks recap takes account of most if not all of the private debt risk including distressed mortgages. A scheme of relief for the high proportion of Irish mortgage borrowers who are currently in default has now been paid for, at least in part. It is time to bring forward such a scheme to enable distressed borrowers to put their houses in order and get on with their lives, freed from the burden and anxiety of unmanageable debt. The recent recap has cost far more than the total of the estimated negative equity in our housing market. In fact the total input by the state into the bank rescue could have repaid more that half of the €130bn capital value of all Irish mortgages. Time the new regime addressed this urgent problem.
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Today, 07:52:00 GMT+01:00 – Delete

@Neil P McC

I have been banging that drum for awhile – or punching that bag as Brian Woods put it – default begins at home. The government could use the opportunity to push wages down, shrink public expenditure and restore competitiveness. But it won’t happen. It entails reform.

@Neil P MC @The Alchemist

“The recent recap has cost far more than the total of the estimated negative equity in our housing market.”

IMHO interesting and valid point. The estimates (guesstimates?) that I have read are 200000 homes in negative equity, and 5% ,out of 700000 mortages, in arrears. If so and presuming 100000 Euro negative equity per home than we are looking at 20 BillionEuro.

However while negative equity is a pain in the posterior it only becomes a problem if a owner cannot pay for a long period of time. Ninety days is the guideline but protection estends this period. However using a guideline of 5% “serious” arrears this means we are looking at a maximum serious problem of 3.5 billion Euro which look miniscule compared to the bank bailouts.

Apart from the serious moral, social and health problems caused by this fear of losing ones home we also have a deeper problem. Every mortgage holder (and their partners) are in the woking age group. Consequently Ireland has at least between 35000 and 300000 people (15% of the workforce) burdened and obsessed with anxiety which effects their ability to contribute and innovate.

In these circumstances the “few” billion it would take to sort it out would be a real “investment” and not a “moral hazard”.

One option would be for people to pay rent for their home based on its current value for a period of time with an option to buy it back with a loan at a later stage. In other words a house that was previousl worth 250000 Euro but is now worth 150000 would attract a rent of 500 Euro a month for five to ten years and at a later stage the “leasee” could borrow to buy their home again.

In fact this could even be used in certain “buy to let” cases as well ie. instead of being a defaulting mortgagee/landlord a former “investor” could cublet thei “buy to let” and pay a lease on the current value with an option to buy back the property with a loan later on .

People could choose to accept or decline these solutions which would diminish the inevitable counter arguments.

In both case the properties would be well managed (because the individuals would have incentives) while the banks (actually the taxpayer) would not be lumbered with empty “non performing” houses and have a good chance of gettiing back most of their money in the long run.

Meanwhile the national economy could benefit from 300000 anxiety free workers and potential social costs would be significantly reduced.

To me that would be a “real investment” worthy of any truly capitalist society and would be fairly easy to implement compared to the complications the government s have had to deal with over the las 30 months. The return to the exchequer would be almost immediate as people re- focused their priorities and feel less afraid to spend money in the economy.

Sorry I should have written:

After a period of five or ten years individuals could opt to borrow to buy back their home (or investment) at the original price i.e 250000 after five or ten years or continue paying a rent which reflected the new market value.

Anyone know why Bank of Ireland’s domestic PDH loans (OO’s) are showing far lower loan loss assessments? See table 9

The UK repo comment is interesting: using 2010 UK CML repo stats it seems we should expect c9.5k repos per year to at least 2013. Houses in possession year end 2010 = 585.

@subprime veteran
“Blackrock does not have a clue about the mortgage business in Ireland or anywhere in Europe … they are using the same experts/quants who created the sub-prime crises in USA… it is sophisticated and complicated analysis but totally flawed.. wall street quants caused the crises and will now kill the recovery as well… irish central bank/ECB are stupid to have allowed these results to have been disclosed without discussing with independent mortgage experts…

I do not expect losses anywhere close to Blackrock estimates on mortgages… but expect significantly higher cost on deleveraging.. results would have looked much more credible if mortgage losses were projected lower and deleveraging cost was much higher….”
Well, perhaps. There is an argument to make that most recent lending in Ireland by the main banks has been subprime – either for the person or for the bank (100% mortgages, up to 125% taking into account personal loans on top, loss-making tracker mortgages, high SVR rates). There is also an argument to make that because these mortgages have been securitised as covered bonds, the risk lies not in the deleveraging, but in the mortgage loss assumptions (they would effectively be the same thing with covered bonds as the bank bears the cost of the lower asset quality that mortgage default results in).

So, given the sub-prime nature of Irish mortgage lending, using a sub-prime loss analysis may be entirely appropriate. No?

I note that the 70 bn in losses/capital requirements now constitutes about a 30% loss on bank assets at the time of the guarantee. This is pretty much the average loss figure for a bursting bubble accompanied by a financial crisis and a blanket guarantee… are we average now?

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