FT Alphaville continue to be unimpressed with the Irish government’s over-turning of the capital structure of the Irish banks: haircutting subdebt holders while protecting preference shares.
The Central Bank of Ireland has released an addendum to its Financial Measures Programme report covering loan losses at Anglo and INBS. It concludes the loan losses estimates that were produced last September are still satisfactory.
What does this mean for the remaining Anglo bondholders (€200 million paid out on last Friday)? The government’s policy on this issue is a little unclear to me at this point. The Irish Times reported in April
the head of financial regulation Matthew Elderfield said losses may be imposed on senior bondholders at Anglo Irish Bank and Irish Nationwide Building Society if the cost of the two failed institutions rises above the current €34 billion bill.
This wording also suggests the converse—that without evidence of higher losses than €34 billion, senior bondholders would be repaid in full. However, I doubt if policy on this issue is being set by Mr. Elderfield. In the week after the stress test announcements, government politicians continued to maintain that they wanted to see burden sharing with Anglo and INBS bondholders. For instance, listen to junior minister Brian Hayes discussing the issue here on the April 2nd edition of Saturday View (56 minutes in).
There isn’t really any need to base such a decision on whether the Central Bank announces combined losses of more than €34 billion. An amended version of the Credit Institutions bill could be introduced that allows the Minister to apply haircuts to all bonds issued by banks that required enormous support from the state, and perhaps this is what government politicians have in mind when they say they are still pushing for burden sharing.
Anyway, there has been no official response to this release from the Department of Finance, who have instead preferred to issue press releases on the subdebt buybacks proposed by BoI, EBS and ILP. My guess is that the government is hoping this issue will just fade away but, if asked, they will still claim that Anglo senior debt shouldn’t be paid out on but that they’re still “discussing the issue with their European partners”.
As a purely political matter, I’d guess that if and when Ireland gets a lower rate on its EU loans, that may prove to be the moment that they admit they had to give up on haircuts for Anglo bonds. Investors who bought these bonds at steep discounts over the past year (because so many people assumed the government would not pay out on them) will have obtained a fantastic rate of return.
Given that Irish politicians and media have decided that Leo Varadkar’s comments about Ireland probably having to get a second EU-IMF deal is some kind of faux pas, it is perhaps worth pointing out that this opinion is widely shared by pretty much everyone I have to talked to in recent months.
Anyway, given that this issue is being discussed, now might be a good time to put up a link to this talk that I gave at the IIEA a few weeks ago. I discuss the risks relating to the current EU-IMF plan the likelihood of the need for a new deal. The slides for the talk are also on the page.
The Central Bank has released the Money and Banking data for the end of April (summary here.)
Looking at the key table 4.2 for the balance sheet of the guaranteed domestic banks, we see some relatively good news. Domestic private sector deposits rose a little in April while the decline in non-resident deposits slowed considerably. This confirms various statements from Michael Noonan and others that the situation with deposits improved after the March 31 stress test announcements. Of course, the situation with falling supplies of credit looks as grim as ever.
The ESCB’s views are in this document.
The Central Bank’s annual report for 2010 was released today. Continuing his valiant service, Lorcan has read the report so we don’t have to. For those ELA-philes out there, Lorcan spotted the following lovely sentence:
In addition, the Bank received formal comfort from the Minister for Finance such that any shortfall on the liquidation of collateral is made good.
Anyone care to speculate on the legal value of “formal comfort”? For instance, relative to the guarantees passed in to law under ELG scheme, how does a formal comfort compare?
Listening to the News at One on RTE Radio One, I heard Minister for Finance Michael Noonan dismissing comments over the weekend from Minister Leo Varadkar that Ireland would probably have to seek a second bailout as it would not be able to return to the markets. That’s fair enough, one would expect a Minister for Finance to say the current programme is going to work and Varadkar was clearly off message. However, it worries me that Noonan’s comments completely misrepresent the true picture in relation to Ireland’s funding situation.
Noonan said (I’m paraphrasing here but the audio links will be available later) that the EU and IMF are providing enough money “to carry us forward in all eventualities” and that the deal runs through Two-Thirteen (which I take means 2013). Noonan indicated that while there was a plan to return to borrowing from the markets in, yes, Two-Twelve, that this wasn’t actually necessary. The clear implication from these comments is that Ireland would not have to request a new deal until after 2013 if at that point market funding cannot be located.
This is not an accurate representation of the EU-IMF deal. Here‘s the European Commission’s report on Ireland, released in February. The last page shows the financing needs. It is clear that the EU and the IMF are not providing enough money to get us through the end of 2013. Indeed, the EU and IMF funds probably only get us to early 2013 (this was clear before the Commission’s report) and that market financing is required. So if we cannot obtain this market funding, we will have to request a new deal from the EU and IMF.
It’s reasonable to expect bluster from our Minister for Finance but we should at least expect him to show a clear understanding of the parameters of the state’s financing needs.
Update: Here is the updated European Commission programme document from this month. Financing needs are discussed on page 22. They differ a bit from the February document but the key point is the same. The programme calls for €14 billion in market financing in 2013 to fund the state.
Lorenzo Bini Smaghi lays out the case for why membership of the euro area has been a stabilising force during the crisis in this speech.
The Dublin Kapuscinski Lecture – ‘Climate Change and Development’ on 31st May 2011 at 1700-1900 in the UCD John Hume Global Ireland Institute. R.S.V.P. to Jean.Brennan@ucd.ie
The series is named after Ryszard Kapuscinski, a Polish reporter and writer who was a “Voice of the Poor” in his famous reportages and books covering the developing world. The lecture series is organized jointly by the European Commission, the United Nations Development Programme and partner universities, in this case TCD and UCD. Ms Barbara Nolan, Director of the European Commission’s Representation in Ireland will open the Dublin Kapuscinski Lecture 2011 on ‘Climate Change and Development’.
Professor Dirk Messner, German Development Institute, will deliver the keynote lecture. “The global development panorama is changing dramatically. The challenges of security and poverty are more interwoven than ever before. Yet, two thirds of the global poor people are now living in middle income countries like China, India and Brazil. What does this new global poverty map imply for European development policies? Development trends are also embedded in an overall global development challenge: – climate change. The world needs to learn to decouple wealth creation from burning fossil fuels. A great transformation to a global low carbon economy is necessary during the decades to come in order to avoid major and dangerous changes in the Earths system. What do these global shifts imply for Europe s role in the world? Europe needs to define its global interests. And it needs to be part of a global governance strategy to shape global development trends.”
A panel discussion will follow, chaired by Prof. Patrick Paul Walsh (UCD Chair of International Development Studies). Panellists include Francis Jacobs, (Head of the European Parliament Office in Ireland), Cliona Sharkey, (Trócaire, Environmental Justice Policy Officer), Tara Shine, (Head of Research and Development, Mary Robinson Climate Justice Foundation, Joseph K.Assan, (TCD-UCD MDP Lecturer in Development Practice) and Frank Convery , (UCD Earth Sciences Institute).
The lecture series offers citizens of the European Union an unprecedented opportunity to learn and discuss development, and issues related to development cooperation.
The ESRI held a conference on pensions policy this morning. Presentations from the conference are available here.
In recent articles, Daniel Gros has emphasised the importance of a country’s financial wealth for its solvency. He further develops his controversial arguments in this VOX piece, with particular emphasis on the distinction between external and domestic debt. An extract:
In a monetary union, the usual assumption that public debt is riskless is not valid. Countries like Greece don’t have access the ultimate option of printing money. In this sense, the public debt of Eurozone countries resembles that of emerging markets (Corsetti 2010).
The crux of the importance of external debt lies in the fact that even Eurozone nations retain full sovereignty over the taxation of their citizens. The logic is somewhat subtle and best explained by an extreme example that makes the point extremely clear. Suppose a nation’s entire debt is held by one man and the nation faces a debt crisis. If this bond holder is a resident of the nation, the government could impose a tax on him equal to, say, 50% of the value of his government bond holdings. Using this new tax revenue, the government could pay down its debt by 50%. Of course this would be an outrageous expropriation and make it harder to issue debt in the future, but it would not be a default.
By contrast, suppose the sole bond holder where a foreign citizen living abroad. In this case, the government could no longer freely tax the individual. Governments do not have a free hand in taxing non-citizens; they are bound by existing treaties and international norms.
The baseline point is that as long as Eurozone members retain full taxing powers, they can always service their domestic debts, even without access to the printing press. For example, governments could reduce the value of public debt held by residents by some form of lump-sum tax, such as a wealth tax. The government could just pass a law that forces every holder of a government bond to pay a tax equivalent to 50% of the face value of the bond.2 The value of public debt would thus be halved, much in the same way as it would be if the government ordered the central bank to double the money supply, which would presumably lead to a doubling of prices.
This is why, I believe, it is foreign debt that constitutes the underlying problem for the solvency of a sovereign, even in the Eurozone.
Of course, we have recently seen a tentative move towards wealth taxation with the (temporary) levy on pension assets. Dominic Coyle does not mince his words in criticising the new tax in this Irish Times piece from Monday.
The OECD has launched a new index with the aim of facilitating comparisons of the quality of life across countries. You can find the country summaries here.
Ireland does quite well in the rankings, although the usual caveat about using GDP in an Irish context applies. Moreover, the data used are mostly from 2008 and we have undoubtedly slipped towards the relegation zone since then.
Here‘s a new and extremely useful survey released by the CSO on access to finance. The survey focuses on SMEs. Specifically:
The scope of the survey was enterprises in the non-financial market sectors … that employed between 10 and 249 persons in the year 2005 and which continued to employ at least 10 persons at the time of the survey (September 2010).
There’s a lot of information in it but the key point is the following:
Enterprises that applied for loan finance had a success rate of 90% in 2007, compared with 50% in 2010. Enterprises applying to banks for loan finance were successful in 95% of cases in 2007, while in 2010 the success rate dropped to 55%.
This survey is part of an EU-wide initiative so we can find comparisons for the figures. See page 11 of this document. The rejection rates in Ireland seem to be far higher than in other EU countries. (In doing these comparisons, note that in the reporting of the Irish survey results “The success rates in this table reflect the share of enterpises that were fully or partially successful in obtaining finance.”)
This seems to pretty definitively disprove the “weak demand” explanation for falling credit.
Paul Krugman gives his assessment of Europe’s crisis resolution policies: NYT article here.
The new IMF Country Report is available here. A transcript of yesterday’s conference call following the release of the report is also available (see here). Dan O’Brien provides analysis here. Update: Additional analyses from Colm McCarthy (see here) and Cliff Taylor (article; SBP editorial).
It is encouraging that both the IMF and the European Commission are impressed with the government’s implementation of the programme. The unavoidable fact remains, however, that bond markets are unconvinced on Ireland’s long-term creditworthiness. Not too surprisingly, the IMF is more willing to be critical of Europe’s approach to resolving the crisis. It is becoming increasingly evident that uncertainty about the evolving balance between bailouts and bail-ins is making investors shun Irish bonds. The critical challenge is to convince investors to provide new funds to Ireland, which is now being hampered by fears of being caught up in any future bail-ins. It is also interesting that the European Commission is more open than the IMF to a modest speeding up of the fiscal adjustment. This could be viewed as a high-return investment in reinforcing the credibility of the government’s capacity to see through the necessary adjustments, which already differentiates Ireland from Greece and probably Portugal.
The European Commission has released its detailed report on the Troika’s recent review of the Ireland deal: it is here.
The revised financing plan is especially interesting on page 21.
Daly discusses how NAMA may get sales going in both the commercial and residential property markets. In terms of commercial property, Daly describes how NAMA can provide finance in a simple and clear manner which hopefully will dispell some of the confusion about this issue when it first came up (the point of this post was that it was a very simple issue but that didn’t stop us getting various comments about where would they get the money from, the whole thing being circular and Ponzi schemes and the like …):
To illustrate how stapled financing might work in practice, let us take the case of an investor who wishes to buy a property asset from a NAMA debtor or receiver but who cannot source any funding or sufficient funding from banks even though he is willing to contribute 30% equity. Assuming a purchase price of €100m, the investor would pay €30m upfront to NAMA and then enter into a loan agreement for the residual €70m which would see him repaying the principal on an amortising basis to NAMA over a five/seven year horizon. The original debtor’s outstanding obligations to NAMA would fall by €100m. The net impact for NAMA would be positive in a number of respects. It would have generated a transaction in the market which would not otherwise have taken place. It would have replaced a loan of €100m with what is likely to have been a weaker debtor with a performing loan of €70m with a stronger debtor, thereby reducing and diversifying its credit risk. It would also have a cash receipt of €30m which it could then use to reduce its own debt. In reality, it does not require any new money from NAMA; it is a recycling of existing debt but achieving a significant cash payment upfront.
The comments about selling residential properties are more interesting. Because the maturity of most residential mortgages extends well beyond NAMA’s projected lifespan, they are keen to get involved with the two pillar banks to provide mortgage finance. Interestingly, NAMA appear to be willing to provide funds to insure purchasers against future price declines:
Our aim would be to unveil a product with the two banks in the early autumn which meets a number of key criteria: one which generates sales of property controlled either by NAMA debtors or by receivers yet provides an incentive to purchasers to invest at current prices in the knowledge that there will be a mechanism in place which will offer them protection against the risk of negative equity in the event that prices should continue to fall. Given that NAMA is effectively providing state funds for this purpose and the pillar banks will be largely state owned, it raises a question about whether such mortgages should be offered beyond the limited set of residential properties owned by NAMA.
Finally, this passage will prove popular with many:
A number of debtors appear to be trapped in the old mindset whereby it is they and not the lender who sets the terms on which business is done. It is akin to falling overboard and then complaining to your rescuer about the colour of the lifebuoy that he is about to throw in your direction. Some of them have difficulty surrendering the grandiose lifestyles that they seem to regard as their continued entitlement, even if the rest of us are expected to pay for it through higher taxes and cuts to services in our schools and hospitals. We have and will enforce against such debtors. If the taxpayer is being asked to keep you in business, it would seem to be a matter of basic common sense that you do not seek to maintain a lifestyle that is beyond your means. The taxpayer does not owe you a living and certainly does not owe you an unrealistic lifestyle if you are not in a position to repay your debts.
Tough words. Let’s see if they’re accompanied by corresponding actions.
The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows a continuation of the steady increase in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 5.7 percent in December to 6.3 percent in March, in line with the previous increases over the past year.
49,609 mortgage accounts have been in arrears for more than 90 days. In addition, 62,936 mortgages have been restructured with 36,662 mortgages that have been restructured but which are classified as performing and not in arrears and 26,274 again in arrears.
An interesting new working paper by Peter Lunn in the ESRI looks at decision-making biases and the Irish banking crisis. The article outlines extrapolation biases, confirmation bias, overconfidence, ambiguity aversion, behavioural convergence, time inconsistency and loss aversion as potential contributors to the banking crisis. There is a lot of interesting material in the article. One issue I have is that many of the biases outlined are general mechanisms and so don’t give a theory as to why Ireland, in particular, had such a dramatic crisis that was so systemic. I think ultimately a behavioural theory of the Irish banking crisis should have some interaction mechanism perhaps with country size or network density. Another area that I think should be developed is the extent and determinants of underdiversification in Irish household wealth portfolios both in terms of country concentration and asset class concentration. I am writing a lengthier comment on this and will link from this post, but put the paper up for now for info.
In addition to his political career, Garret FitzGerald made a huge contribution to the analysis of the Irish economy over many decades. Deepest condolences to his family. News article here.
In the Eolas piece I looked at Ireland’s policy options taking the European bailout/bail-in regime as exogenous (albeit uncertain). Of course, a different question is what we would want that regime to be, one now being hotly debated given Greece’s new difficulties.
A central focus in the recent debate is the proper extent of early private sector involvement (PSI) in bail-ins. Looked at from an Irish perspective, a range of considerations come into this calculation: (i) the reputational damage in a debt restructuring/default; (ii) the ultimate reduction achieved through a restructuring in the net resource transfer; (iii) the risks associated with increased dependence on official creditors and their domestic politics; (iv) the risks of domestic and international contagion; and (v) the implications for future market access of a weakening of the implicit guarantee given to private creditors.
I think the last of these points deserves additional discussion. At the moment we seem to be between two stools. Early PSI is ruled out; but PSI is central to the post-2013 ESM regime, substantially weakening the implicit guarantee and scaring off potential new creditors. Thus there is a certain incoherence at the heart of European policy. It also is a particularly bad combination given the trade-off involved with any resolution regime: it is good to be able to share losses with private creditors ex post; but a regime with easier loss sharing will weaken the implicit guarantee and make you less creditworthy ex ante.
We need European policy makers to move one way or the other, either allowing early PSI before a substantial amount of private debt is paid back, or providing clarity on the nature of the implicit guarantee that gives a feasible route back to the markets for countries that follow through on their adjustment programmes. The ECB seems to be calling for a full guarantee by effectively ruling out defaults. This seems neither likely nor desirable. However, further clarity on the way PSI will be applied in the future, with a reasonable path to avoiding it, would give a country a chance of regaining market access and not having to resort to default. It is probably unfortunate for us that policy precedents are being set in this area based on the quite different Greek situation.
The details of the INFINITI 2011 conference are available here.
- Speaker: Steingrímur J. Sigfússon, Minister of Finance, Iceland
- Date: Thursday 26 May from 6.30 to 8.00pm
- Venue: Trinity College Dublin
- Details here
Barry Eichengreen writes on various financial engineering options in this Project Syndicate column.
For good or ill, the future financial prospects of the Irish sovereign depend in various ways on the future of the Irish property market, both via its purchases of NAMA property and its investment in banks with considerable mortgage books.
The Irish Bankers Federation report on the mortgage market (data here and press release here) paints a picture of a market that has almost completely collapsed. NAMAWineLake provides his customary high quality analysis here. I’d note that the series seem to have a seasonal pattern so comparisons of 2011:Q1 with peak may be a little misleading but even year-over-year comparisons paint a picture of a market in freefall. These figures also tie in pretty well with the figures from the new house price index from the CSO which showed a faster pace of price decline in the three months to March 2011 than had been seen since mid-2009.
The Korean Ambassador to Ireland H.E. Mr. Chang Yeob Kim will speak on the Korean crisis tomorrow in TCD at 5pm.
DATE: Wednesday May 18th 2011
VENUE: Long Room Hub, Fellows Square, Trinity College Dublin