Ireland : Lessons from Its Recovery from the Bank-Sovereign Loop

The proceedings of this CBI/CEPR/IMF conference, held in January 2015, are now available here.

10 replies on “Ireland : Lessons from Its Recovery from the Bank-Sovereign Loop”

Below is the most important letter ever written to an Irish newspaper re property;

The analysis may be simplistic but unfortunately it is not flawed. Banks
ask valuers to tell them what the market value/exchange price is at a
point in time and then lend vast amounts over time based on that simple
number. The surveyor gives them that simple number and do not think it
is their job to tell the banks that the question they have been asked is
stupid on its own and what they should have asked for is the underlying
value. It was obvious in 2005 and 2006 that prices in the property
market were higher than could be sustained by any rational cash flow
analysis. But in a culture that rewards individuals for short term
performance rather than longer term perspective, it was in neither the
bankers’ nor the valuers’ interests to stop it. I cannot see anything in
what the UK regulatory authorities have proposed that makes me think
they understand the role of property valuation in driving asset bubbles
and will prevent it all happening again sometime in the 2020s.

Neil Crosby Professor of Real Estate and Planning University of Reading

Neil has been Professor of Real Estate at the University of Reading since 1994 having been previously Professor at Oxford Brookes and lecturer at Reading and Nottingham Trent Universities. Before that he was a practising valuation surveyor in a combined residential and commercial property private practice firm based in Nottingham. He specialises in commercial property appraisal and the commercial Landlord and Tenant relationship and has undertaken a series of major research studies funded by the UK Government and the UK property industry in these areas. In 2002 he was awarded the International Real Estate Society’s annual achievement award for his work in real estate research, education and practice. He has published well over 100 papers on the various topics listed above and the third edition of his textbook on Property Investment Appraisal with Andrew Baum was published in 2007.

Ta for link:

Methinks ‘De Castle’ was an appropriate venue; it served its purpose during a previous occupation of Hibernia.

Looking forward to the end, if ever, of the present financial system occupation and a ‘real’, as distinct from alleged, death of the odious bank-sovereign loop.


Unfinished business!

Surely the ‘recovery’ from the loop is down to one thing-the ECB’s pledge to do ‘whatever it takes’ and subsequent adoption of QE (which of course was anathema when Ireland was in the firing line) which has dramatically reduced the redenomination risk that drove Euro bond markets and significantly reduced the perceived default risk, although sovereign debt levels are generally higher than ever before.
As for other ‘lessons’ the most obvious to me is policy choice in a systemic crisis versus choice in an isolated situation. The ECB and major governments opposed the bail-in of senior bank debt on grounds of contagion and systemic risk but then proposed or implemented policies at variance with that perception. Fiscal contraction, for example, in one country may or may not ‘work’ but is disastrous if all adopt the policy, as happened globally in 2011-2104. Similarly, urging one bank in Ireland or the EA to delever is fine in a healthy environment but the whole system cannot do that at the same time, other than sell assets to non-banks at fire-sale prices, which in turn reduces the value of assets remaining on balance sheet, opening up further losses, to be filled by the State as investors have no confidence or access to credit. In the US failed banks were taken over by other banks but that never happened in Europe.
The Conference discussed the decision to impose much lower loan/deposits targets on Irish banks, but again the Irish system was essentially closed at the time, so the result was much higher deposit rates, good for savers but bad for NIM, so further reducing capital levels- the Troika significantly underestimated the hit to bank profitability. Moreover, what is better for a bank,an overnight deposit from a corporate or a 5-year bond issue?. Basel rules now stipulate that banks hold a range of liquid assets to meet possible withdrawals, rather than have a loan/ deposit target.
Nama is another interesting issue. It was initially introduced to take property and land development loans off bank’s balance sheets in order to allow the latter to continue to supply credit to the economy i.e. it was based on the view that the external environment was supportive and not still in systemic crisis. The process took far longer than expected because the EC (the Competition issue) insisted on a granular approach to loan value, which was impossible anyway in a market with no credit. The result was much larger capital losses than anyone envisaged and. as revealed in some of the evidence at the banking inquiry, was a big surprise to some policy makers in Europe, who would never dream of marking a bank’s balance sheet to market during a systemic crisis.
Everyone underestimated the scale and the consequences of the global credit crunch, hardly surprising as it had never happened before, and a lot of policy choices had unforeseen consequences . which it is better to admit than ignore.

There has been some extraordinary developments around AIB’s share price.

Last Friday it traded at 7.4 cents which given the 523bn shares at issue gives a market cap of €38.7bn. That compares with BOI’s €10-11bn over recent weeks. Michael Noonan had pointed out the market cap anomaly in the past and in its half-year results AIB noted that ‘AIB trades on a valuation multiple of c. 5x (excluding the 2009 Preference Shares) the net asset value (NAV) of the Group as at 30 June 2015. The Group continues to note that the median for comparable European banks is c.1.6x NAV’, again implying a massive over valuation.

On Tuesday, 17th November AIB and the Dept. of Finance announced the terms of the previously announced deal re the State’s €3.5bn preference share holding, now worth €4.375bn because of a 25% step up last year. Part will be redeemed, paid for by debt issue, with €2.675bn converted into shares.

The conversion price has been announced at 1.7 cents, which would entitle the State to another 157bn shares, bringing the total at issue to 680bn and valuing the company at around €11.7bn.

At the time of writing AIB’s share price has fallen to 3.5 cents.

Spectacular figures for employment in Q3 2015 published in Tuesday’s QNHS. Unemployment rate down to 8.9%. Employment up by almost 3% y-o-y. Ireland is staying on target to hit full employment (5%) by Q3 2017.

What’s equally interesting is that the QNHS figures also show population growth accelerating sharply and net emigration falling sharply. Its not possible to be precise as the QNHS only gives figures for the population aged 15+, but t looks as though the y-o-y increase increase in population in Q3 had risen to 31,000-32,000 (no wonder house prices are rising) and net emigration in the the year to Q3 has fallen to 7,000-8,000 (compared with 11,600 in April). Indeed it links as though Ireland has had net immigration since early 2015. If these trends continue, the next population figures covering the year to April 2016 (to be published next August) will show substantial net immigration and annual population growth of around 45,000..

Our ‘spectacular’ (economic) growth puts me in mind of the following fabulous fable of an equally magical, overnight event: …

“Jack is a young boy living with his widowed mother. His mother owns a cow, which is their only source of income. When the cow stops giving milk, Jack’s mother instructs him to take the cow to the market and sell it. On the way to market, Jack encounters an ‘entrepreneur’ (aka: a phiserman!) who offers Jack some “magic beans” (aka: a liar-loan) in exchange for the cow. Jack (the phool) accepts the trade. When Jack arrives back home – with his bag of beans and no money, his mother is furious, tosses the beans outside and sends Jack to bed – without his Horlicks.

Magically, overnight – a fabulous beanstalk self-erects (aka: Longboat Quay or similar), which Jack – being a curious phool climbs up and enters into a land high in the sky (Tir na D4 – or similar). There he comes upon a fabulous residence (5000 sq/ft; 5 bed, 5 bath) that is the home of a wealthy fellow. Jack breaks into the house (oops, that’s an offence Jack!). When the owner returns home, he senses that an untermensche is nearby, but Jack is already in hiding.

I smell the blood of an …………. (insert appropriate proper name here),
Be he alive, or be he dead,
I’ll grind his bones to make my bread’

(actually, its an offence to threaten someone – but Jack is a ‘traveller’ for God’s sake!)

When the owner falls asleep Jack emerges from hiding and steals a bag of 99.95 gold coins (another offence Jack!) and makes his escape undetected – down the beanstalk (that would be up the M7 in the owner’s 152 Porsche Macan Sport!).

Jack returns to the beanstalk residence twice more (owner is a bit tardy about installing the electric gates, CCTV and house alarm). Jack notices other treasures and steals them (more thefts) when the owner is again absent (in Quinto do ……. – or similar) or asleep: first a goose that lays golden eggs. This latter would be, in modern economical terminology, a bank. Then a harp that plays by itself – this would be the Irish Parliament. However, the owner is eventually disturbed by the lamenting Harp (“Please Minister, I need some more taxpayer monies!”) as Jack attempts to make off with the harp. The owner chases Jack down the beanstalk. Jack calls to his mother for an axe. Before the owner reaches the ground, Jack cuts down the beanstalk, causing the owner to fall to his death. Jack and his mother then live happily ever after with their riches that Jack stole from the giant.” Wrong ending!

What actually occured was that the owner caught Jack and promptly evicted him and his mother – re-possessing their home. Jack and his mother are now in a B+B; they applied for Social Housing. Will be a wee bit of a wait, it will.

That beanstalk is reminiscent of the contemporary belief in a world tree connecting Earth to Heaven. In Neo-classical economical terminology it might be known as Permagrowth. Or, Virtual Reality, if you prefer.

But, no worries John! Lets dream on!

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