Brian Lenihan has told the Dail that he is now open to the idea of winding down Anglo. This is perhaps speculative but Matt Cooper from Today FM has reported that he is hearing from sources that the European Commission is not happy with the restucturing plan for Anglo that has been provided. If true, then these two events are perhaps linked.
Author: Karl Whelan
S&P downgraded Greek government bonds to junk status today and also downgraded Portugal’s debt. Meanwhile, in Germany, there appears to be continued prevarication about whether\how to help Greece. To be honest, I’m not willing to spend that much of my time following the whole Germany\Greece soap opera.
What’s more concerning, however, is that the yield on Irish government debt has jumped dramatically over the past week, with today being the worst day (chart here). The yield on ten year Irish government bond yields rose to 5.25% today with the spread relative to German bonds rising 42 basis points. At 2.3%, this spread is now not too far off the highs of about 2.5% seen last summer.
The Irish Times reports about Bank of Ireland’s capital raising plans here and provides links to all the relevant documentation so I don’t have to.
It is, of course, good news that there’s some sign that private investors are willing to invest in one of the Irish banks. Still (warning — malcontent comment alert) it’s perhaps best to put this in context. These private investors are now willing to do this because the Irish government is buying a portfolio of €12.2 billion in property and development loans from the bank, only €5.4 billion of which are performing, for €7.9 billion (assuming the initial 35% discount is applied to the whole book.)
The idea that private capital sources would renew their interest in investing in the Irish banks after loans had been transferred to an asset mangement agency was also an opinion offered last year by advocates of temporary nationalisation. Whether the route we’ve travelled to get to this juncture has been the right one is still an open question.
It is perhaps because there are still so many questions hanging over his approach to the banking crisis that Brian Lenihan persists with a rhetorical strategy in relation to the banks that largely depends on overstatements, half-truths and falsehoods such as his comments on Morning Ireland today about people who wanted to “nationalise the whole system”, about how temporary nationalisation would have lead to other banks becoming “just like Anglo” and how the bank guarantee scheme has been cost free, indeed how we’ve made a tidy profit out of it.
I received an email recently from someone who objected to my characterisation of NAMA’s goal of being cashflow positive as something of a loaves and fishes act.
The argument put to me was that while Brendan McDonagh says that only one third of NAMA’s loans are income producing and NAMA is projecting to pay a discount of 47% for these loans, the fact that the interest rate on NAMA’s income generating loans are higher than on its bonds means that it will still generate positive cash flow.
Specifically, NAMA’s bonds will pay six-month Euribor while, we are told, that its assets are generally Euribor plus two percent. In this case, NAMA would be cash flow positive as long as 0.33(i+2) is greater than 0.53 i. This requires i < 3.3. In other words, as long as six month Euribor is less than 3.3% (it’s currently about one percent) then NAMA would be cash flow positive.
I don’t disagree with the algebra of the above paragraph. But I do disagree with some of its underlying assumptions. I’m going to write a couple of posts on the various aspects of NAMA’s cash flows.
Here, I want to discuss the extent to which NAMA’s loan portfolio is generating cash.
The domestic response to yesterday’s Eurostat announcement has been fairly predictable. Opposition politicians are treating it as a substantively bad development that makes our fiscal problems worse. The government are calling it a mere technicality that is nothing to worry about.
I’ve generally been critical of those who seek to ease our fiscal problems via accounting gimmicks. So, on this point, I’m more inclined to agree with the government than the opposition. There may be some particularly uninformed bond traders out there for whom it was news that the government’s €4 billion recapitalisation of Anglo last year wasn’t actually an investment but I wouldn’t imagine there’s too many. Irish government bond yields may have risen a bit yesterday but this may be more related to increased jitteriness about the Greek situation and its potential spillovers than the fact that our headline deficit figure has been changed.
Of course, one problem that the government has in making its “just a technicality” argument is that this same government practically bent over backwards to create the strange beast that is the NAMA SPV and then emphasised how important this accounting gimmick was. For instance, we were told that Brian Lenihan “heartily welcomed” Eurostat’s decision to keep the NAMA debt off balance sheet and that he said the SPV “is an essential device for ensuring that our national debt is off balance sheet in Eurostat terms”. So I think there’s an element of live by the sword, die by the sword about this situation.