Author: Karl Whelan

Eurostat Revises Irish Deficit to 14.3%

Eurostat has today announced that the Irish general government deficit for 2009 was in fact 14.3% rather than the 11.7% figure that the government has been reporting. Reuters report

Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector.

“It is important to note that the underlying 2009 general government deficit for Ireland is 11.8 percent of GDP, which is broadly similar to that projected in December’s budget,” he said.

“There is no additional borrowing associated with this technical reclassification. This is a once-off impact, and will not affect the government’s stated budgetary aim of reducing the deficit to below 3 percent of GDP by 2014,” Lenihan said.

Though the Eurostat document does not state this, the revision appears to be related to reclassifying the €4 billion used to recapitalise Anglo Irish Bank as part of the deficit (at this point, I can’t resist an I told you so moment.) If this is indeed the case, I’m not sure that the once-off impact comment is correct since there’s more money going in this year.  Hopefully it is indeed the case that we’re not still pouring money into Anglo in 2014.

Oh, they also revised the Greek deficit upwards and said mean things about Greek budget statistics. So nothing new there.

Irish Nationwide Annual Report

The Irish Nationwide were pretty tardy in putting their annual report online. However, it’s up now, available here.

I’m not sure what to add to what’s already been said about the multi-layered failures at this institution. That said, one useful aspect of the report is that it gives us some additional information on the quality of the loans going into NAMA. The INBS loans are being purchased by NAMA at a discount of 58% relative to their original face value. The report tells us that, of these loans, €1.4 billion of the total of original €8.7 billion face value are currently counted as neither past due or impaired. (I’m not a big fan of the phrase “performing”.)

Mazers on SME Lending in 2009:Q4

The latest Mazers report on lending to SMEs is here.

As usual, Mazars report a very high acceptance rate for credit applications — 87.7% in 2009:Q4. Mazars acknowledge that these figures are skewed to the high side because “limitations exist within bank applications support systems”. In other words, if you call into the local bank branch, have a word with the manager and he tells you there’s no chance of a loan, so you don’t bother filling out the paper work, then this doesn’t count as a loan application that’s been turned down. Somewhat surprisingly, Mazars reckon that “an approval rate of 84% is more representative.”

This still seems to me to be far too high. Mazars own evidence on credit quality provides plenty of evidence for why banks are likely to be extremely cautions in handing out credit in the current environment, regardless of any issues to do with undercapitalisation.

Only 65% of SME loans were fully performing in 2009:Q4.  22% are on “Watchlist” because they are behind 30 to 90 days and 13% are “Impaired” because they are more than 90 days behind. By contrast in 2008:Q2, 85% of loans were performing, 14% were on Watchlist and 1% were Impaired.

These figures show that lending to SMEs is currently a very risky business. Indeed, the fact that 15% of loans were behind on repayments back in 2008:Q2 when the economy was performing much better shows that this class of lending is always somewhat risky.

Personally, I find it hard to believe that the major banks are not currently restricting credit as part of a strategy to get risk-weighted assets down and thus minimise the amount of new capital required to achieve the capital ratio targets set down by the Central Bank. However, in reality, it is very difficult to distinguish between this mechanism and the normal banking approach to screening credit risks during a severe recession.

The fact that this screening often takes the form of turning down loans rather than simply raising the cost of credit has been well understood for a long time and was best explained in this classic paper by Stiglitz and Weiss.

Anglo’s Northern Rock Strategy

Matthew Elderfield’s Oireachtas appearance generated some interesting discussions about the future of Anglo Irish Bank. Alan Dukes has, on a number occasions, stated that the bank’s management are putting forward a restructuring plan that involves splitting the bank into a bad bank to be wound down over time and a good bank that will continue to operate.

Elderfield on the Anglo Split

Elderfield’s prepared comments shed some additional light on the nature of this split:

It is likely that the bulk of Anglo Irish Bank which remains after NAMA will be transformed into an asset management company to manage the bad assets of the bank. A small new bank is likely to be carved out and it is on this entity that we will apply our process.

Continue reading “Anglo’s Northern Rock Strategy”

Elderfield at the Regulatory Committee

The transcript of Matthew Elderfield’s appearance at the Oireachtas Committee on Economic Regulatory Affairs is here. Reading over the answers, this was clearly a very impressive performance by Mr. Elderfield, one that signalled a break from past practices and attitudes in a number of ways. There are a couple of issues arising from Mr. Elderfield’s comments that I would like to discuss at greater length but don’t have time to discuss now, so for the moment I’ll leave it to our commenters to dig through the transcript for interesting material.