Author: Karl Whelan

Administrators Appointed to Quinn Insurance

RTE and the Irish Times are reporting that administrators have been appointed to Quinn Insurance. RTE report

Mr Justice John Cooke made the order following an application by lawyers on behalf of the Financial Regulator.

The application was made under the 1983 Insurance act.

The court heard the Regulator took this action following serious concerns about the way the group was managing its affairs.

The Times reports

The court heard that the company had moved from a position where it had an excess of assets over liabilities of more than €200 million to a position where it had €200 million of liabilities over assets.

As if today wasn’t busy enough already.

Super Tuesday Leaks

Tomorrow we should finally see a resolution of much of the uncertainty that has been hanging over the Irish banking system. We are being told that the estimated prices for NAMA transfers will be announced, as well as the capital requirements set by the Central Bank and the new legal framework for the Central Bank and Financial Regulator.

With the news so soon to be released, there is little point in me speculating as to what is going to happen. What I would flag, however, is that there is something of a disconnect between two sets of statements doing the rounds in today’s media coverage.

First, there has clearly been widespread leaking that the NAMA loan transfers will see some banks taking considerably larger writedowns than had previously been expected. For instance, in the Irish Independent, Emmet Oliver writes that “AIB is set to be hit with a discount of up to 40pc”.

Second, much of the coverage mentions the idea of the state owning 70 percent of AIB and 40 percent of BoI. See, for instance, here and here. And note that Emmet Oliver’s full sentence is “AIB is set to be hit with a discount of up to 40pc, making majority State control all but inevitable” and he mentions the Minister’s “plan to take a 70pc stake in the lender.”

The disconnect is that these two sets of figures don’t seem to add up. There is nothing new about the idea of the state potentially owning 70 percent of AIB. Even based on previous expectations for NAMA discounts, this was always a possibility. For instance, I’m looking now at a Davy stockbrokers report from April of last year that projected a base case of the government owning 78% of AIB.

However, it is hard to reconcile the continuing circulation of the same ownership statistics as before with the new information (if such it is) on discounts and also on capital levels.

To give a concrete example, AIB’s annual report says that it had €9.5 billion in core equity capital at the end of 2009. This included the government’s €3.5 billion in preference shares (this isn’t core equity in my book, or most people’s, and it is likely to be converted to ordinary equity.) So that leaves €6 billion in private core equity capital. AIB is supposed to be transferring €24 billion in loans to NAMA. Forty percent of €24 billion is €9.6 billion.

So, do the math on this and you’d probably come to a different conclusion about ownership percentages than have been flagged by the media. One way or another, we’ll find out tomorrow, but today’s leaks are confusing, perhaps deliberately so.

Update: This post should have been clearer that AIB’s annual report already allows for €4.1 billion in provisions for losses on loans going into NAMA. So the calculations would involve an additional €5.5 billion in losses over and above that. With half a billion in equity capital and the need to get up to a core equity ratio of eight percent, the 70 percent state ownership doesn’t add up. Still, perhaps I’ll see tomorrow how it’s going to add up and still end up with the 70 percent outcome.

Ryan: Save Anglo or Leave the Euro

Following on from yesterday’s post on misleading hyperbole about Greece choosing to leave the euro or being expelled from it, it was truly depressing to hear an Irish minister today raise the prospect of Ireland having to leave the Euro.

On RTE’s Saturday View program, Minister Eamon Ryan said the following in relation to Anglo Irish Bank:

It would be so nice if we could say we’ll let it go and that will be the end of that. The reality is … and that’s kind of Fine Gael’s position and what Labour seems to be saying. There are .. That means that we have to go and effectively say to the European Central Bank, who has a lot of money in deposit in Anglo, and say sorry we can’t pay you back. Now the European Central Bank, it hasn’t allowed a bank fail across Europe. So we would probably then have to leave the Euro. Now the risk of that, in terms of the tens of thousands of jobs that could leave this country because they’d say well Ireland is a riskier country to do business in, we don’t really want to do business there. That is what you’re talking about. So, it’s not easy, it’s not palatable but that’s the choice you’re faced with.

When RTE political reporter Brian Dowling then discussed the idea that there were alternative options to take, Minister Ryan confronted him saying “Do you think we should leave the Euro?”

I think that these are extremely unfortunate statements for an Irish government minister to make.

The facts are as follows.

1. Whatever happens with Anglo, Ireland will not be leaving the euro. Minister Ryan’s assertions that we would essentially be expelled from the Euro if an Irish bank failed to pay back the ECB are groundless. This is not just my opinion. An ECB legal working paper summarises this issue as follows: “while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible.”

2. The ECB has always been aware that it could lose money from making loans to a bank that is then unable to pay it back. This is why its loans to banks are all collateralised, based on a well-developed list of eligible collateral. This list does not include development loans. While it is still possible for the ECB to lose money on its loans to a failing bank (if the collateral turns out not to be worth the value of the loan) there has never been any rule that such an event would result in the country the bank resided in having to leave the euro.

3. There are, in any case, options for dealing with Anglo’s insolvency that could save the taxpayer money without going as far as failing to repay its ECB loans. For instance, Anglo could be declared insolvent and its subordinated bondholders fail to be repaid, while the Irish government could choose to pay back other more senior creditors. There are serious issues to discuss here. The prospect of leaving the Euro is not one of them.

The bottom line here is that Minister Ryan’s statements about leaving the Euro are without foundation. However, it is perfectly possible that they could form the basis for unfounded speculation that Ireland is somehow on the verge of leaving the Euro. I would urge Minister Ryan to issue a clarifying statement correcting these assertions as soon as possible.

As we await perhaps the most momentous set of financial decisions ever taken by an Irish government, the consistent evidence that senior Ministers do not understand the banking situation is extremely worrying.

Greece and the Threat to the Euro

I read time and again, for instance here, that Greece’s debt crisis “threatens the euro”. Indeed, there are lots of right-minded people around Europe who worry deeply about this threat and have determined that a Greek default has to be avoided to save the euro. I’m having trouble, however, figuring out what that this is supposed to mean.

There seem to be different interpretations of what the “threat to the euro” is. The more dramatic interpretations invoke the idea of an existential threat. Others view it as involving reputational harm. I’ll take each of these ideas in turn.

Continue reading “Greece and the Threat to the Euro”

Bad News from the QNHS

Yesterday’s QNHS report paints a picture of a very depressed labour market. The seasonally adjusted unemployment rate for the fourth quarter of 2009 was 13.1%.

It is perhaps worth reminding readers of how the unemployment rate is measured in Ireland. The QNHS, a large nationally representative survey, provides the official measure of the unemployment rate. The survey asks questions to assess whether the person is really participating in the labour force and then, if this is the case, whether they are in employment. So the survey provides measures of both the labour force participation rate and the unemployment rate. 

The QNHS takes some time to process, so it’s release is not very timely. For this reason, the CSO also publishes a “seasonally adjusted standardised unemployment rate” which extrapolates from the most recent QNHS data using Live Register figures on the number of people claiming benefits. Sometime this extrapolation is accurate, sometimes it’s not.

In the case of 2009:Q4, the extrapolation was not accurate. The most recent Live Register release, reported standardised unemployment rates of 12.4 in October, 12.4 in November and 12.5 in December. These data had suggested that the unemployment rate was flattening out. However, the QNHS now reports that the seasonally adjusted unemployment rate rose from 12.5% in 2009:Q3 to 13.1% in 2009:Q4.  

The most recent Live Register release reported an unemployment rate of 12.6% in February. A simple extrapolation from the QNHS release would suggest that this would be revised up to 13.3%.  Overall, the picture has changed somewhat from one in which the unemployment rate appeared to be flattening to one where it still seems to be rising.

A noteworthy feature of the QNHS data is that the increase in the unemployment rate is occurring despite a significant decline in the participation rate. This rate has dropped from 64.1% in 2007:Q4 to 61.5%. For comparison the decline in participation in the UK and US over roughly the same periods has been about one percentage point. So this is an extra 2.5% of the labour force that is no longer counted as unemployed because they are not looking for work.

Perhaps surprisingly, the decline in participation has been most concentrated amongst men. The male participation rate has declined from 73.5% in 2007:Q4 to 69.7% in 2009:Q4 while the comparable decline for females has been from 54.7% to 53.5%. One possible explanation has been the concentration of job losses in the construction sector. Very few women worked in the construction sector, while male construction employment has declined from a peak of 263,000 in 2007:Q2 to 122,000 in 2009:Q4. The decline in male participation may reflect discouraged former construction workers leaving the labour force.

The male unemployment rate, which prior to the recession was similar to the female rate, has risen from 4.8% in 2007:Q3 to 16.6% in 2009:Q4. The comparable rise in the female unemployment rate has been from 4.0% to 9.0%.

Finally, the data show that long-term unemployment is becoming a more important factor. The QNHS shows that by 2009:Q4, one third of the unemployed had been out of work for more than a year; this share was up from one-fifth at the start of the year.