Author: Karl Whelan

AIB Preliminary 2009 Results

AIB’s preliminary results for 2009 are here. There’s some new NAMA-related information but not much. The bank is transferring loans with previous book value of €23.2 billion to NAMA, down from earlier estimates of €24.1 billion. The provisions of €4.2 billion against these loans, corresponding to an 18 percent writedown, are presumably a holding operation until the actual transfer involving a larger writedown.

In relation to stories about AIB shrinking credit, I heard references on the radio this morning to the bank shrinking its loans to customers from €129.5 billion in 2008 to €103 billion in 2009. This is only correct if one accepts the accounting treatment of the €19 billion the banks expect to receive from NAMA as “financial assets held for sale to NAMA” rather than “dodgy property-related loans that have been written down a bit.” I’m sure the bank is restricting lending but it’s not as easy to get loan books down as fast as the “loans to customers” line suggests.

Postbank and Anglo Not Comparable

There are many aspects of the government’s handling of the Anglo Irish Bank fiasco that are open to criticism. However, this doesn’t mean that every Anglo-related criticism of the government is accurate. Today’s Irish Times column by Fintan O’Toole has an appealingly simple argument that I suspect will get repeated a lot in the coming weeks:

Yesterday, Postbank, jointly owned by An Post and BNP Paribas, stopped taking new business. It will close by the end of the year. Its name would suggest that Postbank is actually a bank, but this must be an illusion.

If it were a bank, Postbank would not be allowed to fail. And Brian Lenihan’s reaction to its closure was merely to say that he is “disappointed [his favourite word] but not surprised”.Why does the closure of Postbank get a c’est la vie shrug of the shoulders while the closure of Anglo is so unthinkable that at least €30 billion of public money is being used to keep it, if not actually alive, then apparently undead?

The answer Brian Lenihan would give is that Anglo is of “systemic importance” to the Irish economy, while Postbank is not.

O’Toole then correctly points out that Postbank has lots of branches and customers.

The problem with this argument is that it is based on a confusion of the meaning of the words “close” and “fail” in the context of the banking sector. Postbank is a subsidiary of BNP Paribas Fortis and that bank is not going out of business. Every one of Postbank’s depositors will get their money back and BNP’s withdrawal from Ireland has no implications for its bondholders.

In contrast, when we discuss letting Anglo fail, we aren’t talking about shutting down its nonexistent branch network. What we mean is acknowledging that the bank is insolvent (and Fintan is correct that claims in January 2009 that Anglo was solvent were indeed ludicrous) and then having it declare bankruptcy. Normally, such a decision would lead to Anglo’s creditors not getting all their money back. However, if we did that now, we would face the problem that the Irish government has guaranteed essentially all of Anglo’s liabilities, so no money would be saved for the taxpayer.

My point here isn’t to defend the scale of the September 2008 guarantee or its extension to Anglo but merely to acknowledge that the issues related to Anglo are completely different to those related to Postbank.

Elaine Byrne’s column today also focuses on Anglo with reference to Iceland! She discusses whether, if the Iceland!ic referendum passes, we should follow suit and not pay off Anglo debts. There will be more discussion of this question in the coming months.

There are major decisions still to be taken in relation to reducing the costs to the taxpayer of resolving Anglo and other banks that appear to be only NAMA over-payment away from insolvency. We could decide to just remove the guarantee and let all the banks declare bankruptcy. But this would have, let’s say, some short- to medium-term implications for the functioning the Irish banking sector.

With the September 2008 guarantee set to expire later this year, there is the opportunity in the coming months to arrive at an orderly resolution process in which insolvency is recognised, bad property assets are cleared off the bank balance sheets, providers of risk capital lose money in a way the reduces cost for the taxpayer, and the banks are placed back on a sound footing.

These are very important decisions and the sooner our more influential journalists recognise what the real issues are, the better the public debate will be.

Minister’s Speech at Taxation Institute

Here are the slides from a talk the Minister for Finance gave at the Irish Taxation Institute on Friday. Lots of useful material in it, most of which I agree with. Slide 11 is great. It actually says Iceland! (Less fun is the repetition of the de-listing argument as a serious point.)

Commission Approves NAMA

I guess the news that the Commission has approved NAMA (statement here) will get some attention over the next few days but it’s hardly too surprising. EU guidelines allow governments to introduce an asset management agency of this type and it’s very hard to imagine that the Department of Finance had designed something that wasn’t guaranteed to get approved. However, as I’ve noted before, if you read those guidelines closely, they also suggest that the Commission isn’t in favour of packages that are overly friendly to providers of risk capital.  For instance, the guidelines state

(21) As a general principle, banks ought to bear the losses associated with impaired assets to the maximum extent …

(22) Once assets have been properly evaluated and losses are correctly identified, and if this would lead to a situation of technical insolvency without State intervention, the bank should be put either into administration or be orderly wound up, according to Community and national law. In such a situation, with a view to preserving financial stability and confidence, protection or guarantees to bondholders may be appropriate.

(23) Where putting a bank into administration or its orderly winding up appears unadvisable for reasons of financial stability, aid in the form of guarantee or asset purchase, limited to the strict minimum, could be awarded to banks so that they may continue to operate for the period necessary to allow to devise a plan for either restructuring or orderly winding-up. In such cases, shareholders should also be expected to bear losses at least until the regulatory limits of capital adequacy are reached. Nationalisation options may also be considered.

The relatively tough line suggested by these statements has been evident in the Commission’s rulings on payments to subordinated bonds and on various restructuring plans. This approach undoubtedly limits the government’s ability to overpay for the assets going into NAMA and with the assets falling in price with every passing month, the opportunity to keep the banks from actual or near insolvency via overpayment seems to be slipping away.

In my exchanges with our old friend John the Optimist, I have regularly pointed out economists shouldn’t necessarily be judged on their forecasts and I certainly have made calls here that have turned out to be incorrect. However, I will take this opportunity to point out that tomorrow is the one year anniversary of this column that I wrote for the Irish Times. Among other things which I’d still stand by, the column pointed out the following:

In addition to being unfair, it is questionable whether the bad bank proposal could achieve its goal of properly re-capitalising private sector banks. There may be limits on the price the Government can pay for impaired property loans under EU state aid rules. Banks may still have to write down their assets. It is easy to imagine a scenario where banks struggled with weak capital bases even after a bad bank scheme has been put in place.

And here we are.

Criticism of Higher Civil Servant U-Turn Misplaced?

Writing in the Irish Times, Pat McArdle reckons that criticism of the roll back of the cuts to higher civil servant pay is misplaced. Pat’s key argument is as follows:

The Minister appears to have been influenced by a novel aspect of the review process. For the first time, comparison was made not just with the private sector but also with six other European countries. (Of these, only Britain had any kind of bonus scheme.)

Uniquely, the assistant secretaries were found not to be paid more than in the other countries. This was taken into account by the Minister but not by the Review Body.

Here’s the relevant section of the Review Body report:

4.11 The salary for Assistant Secretary places the Irish post behind the equivalent position in the UK, the latter being 10% ahead of its Irish comparator. The salary for the role in the remaining countries is somewhat lower than that of the Irish post. The rate for the equivalent post in Finland, with which the Irish post is banded, is 74% of the Irish rate.

4.12 When the comparison is made on an adjusted income basis, it is found that the Irish post is behind that of four other countries, viz. the UK, which is 102% ahead, Germany, which is 29% ahead, Belgium, which is 6% ahead and the Netherlands, which is 1% ahead. The adjusted income value of the role in Finland is 97% of that for the Irish position.

It is open to question whether the Irish government should be factoring in high local prices levels when setting civil servant pay, particularly since we are aiming to reduce these levels to restore competitiveness.

The report doesn’t explicitly state how much weight it placed on the adjusted versus unadjusted salaries when arriving at its conclusions. It does, however, note that other considerations were taken into account including the economic environment and the current value in Ireland of the security of tenure:

in Report No. 42, we observed that “the value of security of tenure in present economic circumstances must be regarded as less than that which would apply in circumstances of high unemployment.” We also observed that we would be disposed to discount for security of tenure in different economic circumstances. Since we reported in 2007, the economic environment has, as already mentioned, deteriorated significantly and unemployment is at a very high level and still climbing. Security of tenure is, therefore, more valuable now than in 2007.

So the Review Body was balancing a number of different factors when making its decision and not just looking at the adjusted salary.

McArdle may consider recent criticism to be misplaced but he does not explain why on budget day, the Minister announced that his policy in this area would be based on the Review Body’s recommendations based on its balancing of these various factors and then later announced that it would not. Or whether it is wise to abandon the strategy of following the Review Body’s recommendations. Or whether, as a tactical matter, a government that needs to stick to its budgetary strategy is well advised to start taking steps to overturn decisions on budget day. Or whether, if budget day decisions are going to be reversed, it is advisable to focus only on reversing cuts to the salaries of well-paid senior civil servants.