There is a new CEPR report on this topic – this VOX column provides a summary.
Category: Banking Crisis
The Central Bank have released a new paper by Yvonne McCarthy and Kieran McQuinn (link here) that uses data from the 2007 Survey of Income and Living Conditions (SILC) to describe how various types of households were coping with their mortgage burdens on the eve of the economic crisis. The paper also applies various techniques to estimate how these burdens may have changed since 2007.
I think this type of work is vital for gaining a better understanding of the extent of the upcoming mortgage default problem. It would also be crucial that data of this type be utilised if the government do wish to design a mortgage modification program, as discussed earlier here and here.
Today’s newspapers report (here and here) that control over Sean Dunne’s properties has been transferred to companies whose main shareholders are Ulster Bank, Co-operative Centrale Raiffeisen Boerleen Bank and Kaupthing (Iceland! Iceland!). Personally, I’m relieved that Mr. Dunne’s bankers are not in NAMA, so the Irish taxpayer won’t be at risk of making losses on his loans, either through NAMA overpaying them or through losses generated for state-owned banks.
The fact that these non-NAMA banks have intervened on Mr. Dunne’s business reminded me of comments from Minister Lenihan in his Last Word interview on Monday. About ten minutes in, the Minister said the following:
There’s no one being bailed out here. Builders have to pay. We’ve already begun to see spectacular crashes among developers. They’re not being bailed out. That is another line of rhetoric we had to listen to for about six months last year, that this was all about bailing out builders. It’s not about bailing out builders and it’s very clear again to anyone who’s reading the newspapers now that it’s not about bailing out builders. Builders who are not paying their debts are going to the wall. That’s what NAMA’s all about.
I think what this misses is that all of the spectacular crashes that we’ve seen so far have come from developers who had the misfortune to borrow money from banks who didn’t get into the NAMA scheme. Perhaps I’ve missed them, but I can’t recall any stories about big developers being closed on by AIB or Bank of Ireland. Indeed, the contrary is the case. Instead there have been stories such as NAMA-bound banks lending Liam Carroll money to pay off unsecured creditors and accepting patently unrealistic business plans in order to give bankrupt developers more rope.
In addition, NAMA’s infamous draft business plan also states that eighty percent of the loans due will be repaid in full, though very little of the repayments will appear until 2013. This is essentially an official statement that NAMA’s officials are planning a program of forbearance for bankrupt developers. When one factors in the fact that NAMA will have the power to extend further credit to certain developers, the difference between “extreme forbearance plus additional lending” and “bailout” may appear to be something of a fine line.
All this means that, much as he would like to, it is unlikely that Minister Lenihan will be able to continue dismissing concerns about NAMA’s relationships with developers quite as easily as Matt Cooper allowed him.
You may remember that about this time last year, the state’s investment of €7 billion in preference shares of the two main banks was regularly touted as a great investment, with the 8% dividend playing a big role in helping to reduce our budget deficit. The story in relation to these dividends has now gotten a bit complicated and it now appears that instead of getting €560 million this year, we’re perhaps getting nothing.
As discussed here before (here and here) the EU Commission does not like the idea of taxpayer money going into the banks only to be paid out to subordinated bonds. For this reason, the Commission has prevented AIB and Bank of Ireland from paying coupon payments on certain bonds. This has triggered “dividend stopper” clauses which prevent the banks from paying cash dividends on the government’s preference shares, which are due on February 20 in the case of Bank of Ireland and May 13 in the case of AIB. This in turn would trigger the right of the National Pensions Reserve Fund Commission (NPRFC) to acquire ordinary shares equivalent to the amount of the dividend. And €560 million is a large amount of money relative to the current stock market capitalizations for these banks.
However, it turns out that NTMA are not keen on collecting these shares for the taxpayer. Via Bloomberg, the Irish Times reports:
Speaking at a Dáil committee in Dublin today, Mr Corrigan said failure to pay the coupon won’t automatically lead the government to take a bigger stake in the lenders. The NTMA chief executive said he would prefer the banks to pay the coupon in cash rather than shares. He said he is “in no rush” to collect the shares, and will await a European Union decision on the coupon before deciding how to proceed.
In relation to not being in a rush, it is true that the NTMA don’t have to take the shares. The original announcement stated:
Dividend: Fixed dividend of 8%, payable annually. Dividends payable in cash at the discretion of the bank. If cash dividend not paid, then ordinary shares are issued in lieu at a time no later than the date on which the bank subsequently pays a cash dividend on other Core Tier 1 capital.
Since the banks are not currently paying out dividends on ordinary shares, then it is clear that the shares don’t have to be issued, though it is less clear as to who makes the decision to get shares issued—the banks or the government.
It would be interesting to know the exact nature of this EU decision-making process that Mister Corrigan referred to. The Commission has already made its judgment on the payments to subdebt holders and it has adopted a consistent stance on this issue with other EU banks. There doesn’t seem to have been any conversion of the subdebt to some other form of claim that wouldn’t have a dividend stopper. So what exactly are we waiting for? A bit of clarity on this would be nice.
Governor Honohan delivered a speech to the Trinity College Alumni Career Network this morning: you can read it here.