Category: Banking Crisis

Forbearance and Frontrunning in Irish Property Markets

The most recent Financial Stability Report from the Bank of England warns about the danger to U.K. economic stability from excessive debt forbearance by U.K. domestic banks. The governor of the Bank of England, Mervyn King, put stress on this risk in his speech introducing the report (although he also noted that this does not mean that forbearance is always a bad thing). In the report, only the potential UK fallout from the Euro crisis ranks more highly than excessive debt forbearance on the list of risks to the UK banking system. This should ring alarm bells in Ireland, since the level of debt forbearance in Ireland at present is much higher than in the U.K.  Encouraging debt forbearance is a deliberate Irish government policy, and the extreme level of forbearance by domestic Irish institutions is storing up potential problems for the future.

There is a considerable overhang of unwanted or distressed (in some cases unfinished) property assets in Ireland (see Ronan Lyons and Namawinelake for discussion). The smart-money players (foreign-owned banks with Irish property assets) might front-run the slower-footed players (domestic, taxpayer-owned banks and Nama) by selling relatively quickly, leaving the Irish taxpayer to fund any eventual shortfall. (I am including the IBRC, the vestiges of Anglo Irish and Irish Nationwide, in my definition of domestic banks.) So loan forbearance and front-running in Irish property markets could interact to the detriment of taxpayers.   

 

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Going, going, still here?

Rte reports that private investors will put €1.123 billion into Bank of Ireland in exchange for a large(ish) stake in the company, given the size of their investments. The Department of Finance press release is here. Is this a good deal for the taxpayer? Non-Nazi related comments most welcome.

IMF: “Nothing to see here, keep moving”

The European Commission, European Central Bank, and International Monetary Fund have passed Ireland with flying colours in their latest quarterly review. I’ll post audio of their press conference when it’s available (commenters please drop the link if you see it). The IMF press release is here.

The statement reads that bank reforms are on track, fiscal consolidation is on track, structural reforms are to come, and it’s all good. Lots of touchy-feely language. Those pesky bond markets, and the burning of senior bondholders, weren’t looked too kindly upon in questions, but overall the message seemed to be: Nothing to see here, nothing at all, no to burning senior bondholders, but guess what lads, the next review will be tougher. Stick with the programme.

On twitter, NamaWinelake reported a divergence between the EU and IMF, with Ajay Chopra of the IMF saying he expected to see a more robust approach to burden sharing, while the ECB representative said no, that wouldn’t be happening.  Although much can be made of comments like this, the review exercise seems to be, on balance, a qualified success. The government did meet its agreed targets. Whether the exercise enhances our credibility to the point that Ireland can wean itself off EU and IMF funds without a second loan package is another question entirely.

Allsop Auction Price Declines

Congratulations to regular commenter Dreaded Estate for producing this spreadsheet comparing sales prices at last week’s Allsop auction with the earliest available asking prices. Across the 46 properties for which previous asking prices could be found, the weighted average discount relative to the earliest asking price was 69 percent.

One can complain about this small sample (though Namawinelake points us to this map, showing a nice geographical mix) and also about extrapolating from the prices recorded at these kinds of “fire sale” auction. However, my inclination is that this is useful information about where the property market is likely to bottom out.  (Of course, even with seventy percent discounts, most people will still need to find a bank willing to give them a mortgage to buy a house.)

Nama’s Mortgage Enhancement Scheme

In today’s Irish Times, Fiona Reddan has an interesting short article about Nama’s planned mortgage-enhancement scheme. The scheme is intended to unload some of Nama’s large inventory of houses and flats without unduly lowering property prices.  The scheme, at least as it has been described so far, will work as follows.  Suppose that Nama wants to sell a particular flat for €100,000.  It will offer a buyer the following deal. The purchaser must put down €10,000 in cash, and take out a mortgage from a bank for €72,000.  Nama will pay (itself) the remaining €18,000 and record the flat as sold at 10,000+72,000+18,000 = €100,000.  If after an initial period, say five years, the fair market value of  the house is more than €82,000 (the amount already paid by the homeowner) than the homeowner must “top up” the difference to a maximum of €18,000.  If the fair-market value of the house is €82,000 or less at this date, the homeowner has no need to pay the remainder.

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