Category: Banking Crisis

Cowen on Ireland Defaulting

An Taoiseach has said the following in relation to Morgan Kelly’s article:

“Really implicit in some of the argumentation is the idea that it would be better for Ireland to default. But we simply don’t accept that at all and I think all of the implications from other countries where that happens greatly undermines, not just in terms of financial credibility but also the ability to retain confidence at home,” he added.

Let’s compare this with the following passage from Morgan’s article:

We need to explain that the Irish State has always honoured its debts in the past, and will continue to do so. However, the State is a distinct entity from its banks and, having learned the extent of the banks’ recklessness, we now have no choice but to allow the bank guarantee to lapse and to share the banks’ losses with their bondholders. It must be remembered that when these bonds were issued they had no government guarantee, and the institutions that bought them did so in full knowledge that they could default, and charged an appropriate rate of interest to compensate themselves for this risk.

So here’s a question. When Mr. Cowen says “Ireland”, does he mean “Irish banks”? If so, it would be nice if he was clearer about this matter in the future.

TARP Costs

Morgan Kelly’s recent Irish Times article covers a lot of ground; this post is just about a single dimension of his contribution.

One point he makes is to look at the US TARP:

We can gain a sobering perspective on the impossible disproportion between the bailout and our economic resources by looking at the US. The government there set aside $700 billion (€557 billion) to buy troubled bank assets, and the final cost to the American taxpayer is about $150 billion. These sound like, and are, astronomical numbers.

The estimated cost of TARP has fluctuated quite a bit over time  (the US Treasury helpfully releases valuation updates four times a year).   The most recent release is from last Friday, with the current estimated cost at $105.4 billion.  It is especially noteworthy that the TARP components related to the banking sector per se are projected to make a profit, while the main losses relate to AIG, assistance to homeowners and assistance to the US automobile industry.

The release is here (see also the links there to the underlying calculations).

Of course, the realised fiscal cost of TARP does not provide sufficient information to judge the overall effectiveness of TARP, since it is important to take into account the impact of early repayment of TARP funds on the behaviour of US banks, plus other broader factors.

Finally, the main point remains – the size of the Irish banking intervention (relative to the size of the economy) is much larger than the TARP, reflecting the much more generalised banking crisis here.

Maturity of Irish Bank Debt

Following on from John McHale’s post over the weekend, here‘s an expanded version of the document I sent to John. There seems to be some confusion out there about the extent of Irish bank bond debt, about the various types and about how much is covered by the September 2008 guarantee. The document draws together the relevant information on maturity of bank debt from the annual reports of Anglo, AIB, BoI, INBS and Irish Life and Permanent.

This information isn’t completely timely or perfect: A full Bloomberg trawl is perhaps the best way to do this. Importantly, none of the banks list September 2010, the end of the guarantee, as a maturity date in their tables. Instead, they list debt maturing up to the end of this year. It is well known, though, that the vast majority of the debt of Irish banks matures prior to the fourth quarter. An advantage of these calculations is that they come from publicly available sources and we can be clear about what it is we’re discussing.

The bottom line. By my calculations based on the annual reports showing the state of play at the end of last year—and feel free to correct me if I’ve got this wrong—these five banks had €71.7 billion in bonds due by December of this year with only €0.7 billion of this being subordinated. They then had a further €51.8 billion due after 2010, €14.4 billion of which are subordinated.

The very significant figure for bonds due this year shows that conjectures that the need to roll over bank debt could lead to a serious problem for the Irish government are essentially correct. Whether this scenario will actually happen, we don’t know, but one should be careful to dismiss those who say it could.

Update: The document had tables splitting debt securities into subordinated and senior debt. Because the total includes commercial paper and certificate of deposits, this might cause some confusion. I’ve edited the document to list the split as subordinated and other.

Learning to Say No

The IMF has released a new Staff Position Note that addresses the challenges in establishing a financial supervisory system that is capable of saying ‘No’.  You can download it here.

The 65 Billion Euro Question

In an Irish Times article that must have much of the country talking, Morgan Kelly calls for a Special Resolution authority to force bank creditors to swap €65 billion of debt for equity (link in Greg’s post below).     The number is €50 billion less than called for in his V0X article earlier in the week, and critically calls for the losses to be imposed after the original guarantee expires in September.   He is thus, as far as I understand, not calling for default on the “quasi-sovereign” guarantee. 

I am sympathetic to the idea of forcing the funders of Ireland’s banking binge to bear a fair share of the resulting losses (some thoughts here).   But if Morgan’s policy suggestion is not to be dismissed, we need more specificity on the source of the €65 billion.   The Anglo accounts revealed that roughly €7 billion of bonds will mature post September.   He must have the big two in his sights. 

Even with Special Resolution authority in place, the proposed debt-equity swap could only be triggered if capital adequacy falls below some critical threshold.   But the two “technocrats” Morgan lauds appear to believe that Bank of Ireland and AIB are on course to reach the new capital adequacy requirements.   Patrick Honohan had this to say in a recent speech:

Over the previous few months, we at the Central Bank have been making a careful assessment of the likely bank loan-losses that are in prospect over the next few years. This is over and above the valuation work being carried out by NAMA, and which gives us a good fix on the likely recoverable value of the larger property loans.  We have been working on the non-NAMA loans and figuring out their likely performance as they suffer from the impact of the overall economic downturn – part of it of course attributable to the global crisis, and not just to the bursting of our own bubble.  This exercise involved working with the banks, but challenging their estimates of loan-loss based on our own more realistic – some may say pessimistic – credit analysis. (I am over-simplifying the exercise, as it also looked at other elements of the profit and loss account over the coming years).  The conclusions of this exercise are worth emphasizing. 

To my relief, and slight surprise, it turns out that most of the banks started the boom with such a comfortable cushion of shareholders’ funds that they would be able to repay their debts on the basis of their own resources.  This includes the two big banks.  It is because of this fact – that their shareholders’ funds will remain positive through the cycle – that one of them, Bank of Ireland, has already been able to tap the private market for an additional equity injection.  Of course they do need additional capital to move forward, but, as has happened in the US and elsewhere, the Government’s capital injections of last year into these two institutions looks like being well-remunerated.

The €65 billion number needs more explanation. 

Update (Sunday, May 23)

In correspondence, Karl Whelan has provided maturity information for the outstanding bonds of the major banks.   The information is drawn from the 2009 accounts, and is based on bonds that mature more than one year after December 31, 2009.   Thus, it does not include bonds that mature in the last quarter of this year.   (It is not clear what fraction of the bonds were issued based on the extended guarantee.)

The numbers are as follows (billions of euro):

BOI:       Senior, 18.5;  Subordinated, 5.3;    Total, 23.8

AIB:       Senior, 8.5;    Subordinated, 4.6;    Total, 13.1

Anglo:    Senior, 4.1;    Subordinated, 2.7;    Total, 6.8

INBS:     Senior, 1.2;    Subordinated, 0.2;    Total, 1.4

ILP:       Senior, 5.1;    Subordinated, 1.6;    Total, 6.7

Totals:   Senior, 37.4;  Subordinated, 14.4;   Total, 51.8

These numbers suggest that Morgan’s €65 billion is in the right ballpark.   But they also highlight the extent to which the money relates to the big two, and especially Bank of Ireland.   The most natural sequence for implementing the loss imposition strategy that Morgan proposes would be: (1) legislate a resolution regime; (2) apply comprehensive stress tests to determine capital adequacy; and (3) trigger resolution tools as required.  Based on the stress tests that have been done so far, which we are told have been quite comprehensive and conservative, the big two would not be put into resolution.   Of course, it is evident that Morgan does not believe these tests were comprehensive or conservative enough, with AIB probably being more suspect than BOI.   Even so, I think it is important not to expect too much in the way of loss imposition on creditors from a resolution regime.  Yet it is still worthwhile to pursue a regime even if the savings to the taxpayer are just a fraction of the €65 billion.