I’ve been looking into the AIB debt buyback program, details of which were announced on Monday (Irish Times story here.) Why in God’s name would I be doing that during a rare sunny week in this country? Well, between the state guarantee and NAMA, pretty much everything the banks do these days has implications for the taxpayer, so it’s worth taking a look at. That and the fact that I’m a nerd. Wonky corporate financey post below the fold.
Chairman, CEO and group finance director are to step down: see report here.
The Irish Times lead story cites the IMF’s Global Financial Stability report as having the following sentence: “The United States, United Kingdom and Ireland face some of the largest potential costs of financial stabilisation (12 to 13 per cent of GDP) given the scale of mortgage defaults.” It turns out, however, that the IT was a little behind on a (fairly silly) controversy about this sentence.
It turns out that the IMF’s cost estimates are not new at all but actually first appeared on page 17 of this report released on March 6, which was written as a companion to this report on the outlook for public finances around the world. The March 6 paper reports a cost figure of 13.9 percent of Irish GDP, which amounts to €24 billion. Table 4 also reports the cost for the UK at 9.1 percent of GDP.
For this reason, there was a bit of a flap over this when the BBC reported the 12-13 percent figure, with the UK Treasury pointing out correctly that the sentence and its accompanying table were wrong. The version of the report on the website no long contains the parenthetical “(12 to 13 per cent of GDP)” that the Irish Times had quoted and the table has been altered—I think Ireland may have been listed in the original Table 1.8 but we are not now. In any case, you can find the original source of the calculations from the above link.
So, not the IMF’s finest hour. However, beyond the silliness, it is clear that the IMF’s assessment of the likely costs of financial sector support measures to the Irish taxpayer does not fit well with the government’s current stance that “under extreme stress scenarios” BOI only need €3.5 billion in additional capital, while AIB only need €5 billion.
So where does the substance of the AIB announcement leave us? As has often been the case with the government’s approach to the banking crisis, this pushes us one step closer to some kind of resolution, while still maintaining lots of uncertainty as to what that resolution will look like.
I’ll write a bit more later on the substance of the announcements today from AIB and the Department of Finance. However, I thought I’d first discuss an aspect of today’s developments that hasn’t been discussed in most of the press reports. Together with the Minister for Finance (with whom they have good reason not to disagree) AIB have “formed a view” that they need to have an extra €1.5 billion in Tier 1 capital.
Those who followed AIB and BOI’s fruitless attempts to raise equity in recent months were probably surprised to hear that rather than just announce that AIB was taking an extra €1.5 billion from the government, the bank stated that it was planning to raise these funds itself. Most media stories have focused on how AIB can achieve this by selling its minority stake in M&T, an American bank, and perhaps also selling its stake in a Polish bank.
Now here’s where it gets tricky. RTE and other media outlets have reported this as a simple story of “bank short of funds raises funds by selling assets.” The problem is folks, that plausible as this may sound, that’s not the story at all.