European Commission Report on Ireland: December 2011

The latest European Commission report on Ireland is available here. Lots of interesting stuff in it. One bit that caught my eye is a discussion of an internal report prepared by the Central Bank

A second report covering the use of certain types of credit limits, from a prudential point of view, is at an early stage of development. This would take under consideration policy tools including Mortgage Insurance Guarantees and Loan-to-Value (LTV) limits, as well as potentially fixing all interest rates for certain products such as mortgages.

It’s not obvious to me that banning variable rate mortgages is a good idea, either from the point of view of consumers or from the point of view of international financial institions considering coming into Ireland to offer mortgages. While fixed-rate mortgages do offer increased stability, the premium required is quite large so that financing costs would be higher on average (and house prices probably that bit lower as a result).

There are various reasons why fixed-rate mortgages are not common in Ireland or the UK (this 2004 report on the UK mortgage market by David Miles discusses this issue in detail). But banning variable rate mortgages seems to be an extreme proposal.

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.

The EU and AIB’s Government Preference Shares

I have been sceptical all along about the government’s decision to use €7 billion of public money to purchase preference shares in AIB and BOI earlier this year at a time when the combined market value of these banks had reached a low point of about €1 billion.

When I appeared before the Oireachtas Committee on Finance and the Public Sector in May, I argued that the Irish banks would not have the resources to pay back these preference shares and that they would end up being converted into ordinary shares.

My recent presentation to the Labour Party also argued that the government’s preference shares were most likely going to be converted to ordinary shares, thus foregoing the automatic eight percent annual divided associated with these preference shares.

AIB’s statement in relation to its negotiations with the EU Commission brings us close to this event.

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