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Day of reckoning for Ireland

by Frank Schnittger Wed Mar 31st, 2010 at 06:06:12 AM EST

Five seismic events occurred in Ireland today which will have a profound effect on the Irish economy for generations to come.

  1. NAMA, the National Assets Management Agency (or "bad bank") announced a "haircut" of 47% on the first tranche of 1,200 toxic loans to be transferred from Irish banks by agreeing to pay €8.5 Billion for loans with a book value of €16 Billion.

  2. The Financial Regulator announced that the Core Tier 1 Capital Requirement for Irish banks is to be doubled from 4% to 8% of loans.

  3. Arising from the NAMA haircut and the increase in Tier 1 Capital requirements, the Government estimated that the Irish banks will require an additional 22 billion in capital. 8.3 Billion of this is for Anglo Irish Bank alone, and it may require a further 10 billion when the full extent of its losses are known. Most of this additional capital will have to be provided by taxpayers.

  4. The Financial regulator also applied to the High Court to appoint a Provisional Administrator to Ireland's largest insurance Company, Quinn Direct, after a €400 Million hole in its assets was revealed.

  5. The Government and Unions agreed what amounts to a new "National Agreement" which would guarantee no further pay reductions until 2014 in return for ongoing cooperation with public service reforms to improve efficiency and reduce costs.

front-paged by afew

The 47% NAMA haircut compares to the initial Government estimate of a c. 30% haircut for the total of c. €81 Billion of toxic loans to be transferred to NAMA. The first tranche of toxic loans was always going to be the most toxic however, and so the average figure for all the toxic loans is likely to be much lower than 47% - although most commentators appear to expect that the final figure will now end up north of 30%. Thus the taxpayer will end up paying c. €50 Billion for toxic loans with a book value of c. €81 Billion.

The property market has continued to implode since that 30% estimate was made however, and there is no doubt that that €50 Billion is way over the current market value of the properties on which those loans were secured. It will be a very long time, if ever, before those properties are worth €50 Billion again.

However the most shocking aspect of today's announcements is that over half the capital requirements are for the Anglo-Irish Bank - basically the Fianna Fail house business bank which was primarily responsible for creating the Irish property bubble in the first place. The Government made a huge mistake in including Anglo-Irish in the loan guarantee scheme in the first place, and then in nationalising the bank when it was never going to be solvent or strategic for the future of the Irish economy.

The Government is arguing that it could never have let Anglo-Irish go bust a la Lehman without endangering the Irish banking system as a whole, and jeopardising Ireland's ability to fund its National Debt on foreign debt markets. The contrary argument is that investors received a risk premium for investing in Anglo-Irish and should now bear the costs of its insolvency. Why should the Irish taxpayer take on the cost of liabilities of a private company when it was never a shareholder in the first place?

Ireland's National debt has been effectively doubled overnight, and 70% of that additional debt is being paid to the creditors and bondholders of one private company which will not create one job or increase the flow of credit to Irish business by one cent.

The Financial Regulators decision to increase the Tier 1 Core capital requirement of Irish banks will also massively increase the capital funding requirements of all banks - an increased funding requirement which will also have to be largely borne by the taxpayer. However at least in this case the taxpayer is receiving a much larger stake in those banks in return, with only the Bank of Ireland likely to retain a majority private shareholding.

The Financial Regulators belated abandonment of "light touch regulation" has also resulted in Ireland's largest insurance company being placed in Administration. Obviously tougher regulation is to be welcomed, but this decision could also result in their being even less price competition in the relatively small Irish insurance market. Quinn Insurance was the "Ryanair" of Irish insurance companies breaking up a cosy cartel of established insurers and proving more affordable insurance to many consumers.

The main points of the public sector deal between the Government and Unions to end the campaign of low level (but highly visible) industrial action following Government cutbacks and tax increase in the last Budget are as follows:

* No further pay cuts until at least 2014

* There is to be significant cost-saving reform measures across all parts of the public service

* Review of extent of savings generate to be held in Spring 2011 to determine if scope for any reimbursement of pay cuts

* Similar reviews to be carried out in subsequent years

* Substantial reduction in public service numbers in year ahead

* No compulsory redundancies but flexible re-deployment arrangements necessary

* Unified public service labour market to be created

* Merit-based promotion to be the norm

* Promotion and incremental progression based on performance

* Industrial peace clause to be put in place

Basically the deal (which is subject to a ballot of Union members) recognises and consolidates the current status quo where the Government had put in place swingeing cutbacks with more threatened for the next budget.  The Unions have now agreed to quite a radical set of change proposals in the hope that the savings achieved will obviate the need for further cutbacks in due course.  

Many of the proposed changes had already been bought and paid for under previously national agreements but were never implemented largely because of a lack of leadership at senior civil service management levels. The new Cabinet (of 15 Ministers) appointed after a minor re-shuffle recently contains no less than 6 teachers and virtually no one with experience of running a large business or organisation.

The big question now is whether this latest agreement will actually lead to some much needed changes in how the public service is managed and run.  The fact that all sides now appear to have a vested interest in making efficiency savings to avert further pay reductions and fund future pay increases may mean that greater progress is achieved this time around.  The culture of senior civil servants actively opposing efficiency improvements as it might reduce the size of their personal fiefdoms has to be challenged and changed.

So what will be the combined impact of the five major announcements today? On a positive note they may herald a much more assertive approach to financial regulation and an end to the low level industrial action in the public service which was creating much public resentment without creating tangible benefits for the Unions or their members themselves.

However the negatives probably far outweigh the positives: Ireland's National debt is being doubled on the altar of keeping foreign creditors sweet. The combined deflationary effects of these measures mean that Ireland is almost certainly going to have a "lost decade" of high unemployment and slow economic growth despite the continued resilience of our export industry which is leading to a rapidly expanding surplus of exports over imports in stark contrast to the other PIGS countries.

The EU and ECB will undoubtedly be pleased that Ireland is putting its own house in order on terms pleasing to "international markets" and thus reducing the sense of crisis in the Eurozone as a whole. The Commission could do Ireland a big favour by rejecting the terms of the Anglo-Irish bail-out, but that would probably be hoping for far too much. All serious people seem to be terrified of another Lehman and the disruption this could cause despite the fact that in EU terms Anglo-Irish is a very small and non-strategic bank indeed. Better to put Ireland into penury for the foreseeable future. That should teach the Irish a lesson for getting ahead of themselves.

At one level the decisions made today are deeply impressive: they show a Government, the Irish Congress of Trade Unions and the Financial Regulator all taking decisive action and making major decisions that would destabilise many less cohesive polities and societies. However there is little virtue in making such wrong headed decisions. It all has the feel of the band playing bravely on as the Titanic gradually sinks beneath the waves.

BoI reports loss of €2.9 billion - The Irish Times - Wed, Mar 31, 2010
Bank of Ireland reported a pre-tax loss of €1.8 billion today, with underlying losses soaring to €2.9 billion as impairment charges rose substantially.

The preliminary results published this morning cover the nine months to December 31st 2009, and come only a day after Minister for Finance Brian Lenihan announced details of plans to transfer loans to the National Asset Management Agency (Nama) and recapitalise banks.

"This nine month trading period was very difficult for both our customers and our business and this has been reflected in the substantial increase in credit losses," said chief executive Richie Boucher.

"With hindsight, it is clear that the bank's growth ambitions in previous years had been framed against an overly optimistic view of the outlook for the Irish economy and it was too exposed to the property sector and too reliant on wholesale funding."

Underlying operating profit before impairment charges was just over €1 billion for the period, a 28 per cent fall from the same period in 2008. However impairment charges of €4 billion brought this to a €1.8 billion loss before tax, with underlying pre-tax losses for the period reaching €2.9 billion.

Some €2.2 billion of the impairment charges relate to assets expected to transfer to Nama.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 31st, 2010 at 05:38:52 AM EST
Goodbody Stockbrokers - News and Comment - Morning Meeting Wrap

The once-and-for-all announcements on the Irish banking system yesterday provided a mixed bag for the Irish economy and the Irish taxpayer: (i) The higher than initially anticipated haircut of 47% on the initial tranche of loans being purchased from the banks reduces the risk to the taxpayer as well as reducing the overall amount of bonds to be issued in return for the assets transferring to NAMA. While the final valuations are not yet available, based on the haircut on the initial tranche, a total of €43bn in NAMA debt will be issued, with c.€2bn in the form of subordinated debt as a risk-sharing mechanism. This is less than the €54bn total initially suspected (€3bn subordinated); (ii) the cost of the banking crisis in Ireland looks to be substantially higher than we previously estimated, mainly due to the black hole that is Anglo Irish Bank. The announcement by the Minister for Finance yesterday suggested that the total required funds for this bank may amount to €22bn. Combining this with required capital for the building societies, Irish Nationwide and EBS, along with the preference shares in AIB and Bank of Ireland, the total gross cost may come to €33bn. This is equivalent to 20% of Irish GDP (for 2010), well above the "average cost" of banking crises in developed economies since the 1970s, which we estimate at 11%; (iii) While the government will have an increased presence in the banking sector, which is likely to become bigger by the end of the year, a better capitalised banking system has to be considered a positive for Ireland Inc. as it increases the chances of the banks being able to fund themselves in the future as well as being able to extend credit to the wider economy to fund a recovery.

Tough decisions have been made in Ireland over the last twelve months, with last night's announcements representing the culmination of a total overhaul of how the financial system operates and the amount of capital that the banks are required to hold. This comes after resolute action has been taken to restore stability to the public finances, while, in the background, costs are being reduced in a bid to engineer a real devaluation. All of these were necessary for Ireland to experience an economic recovery and while the costs incurred on Ireland over the course of the past two years have been enormous, the groundwork has now been laid for a recovery.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 31st, 2010 at 05:47:46 AM EST
the Irish banks will require an additional €22 billion in capital. €8.3 Billion of this is for Anglo Irish Bank alone, and it may require a further €10 billion when the full extent of its losses are known. Most of this additional capital will have to be provided by taxpayers

Is this going to be in exchange for equity, or the usual money for nothing (and chicks for free)?

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Wed Mar 31st, 2010 at 07:30:57 AM EST
At the moment those are the Government estimates of what the banks will need by way of capital based on estimated Nama haircuts and tightened regulatory requirements.  AIB will have to sell off its UK, Polish and US assets but Bank of Ireland has little outside Ireland to sell.  

All will try to raise what they can on international capital markets but the Government will act as a sort of guarantor making up any shortfall either by adding fresh capital or converting existing preference shares into ordinary shares.  Last time it injected fresh capital it got preference shares with a pricy 8% coupon in return - which the banks are also trying to unload if at all possible because of their cost.  Current estimates are that AIB will end up being 70% state owned and Bank of Ireland c. 40% made up (probably of ordinary share capital).

So all in all those state "investments" at least have some prospect of a decent return, unlikely the gross overpaying for Nama assets, and the "investment in Anglo-Irish, which is looking more and more like a straight pay-off to its (unnamed) bondholders with nothing but a reputational boost in return.  By reputation I mean of course a reputation for being the biggest sucker in town...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 31st, 2010 at 07:44:19 AM EST
[ Parent ]

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 31st, 2010 at 08:09:29 AM EST
One Irish bank has posted a loss equivalent to c. 8% of Irish GDP.  You got a hand it to these guys, and e are - with a total of up to c. 22 Billion planned by way of Government subvention.

Anglo reports €12.7bn pre-tax loss - The Irish Times - Wed, Mar 31, 2010

Anglo Irish Bank reported a pre-tax loss of €12.7 billion for the 15 months to end of December 2009 after writing off billions in bad loans.

The State-owned bank said operating profit of €2.4 billion before impairment included a gain of €1.8 billion on the repurchase of capital securities.

The bank said today it had written off €15.1 billion on bad loans, including €10.1 billion on €35.6 billion in loans to be transferred to the National Asset Management Agency (Nama).

Anglo said it expects to transfer €35.6 billion of nominal loan assets to Nama in 2010 with a carrying value of €25.5 billion, following which customer loans will be about €36.5 billion with cumulative specific provisions of €3.7 billion.


notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 31st, 2010 at 10:27:23 AM EST
Is there such a think as a profligate bank?  It's funny that no one came up with the term PIG or a similarly insulting acronym for banks. It wouldn't be hard to do.
by Upstate NY on Wed Mar 31st, 2010 at 12:37:51 PM EST
There is a a book called Banksters which is a title which captures how many people feel about the senior bank executives responsible for both the boom and bust in property prices and the losses arising.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 31st, 2010 at 12:55:28 PM EST
[ Parent ]
Manufacturing output rises sharply - The Irish Times - Thu, Apr 01, 2010

Irish manufacturing output showed a sharp rise in March, increasing at its fastest pace since June 2006 and snapping a trend of three successive monthly declines.

The NCB PMI for manufacturing conditions in Ireland rose from 48.6 to 53.0, the first time it has risen above the 50 mark, which indicates expansion instead of contraction, for the first time in more than two years.

New export orders increased at the strongest rate since the survey began in 1998. However, demand not only strengthened in foreign markets, but also showed a rise in domestic markets too. In general, new orders rose at the fastest rate in 30 months.

NCB said it expects that the economy bottomed out in December and January, and predicted expansion in gross national product (GNP) before the second half of 2010. GNP is expected to rise by 2.8 per cent next year.

However, employment continued to fall, marking a 28th month of successive declines. Net job creation is not expected to return until 2011 and will affect consumption, the report said.

NCB also said construction investment would be "severely curtailed" due to oversupply in the market, while government spending would also be pulled back.

"In short, in 2010 expect extremely weak domestic demand to counterbalance a large contribution from net exports on the back of global reflation," NCB said.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Apr 1st, 2010 at 05:00:39 AM EST

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