Prom night

This post has been written in 4 goes, each time adding a new bit to the end as things change. Sorry about the lack of coherent style.

According to the movies, it is that amazing time in every teenagers life. The dorky boy asks the shy girl to the dance, they both turn into beautiful swans and the cheerleader falls into the punch bowl in a fight with her quarterback boyfriend. Prom night - it's awesome. Except in Ireland when it refers to the overnight emergency legislation to appoint a liquidator to IBRC, that wonder financial institution that used to be called Anglo.

I got home last night just in time to watch the stage 2 "debate" in the Dáil and ended up not getting to bed until the committee stage was complete and the bill went down the corridor and up the stairs to the Seanad. While it may not have been high drama, you certainly got the feeling at times that you were watching something important. I'm not going to go into the details of the IBRC bill, as there are many more qualified finance and legal people out there. However I do want to make some observations about the events.

The biggest question is why did it happen last night? Well it seems as though our friends in the ECB couldn't keep their gobs shut and let it out that the Government might be about to liquidate IBRC. With so many other creditors, it became crucial that we got to appoint the liquidator rather than have an application heard from, say, Sean Quinn in the High Court this morning appointing a liquidator more amenable to him. So in that sense the government got the tactics right and just played the nuclear option of emergency legislation. But it does question how good friends we really have in Frankfurt.

Another surprise to me was the length and detail of the bill. This has obviously been sitting in a drawer for a while waiting to be dusted off at the right time. You can't announce a liquidation until it is already happening, otherwise people will panic and run to the hills or courts. But the fact that it hadn't leaked from Dept of Finance or AG's office is testament to the tight ship being run there at the highest levels.

On the debate itself, Noonan, Doherty and Donnelly all performed well. Poor contributions from both Taoiseach and Tánaiste and some pretty awful stuff from parts of the technical group. On that, the technical group would actually have been best served by giving all their time to Donnelly as he has the best grasp on the issue and some really pertinent questions and lines of attack on the bill. For example the issue of temporary interference with the property rights of people is a potential pandora's box. This seemed an unacceptable idea when it came to upward only rent reviews but now seems to be fair game.

The worst part of the debate was the continued heckling and jeering at both Sinn Féin speakers by senior members of the government side. Both Pat Rabbitte and Brendan Howlin did themselves no favours by their carry on. I found it quite embarrassing that seemingly intelligent ministers resorted to school yard behavior just because they didn't like what was being said across the chamber.

Then at lunchtime today we had Mario Draghi's non event of a press conference. In his 15 minute speech he didn't mention Ireland or the Pro Notes once. When asked about them he just said that the council had unanimously noted the events in Ireland. I guess that means tacit approval because the deal still lets the ECB get all it's money back, just quicker than they thought.

I missed Enda's announcement as I was in a meeting this afternoon, but the deal seems to be a reasonable one. We get to turn the pro-notes and their 3.1B every year into an interest only loan at about 4% for 25 years and then start paying down the capital. This reduces our annual cost by over a billion and we get the benefit of 25 years of inflation to turn the capital sum into something a bit less daunting. It is still really annoying that we have crystallized privately generate debt into fully fledged sovereign debt and that not a single bondholder has been burned. But given all that, it's probably as good a deal as we can expect. It will certainly make next December's budget easier and/or allow for additional investment in growth strategies.

I'll let the dust settle now and come back to this in a day or so once things are clearer.

It's the economy, stupid!

One of Bill Clinton's greatest contributions to language, apart from defining what sexual relations may or may not mean, was the phrase "it's the economy, stupid!". So as a stupid person, I spent last Friday in the conference centre in Croke Park being educated on all things economic and fiscal. The conference was organized by Stephen Kinsella, Liam Delaney and Colm Harmon and had in excess of 200 people attending over the course of the day. What follows is a rundown on the sessions I attended and what nuggets of information I picked up from them. I understand that videos of the day will be posted on the Irish Economy blog.

Property Market

After a very welcome cup of tea and having my name ticked off on the attendance list, I plumped for the Property Market session as I felt I might at least understand the topic compared to the meta-debate on how to make good policy that went on in the parallel session. First up was Ronan Lyons who presented his proposal for a site-valuation tax to replace the current property taxes and, perhaps eventually rates. In principle it seems like a good idea to encourage productive, high density use of land zoned for residential use. However, based on his plan I still don't see how the tax would work and provide a sustainable base of taxation for local government spending without large financial transfers from urban to rural dwellers. I tackled him on this in the Q&A session and at lunchtime and we agreed that the plan could do with some refinement.

Next up was Michelle Norris from UCD who presented a paper on the realities of mortgage arrears in Ireland. Despite the low number of repossessions, the stresses that many mortgage holders are put under by both prime and sub-prime lenders is huge. Her presentation really put a human face on the current mortgage crisis. The session finished with Rob Kitchen from NUIM outlining his thoughts on the future of the property market. A lot of his material has already been posted on his Ireland After NAMA blog but it was good to put it all in the one place. He doesn't see a recovery to peak prices for a long time to come yet.

Unemployment

Following a brief coffee-break, and the arrival of Minister Joan Burton with RTE in tow, I headed in to the session that she was chairing on unemployment. Not surprisingly, this was very well attended with standing room only at the back of the hall for a time during the session. First up was unemployment expert David Bell, from Scotland, who outlined the nature of our unemployment problem and compared out situation to that of other European countries. Next to speak was Aedin Doris from NUIM who gave one of the two best presentations of the day. Her mantra was that unemployment was a demand side problem and that no amount of badgering the unemployed can make them get jobs that don't exist. Finally Philip O'Connell from the ERSI examined all the data on state training and concluded that most of the budget was being targeted in the wrong areas. Just as well FAS is being restructured/closed! Due to the interest in the subject this session ran over by about half an hour, and so a much shortened lunch-break followed.

Banking and the Euro

On reading the conference programme, this session immediately jumped out as the headline acts. Brian Lucey, Karl Whelan and Frank Barry speaking with Constantin Gurdgiev chairing was just like an episode of Vincent Browne but without the haranguing and pointless government spokesperson (Coveney and Donohue I'm looking at you!). And it did not disappoint.

After a brief introduction from Constantin where he outlined the topics and the ground rules, the floor was yielded to Brian. During his half hour presentation he discussed the implications of the impending duopoly in the Irish banking system and touched on the likelyhood of co-operative or mutual banks (just like the old building societies) setting up and the possibility of a foreign bank entering the market. From what I took from the talk, we are unlikely to see much in the way of innovation in Irish banking for the foreseeable future with BOI and AIB continuing to dominated the market.

Following Brian was Karl who gave the best talk of the day. He explained in words of one syllable the funding mechanism for the rump of Anglo, why burning bondholders is now old hat, why the interest rate on the Prommissory Notes is a red herring and how the Central Bank could just write off the notes if it could convince 2/3 of the other central banks in the Eurozone that doing so is a good idea. This is a talk that should be watched by every back-bencher who comes out with the "there is no other way" mantra.

After Karl's magnum opus, Frank was always going to have a tough act to follow but he coped admirably and gave a very interesting talk on the problems with the Euro. His premise that unless there is some sort of federal funding mechanism to buffer the impact, the peripheral Euro countries will be at risk of external shock to their economy. Ireland due to it's reliance on the US and UK is particularly susceptible. Another talk that I look forward to watching again once posted online.

Fiscal Policy

I will have to admit that either due to the subject matter or my lack of mental stamina, both Philip Lane's and John McHale's papers went over my head. They seemed to be suggesting that in the new Euro deal that may or may not require a referendum there will be stricter controls over deficit spending and overall debt to GDP ratios than are currently in place. I'm not sure how the Eurozone countries will get to the target 60% in any reasonably time-frame but the plan seems like a reasonable one.

The final two talks by Seamus Coffey (UCC) and Colm McCarthy (UCD) tackled the issue of capital vs recurrent spending. The first presentation was right up my street with a relentless series of graphs outlining the collapse in capital spending through the recession. The implication was that we are now underspending on capital and that future cuts should come from the recurrent side of the budget. The pertinent question is this: Is the 94th euro spent on recurrent providing a better return on investment than a potential 7th euro spent on capital.

The master of Bord Snip then promptly stood up and demolished all of what had gone before. He suggested that we had splurged on capital during the boom, often driving up prices on ourselves, and that having built one motorway to Cork there was no need to build another. Of course this neatly sidestepped the fact that we still have schools housed in prefabs, Dickensian conditions in hospitals and even in a huge recession, gridlock in Dublin on a daily basis. However, his presentation brought the conference to an end in a lighthearted manner and was just what was required after a heavy day's thinking.

General Thoughts

Overall the day was very enjoyable and very enlightening. From an organizational perspective some of the major positives were the free entry cost, working wifi, good chat on the conference hashtag (#ieconf), roughly sticking to schedule and a large turnout. The downsides include some issues with microphones, spam overload on twitter during the afternoon, running out of sandwiches at lunchtime and the lack of attendance by politicians and senior policy makers with a few notable exceptions. If, as has been suggested, these conferences become a regular event I will certainly try to attend. Congratulations to all involved in the event as I would deem it a great success.

Back in bonds!

Not quite as catchy as an AC/DC song with a similar name, the Irish Times reports that Ireland was back in bonds yesterday.The NTMA managed to swap about €3.5B of bonds that were due for repayment in 2014 into new bonds that are due in 2015. This is a good thing, as it reduced the amount of refinancing that will need to be done by NTMA in 2014, the first year of Ireland's post Troika existence.
However, to call it a massive success and claim that it shows an "appetite for Irish Government paper" is stretching things a bit. As opposed to you or I getting a term extension on our mortgage which reduces our monthly repayment, we have actually increased the cost of this borrowing from a 4% coupon to a 4.5% coupon. So this postponement of a year will cost us an additional €35M in 2012 and 2013. That crafty bond market doesn't give stuff away for nothing.
I am sure that it is just coincidence that the NTMA carried out this bond swap on the exact same day as yet another huge, un-guaranteed Anglo bond was repaid. Likewise I'm sure that the arrest of Ivor Callely yesterday was also just another coincidence, just like the arrests of Sean Fitzpatrick were in the past. I wonder what poor unfortunate will be perpwalked the next time the Rothschilds come looking for their cash back.

Bonds and loose change

Tomorrow sees the repayment of about $1,000,000,000 of unguaranteed bonds owed by the rump of Anglo. This is the money that Dana was mentioning at every opportunity during the last few presidential debates. This equates to about €730,000,000 or in some more manageable terms, heading towards twice the total spend on Special Needs Assistants for a full year or about 20% of the cutbacks that are going to be announced in the upcoming budget.

The argument for paying goes along the lines of this: the EU/IMF deal has us going back to the market next year. If we don't pay back this bond the reputational damage done to Ireland will so great that we won't be able to afford to go back to the market at a reasonable rate. Therefore we must pay back these bonds at face value to have credit available to us in the future. Sounds reasonable, doesn't it?

Except it isn't. These are unguaranteed bonds that have been traded multiple times since issue with the current owners probably paying somewhere around 10c in the euro to mop them up. So the original lenders have already taken losses on these bonds. The current owners are hedge funds and the like who are looking to make a killing when Ireland Inc foolishly pays back face value on bonds that are effectively junk.

Of course I am just guessing that these bonds are held by hedge funds as nobody will actually say who holds these instruments. We have no idea who the owners are and whether they are the same institutions who will be our lenders in the bond market in the future. However, the cloak of secrecy surrounding their identity suggests to me that they are not the same people.

I'm also getting sick of Ireland trying to be the best boy in the class while Greece gets 50% hair cuts, second bailouts and a referendum on their financial future. while I wouldn't suggest becoming the rebellious punk that is Greece, we could at least ruffle our hair once in a while, open the top button on our shirt or wear mismatching socks. We still are, despite the best efforts of Fianna Fáil, a sovereign nation and should play that card once in a while. We have made some progress on the reduced interest rates, you just get the feeling that we're still sucking up to teacher in the hopes that someone else will get into trouble before us.

Speaking of trouble, I really can't believe that €3.6B was mislaid in a transfer between two state agencies, namely NTMA and the Housing Finance Agency. How someone doesn't immediately notice that rather than going up by €3.6B that their overall balance went down by the same amount is outrageous. I would certainly know if my wages were taken out of my current account on the 20th of every month rather than deposited. It makes you wonder what sort of quality control and monthly account reconciliation is going on over at the HFA.

PS - now that #aras11 is over I'll be getting back into more regular blogging. Huzzah say the masses!

Burning Anglo

One of my favorite tunes of recent times is Doomsword's Heathen Assault. It is a song about the onslaught of the Danes through medieval England and features a very simple refrain that gets the crowd singing.

Burn! England to the ground
Burn! Jorvik to the ground

To my mind this is currently the best option for Anglo Irish and their bond holders as well. And unlike what various ministers might like to portray (Mary Hanafin I'm looking at you) it wouldn't be the end of the world or some sort of treason to suggest it as a course of action.

If the government pulled the plug on the blanket guarantee of Anglo the the company becomes insolvent. At some point the creditors would get together and insist a liquidator is appointed to wind up the company as a going concern. This leaves three groups looking for money back - depositors, senior debt holders and subordinated debt holders. Remember the equity holders have already been written off when the bank was nationalized. The first two have primary call on the assets of the bank and it is unlikely that these assets would cover the liabilities to them. This leaves nothing for the subordinated holders so they get burned.

This leaves the assets of the company to be divided between the seniors and depositors. I would imagine that the assets would be split pro-rata between the two groups. So if there were say €10B in deposits, €30B in bonds and only €20B in assets then the depositors would get 25% or €5B and the bond holders the remaining €15B with each bond getting effectively a 50% hair cut. On the deposit side again the €5B would be split pro-rata amongst the depositors. All deposits would be covered up to €100k by the old fashioned deposit guarantee, but beyond that the big depositors would also end up being burned as well.

To my mind, that seems the most straight forward solution to the Anglo problem. We've had enough dumping of good money after bad into this corpse. Of course it doesn't suit those who are invested in Anglo compared to the current policy, but to be honest I don't care. They invested in a flaky company, took their high rewards and so now should have to face some of the consequences. You can't have the tax payer on the hook for all of this.

Bond blues

I don't really know a huge amount about the financial markets. I sometimes feel like the guy on the Financial Regulator ad who doesn't know what a tracker mortgage is. Well maybe I'm slightly further along the learning curve than he is but probably not by much.

I have been doing some research into bond yields over the last few days, trying to understand what is currently going on with regard to Irish Government bonds. Today, NTMA issued €1.5B in two sets of bonds - €500M of 4 year bonds at 4.767% and €1B of 8 year bonds at 6.023%. Both of these bonds have a coupon of 4% so plugging the figures into one of many online yield calculators I reckon that only €875M was paid into NTMA's bank account for the longer bond and about €485M for the shorter one.

So while it is correct to say NTMA shipped €1.5B in bonds, we the people only have €1.36B in cash and an annual interest bill of €60M to show for it as well as the requirement to pay back or roll over the €1.5B principal in the future. Of course the spin will be the over subscription to the issue, but you'd be mad not to grab a 6% return that is effectively guaranteed by the EU.

The other question of interest is who is actually buying these bonds. I strongly believe that a large portion of them are being purchased by Irish banks looking to bolster up their balance sheets. This source of this money is the bail out that the banks are getting from the Irish state and ECB at rates far lower than we are paying to borrow it back off them. Somehow it seems wrong that the public are being screwed repeatedly in this process. What is also galling is that part of this borrowing at 6% is being lent to Greece as part of their EU bailout at 5%. Again the Irish taxpayer is being taken for a ride.

Smarter economists are welcome to correct my maths and show me where I am getting this completely wrong.

Dividing Anglo

I was always under the impression¹ that all the toxic bad debt in the Irish banks was being sucked into NAMA and that once completed the banks would be hale and hearty. There would be credit flowing, share prices would rise and dividends would be paid out to deserving pensioners.
Therefore Richard Bruton's good bank/bad bank suggestion was deemed completely unnecessary and the proposal was mocked and jeered by the government, Alan Dukes in Anglo Irish and the commentariat in the main stream media.

So how is it that 12 months on this is almost exactly the solution now being proposed for Anglo? Surely having had the poison sucked out into NAMA they should only have performing loans left in the bank? What is left to put into the Bad Bank? How many of the sub €5M loans still on their books are now classified as impaired? If it is a lot, then why are we continuing to bank roll this basketcase? If it isn't very many, then why do we need an extra entity to handle them? Won't this just create another expensive set of directors and senior management to run the hulk?

1. Not really but this has been the official position.

Anglo Irish bailout equivalents

Brian Lucey (Professor of Finance in TCD) posted a Anglo Irish challenge on Twitter this afternoon. He is looking for things that we could have spent the €25B that Anglo has cost the tax payer. These items might be useful or might be ridiculous. Here are some of my suggestions (some of these are a bit back of the envelope)

• A Maglev rail system from Belfast to Cork via Dublin. Based on the costs for the Shanghai one it would cost about €11B but lets assume Ireland is twice as expensive as Shanghai.
  
• The Porto metro system that has been built in the last decade or so cost about €4B and has about 70 stations over 60km of track. Therefore we could have a 400 station system with about 250km of track
  
• A round the world plane ticket costs about €1,500. So we could send every man, woman and child on three trips and still have money for some duty free on the way home.
  
• Canada is in the process of purchasing 65 F35 fighter jets for about €7B. Our Anglo money could get us 250 allowing for some bulk purchase discounting.
• The 200km long proposed Japan-Korea tunnel is estimated to cost about €60B. Dublin to Holyhead is about 100km so the Anglo money could almost bankroll a tunnel joining Ireland to the UK.
  
• We could buy for full cost all the external debt of Bangladesh. This is all the money owed by the country and its residents to outsiders.
  
• Pigs cost about €1.50 per kilo and weigh on average say 100kg. So that's €150 per pig or about 160 million pigs per Anglo which is about 5% of the world's total pig population.
  
• Gold currently trades at about €1000 per oz. One Anglo turns into 25M oz or around 700 tonnes of shiny metal.
  
• The construction of nuclear power plants comes in at around €1Bn per GW. Eirgrid's website suggests that Ireland's peak consumption is about 5GW in winter. This means we could power Ireland 5 times over for the cost of the Anglo bail out.
  
• It costs about €100k per annum to employ an academic between wages, PRSI, pensions etc. and there are about 2000 of them employed in TCD. Anglo's lump sum would cover TCD's academic staff costs for 125 years assuming no inflation. Given inflation that might come down to 40 years.
  
• My mortgage (not with Anglo) could be paid off about 100,000 times over. Instead it'll take me another 20 years to do it just once.

There is almost an infinite number of possibilities. I look forward to seeing Lucey's final list.

The Rise of Quanglo

This country and specifically the inbred circle at the top of the financial world gets worse by the day. After years with effectively no supervision, the first time the new financial regulator steps up to the plate and actually does his job by protecting the interests of the public he is asked to back down. The anger of the Quinn employees is wrongly directed - the regulator isn't their enemy, the man at the top of the firm who led them over the edge of the cliff is.

I am at a complete loss understanding why the tax payer, through Anglo Irish, the bank we already own and have pumped billions into, is to underwrite any outstanding debts that might be incurred by the Quinn group. This is a private company that made bad decisions and should not be protected from itself. Live by the market, die by the market should be the motto, not privatizing profits and socialising losses. I'm sure that Quinn is a wonderful employer up in the Cavan area, but the future of a few FF TDs in the region should not saddle the rest of the tax payers in the state with another massive debt.

How can an institution that has just been bailed out by the tax payer now turn around and use that money to bail out yet another corporation? Of course the links between Anglo and Quinn are well known with the magic 10 who were given unsecured loans to buy out Quinn's CFDs a while back. Any surprise that the FF gombeenarchy is rowing in behind these shenanigans to protect the Galway tenters? Makes me sick.

Day of Doom

Today, 30th March, is (un)officially the day of doom for several reasons.

• The NAMA transfers are announced
• Quinn Insurance is put into administration
• Some eejits in Switzerland finally make black holes

NAMA

I've written various bits about NAMA in the past and have always believed that it is a rotten deal that does nothing in the long term for the tax payer. Sure, it keeps certain financial institutions running and keeps the wolves from the door of certain developers for a while but how is that really in the state's best interest. Yet again Elaine Byrne says it far better than I can in today's Irish Times where she says we have been sleepwalking into NAMA. A letter in today's paper also sums up a lot about what is wrong with the Irish mentality where thousands march about hurling and hunting and only a few hundred (one of whom was me) marched against NAMA last September.

So today we finally get to see some of the toxic loans transferred into NAMA from the banks. According to reports, after this exercise INBS, EBS and AIB will end up effectively in state ownership and the state will hold a substantial minority shareholding in BOI and we will be left needing to recapitalize them giving an overall cost of about €22,000,000,000. As Elaine Byrne puts it, that is about €6,000 per man woman and child in the country.

I still believe the fundamental flaw was the blanket guarantee of all the bank liabilities as opposed to just depositors. Bond and share holders were taking a punt, were drawing down the big returns and so when it all went wrong should not have recourse to get the state to repay them. A short nationalization of BOI and AIB to keep consumer banking functioning while the rest went to the wall would have been cheaper and quicker. Instead we're now up to our gills in debt for absolutely no gain.

Quinn

This story is only just breaking, but putting the Quinn group's insurance companies to be put into administration is a major step. With the regulator saying he had very serious concerns about the companies abilities to meet liabilities the sweetheart deals between Anglo and Quinn have come around to bite everyone concerned. One wonders if the large dividends recently paid by the Quinn group will be recalled or if there is in fact any mechanism to do this.

CERN

So not actually a bad story - the LHC finally got switched on today and collisions were detected. Unless black holes behave differently than expected, by my being able to type this the universe hasn't been destroyed. Now lets go see if we can find this Higgs Boson and use the knowledge to cure cancer or feed the world or at least come up with a new version of Teflon. Science FTW!

Iceland referendum

Yesterday's referendum result from Iceland shows what happens when the citizens of a country have had enough of being bullied by corporate and financial interests. About 93% of the ballots cast voted against the deal to repay UK and Dutch investors in Icesave, the Icelandic online bank. This follows the Icelandic President's refusal to sign into law a repayment deal that would leave the residents of Iceland responsible for paying back Icesave's debts.

About €4Bn was lost by investors from Holland and the UK when the bank went bust towards the end of 2008. The online bank was paying high interest rates on deposits which should have been a big warning sign to investors that the risk involved in depositing money there was high. This is the same situation that has existed with Irish banks for the last few years - they have had to pay high interest rates to attract deposits due to their shaky foundations.

When Icesave went to the wall, the Dutch and UK governments stepped in and repaid the depositors from their respective countries. They then demanded that Iceland repay them and in the worst case of international bullying, the UK invoked various anti-terrorism laws to freeze assets belonging to various Icelandic institutions and people.

To my mind, if you live by the sword then you die by it. Taking the reward of high interest rates should remove any responsibility for states to repay you if the bank folds. However, it appears that Iceland has agreed to pay back this money but just not under the terms of the deal struck by the government. It is now back to the drawing board to see how the €4Bn will be raised. For a country with a population of about 320k that works out at about €12,500 each, roughly in line with what NAMA is going to cost per-capita in Ireland. No sign of a politician calling for a referendum on that any time soon though.

For more column inches than you could possibly read on Iceland have a look at the Irish Economy blog.

AIB shenanigans

The row about pay levels for bank executives has raised its head in the last few days with AIB's appointment of a managing director. As part of the re-capitalization earlier on in the year, Brian Lenihan capped the pay for top bankers at €500,000. However it appears that AIB was unable to attract anyone from outside the organisation to run the place for such a paltry sum of money.

Therefore, AIB decided that they would have to appoint from within and came up with Colm Doherty as the man to do it. The problem was that Mr Doherty was already earning in excess of the €500,000 cap. After various back and forths it was announced this morning that he will take the job at the reduced rate. Of course it is unclear as to whether bonuses, options and other perks will be extended to Mr Doherty to bring his total package back up.

Of course the real problem with the whole exercise is that we now have AIB being run by an insider - one of the very people who ran the bank into the ground over the last few years and forced the government to step in and prop it up. Is it really that difficult to attract someone half competent to run the company for less than a half million? Half competent would be infinitely better than the current group at the top table since they have shown themselves to be completely incompetent.

To my mind the thing that stinks here the most is the timing. With NAMA jst around the corner, AIB released an interim statement today which has been completely ignored as people focus on the pay dispute. In the section called Asset Quality there is an interesting table showing the breakdown of the €24B of property loans that will be transferred to NAMA. It reckons that €10.5B of those will be impaired by the end of the year. That is almost 44% of their NAMAbound loans in trouble which is hard to reconcile with Lenihan's continued insistance that NAMA will end up making a profit for the Irish taxpayer.