Showing posts with label Promissory Notes. Show all posts
Showing posts with label Promissory Notes. Show all posts

Friday, May 23, 2014

23/5/2014: An Icy Gust from the IBRC's Promo Notes Past...


So Irish Central Bank pre-sold EUR350 million worth of 'Anglo' bonds that were due to be sold under its minimum commitment to sell EUR500 million worth of bonds in 2014. Except it pre-sold them back in 2013... Here is the original Bloomberg report on the matter:  http://www.bloomberg.com/news/print/2014-05-01/irish-central-bank-said-to-mull-faster-2014-bank-aid-bond-sales.html

Why is this important?

Remember, the EUR25 billion worth of 'Anglo' Government bonds held by the Central Bank after the February 2013 'deal' or swap of Promissory Notes for bonds carries with it a commitment to sell minimum required volume of bonds annually to the market.

Here's Minister Noonan on this:


Also, remember, the bonds held on Central Bank balancesheet accrue interest payments from the Government that the Central Bank subsequently 'returns' as divided to the state (having taken its 'cost' margin out to pay for necessary things, like, new HQs building etc).

Once the bonds are sold, however, the interest is paid to their private sector holders.

It is likely that the yield on Government bonds sold was somewhere around 3%, which means that Irish taxpayers just spent EUR10.5 million in interest payments that were, put mildly, unnecessary. We were not required to sell these bonds in 2013 and could have waited until 2014 to do so.

Let's put this into proper perspective: EUR35 million was pledged by the Government this month to help resolve homelessness crisis. Laughably small amount, but still - a necessary gesture from the cash-strapped state. This could have been EUR45 million (or more) should the Central Bank not engage in bonds activism.

So why did Professor Honohan go to the markets to sell the bonds back in 2013? The reason is simple: ECB was never too happy with the 'deal' that pushed Ireland dangerously close to using Central Bank to fund the state (IBRC). Accelerating sales of bonds pro forma accelerates Central Bank exit from such an arrangement.

Alas, happy or not, ECB hardly can do anything about unwinding the 'deal' in practice without doing some serious damage to the euro system. That said, we might see Frankfurt ramping up pressure on CBI to accelerate future sales, once the banks stress tests are fully out of the way - in, say, 2015. That will once again bring to our attention the simple fact that the mess that was IBRC did not go away.

Keep in mind that the Government own estimates of the impact of the promo notes deal on government deficits over the short term was the total 'savings' of EUR2,025 million in 2014-2015. Doubling the rate of disposals from current will see this reduced by EUR30 million in two years.



More problems are ahead relating to the interest rates. The bonds are floating rate notes, with yield tied to  6 months euribor http://www.ntma.ie/news/ntma-issues-eight-new-floating-rate-treasury-bonds-in-exchange-for-promissory-notes/ reset every six months.

The problem is that whilst euribor was running at 0.372% back in February 2013, nowadays it is at 0.410% - a difference of 0.038%, which, over EUR25 billion quantum implies annual interest costs increases of some EUR95 million. Most of this is going to be rebated back to the Government via the Central Bank, but with any acceleration in the sales of bonds, this is also going to get eroded.

All in, we are already running below EUR2 billion 2014-2015 'savings' assessed on the Promo Notes deal, and counting...

Thursday, September 26, 2013

26/9/2013: Fiscal Council Estimates of the Promissory Note Deal

So the Irish Fiscal Council published tonight "The Government’s Balance Sheet after the Crisis: A Comprehensive Perspective" paper authored by Sebastian Barnes and Diarmaid Smyth. 

The paper is good, interesting, but as always (not a criticism) is open to interpretations, questions and debate. One criticism - it is hard to wade through double-counting and incomplete reporting of the Government assets and charts nomenclature does not appear to correspond to the one used in the text. One simple table listing all assets with the estimated value attached and a column outlining core risks to valuations involved would have saved the authors pages and pages of poorly constructed material.

Overall, however, it is good to see the broader approach taken by the authors to the problem of fiscal sustainability of public finances in Ireland. We rarely observe such. And I will be blogging on this later.


But the very interesting bit relates to the final official estimates of the Promissory Notes deal. Keep in mind, here's my on-the-record estimate of the net benefit from the deal in the range of 4.5-6.3 billion euros over 40 years horizon with most of this accruing earlier on in the life span of the deal. Here's the record (see box-out at the end of the article: http://trueeconomics.blogspot.ie/2013/03/2332013-sunday-times-10032013.html).

So here are the Fiscal Council estimates:

Mid-range minimum sales of bonds scenario: net savings of EUR 5-7 billion. Accelerated sales scenario: mid-range estimate of EUR 2-3 billion. Base Case for Euribor+150 and Euribor +250 at minimum levels of sales of bonds: EUR4 billion and EUR7 billion. The difference to my estimate is immaterial since I am looking at a longer time horizon for my estimates than the model used by the Fiscal Council does.

Reminder - some other estimates of the net present value of the savings from the deal run into 19 billion euros… ahem!..


I am looking forward to studying the spreadsheet with the model included which the FC is promising to make available on their website.

Monday, February 11, 2013

11/2/2013: What's David Hall's Case is Now About?



In light of the recent changes to the IBRC position and the Promo Notes, there can be some confusion around the case David Hall has taken against the Minister for finance. In particular, the confusion can arise due to the claims that we have made a "deal" on the promissory note and in light of the IBRC Bill 2013 provisions (Article 17). Let me try to (speculatively, I must add) shed some light.

The promissory notes were a product of the Credit Institutions (Financial Support) Act 2008 passed by the Dail Eireann on October 2, 2008. More specifically, the Minister for Finance, in allocating capital funds to the insolvent Irish banking institutions (see more of the background on this here: ), relied upon the provisions of the 2008 Act, Section 6. However, article 6.3 of the Act clearly stated that “Financial support shall not be provided under this section for any period beyond 29th September 2010, and any financial support provided under this section shall not continue beyond that date.” Furthermore, the Minister was given such powers (limited by the above date) to appropriate “all money to be paid out or non-cash assets to be given by the Minister… may be paid out of the Central Fund or the growing produce thereof” (Section 6(12)).

Furthermore, to the point of Defense in the case, Article 6(4) of the Act stipulates that “Financial support may be provided under this section in a form and manner determined by the Minister and on such commercial or other terms and conditions as the Minister thinks fit. Such provision of financial support may be effected by individual agreement, a scheme made by the Minister or otherwise.” This section is still covered by the 29th September 2010 cut-off date, but in so far as it covers (potentially) multiannual commitments created before that date but with a maturity beyond that date, it is unclear if this section covers the duration of the original Promissory Notes. Regardless of whether it does or not, the section is constrained explicitly by Section 6(5) which states: “Where the Minister proposes to make a scheme under subsection (4) – (a) he or she shall cause draft of the proposed scheme to be laid before each House of the Oireachtas, and (b) he or she shall not make the scheme unless and until a resolution approving of the draft has been passed by each such House.”

David Hall is claiming that in a democracy and under article 17 of the Irish Constitution the Dail and our elected representatives have the power to appropriate funds from the central fund (which, like all the rest of the Government funds, is made up of receipts and our taxes).

The point here is that David Hall is saying that it is not constitutional that one person, namely the Minister for Finance, or any future Minister for Finance, could spend monies (or future moneys) through issuance of bonds, various securities, even using another Promissory Note without any upper limit being set on such payouts and without any cabinet or Dail approval or vote.

According to David Hall’s case, this constitutes the core threat to the democracy enlisted within his claim. He believes that under the constitution that TD should have to vote on such expenditure and that they cannot give away their constitutional powers.

The fact that the current Promissory Note (and only in relation to IBRC notes) has been changed and eliminated does not alter the risk of future breaches of constitutionality (if David Hall is correct in his challenge) or abuses of the public purse.

Friday, August 24, 2012

24/8/2012: Perverse logic of Berlin?


An interesting article in the Irish Times today (link) quoting Germany's Fin Min on Irish debt-relief proposals, saying that Ireland's "massive" reform progress should not be compromised by the country efforts to gain relief on banks-related sovereign debts. From the Irish Times: "We cannot do anything that generates new uncertainty on the financial markets and lose trust, which Ireland is just at the point of winning back."

While we should be careful not to read too deeply into Mr Schauble's comments - which can be interpreted in a number of ways - the logic of the German Fin Min is worrisome.

Ireland has raised exceedingly expensive funds in recent bonds and T-bills auctions with explicit desire to test the markets appetite for Irish paper. In many ways, the relative success of these auctions was underwritten by external dynamics in debt markets, but also by the markets perception of Irish progress on reforms and by the markets expectation of the decline in future debt liabilities related to the banks debt deal. In other words, Ireland has paid a hefty price so far for starting the process of recovering some market access for the Sovereign. This is a net positive, albeit severely limited by the cost of funding raised.

Hence, we have a bizarre situation:

  1. a member state in the Euro zone is undertaking all the right (from the markets & policymakers point of view) steps, achieving measurable progress, and generally behaving like the best pupil in the class, yet 
  2. German leadership - the proxy for the Euro zone leadership - is unwilling to help that state in its efforts.
Surely, if Germany really wants stabilization and recovery in Europe's periphery, writing down €30 billion of promissory notes would be the cheapest approach to take toward reinforcing Irish efforts to deliver on the programme. Since the funds are fully linked to the ELA, this would imply absolutely no negative effect on private markets expectations. If anything, it will signal Europe's willingness to use the monetary system to support the process of resolving banking insolvency-induced stress on the sovereigns. Reduction in Ireland's debt burden in this context will be non-trivial and will help restore bonds markets confidence in both Ireland and the Euro zone system.

The bond markets operate - basically speaking - at the following level of logic:

  • If an action reduces supply of debt, ceteris paribus, price of debt goes up, yields go down. Restructuring Irish Government's banks-linked debt will act to deliver exactly this effect.
  • If an action reduces future potential haircuts that can expected by the private sector holders of debt in the event of prababilistic restructuring, price of debt goes up and yields go down, since future expected losses on privately held debt will be lower. Restructuring officially (Euro system) held ELA will deliver exactly this.
  • If an action improves debt sustainability of the sovereign, yields will go down. Restructuring ELA will do exactly this.
  • If an action does not introduce new moral hazard into future funding incentives for the sovereign, longer-term yields will be lower. By restructuring ELA - which has nothing to do with Irish exchequer past poor performance or policy choices, but has to do with rescuing risk-taking behaviour of the foreign funders of the Irish banks - the Euro zone can achieve exactly such long-term consistent repricing of Irish debt.
  • If an action reduces the need for future funding, expected future bonds issuance falls and with it, the yields will fall. By removing the need to fund future repayments of promissory notes, the EU can achieve exactly this effect.
  • If an action improves economic growth prospects for the nation, thus lowering risks associated with future tax revenues growth, deficits and debt financing, it will reduce yields on Government debt. This, again, is something that a restructuring of ELA/promissory notes will achieve.
Any way you spin it, aggressively restructuring the promissory notes and the ELA will deliver the benefits for the Irish exchequer. If, as Mr Schauble clearly believes, there is a case for contagion of risks across the peripheral sovereigns, such benefits will also be positively felt by other peripheral economies. In addition, such benefits will also help give some much needed credibility to the Euro zone overall policy efforts in dealing with the crisis.

Sunday, April 1, 2012

1/4/2012: Flightless dodo - the Hunt of Chief Noonan

I am not usually prone on updating my past posts, but the Promissory Notes 'deal' announced last week by Minister Noonan just keeps on giving more and more backlash and analysis. So:

  • My original post here.
  • Note the updates in the above
  • FT Alphaville view here which is broadly in agreement with my view and with links I posted in the original post updates.
  • Interesting information coming out of ECB on Minister Noonan's claims that the 'deal' is a part of some 'broader plan' - via the Irish Times, here.
Reiterating my view:
  • Promo Notes have been paid, not deferred
  • Payment of Promo Notes was originally to be based on Government borrowing cash from the Troika. Under the 'deal' it has been replaced by the Government borrowing cash from BofI
  • Payment of Notes under the 'deal' cost us more in new debt and increased deficit in 2012, but will decrease interest payment in 2013 compared to original arrangement. Net effect on interest cost - nearly a wash.
  • The 'deal' is NOT (see ECB official statement) a part of any 'broader deal'.
  • The ECB are now clearly on a defensive - which means they will be unlikely to support any further 'deals'.
Having gone out with a brave claim to spot a bald eagle soaring in the sky and get a feather for his war bonnet, Chief Noonan came back with a smudgy mud-print of a dodo, a bill for €400mln+, and a promise to go hunting again. Next stop, trading gold for glass beads... oh, they sparkle so nice.

(Obviously - an allegorical analogy. For those rare readers lacking in humor department.)

On a serious note - I find it discomforting and sad that an excellent seasoned politician and a very promising Minister for Finance has been forced into this position of defending the failure. Let's hope his luck (and progress) change in the nearest future.

Thursday, March 29, 2012

29/3/2012: Promissory Note 'deal' 2012


Trying to sort out the convoluted 'deal' announced by the Minister today and juggle two kids, plus struggle against the computer on a strike from too many files open is a challenge. I might be missing something, but here's my understanding of the thing.

  1. €3.06bn will be delivered not i cash, but in a long-term Government bond of the equivalent fair value
  2. We do not know maturity, but 2025 was mentioned before. Ditto for coupon rate, though Prof Honohan mentioned 5.4% coupon.
  3. Current pricing in around 88% of the FV, so €3.06*0.88=€3.47bn issuance to deliver fair value. If average  over longer term horizon is taken - that would go up. If yield is higher - that will go up. It is unclear what fees will be involved as the transaction is complicated (see following).
  4. As is - at current market pricing, there will be an increase in Government debt of roughly €410 million, plus the cost of transactions.
  5. As described above, and as indicated by Minister Noonan, Government deficit will increase by €90mln (approximately: 5.40%*410mln=€22mln plus margin on Government bond yield over interest rate holiday under Promo Notes in 2012).
  6. IBRC will receive the bonds and will repo them to Bank of Ireland on a 1 year deal. In other words, Bank of Ireland will buy the bond from IBRC then put it into ECB repo operations. LTRO being now closed, this will have to be normal repo with ECB. Bank of Ireland will repo IBRC-owned Government bond at ECB Repo rate (1%) + 1.35% margin. In effect, margin is the gross profit to the Bank of Ireland on this transaction.
  7. Before Bank of Ireland formally approves the transaction, bond will be financed by NAMA against IBRC collateral (now, imagine that - NAMA holds IBRC's assets and has a working relationship with IBRC. IBRC has no collateral that is equivalent to Government bonds - hence it cannot repo anything at ECB. So by definition, the collateralized pool backing NAMA-IBRC repo will have to be stretched). A year later, BofI might reconsider and roll the deal, but one has to assume that the margin will remain either fixed or go up, plus whatever the repo rate will be then?
  8. NAMA, as far as I understand, has no mandate to carry any of these operations, thus potentially acting outside its legal mandate.
  9. Minister for Finance will guarantee the entire set of transactions, including Bank of Ireland exposure. In effect, Minister will guarantee Government bonds (which is silly), collateral from IBRC, NAMA exposure, Bank of Ireland exposure and so on.
  10. NAMA will use own cash to finance the bridging transaction.
  11. Having received the funds from the repo, IBRC will remit these to (€3.06bn) to the CBofI to cancel corresponding amount in ELA.
  12. Has Net Present Value of the debt been altered? We do not know. We need to have exact data on bond maturity and the coupon rate, plus on overall profile of the rest of the notes to make any judgement here. Any change in the NPV under the above outline (1-5) is immaterial. 
  13. The positive factor of so-called 'more flexible fiscal buffer' is a red herring, in my view. The idea is that we are 'saving' cash allocation of €3.06bn this year, making it 'available' for borrowing in 2013. This is rather stretching the reality - the 'cushion' has been pre-provided to us by the Troika deal and is specific to the Promissory Notes. There is no indication that it can be used for any other purposes. Even if it were to be used for any other purpose, it would be an addition to the bond issued, so our debt will increase by the amount we use from the 'cushion'. Furthermore, the deal runs out in 2013 and thereafter no 'cushion' is available. So on the net, we have just paid 400mln increase in debt, plus 90mln in deficit to buy ourselves an 'insurance' policy that should we need 3bn in 2013, we will be able to ask for it from the kindness of the EU and have it for no longer than a year. That's pretty damn expensive insurance policy.
  14. The negative factor is that we now have almost 3.5bn worth of extra debt that is senior to the promissory notes it replaced and once it is repoed at the ECB it will be senior to ELA exposure. 
  15. Furthermore, this debt is in the form of Government bonds. So suppose we want to return to the debt markets in 2014. We have higher stock / supply of Government bonds (albeit 3.47bn isn't much - just a few percentage points increase) that markets will price in. Higher supply, ceteris paribus, means lower price, higher yield on bonds we are to issue in 2014. 
  16. Minister Noonan and a number of other Government parties' members have mentioned 'jobs creation' capacity expansion as the result of this deal. The only way, in theory, this deal can lead any jobs creation is if the Government were to use €3.1bn allocation available for Promo Notes under the Troika deal for some sort of public spending programme. Which, of course, means our debt will increase by the very same amount used.
Brian Hayes on Today FM described the 'deal' (H/T to Prof Karl Whelan) as 'A creative piece of financial engineering.' Presume safely that Brian Hayes has a firm idea that this description is a 'net positive' for the Government.

Following the announcement by the Minister, there were no questions allowed by Dail members and the Minister moved on to the really important stuff - straight to press briefing in the Department of Finance. He might have opted for the right move, however, since the Dail, without any interrruption vigorously engaged in a debate on this important topic:



On that note, the last word (for now) goes to Prof Whelan: "Ok, after exchanges with very wise @OwenCallan I have decided that this deal defers the 3.1bn payment by only one year. Worse than hoped for" (quoting a tweet).

Welcome to the wonderland of wonderlenders.


Updates:

Adding to the above, it is worth postulating directly - as I have argued consistently, ELA is the only debt we can - at least in theory - restructure and promo notes are a perfect candidate for such a restructuring. By converting a part of these into Government debt we are now de fact increasing probability of a sovereign default or restructuring.

Karl Whelan has an excellent post on the 'deal' - here.

ECB statement on Ireland's 'deal' is here. This clearly states that there is no deferral of any payment on Promo Notes and that the Noonan's 'deal' is a one-off. Thank gods it is - because at a cost of €400mln in added debt, plus €90mln in deficit, repeating this exercise in PR spin would be pretty expensive.


Update 30/03/2012:


Today Irish Times is reporting that:

"Minister for Finance Michael Noonan said the big benefit was the money would not have to be borrowed to pay this year’s instalment on the promissory notes, the State IOUs paying for the bailouts."

A truly extraordinary statement, given the state will borrow the money (some €410mln more in principal and €90 mln more in interest than actually it had to borrow) using a Government bond to pay said IOU!

The Irish Times headline reads: "Government wins backing on €3.06bn payment". Yet there is no any 'backing' from anyone on this deal, because the deal does not change the payment itself. Read the above-linked ECB statement on the 'deal'.

In another extraordinary statement, the Irish Times (this is their own claim) says: "Further talks on a long-term deal on the remaining repayments as part of a wider restructuring of the banks will continue between the Government and the troika of the EU Commission, the ECB and the International Monetary Fund." Is there ANY evidence that any such negotiations are ongoing? Where is this evidence? Please, produce!


And an excellent piece from Namawinelake on the above: here.

Wednesday, March 21, 2012

21/3/2012: Anglo's Promo Notes - perfect target for debt restructuring

This is an unedited version of my Sunday Times article from March 18, 2012.



At last, courtesy of the years of economic and financial mess, Ireland is waking up to the problem of our debt overhang. For those of us who have consistently argued about the unsustainability of our fiscal and real economic debts predicament, this moment has been long coming. The restructuring of some of the debts carried by the Government directly or indirectly, on- or off-balancesheet is a matter of when, not if. Enter the debate concerning the Promissory Notes.

Per international research, State debt in excess of 90-95% of the real economic output is unsustainable. In real economics, as opposed to fiscal projections, debt becomes unsustainable when it exerts a long-term drag on future growth.

At the end of 2011, official Government debt in Ireland has reached 107% of our GDP or 130% of GNP, according to NTMA. The Irish economy is now operating in an environment of records-busting exports, current account surpluses, and healthy FDI inflows, and yet there is no real growth and unemployment remains sky-high. By comparatives, Irish economy is a well-tuned, functional car stuck in the quicksand – engine revving, power train working, wheels engaging, with no movement forward. This is a classic scenario of a debt overhang crisis – the very same crisis that Belgium has been struggling with since 1982, Italy – sicne 1988, Hungary – since 1991, and Japan – since 1995.

Something has to be done to deal with this problem in Ireland no matter what our Government and the EU say in public.

Uniquely for a euro area country, Ireland’s debt overhang did not arise solely from fiscal or structural economic shocks, but was strongly driven by the country response to the financial crisis rooted in a number of forces, including policy and regulatory errors by the EU and ECB. Also, Ireland has undergone the most severe adjustments in its fiscal position to-date compared to all other ‘peripheral’ economies, proving both our capability and commitment to reforms.

Lastly, in contrast with all other countries, Ireland’s economy is capable of getting back to sustainable levels of economic activity. Irish economy needs a supporting push out of the quicksand of banks-linked debt overhang to deliver on its sovereign debt commitments, and become once again a net contributor to the sustainable fiscal system within the euro area.

The IBRC Promissory Notes are a perfect focal point for such a push for a number of reasons.

First, the magnitude of the Promissory Notes allows for significant room to reduce Irish Government’s future liabilities, combining €28.1 billion of debt, plus 17 billion in interest repayments. These represent 29% of our GDP. Eliminating this liability will restore Ireland back onto sustainable fiscal and growth paths. Restructuring the Notes will not constitute a sovereign default. Although their value is counted in Irish Government debt, they are not traded in the markets. The Notes are, de facto, Irish Government IOUs to the Central Bank of Ireland with IBRC acting as an agent.

Second, Promissory Notes underwrite €28 billion of €42 billion IBRC debts to the ELA programme run by the Central Bank of Ireland. ELA funds are not borrowed by the Central Bank from the Eurosystem or the ECB, but are created by the Central Bank under its mandate. There is no offsetting physical liability the Central Bank needs to cancel by receipt of payments from the Government. The Notes also do not constitute Central Bank funding for the Government as they finance stabilization of the Irish (and thus European) banking system. Lastly, the ELA funding extended to the IBRC is already in the financial system. Removing requirement on the Irish state to monetize the Promissory Notes will not constitute an inflationary quantitative easing.

The Government is correct in focusing much of its firepower on the IBRC’s Promissory Notes. Alas, efforts to-date suggest that it is not setting its sights on the real solutions needed. This week, Minister Noonan has identified the direction in which the talks are progressing: restructuring the Promissory Notes repayment time schedule, plus possibly reducing the interest rate attached to the notes via converting the notes into ESM debt.

The problem with this approach is that a transfer of liabilities to ESM will convert Promissory Notes into a super-senior Government debt. This is likely to have a negative effect on Ireland’s ability to borrow funds from the markets in the future and make such borrowing more expensive.

In addition, lowering interest rate on the Promissory Notes carries two associated problems with it. The move can only have an appreciable effect on Exchequer finances after 2014, when interest on the notes ramps up to €1.8 billion from zero in 2012 and €500 million in 2013.

Delaying repayment of notes instead of reducing the principal amount owed on them will not provide significant relief to the Exchequer in the future and will make the period over which the debt overhang occurs even longer than 20 years envisioned under the current Notes structure. This will pose serious risks. History of business cycles suggests that between now and 2025 when Notes repayments will fall significantly, we are likely to face at least two ‘normal’ or cyclical recessions. During these recessions, Notes repayments will coincide with rising deficit pressures and national income contractions that will exacerbate the Promissory Notes already adverse impact on Irish economy. Extending the period of notes repayments risks compounding more recessionary cycles in the future.

Furthermore, delaying notes repayments can risk increasing the overall future demand for debt issuance by the state. Currently, Ireland is facing two debt-refinancing cliffs during the life of the Promissory Notes: €45.6 billion refinancing over 2013-2016 and €62.4 billion over 2017-2020. If Notes repayments are delayed, their financing will stretch further into post-2020 period, just when the subsequent roll-overs of Government bonds will be coming due.

In more simple terms, current proposals for Promissory Notes restructuring are equivalent to making quicksand pit shallower, but much wider.

Ireland needs and deserves a direct restructuring of the ELA. The most optimal outcome of such a restructuring would be de facto cancellation of ELA requirement for repayment of IBRC-borrowed €42 billion. Once again, such a move would have zero inflationary impact on the economy as on the net no new money will be created in the euro system over and above the amounts already present.

There remains, however, one sticky point. Allowing Ireland to restructure its ELA can, in theory, lead to other Central Banks following the suit. This problem of moral hazard can be easily mitigated by ECB by ring-fencing Irish ELA restructuring solely for the purpose of winding down IBRC. Making ELA writedown conditional on shutting down Anglo and INBS, plus potentially Permanent tsb will disincentives other countries from using their own ELAs to rescue solvent banks. Irish restructuring can be further isolated by tying ELA writedown to progress already achieved by Ireland in tackling fiscal deficits and restructuring its banking sector. Put simply, with such a proviso in place, no other Euro area country would want to dip into its National Central Bank vaults if the associated cost of doing this will amount to over 50% of its GDP.

Ireland’s crisis is unique in its nature and its resolution provided a buffer to cushion the credit crisis blow to the entire euro area banking sector. Ireland both deserves and needs a breakthrough on the debts assumed by taxpayers in relation to the insolvent IBRC. Even more importantly from Europe’s point of view, the ECB needs a positive example of a country emerging from the deep crisis within the euro system. Ireland is the only candidate for success it has.

Source: NTMA and author own calculations.
Note: In computing second round of rollovers, only Government bonds are included and taken at 95% of the principal amount. All other debts are excluded.

Box-out:
In the wake of last week’s Quarterly National Household Survey release, the Government was quick to point to the improvement in the number of employed on a seasonally adjusted basis as the evidence the employment policies success. Overall numbers in employment rose in Q4 2011 by 10,000 or 0.56% compared to Q3 2011, once seasonal adjustments were made. Furthermore, per seasonally adjusted data, full-time employment was up 8,700 – accounting for 87% of this jobs creation. Alas, this is not the entire picture of the job market health. Year on year, seasonally adjusted employment was down 17,800 or 0.97%. More ominously, unadjusted employment was up just 2,300 in Q4 2011 compared to Q3 2011 – an addition of statistically insignificant 0.1%. Interestingly, full-time unadjusted employment figure fell by 700 jobs (-0.1%), while part-time employment rose 3,000 (+0.7%). At the same time, number of part-time workers who are underemployed has jumped 5,800 in a quarter and 28,100 year on year. Two reasons can help explain the above disparities. First, Government training programmes have been aggressively taking people out of unemployment counts, increasing employment numbers. In the case of Job Bridge, for example, these are unpaid ‘internships’ with questionable rate of post-internship transition to work so far. Second, since Q1 2011, CSO has used a new model for seasonal adjustments, which may or may not have an effect on seasonally adjusted headline numbers. Lastly, seasonal adjustments can increase, not reduce quarterly data volatility at the times when trends change. Particularly, with flattening out of the employment figures after years of steep declines, seasonal adjustments can introduce a temporary bias into subsequent data. In short, making conclusions about the actual changes requires more careful reading of the numbers than a simplistic headline figure referencing. With all annual indicators pointing to a shallow decrease in employment, the Government would be best served to have some patience and see how subsequent quarters numbers play out before jumping to conclusions on the success of its policies.

Thursday, March 15, 2012

15/3/2012: What's up with 'collateral'?

An interesting point made today by Michael Noonan that carries some serious implications with it (potentially).

"You could take it that the ECB were never particularly happy with the level of collateral provided by the promissory notes and would like stronger collateral," Mr Noonan said in an interview with RTÉ." (as reported on the Irish Times website).

What can this mean? Collateral for the Notes themselves is Government guarantee plus letters of comfort to the CB of I. In other words, the Notes collateral can only be enhanced by making them fully-committed formalized Government debt - aka bonds. Now, Noonan in the recent past had implicitly linked Promo Notes to ESM.

And herein rest the main problem. Right now, Promo Notes are quasi-governmental obligations and as such are ranked below ordinary Government bonds (hence collateral quality concern of the ECB). Although the Notes are counted into our total debt, they are still not quite as senior as other forms of debt. This, in turn, has marginal implications in the valuation of our bonds. Although at this point this is academic, should we return to the markets, potential buyers of Irish Government bonds will consider them as secondary, since the Notes are not traded in the market and represent a tertiary (quasi- bit) claim on the state after ordinary bonds (secondary) and EFSF-IMF-EFSM (soon to become ESM) debt (so-called super-senior obligations of the state).

By converting these notes into ESM funding, the Government will in effect risk making these Notes super-senior, exceeding in seniority those of ordinary Government bonds. Now, the total amount of debt under the Notes - principal plus interest - is €47-48 billion or roughly-speaking 30% of our GDP and ca 27% of our Government debt. This is hardly a joking matter.

It can have material implications for our ability to access bond markets in the future (both in terms of amounts we can raise and rates we will be charged). But more ominously, it can fully convert quasi-public debt into super-senior public debt.

This will satisfy ECB's concerns about the quality of collateral, but it will also mean that these notes will be put beyond any hope of future further restructuring.

Monday, March 12, 2012

12/3/2012: Why the 'trackers deal' is bad news for Irish mortgagees

The news galore surrounding the Promissory Notes (usually reported cheerfully with the customary references to unnamed sources as to the eminence of the 'deal') and so-called 'lobbying' by the Irish Government to restructure more broadly (un)defined 'banks debts' is continuing to gain momentum day after day, with no actual real signs of anything tangible being done. 


But the real news here is what is being 'rumored' and 'discussed', not the actual feasibility of the 'deal'.


Per reports and Ministerial statements, Ireland is lobbying ECB / EU Commission /EU in general (whatever that means) to allow the country to alter the burden of the IBRC Promissory Notes and, crucially, as per last night news - restructure loss-making tracker mortgages on the balancesheets of its banks.


Minister Noonan stated yesterday on RTE that the discussions on the promissory notes also included the possibility of 'shifting' loss-generating (for banks) tracker mortgages off banks balancesheets into IBRC. The problem, of course, is that these mortgages account for ca 53% of all mortgages held/issued by the Irish banks in relation to the residential property. The rates of default on tracker mortgages is lower than that for ARMs


The banks are complaining loudly that their funding costs exceed the tracker mortgages returns due to low ECB financing. So the real issue here is that the banks are facing state-imposed 'reforms' that are in effect forcing them into future losses on tracker mortgages. The current losses are due not to the actual tracker mortgages problems, but due to the banks prioritizing bonds and debt repayments (raising cheap funding to do so) while complaining about losses on tracker mortgages.

Alas, something is seriously off in this argument for the following reason. Irish banks largely fund themselves at ECB rate via LTROs and normal repo operations. What 'funding costs' they have in mind, beats my understanding of their operations. So the whole issue is a red herring. The banks simply make too small of a margin on these mortgages to use them to cross-subsidize market funding access. That's the real story - the story of the potential loss, not actual loss.



How bogus the issue is? Bank of Ireland doesn't even bother to identify specific losses or any issues relating to tracker mortgages in its latest interim report.


So overall, the issue is a bogus concern for mortgagees covering up the real desire of the Government to provide yet another rescue line of taxpayers' funds to the banks. In other words, the move of tracker mortgages will do absolutely nothing to alter the conditions of loans repayments or costs of these mortgages to the mortgagees. Nor will it reduce the mortgagees debt. Instead, it will simply shift lower margin products off banks balancesheets, allowing the banks to gouge their ARM holders with higher margins over the ECB rate without direct comparative (transparent) pricing to tracker mortgages. More opacity, higher margins, no help for tracker mortgagees, shifting more burden of banks bailouts onto ARM mortgagees - that is, in the nutshell, what Minister Noonan's game plan appears to be.

Tuesday, February 28, 2012

28/02/2012: The truth behind the ELA

We are made actors in the theater of absurd, folks.

Anglo & INBS are now fake banks with their banking licenses retained solely to prop up their ability to borrow from the euro system and for no other reason.

These 'banks' are made up to look like some quasi real entities by a fake lending scheme (ELA) which was conceived by the complacent Government and Central Bank with a nod of the conveniently 'see no evil' ECB.

The sole objective of this scheme is to continue faking the system stability of the Euro area banks many of which are now barely alive themselves. The scheme operates like some Madoffian Dream with banks pretending to use collateral (which in effect is rather dodgy in many cases and assumes that Spanish Government bonds are as risk free as German Government bonds) to borrow money they can't really be expected to repay (does anyone really think LTROs 1 & 2 can be unwound by calling in the loans or liquidating the 'assets' repoed?) so they can buy more Government bonds and put borrowed money on deposits, thereby creating fake demand for Government bonds (lower yields lead to a pack of idiots claiming that Government debt is now sustainable as its cost 'came down') and increasing headline 'deposits' figure for ECB (pretending there is no liquidity shortage in the system).

Of course, the very reason for this ever-growing pyramid of deception is the very same as the underlying cause of this mess - a currency union conceived solely to promote political objectives of the ever-expanding EU. Nothing else.

The only real thing about this mess is the money Irish Government takes out of the pockets of its residents to dump into this pyramid. Nothing else.

To use a literary analogy, it's not that we are about to hear a child scream 'The King Has No Clothes' that is the most apparent feature of this circus. It's that we have NCB, ECB, National Government, EU Commission and Parliament and courts all acting up in collusion to deport all children from the town, lest they might see that the king is, indeed, naked.

Friday, January 20, 2012

20/1/2012: Non-News from a Road to the Second Bailout

This story in the Irish Times yesterday clearly requires a comment. So here it goes.

Here's the best time-line and explanation as to Minister Noonan's 'efforts' to secure 'savings' on the Promissory Notes.

Now, consider the following from the Irish Times today:

"We think there’s a less expensive way of doing [restructuring of the Promissory Notes] by financial engineering, and we’re not talking about private-sector involvement or restructuring,” said Mr Noonan in Berlin "...it is about pointing out to the troika that there are difficulties and that it could be less expensive – and everyone still gets their money.”


"A senior German official said Berlin could envisage extra programme funding being used for the Irish banking sector not currently earmarked for this purpose."

The above might mean many things:

  1. Ireland still has some funds due under the original 'bailout' that were earmarked for banking measures, but were not yet used in the last recapitalizations round in July 2011. This will not in itself constitute any new measures materially impacting Ireland's Government debt projections. It will not constitute a second bailout (as the funds are already earmarked under the first bailout), but by reducing funding available for fiscal and other banking requirements it will increase the probability of such a bailout in the future.
  2. Ireland can be allowed to borrow more from the EFSF/ESM, swapping the Notes for marginally cheaper funding. This too will not constitute any material impact on Ireland's Government debt projections. But it will constitue a second bailout.

Neither option involves any possibility for 'private sector involvement' and at any rate, Minister Noonan's reference to PSI is a red herring - there can be no PSI in relation to the Promissory Notes as these do not involve private investors or lenders at all.

However, both (1) and (2) have material impact in terms of Ireland requiring a second bailout - both increase materially the probability of such an eventuality.

Lastly, there is a catch. The problem of capital adequacy, highlighted by Minister Noonan, means that 'financial engineering' can only involve temporary relief in terms of payments timing, not material relief in terms of NPV of the debt assumed by the state under the Promissory Notes. We will be allowed to borrow more time. At a cost of longer loans, and more repayments in the end. Which, of course, does nothing to achieve sustainability of the 'solution' from the point of view of us, taxpayers, who Minister Noonan expects to pay for all of this. But it probably does give him a chance of holding a 'triumphant' pressie announcing some sort of a 'deal'.

So in the nutshell, the Irish Times story is... errr... a non-story. A sort of traditional Spin that comes out of the Government every time they are caught... errr... fantacising the reality. As NamaWineLake put is so excellently:
"...it has been four months since Minister Noonan’s meeting with the ECB and others in Wroclaw where he, to use his own words “had a ball to kick around” and has proposals. It is two months since Enda Kenny discussed the matter with Angela Merkel. It is more than two months since Minister Noonan said that “technical discussions” were ongoing. And yet the Troika yesterday downplayed any progress in the matter saying that Minister Noonan had merely “requested discussions”."


Or maybe, just speculating here, Minister Noonan is bringing up the Promissory Notes once again this week because next week we are about to repay another tranche of Anglo bonds? Last month, around the time of the repayment, there was much-a-do-about-nothing going on in referencing the very same Promissory Notes?

However, there is, in the end, something openly honest about Minister Noonan's windy trip down the 'Imagine the Superhero, ya Villain' lane.

"[Minister Noonan] said he hoped that the ECB would extend its programme of low-interest loans beyond next month to improve euro zone bank liquidity in the hope it would stimulate the market in longer-term sovereign debt papers."

Point 1: LTRO-2 was already announced, so Minister Noonan is either uninformed, or pretends to be uninformed to posit himself as a a heroic 'rescuer' proposing a real 'solution'.

Point 2: Minister Noonan clearly shows that his sole concern is how to raise more debt for Ireland. Not how to balance the books (in which case he shouldn't need banks to pawn their assets as ECB to buy Government bonds with this fake cash), or reform the economy (in which case growth would resume and the State shall not require the said scheme, again) and not with restoring functional banking system to health (since functional healthy banking system lends to the real economy, not to Minister Noonan).

At last, truth revealed?