Why are Buy to Let Mortgages being allowed fester?

The mortgage crisis is the rancid gift that keeps on oozing.

The publication this week by the Department of Finance of mortgage arrears figures highlights the festering lethargy that has characterised much of the Irish response to the financial crisis.  That it publishes slightly different figures on the same issue as the central bank highlights the embedded inability of the Irish state to engage in any sort of joined up thinking.  The central bank data is of end March, the Department of Finance end April.  They use slightly different presentations and slightly different emphases on the same dataset. To get a full picture of what is going on one needs to read two publications and interpolate two different time series. Why is this effective duplication allowed? Why is it needed?  Why do we not have ONE official source, weekly or monthly or quarterly or whatever, from ONE state agency providing ONE comprehensive dataset?  Do the central bank and department of finance not talk to or coordinate with each other? Does one hand know what the other is doing?

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None so deaf as those that will not hear….(AKA Irish Elites)

There was an interesting book launch last night at the Long Room in TCD. Phillipe Legrain is on a tour of various places, doing local and localized launches of his new book.

He, and Senator Sean Barrett who gave the launch, delivered very strong, impassioned speeches. In his book Legrain lays a large quantum of the blame for the mess on the failure of interlocking European institutions. He backs squarely the Irish need for sovereign debt relief ; he calls for debt-equity swaps for distressed homeowners and SMEs; he castigates the failure of the economics elite to see the crisis, and challenges the policy making apparatus of both local and European governance. He calls for hardball negotiations, and lays out a path for same.

Legrain is no fire breathing radical. He is however from personal and professional background and inclination deeply European. His book has been lauded with positive reviews.  He challenges us.

Given this, and given the importance of the topic on which he speaks, it was frankly astounding to see how widely the launch was ignored. With the exception of Sean Barrett, there was (as far as I could see) not a single faculty member from a single economics department; with three exceptions the same for business school faculties. The Central Bank? The Department of Finance? Taoiseach? Foreign Affairs? Most of the media? Any elected official of state? Nobody that I could see. We could create a list as long as the page of elite institutions (IBEC? IIEA?, ACCI? …..) who were NOT represented at this talk, or if so were very well disguised.  It was to my mind a clear example of how we have  a collective elite who have firmly pulled on the green jersey and decided to press on regardless. Maybe they are right, maybe wrong, but one thing we have learned is that groupthink is bad. We need outsiders to challenge, but we need also to be prepared to be challenged. Seems we aren’t.


The ECB experiment

This is a version of my column in the Irish Examiner of 26 April 2014. Macroeconomics is hard. Its hard because there are actually few coherent theories, such internally coherent theories as we have oftent tend to be at odds with reality, data are of fairly low frequency (monthly usually) and we cant run experiments usually. Those of us who are not practicing macroeconomists thus tend to fall back on fairly simple rules of thumb when assessing policies and outcomes, often by reference to the past. Thus in Europe the ECB has in fact run an experiment against the Federal reserve board. While the Fed has taken the lessons of the 1930s on board and expanded its balance sheet, the ECB has taken the lessons of the 1920 on board and done so reluctantly and is now unwinding them. While the USA engages in quantitative easing, the ECB has engaged in quantitative squeezing. And the results are in; look at the comparative unemployment, performance of the two regions which is really the key metric any sentient or ethical policymakers should concern themselves with. Yes, the USA has an advantage in that they cleaned the banks earlier than did the Eurozone, and thus the monetary transmission system, such as it is in the modern world, was able to work. But that aside it is striking how in recent years the two banks have diverged.  It is reasonable to infer that the experiments have had different outcomes.

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The Banking Union: what’s in it for Ireland?

This is an expanded version of an OpEd in the Irish Examiner published 15 December 2012

Group Chief Executive of the Bank Of Ireland, Boucher, reacts during an interview with Reuters at the company's head office in Dublin, IrelandThe new banking union proposals that are now emerging from the wreckage of the European economy are to be given a (very) cautious welcome. Without going the whole Naomi Klein “shock doctrine” route, its very clear that once again this is a win for (mainly german) banking interests. They for one have not wasted a good crisis, unlike our hapless crew of permanent and transitory governments. Banks have walked away scot free, in essence, from the calamitous decisions they have made. In Ireland, faced with a government as weak as water they essentially bluffed and buffaloed a hapless crew of inepts into socialising the losses. Anybody who think that senior bank management have learned their lesson of humility need only look at the truculent faces when the elected representatives dare question their remuneration.

1-leg-stool1A banking union required three essential elements: a common supervisor, a common system of deposit insurance or assurance, and a common method to resolve problems. What we have here is the first, and its as good a place to start as any. But without the others its a onelegged stool. The power in European banking has now shifted decisively to Frankfurt – already building an new towerblock (for a cost of over a billion euro…) the ECB will soon need more space. As presently proposed the effect of the new regulator will be to shift regulatory control of AIB, IBRC and BOI to Frankfurt. What exactly that will mean for the newly beefed up regulators office in Dame Street (the beefing up requiring that it move to the IBRC shell – very apt) is unclear. Will staff move to Frankfurt or more probably will it be a remote operation?

Two issues emergent from this require us here to think long and hard. These are the future funding of SMEs and the future of those vile promissory notes

On SME funding the Irish banks are in a bind. They need to continue to delever, and the only way to do that is to progressively increase the deposit base (costly) and/or reduce outstanding loans. In particular, reducing loans will be done while also shifting the balance of loans away from riskier towards less risky ventures. Lending to SME’s is inherently more risky than to more established sectors and ventures. The easiest venture at present is to obtain cheap money from the ECB and purchase Irish government bonds, a carry trade as it is known, reaping a handsome profit for the banks and incrementally driving up the price and down the yield on these bonds yielding a handsome political dividend for the government. Evidence from the ECB biannual survey on access to finance that along with Greece Irish SME’s are the most likely to be discouraged from applying for credit. Although only around 10%, this is unfortunate – discouraged borrowers may be borrowers that have excellent prospects but feel that there is no point seeking a loan. Since March 2010, when the data series begins, excluding property and financial services related lending, lending to the SME sector has fallen by 24%, while in the overall economy it has fallen by 22%. Within the SME sector lending to property and financial services related activity has risen by 30%. Its hard to see how this is justified given the job creation engine that the SME sector can be. As banks regulatory oversight moves more and more remote it is likely that the existing centralization of lending decisions at HQ will intensify. It is reasonable to assume that local managers of banks are more likely to be at least approachable by local SMEs seeking finance. If we wish to reduce discouragement in applicants we need to be very nimble in negotiating the parameters of this new regulatory regime. It’s a good job we have a history of nimble wily negotiators with the ECB….




















IOU_1The creation of the new regulatory framework was a quid pro quo for the establishement of the new ESM lending framework. This will lend to banks for new capital needs, finally breaking the linkage between the soverrign and the banking sector. However, this is of little use to Ireland. We have invested 24b in the pillar banks and 30b via the wretched promissory note in IBRC. The proposal on the table will not give us any relief on these. The government in march 2012 engaged in a complex shell game to avoid payment of the note but this was for a one year basis. Despite this can kicking they continue to claim that they have avoided repayment, which is simply untrue. Thus a solution to the deferred 3.1b and the regular 3.1b needs to be found before march. All indications are that this will involve a restructuring of the repayment schedule, to reduce the amount of money destroyed from 3.1b to perhaps 1b per annum. That anyone outside a lunatic asylum would consider it acceptable for a state so broke that it is cutting respite care to carers to destroy a billion euro shows how degraded our political debate has become. After Minister Rabbit stated that we would not pay in March I asked the Central Bank, the ECB and the government for a statement. Despite being the ultimate loser in any refusal to pay the Bank declined to comment. The ECB reiterated the statement by its president that it was Frankfurts way all the way, while the government press office reiterated that we hadn’t paid in 2012 and were seeking a deal. None of these give any hope that a meaningful reduction in the outstanding debt, as opposed to some restructuring of the payment schedule, is in the offing. That wont prevent the government from touting some form of interest reduction or extension of the repayment schedule as a triumph. But it should.

Green Jerseys, False Colours and the Irish Bond Market

There is a most interesting letter (of the Green jersey type) in the Irish Times this morning. It is from a Donal O’Mahony of Shankill and is on the wonderful performance of Irish government bonds. Ireland is truly lucky to have this sage, and also to have his namesake Donal O’Mahony the head of debt research at Davy stockbrokers (prime dealers in Irish debt). After all, they couldn’t be the same person, as who fly under false colours and not declare in a letter their interest and affiliation…. Anyhow, Shankill Donal states that we are addicted to “failure porn”,  in looking backwards, which tells me that the mindset that in the 1970s cut out of the biology syllabi the parts on the human reproductive system (durty filthy durty shameful durty stuff) still lives. Dont look back as then you might see stuff you dont like…

Anyhow Shankill Donal (not I guess to be confused with Davy Donal) says

” a stunning 88 per cent return in Irish government bonds since July, 2011 has gone largely unheeded by the Irish media, politicians and, most disturbingly, an insolvent Irish pensions fund industry . . . unheeded by all, perhaps, except those clear-headed international investors who see the improving creditworthiness that we ourselves discredit. “

okkkaay. Lets look at that.

First, and presumably because Shankill Donal is not Dawson Street Donal, he might not be aware of the (from my ivory tower view anyhow) significant debate on the bond performance. Shankill Donal must be a bond trader somewhere though as he focuses on the price of bonds, when most people focus on the interest rate on bonds. Shankill Donal and Davy Donal should get together and talk….Even a casual perusal of the interwebs will throw up dozens and dozens of articles on the irish bond market. But maybe Times Letters Page Donal doesnt use the intergoogler. anyhow, here is the most recent article I could find, to assuage him that yes, this ignorance is all in his mind.

Second, the underlying assumption is that the fall in yields is down to improved creditworthiness. Hmm.. Maybe he is a trader but he is no economist.  Bond investors care about creditworthiness only over the holding period. As nobody serious ever has to my knowledge suggested default on the actual NTMA issued government debt, as they were backed by the IMF and ECB for a period of years, as the strong likelihood is that some sort of (dont call it a bailout) deal will be in place from 2014 onwards, the strange thing is that irish bonds were ever so low (interest rates so high). Proof that he isnt really Dawson Street Donal is that he seems to think the fall in interest rates  / rally in bond prices is down to ourselves alone. Maybe hes a member of Sinn Fein? The fall in interest rates is of course down to a mild increase in risk appetite  a change in government from bumbling to fumbling, a realisation that the Euro is here to stay and the euro members seem willing to inflict and bear any pain to make that so, the continued efforts to stabilise the irish budget deficit, the apparent end (apart from clouds on mortgage debt and court cases on subbie toasting  to bank bailouts and a carry trade. The carry trade is of course the irish banks taking cheap ECB money and buying higher yielding irish debt. This has boosted the irish banks holdings of Govt debt to 10% or more, from 5% of a much smaller number in 2011. Victor Duggans blog on this is a must read. In essence, as Business Insider says s

“Simply put, Irish banks have dramatically increased their holdings of Irish government bonds, from a very low base.  This reflects the recapitalization efforts and tightens rather than loosens the linkages between the sovereign and domestic banks. The largely nationalized banks are funding a large share of the government’s deficit”

And those steely eyed wonderful international bond buyers that Shankill Donal loves? Well, theres one of em anyhow, Franklin Templeton, but that seems to be it. In fact, the NTMA said, and who can object

He welcomed the attention of US investor Michael Hasenstab’s Franklin Templeton Investments, which has become Ireland’s biggest private sector creditor over the past year-and-a-half by investing in bonds.Mr Corrigan said: “As an investor, Franklin Templeton are clearly very welcome in the positive view they have taken on the Irish market.”We would prefer if we had 10 Franklin Templetons, rather than one.”

In fact it seems that things might be the opposite of what Shankill Donal thinks. The NTMA very kindly publish a summary geographical holdings of Irish Bonds : the holdings of irish government bonds by non residents have FALLEN over teh last year, from 66b to 60b, from 78% to 74% of total. And this is with Franklin Templeton ploughing in. Dawson Davy Donal knows this of course, which is why he would never laud “clear-headed international investors” without caveat.

Finally of course there is the utter ignorance by Shankill Donal of diversification. No reputable or serious economist, such as Dawson Street Donal,  would urge increased home bias, or the use of domestic pension funds to purchase and buoy up government bonds (a form of financial repression). Irish pension funds should of course have some assets in all forms . And they havent done badly over the 2001-11 period – a survey showed a return per annum of 8.5%, well over the 6% global average. So whatever they are doing its not too bad.  Irish investors, including pension funds, need to be more, not less, diversified globally.

So, while its great that Shankill Donal is taking an interest and holding up a mirror to the facts, he should look up his namesake Dawson Street Dave and have a chat about whats really going on. Its not all bad news, but its not all good news, not by a long chalk….

Can investors not afford firesales or just dont want to engage in them?

Property prices  in Ireland have dropped precipitously  and yet we still see few (apart from those that Alssop Space) enough investment properties (buy to lets) coming on the market deeply discounted. A fascinating study (firewall alas)  suggests that it is not simply an unwillingness or inability to lock in the loss that causes people to hang on. The authors employ a survey of 750 investors, and find three main behavioural reasons why people dont list for sale underwater investments

  1. Familiarity bias : this refers to the trait that people “know” their own asset. The investors know their asset, their property, is different. They are too close to it. This bias causes people to overestimate possible returns and underestimate risk.
  2. False Reference : people have locked in the purchase price, and even when they “know” the fair value is much lower they find it impossible to change the reference point to a lower value. Thus they stay at the unrealistically high “frame of mind”
  3. Status Quo Deviation Aversion: it is psychologically costly to change your mind, so people stay the course and refrain from listing at a lower price. After all, prices might rise.

What they dont find is also interesting: the affordability issue is not as important as the (combined) behavioural issues.

All of these of course can be applied not just to individual us property investors : think of NAMA and government policy – we saw the setting of November 2009 as the (false) reference point for prices, we see that the argument of Ireland being fundementally different is still potent, and we see that there is no amount of evidence or argument that will sway the goverenment from its course….

The Psychology Behind Why UnderwaterInvestment Properties Are Not Listed for Sale
Michael J. Seiler, Mark A. Lane, Vicky L. Seiler ,  The Journal of Behavioral Finance & Economics Vol 1 (2)  Spring 2011


So, it seems now that Dr Merkel backs the idea that no, there should be no retrospective debt deal. Where does that leave us?

We have invested 20+ billion into the pillar banks (or another word starting with P and ending in X as a noted economist of many years standing is wont to call them). This is valued at 8b in the NTMA, and consists of the ownership of AIB, ILP and a chunk of BOI.

The ESM it is now clear will only deal with new claims. Therefore we will not get this back. Even if we did, in the context of a gross government debt of  170b, its a drop in the ocean. Even the whole 20b would not be meaningful. We face debt/GDP levels of 120% in the near future and when we measure against the taxable GNP we are heading towards hellenic hellish numbers of 150% plus

We have 28b in the wretched promissory notes. These are as flammable as petrol soaked crepe paper but the government refuses to consider setting match to them. And so they advance into the budget with 3.1b (6w tax take) in the hole of nonvoted captial spending, aka money to Anglo to give to the Central Bank which will destroy it.

History tells us that countries with unrepayable debts restructure, default outright, fiscally repress or let inflation do the dirty work. Where we now stand the latter is not possible with the BundesHawks at the ECB vigilant against weimarian excesses; repression takes time; default is a last resort. So we need to restructure. The only choice is what and how. The only stuff we can  restructure is the ProNote. Id restructure it to zero. Talking to politicians they are obsessed with the 3.1b- this is a liquidity issue. Unless we get the entirety of the Pronotes removed we are in deadly danger. Even with them gone we still labour under a massive burden of debt.

Unpalatable choices abound.

After Merkel…Ireland’s unpalatable choices