Sometimes things seen cannot be unseen. The tragedy in Syria, and that’s where the main impetus of refugees is from now, has been a horror. But numbers numb. 250,000 dead including 20,000 children is for most of us incomprehensibly large. But one death, that of a poor wee toddler washed ashore in Turkey, a small helpless child, that is comprehensible and unbearable. Continue reading
So I spent the last few days in Portoroz, on the Slovenian coast, at the 15th Portoroz Business Conference. My talk was on the future of banking post crisis. The slides are attached.
Slovenia is facing a banking crisis, mostly down to crony capitalist lending to politically connected firms. Sound familiar? They had the Governor of the Central Bank and the Finance Minister there to grill over that, along with at least two other ex FinMins in the audience. They are setting a NAMA up also. Slovenia has a banking system fairly much deposit based with Euro area deposits and loans almost matched. It doesnt have much in the way of bonds. Its a clean system in that sense. But the great fear there is that the hole in the bank lending might be as much as 4-6b, which in a country with a GDP of 35b or so is a fair whack. Slovenia has public debt levels of 54% GDP so they should be able to raise this if needed. The alternative is a fullscale bailout. Right now their 10y bond is hovering at 6%.
The spectre haunting the CEOs and CFOs at the conference is that of another peripheral country recently involved in bailout negotiations, where deposit bailins became real. Such was admitted as being unlikely but the genie is out of the box. Slovenia is a beautiful country, with spectacular scenery, lovely people, great food and enjoyable in every way. It has a trade surplus, and is undergoing reforms at a steady pace. The absence, now or prospectivly, of a proper banking union is a major problem for them. The irish experience, of a sovereign state beggared for the banks, is not one that cheers them.
So .. This is, as best I can figure, the profile of the main Irish bonds maturing in the next generation or so.
Yes children, NAMA… Ok, they’ll just roll it over but its still a bond (two actually) and still has to be dealt with…
Bear in mind … GDP 2014 is predicted to be c 170b.
Data : NTMA for Gov and EU, Reuters for the others.
Another multisignatory oped in the Irish Times, this time on the need for mortgage debt, with some writeoffs, being needed.
Economists Constantin Gurdgiev, Brian Lucey, Stephen Kinsella, Ronan Lyons, Karl Deeter, Shane Whelan, David Madden, Brendan McElroy, Valerio Poti and John D Masson suggest a way to help mortgage defaulters
THE BURSTING of the boom has left tens of thousands with debts they will never be in a position to repay. These debts are poisoning the balance sheets of Ireland s banks, preventing the emergence of an economic recovery, as well as causing untold social misery. As a society, we must face up to this.
Two main problems exist: first, hundreds of thousands of people now find themselves in negative equity, where the value of their primary residence is less than the loan secured on it; and second, more than 100,000 also find themselves in difficulty paying the interest costs on their personal home loans.
With house prices continuing to fall, interest rates set to rise, after-tax disposable income falling and unemployment remaining high, there is a massive socioeconomic problem to be addressed.
Current asking prices suggest that 200,000 households are in negative equity, the majority of 270,000 people who bought between 2005 and 2008. Figures from June show 36,000 mortgages were in arrears of three months or more, with collective arrears of just over half a billion euro. These figures do not account for tens of thousands who have renegotiated, switched to interest-only repayments or obtained a reduced repayment schedule for a period of time.
If house prices fall by 55 per cent from the peak, half of buyers in 2004 and a quarter of those in 2003 would enter negative equity and 200,000 households would face negative equity of more than EUR 50,000 and there would more than likely be 60,000 households in arrears.
Their arrears of EUR 10 billion would compare to total mortgage debt outstanding in the Republic of EUR 115 billion. In the context of an overall bank bailout scheme of EUR 50 billion and rising, it is relatively small but at the individual level and, equally importantly, at the level of the real economy, it is a very large problem indeed. We suggest that this makes full or partial debt forgiveness a viable consideration. From an economic perspective the key question is: how would partial debt forgiveness affect the Irish economy?
Individual households in debt do not spend, they do not invest: they attempt to pay down debt when and where they can and they hoard cash. Arrears and negative equity lead to reduced entrepreneurship in the long run, as distressed households face both less wealth against which to borrow and more uncertainty about their income and safety-net savings.
In Ireland this is compounded by the draconian, outdated and entirely inappropriate laws on personal bankruptcy, the lack of non- recourse mortgages and the effect bankruptcy judgments have on an individual s ability to engage in business.
These cumulative economic effects can be tackled through a debt forgiveness mechanism. Banks must allow private home borrowers to revert to pre-crisis debt burdens. Ireland s banks must acknowledge that current debt levels are unrealistic and that timely write-offs are necessary.
Unable to control the external value of our currency, we need to replicate the effects of a devaluation internally to regain international competitiveness. The problem with deflation (and we are experiencing a brand of it) is that as price levels fall, the pain of the debt increases. Generally a policy choice is to inflate the debt away, but in Ireland, we typically do not issue loans on long fixed rates so, even if we could devalue our currency, borrowers would still be crippled as rates shot up. In the long run, socially and economically, debt forgiveness is the best option.
Internationally, more advanced menus for systemic mortgage default crises cover a wide range of options. Successful debt resolution regimes set the cost of restructuring at levels where households ability to pay preserves the value to lenders, in excess of what can be achieved in an immediate foreclosure.
In the case of Ireland, such a formula would most likely lead to an implicit writedown of at least 30 per cent of the more recent mortgage amounts on average, yielding an expected total cost to the entire system of circa EUR 37 billion to EUR 49 billion.
In Ireland, there were two initial responses to the crisis. The Government forced banks into signing, then extending to February 2011, a moratorium on repossessions, meaning lenders must wait at least a year from the time arrears first arise before applying to the courts for a repossession order.
Privately, people have been exhausting their savings, and that of family and close friends, to stave off slipping into arrears. Both of these are stop-gap measures and new approaches are emerging.
Publicly, the Expert Group on Mortgage Arrears has proposed reforming bankruptcy and introducing non-judicial debt settlement. Privately, Ireland is seeing more and more accidental landlords as people rent out their home and either move back in with parents or become tenants elsewhere. These are, in the end, only temporary and partial measures.
We suggest that as there are three parties to the problem the banks, the regulator (ie the State) and the individual these three must also be part of the solution.
For persons in negative equity, or where the loan is so large that it is becoming distressed, we suggest some degree of individual debt forgiveness and restructuring.
There is an argument of moral hazard that must be addressed if individuals do not suffer the consequences of their actions, then there is a reduced incentive for them and for others to behave in a sensible fashion. We argue that the existing levels of distress, plus the partial nature of the debt forgiveness help to mitigate this. People have already been burned and this lesson will not, it is to be hoped, be lost.
In addition, the banking and regulatory systems have collapsed and are in the process of being rebuilt. Central to the new systems must be a set of regulations, rigorously implemented, which prevent this problem from recurring and which will realign incentives properly to price risk in lending by shifting some of the burden off the shoulders of the borrowers and onto the lenders.
In order to implement this burden-sharing, a binding arbitration process needs to be put in place, to allocate the excess burden. In addition, we need urgent changes to the bankruptcy laws and to introduce the non-recourse mortgage option.
The request for entry into arbitration can be initiated by the borrower or lender. The arbitrators, which could be Mabs or some other independent organisation, would be empowered to determine either the allocation of any negative equity burden or to alter and adjust the mortgage terms.
For lenders who refuse to enter into arbitration, alterations to the mortgage code or ultimately the withdrawal of licence are appropriate responses. The public good is best served here by forcing the banks to take the great part of the losses for which they were responsible, not forcing the hard-pressed homeowners to take an unbearable burden into the future where they will inevitably buckle under the strain of repayment with disastrous social and economic consequences.
The losses that will be crystallised in the banks can be filled with additional Nama bonds now that we have Nama, we may as well make some use of it. This will increase the interest burden on the taxpayer, or in the end perhaps on the ECB but we argue that, in the overall socioeconomic context, debt forgiveness to the maximum feasible extent is a first step to restoring the economy and society.
Dr Constantin Gurdgiev, lecturer in finance, TCD;
Dr Stephen Kinsella, lecturer in economics, University of Limerick;
Ronan Lyons, Oxford University and Daft.ie;
Karl Deeter, Irish Mortgage Brokers;
Dr Shane Whelan, actuary, UCD school of mathematical sciences;
Prof David Madden, school of economics, UCD;
Dr Brendan McElroy, department of economics, UCC;
Dr Valerio Poti, lecturer in finance, DCU;
John D Masson, lecturer in economics, UCC.
In a desperate attempt to stave off the inevitable the government laid forth a series of plans, and plans for plans, for Anglo in particular. Here is my opinion as of early October 2010
IN 1968, Robert Conquest, the historian, published the first edition of a classic study of the purges under Stalin. Called The Great Terror, it was of course reviled by the Soviet state and its fellow travellers for its suggestions of tens of millions of innocents sent to the gulags. In 1990, he published a second edition, this time with assistance from the state archives, in which he substantiated his claim. His publishers asked if he wanted a new title, and he is reputed to have said how about I told you so, you f*****g fools ? . While we can in no way equate the meltdown of the Irish banking system with Stalinist purges, the same cycle independent analysts warn, they get reviled and attacked, and belatedly the official line eventually shows that they were if anything overoptimistic has been at work on this issue. The reality is the external critics and commentators have been proven substantively more correct than Government in our fears about the cost of the banking crisis.
The events of the last couple of weeks smack of increasing desperation by the Government. First we had the farrago of the announcement of Anglo being split into a bad and a worse bank, with conflicting statements issued on its operation. It is worth noting, by the by, that three weeks on, the Government has not yet seen fit to formally send details of the plan to the European Commission either a sign of incredible sloppiness or an indication that it was all smoke and mirrors.
The Anglo split, we eventually discovered, involves the exact same situation then Anglo deposits funding Anglo loans as now, but with two banks involved instead of one. When it became clear that this was not a solution but a demonstration of the ineptitude of policy, the markets reacted as was predictable on September 6th, our 10-year bond yield was 5.8 per cent and three weeks later, it was 6.9 per cent. The increasing yield appears to have been the catalyst for the announcements on Thursday, in another attempt to calm the markets. So what do we know from these?
There has been a massive change in the operation and scope of Nama. It will now not take over EUR 7 billion worth of loans from AIB and Bank of Ireland that are EUR 5-20 million, these loans instead remaining with the banks. Indicative figures from the banks suggest these loans would have attracted discounts at or near 70 per cent. It appears that this is being done in large part to facilitate the transfer to Nama of EUR 19 billion of Anglo loans.
The consequence is that these deeply impaired loans will remain on the books of AIB and BoI. This will do nothing other than to further impede the ability of the banks to recover. Let us not even begin to consider the tens of billions of losses that will emerge from the loans that were never going to Nama.
The banks remain deeply damaged, and the Government has scuttled its own plan for their solution. In a desire to reduce uncertainty around the Nama process and to have it completed (after which happy event we were constantly told credit will flow ) by the end of October, Nama will have to complete due diligence and valuation of EUR 19 billion worth of Anglo loans within one month. Given that these loans are in all probability those with poorer documentation and security, this is an enormous ask. In effect, the Government is transferring loans from one State institution to another without detailed transfer valuation.
This is exactly what was done in Sweden and what was urged by me and others in April 2009. By contrast, nationalisation per se requires no such controversial asset-pricing process. Nationalisation can still involve a Nama if the Government believes that reprivatisation of the banks would proceed best if certain of the most toxic and compromised assets have to be taken off the bank books altogether rather than just written down to market price.
It is important to realise that, had the State nationalised the banks, this would have happened only after it had forced them to recognise the true state of their losses. Nationalisation would have been a consequence of the State injecting the needed capital, as will now happen with AIB.
It is instructive to examine the case of AIB. AIB has an asset value on the market now of just about EUR 600 million. The taxpayer will have to inject some billions in additional capital, taking our stake towards 90 per cent. We will be purchasing, however, the carcass of AIB. Its valuable assets, in Poland, the UK and the US, which would over the next number of years have provided valuable cash flow, have been or will be sold. The State will in effect pay billions for an asset worth millions, an asset that will moreover not likely recover in value for decades.
On March 19th in this newspaper, I suggested that the policy of asset disposal by AIB was folly. I stand by that statement. While some asset disposal may be required as a token to the commission, selling the crown jewels leaves the organisation weaker.
Again, had a realistic loss assessment been forced on the banks in early 2009, and such assessments were in the public domain from independent analysts, we could now be moving towards refloating AIB as a medium-sized international bank rather than purchasing the AIB that existed pre-1970.
This takes place against the backdrop of a tocsin from the markets spelling their gloomy view of Ireland Inc. The Government, when not complaining that the markets are irrational or incorrect, has been adamant that bond yields are high due to uncertainty around the banks, without taking responsibility for the continuation and deepening of that very uncertainty. This is in some degree true markets don t like uncertainty, defined as not being able to put a probabilistic outcome on an asset, but quite like dealing with probabilistic risk. Diminution of uncertainty will, I fear, not bring significant relief in the bond markets.
The main determinants of sovereign bond yields, in the medium and long run, are well understood, at least in academia and by the markets. Researchers have demonstrated clearly, over time and across countries, that it is public debt that drives spreads. Having locked itself out of the markets, the NTMA is clearly betting that in early spring there will be a radically different perception of our fiscal position. All is therefore staked on the budgetary process delivering a credible plan. Another magic bullet is being sought.
A further problem with the bond markets has revealed itself with the realisation that while the Minister expects the subordinated bondholders to carry some pain, they are not playing nice. People like Roman Abramovitch do not get to own 300ft yachts and Premiership football teams by giving money away unnecessarily. It now appears that, in some cases, the subordinated bonds cannot be subject to a haircut unless the senior bonds are in default. And the Minister has stated, in cataclysmic and apocalyptic terms, that this will not happen.
What is missing here is that in most modern states there is a banking resolution mechanism, a special form of bankruptcy proceedings for banks, which can set the terms of how, and if, and in what way, bondholders are remunerated when the banks are in distress. It is negligence beyond the normal sclerosis of the Irish political system that three years after the Northern Rock collapse, we do not have such a mechanism. The effect of this is to protect the subordinated and senior bondholders. One has to ask why has such a mechanism not been put in place, and to whose benefit is it that it is not? It s clearly not in the taxpayers best interests. But then very little of the Government s policy on the banking crisis has been. While a resolution scheme may yet emerge from the slough of despond that is the Dáil, it will be too late to prevent the transfer of tens of billions of euro from taxpayers to wealthy private individuals, some of whom are certain to be domestic. We must find out why that is being allowed to happen and who benefits.
Alan Ahearne again weighed in suggesting , after the ’46’ that NAMA was going to work. I wasnt so sure and said so September 7 2009
OPINION:THE ARTICLE by Dr Alan Ahearne in Saturday s Irish Times, (which we can presumably take as being a statement on Nama from the Department of Finance and the Government) contains much that can be agreed with. Few would disagree the banking system must be cleansed and positioned to again take a central place in the economy. What I and I suspect most other critical thinkers would find harder to agree with is the assertion that the only method of achieving this is Nama-as-is, writes BRIAN LUCEY
This, let us recall, involves a conscious decision to use taxpayers money to overpay banks for their toxic assets, thereby transferring billions of euro from the taxpayers to bank shareholders. That the Government s economic adviser would express surprise that there has been a heated debate about a strategy to overpay by billions at a time of fiscal crisis suggests that the mandarins of Merrion Street are totally out of touch with reality.
Barely one in four people supports Nama, and while people may not understand all the technicalities, they do see the core immorality and unfairness at the heart of Nama. Tens of thousands of people own their own toxic assets , houses in negative equity. Yet the Government is not suggesting that they should come along and pay us more than they are currently worth according to a vague, as yet secret, formula built on a pyramid of unrealistic assumptions. So why then are bank shareholders getting this deal?
Beyond this, the argument rests on a series of weak assumptions. Most startling, perhaps, of all of these is a call for Irish banks for Irish people , when Dr Ahearne states: For our economy to recover, we need clean Irish banks . This continues a line of rhetoric against foreign banks operating in the State best exemplified by Fianna Fáil TD Ned O Keeffe, who stated that the damage done to the economy was brought about by the foreign banks who came into the country .
One thing we know from economics and from painful experience in this State is that competition, while sometimes raw and painful, generally benefits the customer. The ghost of 1930s protectionist and corporatist economic policies of the majority party of Government are stirring again, it seems.
Dr Ahearne notes that Nama bonds will be traded on international markets. This ignores the difficulties any new issue of debt is likely to face in the next few years. With no track record, yielding a coupon rate well below that of State bonds, these bonds will almost certainly trade at well below face value. I assume the Nama bonds will be issued with a maturity which approximates assets of 10-year duration or longer. The assumption that the bond markets will swallow whatever amounts of Nama bonds are issued is untested and unbacked by anything other than hope or assertion.
A further assumption is crucial to the Nama debate that banks and property developers acted in a manner that was more restrained than the average household. We are asked to believe that in an era when young couples were getting 110 per cent mortgages, millionaire developers were only taking 75 per cent mortgages. It beggars belief to be asked to take this on trust.
The reality is that very little pure equity was used in the latter years of the bubble; a common practice was, it seems, to pledge the rise in previous developments as equity, to pledge stock market positions, to avail of tax shelters to generate tax savings then pledged, or to borrow elsewhere, unsecured on the new development. Dr Ahearne s arguments suggest that we are at or near the trough of property values, and that over the prospective and as yet mysterious lifetime of Nama, there will be a general uplift in property prices. Closely related is another, which seems to imply that the Government considers that contrary to all indications, we are near the peak (not the trough) of financing.
Values for some properties might reasonably be expected to experience some uplift when the current extremely high cost of financing purchases of property eases. The statement on costs of purchases is opaque, given that we are experiencing historically low rates of interest. A significant debate on property price paths has taken place over the last number of weeks. Significant evidence indicates that a decade or more can elapse with little upward movement in prices.
Last week this point was reiterated in court by Prof Morgan Kelly, and the Dutch Central Bank published research which indicates that Irish property prices are still well out of line with international norms. A plan B for Nama which lays out a scenario where property prices do not rise would be enormously helpful, and would be an essential part of any normal business plan.
Another assumption is that Nama will pay for itself Of course interest rates are expected to rise, but that will increase both Nama s income and outlays. This rests on two assumptions that the interest rates paid on the loans Nama will take over are floating, and that the assets which underpin these loans are sufficiently robust to continue servicing increased interest rates. Neither assumption, in my view, is reasonable. There is no rationale for assuming that over a 10-15 year period, interest rates and property yields move together, unless such a period includes a property boom. It would be good to see evidence that development loans were, in fact, floating rate rather than balloon or fixed loans. Information in aggregate cannot be commercially sensitive.
A new argument against nationalisation also emerges in the shape of the value of a stock market listing in providing monitoring and transparency. While a market listing is indeed useful, if the banks have to be nationalised then the relevant investor is the State, which, via the Central Bank, already knows what s going on in the banks with weekly detailed reports. Academic research indicates that it is corporate bonds, not equity markets, that are most efficient at monitoring corporate health.
The Government has set its face firmly against the non-senior bondholders taking any further hits, and thus we can suppose that the deep pool of traded debt of the Irish banks will remain traded, and thus transparency and monitoring can occur via this market.
Dr Ahearne also argues that nationalisation (after the banks realise any losses involved in Nama transfers) will not be required. He contends that the value of loans on the banks balance sheets already includes adequate provision for bad loans, and as such any further losses will not fully erode shareholders equity.
This begs the question that if the banks had made adequate provisions, then presumably Nama would not be required. It is precisely because they have not made these provisions that they wish to offload the toxic loans to the taxpayer. The circular logic continues with the Minister stating that the banks need not be nationalised, as doing so would mean the boards would have traded recklessly, and thus would have had to resign. As they have not resigned, the argument goes, the banks must be solvent.
Which again brings us to the question: why then do we need Nama with its accompanying transfers of billions of euro from the taxpayer to the shareholders?
Recall FG proposed a state bank? Here was my reaction plus some thoughts on NAMA, in the Irish Times May 18 2009
NAMA IS dead in the water, moving only due to political inertia. It is drifting towards legal reefs and organisational shoals that were clearly visible on the charts.
Six weeks after its announcement in the Budget, nine months into the domestic banking crisis and the Government is reduced to pleas to trust them that the operational details will be revealed, eventually.
It is startling enough to see the Minister for Finance of a Eurozone country engaging on what is effectively a roadshow to sell bonds, a task more typically entrusted to mid-ranking corporate financers; it is surely unprecedented that on such a roadshow, the aim of which is to raise funds, the person doing the selling would cast such cold water, as he did, on the very concepts underpinning the sales concept.
To make matters worse, back at home, Michael Somers, the ultimate head of Nama (the National Asset Management Agency), more or less suggested to an Oireachtas committee that he had no idea how the organisation would or could work.
In this regard, Fine Gael s plan for the banking system is to be cautiously welcomed. It represents an attempt by that party to engage with the complexity of the banking crisis, and although in my view potentially flawed, is superior in almost every way to Nama.
The Fine Gael plan seeks to create a National Recovery Bank which would be capitalised by the State. This National Recovery Bank would underwrite or guarantee the SME (small and medium enterprise) lending of the existing banks via short-term Government-guaranteed borrowing from the European Central Bank.
The recovery bank would signal the end of the blanket guarantee on interbank and debt instruments after September 2010 in an effort to force the holders of those instruments to take a share of the losses on toxic lending; and it would create good and bad banks from the existing stock of banks the bad banks then remaining as workout vehicles to run themselves to liquidation.
The Fine Gael approach is conceptually similar to that of the Federal Deposit Insurance Corporation in the United States when they move to rescue or liquidate failed banks.
However, as Karl Whelan points out on irisheconomy.ie: The FDIC arrive secretly on a Friday afternoon they don t signal 16 months beforehand that they ll be shutting a bank down.
The reason for this is that a time period between announcement and effect allows for significant problems to emerge.
The Fine Gael plan would create a system which, at least for a while, is populated by undercapitalised or zombie banks, banks which are not be able to carry out their normal role in the economy. As well as undercapitalisation, the banks would be illiquid. As a consequence of the announced end of the guarantee, banks would not be able to source any funds that extended beyond September 2010 (when the guarantee ends) and so would be forced to rely only on the sluggish interbank markets, with the certainty that as the end of the guarantee looms, they would only be able to source short-term expensive funding.
The banks would not be able to extend new credit, nullifying the desire to pump credit to the SME sector.
Indeed, the effect of the drastic reductions in capital that would be a consequence of the banks having to, on their own, absorb toxic loans would be to reduce the banks to a state where they were unable to continue in business.
While it is proposed to rectify this at the end of the guarantee period by carving good banks out of bad, the plan would result in at best temporary zombification of the entire system and at worst a closure of the banks.
The consequences of this for the economy are well known and would be utterly disastrous. There is an issue common to both Nama and the Fine Gael plan: an assumption that they will, if implemented get credit moving . This is fallacious, as no plan thus far suggested can, in fact, increase credit.
A combination of a shrinking economy and shrinking capital bases of banks will inevitably result in shrinking lending. It cannot be otherwise.
The key issue is to manage the shrinkage, to ensure that the percentage of credit overall which extended to non-productive investment or overextending household leverage is drastically reduced.
Sectoral credit exposure management is properly the role of the financial regulator and the central bank.
Another issue with the Fine Gael plan is related to the period between announcement and implementation. Depositors would be told that deposits would be transferred to new, clean banks, when set up. In effect, the Fine Gael plan would be to say I m from the government, trust me .
In an environment where not only trust in the banking system but in the political system is broken, this is not in my view sufficiently strong to stop people moving deposits to other credit institutions. Politicisation of credit decisions is rarely a good idea. There is no guarantee whatsoever that the National Recovery Bank would not be politicised.
Indeed, the plan says that some banks would be provided with new guarantees to enable them to operate in the interim between announcement and implementation. This raises the questions of who decides what banks get which funds and on what criteria.
Finally, the Fine Gael plan contains within it, as does Nama, the acceptance that the State will end up the owner of the banks nationalisation. It states that if the new banks that are carved out are not able to raise funds, the State will provide.
It is certain that were any Irish bank, no matter how clean, to go to the international equity markets in late 2010 and seek funds, they would get a cold reception.
So nationalisation of the active bank system would be required. As all paths identified in the debate so far lead to the same end, nationalised banks, it is surprising that discussion on how to get there persists. It is only delaying the inevitable.