Finance

Allied Irish Banks: €13.3bn

Bank of Ireland: €5.2bn

EBS: €1.5bn

Irish Life & Permanent: €4bn

Anglo: Results in May

Irish Nationwide: Results in May

Restructuring:

Bank of Ireland to be slimmed down, reduce assets by €32.6bn by 2013, leaving total of €82.5bn

Allied Irish Bank: Reduced assets by €19.4bn, leaving €67.5bn. To be merged with EBS.

Irish Life and Permanent: To be broken up. €15.7bn of assets to sell, leaving €21.3bn

EBS: to be merged with AIB. €4.9bn of asset sales, leaving €11.5bn.

Total asset sales by end 2013 - €72.6bn. Or €511m per week. Apparently this will be achieved without an asset fire sale.

Central bank documents here Michael Noonan’s speech here

I have written ad nauseum on this blog about Irish Central Bank Emergency Liquidity Assistance.

Anglo were the first bank to make use of the facility. Assets that they could not repo via the ECB were repo’d through the Irish Central Bank via a Master Loan Repurchase Agreement.

Following the continued deterioration of Anglo’s books, the Irish Government recapitalised the bank via a Promissory note, which also was not eligible for ECB operations. This too was repo’d via the Irish Central Bank via a Special Master Repurchase Agreement.

Today Anglo released their Annual report, and on page 95 of that report we learn that there is a strange new facility being used by Anglo to access liquidity from the Irish Central Bank called a ‘Facility Deed’.

According to the bank, a Facility Deed is (emphasis mine):

The FD is an unsecured loan facility guaranteed by the Minister for Finance, who separately benefits from a counter indemnity from the Bank should the guarantee be called upon.

The bank give no breakdown of how much of the €28.1bn it is getting from the Irish central bank comes via each instrument, but the collateral seems to break down like this:

Masterloan Repurchase Agreement: Collateral - stuff that is not acceptable for ECB repo operations. I imagine if you stood still in Anglo’s head office for too long, they would securitise you and add you to the MLRA..

Special Repurchase Agreement: Collateral - Promissory notes. Money the Minister for finance has promised to pay the bank.

Facility Deed: Collateral - Nothing. Nada. Zip. Minister for finance told the CB that Anglo are good for the money. Or “print a few more Euros for Anglo there, it’ll be fine”.

Like I said, we have no idea how much money is involved in the Facility Deed, but it does bring the printing of € on Dame Street to a new level. The Irish Central bank can now do it on instruction from the Minister for Finance.

Of course, this also creates a real headache for the ECB. If they are to give a facility to Irish banks to stop them accessing ELA from the Irish Central Bank, how are they going to account for stuff like this?

At 4:30 tomorrow (3:30 GMT) Ireland should hear the final, final cost of its banking collapse.

The press conference should kick off here:

(click to play)

And the documentation will be available here at the time the conference starts.

(Thanks to NAMAwinelake for the above links)

Irish Minister for Finance, Michael Noonan will be making a statement to the Dáil from 16:45 which can be watched here. - requires windows media player, alternatively, this link is to the Flash player

Keep an eye on Twitter to where the hashtag seems to be #stresstest

In the meantime, here are links to the latest financial reports from the banks:

Irish life and permanent annual report (published today 30/3)

Bank of Ireland unaudited interim report for year end 31/12/2010

AIB still haven’t published any financial report for y/e Dec 2010 (I hope it is not that they are embarrassed by something). So here is their interim report to end June 2010 and their interim management statement from Nov 2010.

The latest I can find from EBS is their 2009 end of year

I don’t think there is any point putting up any financial data for Anglo and Irish Nationwide BS as they are not likely to survive for much longer.

With the stress test results due tomorrow afternoon, it is probably worth looking at how much we have paid into the banks so far.

Here’s a table of the money we have put into the Irish banks and the money we have promised to put in:

*special investment share

** 1,663m  Preference Shares in BOI were converted to Ord shares in april 2010, but this did not lead to any new investment. A similar move is planned for AIB pref shares (originally planned for end of Feb, but now likely to be included in tomorrow’s recap)

Sources: http://www.finance.gov.ie/documents/publications/reports/2010/noteprommissory2010.pdf

http://www.finance.gov.ie/documents/exchequerstatements/2010/Enddecstatement.pdf (note 6)

http://www.nprf.ie/Investments/directedInvestments.htm

Next we can look at what bank liabilities we have guaranteed (contingent liabilities):

Source: http://www.ntma.ie/ELGScheme/GuaranteedLiabilitiesbyInstitution.php Central bank data www.centralbank.ie

At the end of December 2010, deposits guaranteed by the NTMA stood at €86bn http://www.ntma.ie/Publications/2010/Outstanding.pdf But  this only accounts for deposits above 100k, everything else is covered under the Deposit Guarantee Scheme. It is difficult to get a figure for this contingent liability, as the DGS includes credit unions and a much larger list of banks than the ELG scheme covers. But I think we can leave the sub €100k deposits out of these calculations, as a guarantee of that level is not unusual in Europe these days.

Next, for contingent liabilities, we have to look at NAMA bonds.  Total outstanding is: €28.666bn http://www.nama.ie/Publications/2011/NamaDebtSecuritiesIssued.pdf *not included the subordinated bonds

Also, in the banks there is unguaranteed debt, that the government seems happy to pay off (ref the Anglo €750m bond paid in full last month). This totals €21.4bn (€15.4 senior and €6 subbie)

So, to get the total contingent liability we add : Unguaranteed debt: €21.4bn + NAMA: €28.666 + guaranteed bank /CBI: €71.2bn + ELG deposits : €86bn which gives us €207.266bn

Gives a graph like this:

These numbers on the contingent are unlikely to settle down for a while – especially with the PCAR II coming tomorrow and all the recent FRNs having very short maturities. But safe to say that the columns above will tend to move left, rather than disappear off the graph altogether.

For a balance sheet, of course, we need an assets side too. So let’s look at how that balances up:

*In estimating the current net worth of NAMA assets, one has to take into account the valuation date of Nov 30^th for all transfers. Since Nov 30^th 2009 Irish Commercial property has fallen 11.7% and residential has fallen 14.1%. NAMA could also include a ‘Long Term Economic Value(LTEV)’ adjustment to the valuation of Nov 30^th 2009 (ie value the asset higher than the Nov 30^th value). Because this adjustment was done on a loan-by-loan basis, there is no evidence as to the size of these adjustments (or if there were any). In coming to the current value, I took account of property price increases in the UK (+10% comm., flat resi) and came to an overall reduction of 10% on transfer price – I presumed no use of the LTEV clause by NAMA.

**I have not included the total of subordinated bonds (€1.5bn) issued by NAMA as I presume they were created to be defaulted on, so will only become a liability if NAMA makes a profit.

All told, getting the figures down is a little like trying to nail fog to the wall at the moment, but this is a ‘best guess’ from currently available information.

If you can see a glaring error/omission, please put up a comment.

Like I said, this will be out of date by tomorrow, so will update then.

Not the huge rise it took when the Deposit sales from Anglo and Irish Nationwide were going through, but still a notable jump to €3.39bn.

The figures from last week were:

(The figures are reported each morning for the previous day, so this mornings figure is for Friday’s use of the facility)

This time, there doesn’t seem to be much to panic about. If we look at the list of updated eligible collateral provided by the ECB here we can see the last two entries on the list are from AIB mortgage bank - XS0609424550, which is a €500m floating rate mortgage covered security and XS0609424717, a €1.8bn floating rate mortgage covered security. Both of these securities replace XS0354209081, a €2.5bn floating rate note which matured on Friday.

The new notes are priced at one month euribor +2.5% - the note they are replacing was priced at one month euribor + 0.25%.

If the jump has been caused by the new AIB securities, then we should see use of the marginal lending facility remain elevated until Wednesday of this week, when the normally MRO should take them.

Interesting side note - last Friday was also the monthly reporting date for Irish Central Bank Emergency Lending (numbers will not be available for two weeks) and as there has been no big moves in either the MRO or the LTRO during the month, it is safe to assume that ELA will remain elevated when next reported. Although, by then we will have the results of the stress test and, possibly, an ECB solution to the ELA problem.

European Peripheral bailouts – At risk from the Japanese Earthquake?

The expected repatriation of Japanese funds following the catastrophic earthquake on March 11^th could have knock-on effects for the costs of sovereign bailouts in Europe.

Under the model used for the Irish loan rescue deal, European institutions (the EFSM and the EFSF) do two thirds of the heavy lifting, with the IMF taking up the remaining third.

Of course, all of the above triumvirate of acronyms have to borrow money in order to lend it, and, particularly in the case of the EFSF, have gone through several hoops to ensure they can borrow cheaply.

It is worth looking at the ultimate source of those funds to see how the Japanese earthquake could mean that the next time Europe needs to go the market, it could find the purse strings tightened.

Let’s start with the IMF. Latest figures (end Jan 2011) show that the IMF’s General Resources account (GRA) has outstanding lending of SDR61.5bn ($97.7bn). Here’s a quick chart showing where that lending is going:

With continued dislocations in Europe, further IMF funding seems likely – and in the case of Ireland who have only drawn €5bn of the €22.5bn – are definite.

Helpfully, the IMF also provide a breakdown of their committed, but undrawn borrowings (i.e. borrowings by the IMF to fund the General Reserve Account).

It looks like this:

The total of committed (but undrawn) funds from Japan comes to SDR57.66bn ($91.6bn). For these funds, the IMF currently pays an annual interest rate of 0.32% per annum.

Of the two other original acronyms (The EFSM and EFSF) we only need to worry about the EFSF, as the EFSM’s budget is limited to €60bn.

The EFSF has an AAA rating and it maintains this by both over collateralising loans and by maintaining a cash reserve for each loan granted. So, in the case of the first tranche of money loaned to Ireland in Jan, the EFSF used €6bn worth of loan guarantees to borrow €5bn. Then, due to cash buffer rules, it only forwarded €3.6bn to Ireland.

This note is looking at the source of funding, rather than the application of it, so let’s look at the geographic breakdown of the funding of the first €5bn borrowed by the EFSF:

Now, the EFSF issue was eight times oversubscribed, so there was plenty of demand in the market for this hybrid Eurobond. But, if next time the EFSF goes to market it finds that it has lost 22% of its customer base, this will surely be reflected in rates.

Japan currently accounts for 37% of the IMF’s future agreed funding, and has accounted for 22% of the EFSF’s borrowings. The question for the Europeans is will they find off-shore funding so easy to attract when Portugal/Spain/Italy/Belgium come calling?

Japan might not be as willing (for obvious reasons) to use its capital in Europe when it is so badly needed at home. China has been going to great lengths recently to tighten recently, and the current turmoil in the Middle East/North Africa may mean that funding will be harder to access for that source too.

So, what might all this mean? With apparently little appetite from the US for the EFSF, it seems that Europe will have to rely more on internal markets to fund itself.

We can return to Japan to see what that might mean - very high levels of debt, most of which is held domestically. If that pattern does repeat in Europe, it certainly seems to point to sluggish recovery of the Eurozone - which, in the Japanese case was called the ‘lost decade’.

Firstly, please excuse the op-ed nature of this blog-post.

Recently I have often found myself discussing the unsustainable levels of debt the Irish sovereign is taking on. My main argument centres on debt dynamics - where the interest payments on the debt so outpace the sluggish growth in the economy that the portion of national income that goes on debt servicing increases every year.

Works like this : sovereign debt = 100% of GDP. Interest on debt is 5%. If growth in the economy is less than 5%, then the economy will shrink by the difference. (this is a massive simplification of the process, but will do for this post). If the economy fails to grow by enough to meet interest payments, then the following year the debt will remain the same, but the economy will have shrunk, so then sov debt = 102% of GDP.

If this cycle continues over a number of years, then the debt quickly becomes unsustainable.

Unfortunately, Ireland continues to run budget deficits which will add to the level of the sovereign debt, and also has continuing guarantees over (and ownership of) the Irish banking system.

Very simply, looks like this:

Now, we can take that €149bn + €Xbn bubble and put it in a new chart to see how it is funded:

If we look at these sources, there are obvious problems with some of them as a source for future funding, in the short to medium term. Ireland has not issued any new debt since September, and is unlikely to be able to issue any anytime soon. So we can ignore ‘Bonds’ for a minute, and the only short -term debt that is coming in is increases in Irish consumer post-office savings, which is hardly a reliable source of funding.

The IMF have pledged €22.5bn, of which Ireland has drawn €5.8bn already. The EFSF and the EFSM, along with some non-euro EU states have pledged another €45bn, of which €8.5bn has been drawn down.

The Promissory notes account for €31bn of the debt, and I will come back to these in a minute.

To get a full idea of where Ireland is, we also have to look at the position of the Irish banks, and their access to funding.

First, Irish banks do not have access to the markets. This much is obvious. So they have been relying on the ECB and the Irish Central bank to provide liquidity, and more recently, on the Irish state to provide guarantees for funding provided by those central banks.

Lets chart the two ways Irish banks are using the state to allow them access funds:

For more on FRNs see here, for more on ELA, see here.

Let’s look at the Promissory notes for a minute, because they are of particular interest.

Anglo Irish Bank was fully nationalised in Jan 2009. This is important, as it illustrates the fully enclosed circular nature of this transaction:

The state hasn’t ponied up any cash for the promissory note, it simply wrote it. (A promissory note does exactly what it says in the tin - it is a promise to pay at some point in the future).

Currently the state has promised to pay the promissory notes off over a 10 ten year period, at an assumed average interest rate of 4.7%.

So, the promissory note cost the state nothing, is going to have ‘reasonable’ interest costs for the term, and was readily turned into cash by the Central Bank.

Here is where the Heresy starts..

The Central Bank have already decided that it can accept promissory notes for its own (outside of ECB) monetary operations. The state has decided that it is ok to use an arm of the state (the CB) to create money to bail out another arm of the state (Anglo) via the accountancy trick that is the Promissory note.

So, let’s wrote another note. Only do it properly this time.

First, nationalise the bits of the banking system that are not already nationalised. This will make everything neater. Also, under the Credit Institutions (stabilisation) Act, it will mean that the minister for finance can act without any fear of share-holder action.

The Minister for finance then writes a promissory note for the total of all outstanding debt in issue by the Irish state plus all debt in issue by the Irish banks plus all liquidity provided by the ECB plus a bit to cover for future loses of the Irish banks he owns.

About €250bn should cover it.

The advantage of the government writing the promissory note, is that it gets to set the terms of that note. The interest on the current promissory note is set with reference to the 10 year Irish bond yield. This note could be set with reference to anything, but it would probably be fair to set it at the same level as the EU/IMF bailout. Of course, 5.9% of €250bn is €14.75bn. Paying that will be no improvement of Ireland’s situation, will it?

Well, actually it will, because we will be paying the interest to ourselves. We will either be paying the €14.75bn to a bank that we own, or to a central bank that we own. We pay them €14.75bn, they make profit of €14.75bn and pay that back to their shareholder - the state. The payment is circular, so the interest rate doesn’t matter, we are paying it to ourselves.

Most important is the term (the point in the future where we actually pay this back). Ireland does not need to worry about any debt roll-overs coming in the near future, so make it a 100 yr term. We will ‘promise’ to have this paid back by the 2111. Hopefully, inflation will have taken care of some of the burden by then. With this exceptionally long term ,we are not disadvantaging any of our creditors, because they will have been paid their money up front, via the nationalised banks. The drop on the ‘real’ value of the debt will not matter at all, becasue we owe the money to ourselves.

Interest payments would still be high, but they would (to quote Patrick Honohan) be manageable.

There has been a precedent set by the current cycle of the promissory notes for an operation just like this, and it could be argued that the monetary effect of this operation would be minimal. After all, the entire thing happens with a closed loop. The Irish state would own every side of the transaction, just as it does with the Anglo notes.

There are many arguments against this move - not least being the uproar it would cause among our eurozone ‘partners’, but there also are strong arguments in favour of it, not least being that we cannot pay the liabilities that are coming down the track.

Also, it is hard to get away from the fact that we are already doing this to the tune of €31bn..

The latest Irish Central Bank data has just been released.

It was expected that the ELA (accounted for in ‘other assets’) would drop by €17.5bn to reflect the FRNs that were issued by the Irish banks in January.

So, the expected figure would be in the region of €34bn.

The numbers show the complete opposite.

Other assets at the end of February stood at €70bn.

This, needless to say, is shocking.

What it seems to show is that the funding situation of Irish banks have reached critical/disastrous levels.

The Central Bank press release says:

One-off technical factors affect the Central Bank’s balance sheet at end-February 2011, most notably transactions surrounding the transfer of deposits and bonds from Anglo Irish Bank and INBS to Allied Irish Banks and ILP.  Releasing the NAMA bonds involved in the transaction in order to allow the transfers to be completed resulted in elevated levels of usage of the Marginal Lending Facility (MLF) and a corresponding drop in Eurosystem conventional refinancing (MRO).  MLF usage subsequently fell on 2 March and there was a corresponding increase in the MRO figures.

Over half of the increase in Exceptional Liquidity Assistance (ELA), as reflected in the ‘Other Assets’ column of the balance sheet, relates to collateral issues. In particular, a change in Eurosystem collateral rules (see link to ECB press release below) led to some additional temporary reliance on ELA while the relevant collateral was being reconfigured to restore eligibility.

The first part of that makes sense - we already knew the Marginal Lending Facility would have an effect on the monthly figures.

But the second part - regarding ELA is a bit less clear. We were expecting ELA to come in at around €34bn (allowing for FRNs issued and presuming no deterioration in bank funding), but it has come in at €70bn, €36bn ahead of expectations. The CB of I say ‘half of the increase’ is due to collateral issues. Well, the increase was only €20bn, so counting half that means that €10 is due to the ‘issues’.

If only €10bn of the increase is from these issues, where has the other €26bn of ELA come from? (ie €70bn - expectation of €34bn = €36bn - collateral issues €10bn = €26bn)

On the collateral issue, the ECB press release on the changes says:

The Governing Council of the European Central Bank (ECB) has decided to amend the rating requirements for asset-backed securities (ABSs) to be eligible for use in Eurosystem credit operations.

The Eurosystem will require at least two ratings from an accepted external credit assessment institution for all ABSs issued as of 1 March 2010. In determining the eligibility of these ABSs, the Eurosystem will apply the “second-best” rule, meaning that not only the best, but also the second-best available rating must comply with the minimum threshold applicable to ABSs (see the press release of 20 January 2009).

As of 1 March 2011, the second-best rule and the requirement to have at least two ratings will be applied to all ABSs, regardless of their date of issue.

That press release is from 20th November 2009 so the changes should not have come as a surprise to the banks. It is worrying that €10bn worth of asset backed securities were not prepared for the change. But it does lead me to question the insistence from the Irish Central Bank that the jump in reliance on ELA is ‘temporary’. If the Asset Backed securities failed to meet the standard, then the bank in question will have to put more assets into the ABS to bring it up to standard. If they are having to concentrate their assets, then they will have less access to liquidity permanently, rather than temporarily.

The excellent Joseph Cotterill wrote a post on Alphaville last December that highlighted the collateral difficulties of Irish banks.

So, it seems that Irish banks are running out of deposits, running out of collateral, and running to the Irish Central Bank to keep their doors open.

The end of February exchequer statement, released by the Department of Finance, shows how much money Ireland has drawn from the EU/IMF ‘bailout’. Note 7 shows:

It is probably worth having a look at the total €85bn package for Ireland, to see who has promised to lend the money, and - more importantly - when they are getting it.

Probably easiest if we go through the sources in order.

First on the list is the National Treasury Management Agency (NTMA) and the National Pension Reserve Fund (NPRF). The €17.5bn provided by these agencies is either from money borrowed in the market by the NTMA (pre-funding of the exchequer) or from state savings in the NPRF.

Second is the International Monetary Fund (IMF). The IMF funds itself through a mixture of subscriptions and borrowings. Dominique Straus Kahn aims to get the IMF’s lendable resources to $500bn to help countries affected by the 2008 crash. In 2009 it secured a bi-lateral $100bn loan from Japan. The problem facing the IMF when it comes to helping developed economies is that developed economies normally need more money to make any help effective. This interactive map shows which countries the IMF is currently involved with - note how high the lending to Ireland is compared with most other (more populous) nations. All lending provided by the IMF is on a senior basis to any other debt of that country. So, no matter what happens, the IMF always gets paid first (in theory anyway). Lending from the IMF to Ireland is at 5.7% over a 7.5 year term.

Third on the list is the European Financial Stability Mechanism (EFSM) referred to as ‘European Financial Stabilisation’ by the Irish department of finance above. This fund, using the budget of the European Commission as collateral, can borrow up to €60bn. Because it is backed by the European Commission, it has the backing of all EU member states, rather than just the Eurozone ones. In January the EFSM successfully issued €5bn of bonds to fund the first payment to Ireland under the programme. The bond was sold at 2.59% yield. The Commission are charging Ireland 5.7%, made up the of yield of 2.59% and a ‘naughty country‘ margin of 2.925% (as agreed in May 2010 by the commission).

Fourth is the European Financial Stability Facility (EFSF), which is by the far the most complex of Ireland’s funding sources. The EFSF have provided a FAQ that is very helpful when trying to understand the thing, but here is brief synopsis of how it works:

(i) The EFSF is only available to eurozone members, and only backed by eurozone members.

(ii) The EFSF needs an AAA rating to raise money as cheaply as possible. But many eurozone member states do not have an AAA rating, so in order to overcome this the EFSF is ‘over-guaranteed’ by 120%. This means that for every €100m in debt it issues, it has sovereign guarantees of €120m. Currently the EFSF has sovereign guarantees of €440bn, as outlined below, so can borrow a maximum of €366.66bn.

(iii) This doesn’t mean that the EFSF has €366bn to lend though. As part of the ‘further credit enhancements’ the EFSF keeps some of the money it borrows for a country as a cash buffer. So , in Ireland’s case, we can see that €3.617bn has been borrowed from the EFSF. But in order to fund that, the EFSF had to borrow €5bn. If this ratio holds true for all future loans by the EFSF, it means that the €440bn guarantee translates into (((440/12)*10)/5*3.617) €265bn of effective lending.

The EFSF issued its first bond on January 25th. The €5bn issue was eight times over-subscribed (ie received bids of €4obn) and was issued at a yield of 2.89%. Ireland got €3.617bn of that and is paying 5.9% interest on it.

Last on the list for the €85bn are the UK, Denmark and Sweden. Their total lending is €4.8bn and this serves to ‘top-up’ the EFSF portion of the loan to €22.5bn to equal the EFSM and IMF portion. The UK, Sweden and Denmark are not included in the EFSF loan as they are not eurozone member states.

So, that is where Ireland’s funding is coming from, and how much it is costing. You have two years to get to know the ESFM and the EFSF, because they are both due to be replaced with a new acronym in 2013, the ESM

There has been much head scratching over the ECB USD liquidity provision.

For the past six months, there has been a single bidder for the one week USD programme, with the amount is the order of $70m.

But, continuing with the recent ECB theme of reductions in the amount of liquidity provided (see here and here), there were no bids for the USD programme in last weeks operation, and again, no bids when this mornings allocation was announced.

This doesn’t necessarily mean that the mystery bidder is gone for good, but it may be the end of one of the odder ECB operations.