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Markets are right to be worried

Markets are right to be worried — ‘final’ €50bn to fix banks looks like tip of iceberg

Sunday October 10 2010

THE soaring cost of bailing out the banks means that Ireland is now locked out of the bond markets.

Lenders are terrified that they might not get their money back. And they are right to be worried because the real cost of fixing our broken banking system is almost certain to far exceed even the €50bn figure that has so terrified Irish taxpayers and the international financial markets.

Last week, Finance Minister Brian Lenihan announced that the cost of fixing Ireland’s broken banking system had risen once again. He put the “final” cost of sorting out the Anglo mess at between €29bn and €34bn, up from the €25bn figure that had been previously indicated by official sources.

Just for good measure Mr Lenihan also announced that AIB would require an extra €3bn of new capital while the Irish Nationwide needs an extra €2.4bn.

When the estimated cost of bailing out each institution is totted up, the total comes to just more than €50bn.

That is a truly terrifying figure, the equivalent of about 40pc of the value of this year’s economic output as measured by GNP.

The reaction to Mr Lenihan’s announcement was immediate and severe. The government was forced to cancel the last three monthly bond auctions of 2010 as international investors insisted that the government devise a credible fiscal strategy; while the political system went into a deep shock from which the only escape route is likely to be an early general election.

Unfortunately, things aren’t as bad as Mr Lenihan told us last week.

They are almost certainly much worse.

First things first. Even the €34bn cost of bailing out Anglo, which the government insists is a “worst-case scenario”, will almost certainly be exceeded. That is the view of ratings agency Standard & Poor’s, whose bearish stance on the likely cost of the Irish bank bailout has consistently been vindicated by events.

For what it is worth, some analysts now reckon that bailing out Anglo will cost up to €40bn.

This would push up the total cost of fixing our banks to €55bn.

However, horrific and all as it might be, a €55bn tab for sorting out the banks might be just about bearable if we and our creditors could be confident that this was the final figure. Unfortunately we can’t be sure that the meter will stop running at even this enormous figure.

When one looks closely at the figures published last week it is clear that, with the exception of Anglo, the extra capital being pumped into the banks relates almost exclusively to losses suffered on loans being sold to Nama or, in the case of AIB and Bank of Ireland, loans of between €5m and €20m that had originally been destined for Nama but will not now be transferred to the state’s bad bank.

Which, of course, begs the question, if the banks have suffered such horrific losses on the loans they are transferring to Nama, about a fifth of their total peak lending, what sort of losses can they expect on their other loans?

When it published its half-year results on August 4, AIB revealed that, after transferring about €23bn of bad loans to Nama and the disposal of its Polish, American and UK interests, that it would have a loan book of about €81bn.

This loan book will include €27bn of Irish residential mortgages, €32bn of business banking loans, €16bn of commercial and SME loans and €6bn of personal loans.

Over at Bank of Ireland, the composition of its expected post-Nama and disposals loan book looks remarkably similar to that its great rival.

Bank of Ireland is expecting to have a total loan book of €82bn of which €28bn will be Irish mortgages, €31bn of non-property lending to SMEs and other corporates, €24bn of property and construction lending and €4bn of consumer lending.

Meanwhile, Irish Life & Permanent‘s mortgage banking subsidiary Permanent TSB, which has transferred no bad loans to Nama and has not had to be bailed out by the taxpayer, had a €38.7bn loan book at the end of June which included €27.6bn of Irish residential mortgages, €8.1bn of UK residential mortgages, €2.3bn of commercial lending and €1.5bn of consumer lending.

What are the odds on at least some of the banks’ post-Nama loan books going bad?

Between them the six Irish-owned banks had €99bn of residential mortgages on their books at the end of June. With house prices now down by at least 50pc from the peak and still falling, a significant writedown in the bank’s mortgage loans books is inevitable.

Even a 20pc writedown would cost the banks a further €20bn in fresh loan losses.

The combined €50bn that AIB, Bank of Ireland and the Permo have lent to SMEs and other companies must also be vulnerable to further, substantial writedowns as is their €11.5bn of personal lending. And as for the banks’ non-Nama property and construction lending, I’d be very surprised if it wasn’t cause for a few sleepless nights among the surviving bank bosses.

Add it all up and it is clear that even the €55bn estimate for the cost of bailing out the banking system will be comfortably exceeded, with Standard & Poor’s now putting the likely figure at €90bn.

The way things are going, I suspect that the S&P estimate could well turn out to be a floor, below which the cost won’t fall, rather than a ceiling, above which it won’t rise.

Comment :

             +derivative Losses 200,000,000:00?

This figure is creeping up and up and up and This Minster Lenihan is definitely not firing on all cylinders!

He is going in the wrong direction, Mr Lenihan is still digging an even bigger hole and I think we will not now be able to get out of it without massive help from the IMF.

With the available figures still dirp, dirp, dripping out of the Finance Department I now believe we are looking at a possible 150,000,000,000:00 (Billion) but without a look at the books in Bank of Ireland, Allied Irish bank, and Irish Life and Permanent, remember these institutions are issuing their own bonds and the government are guaranteeing these bonds.

There are bonds coming up for renewal to the tune of 30 to 45 Billion from the various banks and I can’t see how the banks are going to re-finance under the current circumstances.

Needless to say we are not been given the full figures and I expect that Lenihan and his gang of financial terrorists will try to sneak out more bad figures soon ,this would more than likely be done using cronies from the various media they control .

At this stage we the public have been softened up and there is likely to be more and more drip drip feed of bad news.

The government’s attempt to con the opposition parties into a half-baked union is most telling and this tells me that the real figures must be really bad!  Even worse that my figures as I keep reminding people there is no mention of the huge losses on their derivatives trades by the  various banks and these losses will have to be brought out for all to see sometime .  
    
This brings a whole new meaning to the praise “Well connected”
This stinks to high heaven!

http://thepressnet.com/2010/10/03/nama-changes-were-designed-to-keep-bank-of-ireland-private/

and http://thepressnet.com/2010/10/02/majority-of-countrys-banking-system-nationalized/

“A picture is worth a thousand words”

Europe’s biggest can of worms is overflowing again.
Fears that Europe’s banks are vulnerable to losses on risky government bond investments are sending shivers through the European bond markets, especially Ireland and Greece. Investors are dumping risky bonds tied to weaker European economies and crowding into the safe havens of German and British government bonds.
Ireland, which is grappling with an increasingly expensive bail-out of troubled lender Anglo Irish Bank, is the single worst performer Tuesday.
The premium that Ireland has to pay over Germany to borrow from investors in the bond market has hit its highest level since the euro was created in 1999 (Specifically, 3.75 percentage points compared with 3.47 percentage points on Monday.) Prices of Irish bonds have fallen, sending the yield on the benchmark 10-year Irish bond above 6%. (Bond prices and yields move inversely.)
Greece isn’t faring much better. The yield on its 10-year note is nearly 12%, while its own “risk premium” over Germany has also blown higher. Portugal’s spreads are also weaker. Credit-default swaps for Spain, Portugal, Ireland and Greece have all jumped in price, suggesting investors are more worried about these countries defaulting on their debts

Source http://blogs.wsj.com/marketbeat/2010/09/07/europes-bond-market-tanks-again/

Struggling with the euro zone’s biggest budget deficit relative to its gross domestic product at more than 14% last year, Irish authorities are also grappling with the ballooning cost of bailing out the banks, especially state-owned Anglo Irish—a bill that has already hit €33 billion ($42.55 billion), or roughly 20% of Ireland’s GDP.

Source http://wsj.com

ON THE radio on Monday, Brian Lenihan spoke of “not showing his hand” to the European Commission. He suggested that we in Ireland had to “hold our nerve”. These phrases are not normally used in economic policy — rather, they come straight from the world of poker.
This language is appropriate as it probably best sums up the Government’s policy throughout the banking crisis — it has all been a big bluff.
Yesterday, the financial markets reacted to the gambler’s words by selling Irish bonds, thus driving the yield (at one stage) up from 5.78pc to 6.15pc.
Yields came down to 6.01pc, following rumours that the European Central Bank was buying Irish bonds. We are fast becoming a vassal state of the ECB, the only institution prepared to buy Irish bonds.
The ECB is doing this for one reason — to protect the bondholders of Anglo from the default which has to come. In this little game, we issue expensive IOUs at 6pc that the ECB buys with money it prints for nothing to keep open zombie banks that don’t lend. The ECB is doing this not to protect you, but to protect rogue creditors who have no right to expect that they will be paid.
source http://www.davidmcwilliams.ie/2010/09/08/we-dont-have-an-economic-policy-its-all-just-a-big-bluff

Ireland has effectively nationalised its financial system for two years: it will guarantee deposits and debts for the country’s six biggest banks until 2010. This means it is assuming potential liabilities of around EUR550bn, compared with existing government debt of EUR40bn and overall GDP of EUR160bn. The move has increased pressure on the UK authorities to boost the size of the deposit guarantee.
The move was designed to shore up rapidly dwindling confidence in the banking sector. Irish financial sector shares plummeted early this week amid fears that it is particularly dependent on the frozen interbank market; loan to deposit ratios are 150% in Ireland compared with 130% in the rest of the EU, Sebastian Orsi of Merrion pointed out in the FT. Banks have been “bleeding money” as the Irish property and construction markets have tanked, noted Ambrose Evans-Pritchard in The Daily Telegraph. Ireland has become the first eurozone member to slide into recession now that the property bubble has burst and consumption has slumped.
What next?
By effectively betting its economy, Ireland has “certainly upped the stakes in the confidence game that is banking”, as Alphaville said in the FT. The hope is that the guarantee will improve Irish banks’ access to funds on world markets. But Ireland may be in for a bumpy ride. Note that the banks’ assets are highly concentrated in “fast-fading” UK and Irish property, said Lex in the FT. At Anglo-Irish Bank, the exposure to these two sectors is 80% and at Bank of Ireland and Allied Irish it is 71% and 60% respectively. And if markets keep withholding wholesale funds from “property plays”, then the government “may have to reconsider that guarantee”.
source https://info.moneyweek.com/article.php?p_id=10807

Comment :
“A picture is worth a thousand words”

I have posted the various sources above in support my own opinion that the government are totally on the wrong economic path and what’s even worse they are hell bent on sticking with this disastrous policy all logic seems to have disappeared and we are becoming slaves to the mantra we must spin ourselves out of this mess no matter what
Brian Lenihans language is increasingly that of a gambler (read DavidMcWilliams latest posting on this Link above)
David is one of the country’s finest economists and it would appear this government are choosing to ignore his sound advice just like they did on the eve of the first bank blanket guarantees
This is the time when the government should be getting the best minds in the country to come up with a real solutions to the financial crises that is after all their own making
Whether you agree with me or not, that facts are the well informed lenders (Bond Traders) of the world certainly do so, and what’s more they are getting very nervous at the lack of this governments realistic economic road map
The constant dirp drip feed of ever more disastrous figures emanating from Anglo and NAMA should frighten all of us
The Governments belligerence and a misplaced sense of loyalty to their pals a la Galway tent has to be abandoned pronto, and these gamblers must face the music themselves
The Irish nation cannot afford the commitments made by incompetent government minsters that are overwhelmed by the sheer complexity that is the Derivatives market
It is just plain stupid to expect civil servants who have no training in this field to advice party indoctrinated con men to understand these financial nuclear bombs
There are only a hand full of people in the world that understand these complex financial instruments ,even after 10 years of market participation myself I still don’t know anybody in the field that has successfully traded their way into profit
These financial instruments were created by the largest financial corporations in the world (AIG, JP Morgan, Citi etc and they were designed as far as I can make out to protect themselves as they were the market makers as well as the insurer and we all know that insurance companies are notorious in looking after themselves
the bottom line here is the markets have now copped on to the spin the Irish Government have been spewing out on the world’s airways and they Ireland Ink has a set repayment capability and that is now breached and any further surprises coming from Anglo Irish and Allied or Bank of Ireland is going to push this little country over the Default Bridge
And with the current Captain on the Irish Titanic ignoring the warnings of Icebergs dead ahead what does he do?
Call for more Ice for his pals cocktail,s

A Message from Brian Clowen

With the whole country turned against him (except for his cronies)
Brian Clowen has gone into the studio to get his message across to the country and also with an eye on the X Factor Brian is wasting no time because of his impending job loss
In any case there is always a chance the voters will believe his lies and vote him and his gang back into power
Some chance!

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