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Posts tagged ‘Loan’

“Deleveraging” crap just Default now

Having returned to Ireland after more than a decade abroad, I was struck at how our language had changed. In particular how suspicious people had become – we suspect everything. Before I left we would have “thought” or “believed” or “predicted” but now we seem to generally just “suspect”. And more often than not we “somewhat” suspect. When did that adverb gain such strong currency? It used to be “a bit” or “slightly” but now it’s “somewhat”. Mind you I seem to have picked up my own habits abroad, “while” became “whilst” and the past perfect seems to have overtaken the simple past tense so “I got” becomes “I’d gotten”. But regardless of the differences, I have been picking up new words and phrases along with everyone else – bondholders, “we are where we are”, tranches, “there is no alternative”. But there’s a new one which I think will be on everyone’s lips this time next year – deleveraging.
Before discussing what it is, let me remind you that with respect to the IMF/EU bailout, €10bn is pencilled in for the banks, a further €25bn is more lightly pencilled in as a contingency for the banks and €50bn is for our day-to-day spending (y’know the spending for which we are fully funded to the middle of next year and if you factor in the National Pension Reserve Fund and flogging off State-assets then we would get to 2013 by which time our deficit should be running at 5%). And of the €10bn pencilled in for the banks, €8bn is for recapitalisation which is to be completed for most of the banks by the end of February 2011 (Irish Life and Permanent has until May 2011 and the betting is that its €200m-odd recapitalisation will not be funded by the State). The remaining €2bn for the banks is required immediately and it is for “deleveraging”.
Let’s imagine for a moment that you decide to establish a new bank tomorrow – why not, could you be any worse than the present operators? You have €100k which you mostly use to set yourself up with a license and a premises and brand so people don’t think you’re just going to steal their deposits. You offer depositors 3% if they entrust their cash with you and on the other side you lend out at an average of 5%. You hope that you will lend out what is deposited and that the difference in interest rates will cover your ongoing costs of the operation and hopefully a profit. Now at the start you might only be able to lend out a proportion of your deposits whilst you’re building business though you might deposit the remainder with other banks so it is earning some money for you. But as time goes on you get up to lending nearly 100% of your deposits because you know it makes most financial sense if you can be lending as much as possible of the money that is costing you 3%. This is phase one and after a couple of years you have a nice little business running – let’s say that you have €100m in deposits on which you pay €3m a year in interest and you lend it all out and get €5m from your borrowers. Nice. Your loans to deposit ratio is plainly 1:1 or 100%.
You then decide to embark on phase two and in addition to taking deposits, you decide to issue bonds (formal IOUs) to the “market”. And you might pay a bit more than the depositors are getting, say 4%, but still you expect to turn a profit. So at the end of phase two you have €100m in deposits, €100m in bonds and you have lent it all out at 5% so you receive €10m in interest and on the other hand you pay out €7m in interest to your depositors (€3m) and bondholders (€4m). Nice also. Though your loans to deposit ratio has gone to 2:1 or 200%.
So deleveraging means using your assets/income to pay down your debts. As a householder who might have a mortgage and credit card debt, you might deleverage by taking cash from a deposit account and paying down the credit card debt. You might also trade down your car and use the profit to pay down your debt. You might change jobs or take on more jobs to increase your income and use that to pay down debt. You might ask for handouts from family or friends. You might ask your lenders to take a “haircut” on their loans but I wouldn’t bank on the response you’d get. With the banks “deleveraging” really means paying back the bondholders – remember that, when the term comes up again and it will a lot during the next year. I suspect.
But think about how the bank above can deleverage. It can call in loans and it can stop new lending. It could sell on loans to another institution. It could sell the lease on its premises and move to a cheaper premises and use the “profit” to pay off bondholders.  We might cut operating costs and use the increased profit to pay off the bondholders. The above example of a new bank is simple. After a few years the bank might have gone to phase three and perhaps bought another bank or started a specialist subsidiary dealing with sub-prime mortgages or specialist equipment leasing, for example. Deleveraging could also involve selling these operations and repaying the creditors who lent you the money to start these businesses.
Coming back to our present, real-world travails we are to use €2bn of the IMF/EU bailout immediately to deleverage the banks (more correctly I think it will be coming from the “internal” bailout funds at the National Pension Reserve Fund or the National Treasury Management Agency cash on hand). What banks will be the recipients of the €2bn? We don’t know. Which is concerning but not as concerning as the commitment that the Irish Times reported during the week to reduce the loans:deposit ratio% from 165% to 100-120% – “The banks have an average loans-to-deposits ratio of 165 per cent – a measure of reliance on external borrowing. This means that for every €100 on deposit, they have €165 out on loan. Under the EU-IMF plan to reduce the size of the banking sector, the banks must reduce this to 100-120 per cent by selling off loans and “non-core” businesses.”

full article at source http://namawinelake.wordpress.com/

Economist David McWilliams, who correctly predicted the crash, said today that Ireland was being “victimised” because the EU was about to create a new structure which would allow countries who made mistakes in the future to burn the bondholders.

He says the governor of the Irish Central Bank and the financial regulator were the wrong people to have negotiated the deal for Ireland because they were too concerned with national credibility which is already shot.

“We don’t need economists negotiating for Ireland, we need liquidators,” said McWilliams.

There is also a sense of cosiness about this deal that is worrying. We have the band-aid headline figures, but not much about how the IMF wants to structure spending cuts and taxes.

The head of the IMF mission to Ireland, Ajai Chopra, says the country has a bright future and its open, flexible economy gives it a better chance than others to rebound quickly.

But why? What are the IMF views on structural reforms?

We don’t know what it thinks about capital expenditure on big projects like the brand new Metro train line from Dublin Airport to the city centre. We don’t know what it thinks about the controversial Croke Park agreement, that guarantees no pay cuts in the public sector or the fact, for instance, that Brian Cowen is one of the highest paid leaders in the world or that utility companies remain in state control.

So the view held by many voters – that the arrival of the IMF was a good thing because they would take decisions that were too difficult for Cowen – is misplaced.

For now, it looks like the IMF’s arrival was a cover for a fresh injection of capital into the banks, and the political structures and regulatory inertia that created this financial mess in the first place remain untouched.

So it’s looking like “game on” for more of the same political cronyism that got Ireland into this sad position.

Ireland bailout: The full government statement

Ireland bailout: The financial regulator statement

So now over to economist Stephen Kinsella of Limerick University who says beggars can’t be choosers, but he still believes more cash may be needed.

1. Is €85bn enough?

We’re told that we’re borrowing €67.5bn from the EU/IMF at varying interest rates, averaging 5.83%. Adding in €17.5bn from our own coffers gives an €85bn bailout.

The emphasis is clearly on the fiscal problems of the state, with the banking problems being resolved by a combination of reforming the banks and pumping more money in over time.

First things first, the banks get €10bn in exchange for some fairly major restructuring. They can access a further €25bn if required.

The state can access €50bn to run the country in the next few years if it
can’t get the markets to lend it money at a lower rate after 2011.

Expect to see [Ireland’s National Asset Management Agency or “bad bank”] Nama get more loans, as well as AIB getting all but nationalised. Other smaller banks will get sold, I’d say.

Despite all of the churning the EU/IMF loan and its associated fiscal conditions represents, we return again to the cardinal problem: is this loan enough, this time? Independent analysts (trueeconomics blogspot and the Financial Times) have put a mid-range estimate of €50bn-€70bn on the bank bailout alone.

We’ve already put in over €32bn, so adding another €35bn puts us in the firing range for a banking resolution. Unless, of course, the banks’ loan books worsen again, with the coming wave of mortgage defaults in which case they’ll need more.

Recent figures in the annual report of Ulster Bank parent, RBS, suggested between 12% and 20% losses on the €115bn residential mortgage book.

If we see anything like that figure, we’re toast again.

But right now, with bits of banks being sold off, others nationalised, and Nama employed to work out bad debts as much as possible, the bank recapitalisation looks like a ball park figure that might be correct, and the state has committed to getting its house in order. It just might be enough, but barely. We’ll watch this space.

A separate but obviously related question is: how does a tiny open economy with 2.2 million workers service the debts run up by private banks, whose bad debts are now allied to those of the state? How does the state grow its way out of this debt?

2. Where does all this “buy-in” come from?

For some reason last night, we heard a lot about the “buy-in” expected from the Irish government, the EU, and the IMF. It seems that the cost of this buy in is the pensions pot.

The effect of dipping into our pension reserve

We’re using €17.5bn of our own money in this bailout, €5bn from cash reserves, and €12.5bn from the National Pension Reserve Fund. This does three things.

First, it lowers the amount to be repaid internationally (though there is an
interest rate involved) because we’re effectively borrowing from

Second, it commits the present and future governments to a programme of austerity up to 2015.

There is now practically no policy discretion on the behalf of the sovereign, regardless of which political party takes office. Taking account of the parts of the NPRF already committed to other activities, when the €12.5bn is drawn down, €5bn will be left in the pot to play with.

Third, it ensures that the cost of any default is borne first by the Irish state.

Noses and faces come to mind.

3. Why weren’t bondholders burned?

Because it was contrary to the interests of our eurozone partners. End of. It’s sad, it is awful, but the simple truth is that beggars can’t be choosers, and we are beggars. The state asked for bondholders to be burned, but it didn’t help solve the problems of the eurozone, and so the fairer option was discarded.

source http://www.guardian.co.uk/business/ireland-business-blog-with-lisa-ocarroll/2010/nov/29/ireland

and then today in the sunday indo we have this

Sunday December 05 2010

Last week’s deal between the Irish Government and the ECB/EU/IMF troika — the details of which continue to trickle down from the stratospheric heights of secretive bureaucracies to the lowly taxpayers — has been anything but a rescue for our battered economy.

Far from providing a resolution to Ireland’s financial and fiscal crises, it made the restructuring of our banks’ debt inevitable, no matter what the conditions underlying the deal says.

Instead of resolving the core problem of catastrophic losses within our banking sector and the related problem of the fiscal insolvency of our Exchequer, the ECB/EU/IMF loan created an internationally binding agreement that officially transferred the debts of our private banks onto the shoulders of Irish taxpayers. By doing so, the EU, with the complicity of the Irish Government, has delivered a full-blown contagion across the entire Irish economy.

The levels of our banking sector indebtedness are gargantuan. Carrying the Government and household debts amounting to some 225 per cent of the annual national economic output on the shoulders of ordinary income earners is a problematic proposition for a healthy economy. Doubling it to also cover the debt obligations of our banks is simply equivalent to economic suicide. Worse than that — it is an act of subjugation of the ordinary taxpayers by their own Government.

Recognising that in addition to the catastrophically increased indebtedness of the real economy achieved by the ECB/EU/IMF deal, we have also experienced an unprecedented collapse of economic activity, which implies that the end game has not been changed by the latest loan agreement.

Default through the restructuring of Ireland’s overall debts is inevitable.

The loan has simply delayed it, buying Europe some time before it has to face the ultimate crisis. The problem is, delaying things serves only to exacerbate the future fallout.

Insolvency is a condition that is determined by three factors — the overall levels of debt, the cost of servicing this debt and the economy’s capacity to repay interest and principal on the debt.

Before last week’s loan was forced onto the Irish Government, our real economy — households, non-banking financial intermediaries and non-financial corporations operating here — were carrying the debts of €340bn. Add to this the Exchequer’s outstanding debt and the total level of Irish economy’s indebtedness and ex-banks, and the figure stood at €430bn. This was secured against the expected national income of about €130bn in 2010. In other words, the Irish economy has leveraged some 3.3 times its income.

Courtesy of the ECB/EU/IMF loan, our debt levels have risen overnight to €497bn. Factoring in future borrowings that will be required to underwrite the banks’ bondholders, this figure can be expected to rise to €560bn in three to four years’ time in constant euros. Nominally, the debt pile could reach over €593bn under benign inflation assumptions and before we factor in rolled-up interest.

Getting a new credit card can never solve the problem of an insolvent household. Ditto for an economy.

Assuming the Government projections for increasing the pool of Irish taxpayers materialise — a tall order assumption in the society where already excessive tax burden is shifting more and more economic activities into cash-only grey markets — by the end of 2014 total debt of the Exchequer and households will add up to €341,000 per taxpayer.

For a person on average earnings, this adds up to 10 times the current annual pre-tax income.

Let’s consider the above numbers from another point of view. Using the ‘subsidised’ rate of interest attained under the loan deal, the total ex-banks’ cost of interest repayments for the Irish economy in 2014 can be expected to be €34.6bn per annum, or more than one-quarter of our entire national income.

Now, imagine the thoughts running across the bond traders’ desks when they attempt to calculate our solvency ratios.

In short, debt restructuring — or in the more direct language of the street, a debt default — is no longer just an option. Instead, courtesy of the ECB/EU/IMF loan and our own Government’s failures to manage the banking and fiscal crises, it is simply unavoidable. Which brings us to the question as to what alternative do we have to minimise the damage to the real economy? At this moment in time we face a painful choice: either we choose a path of orderly restructuring of our banks’ debts today, or we face a disorderly collapse of the banking and Exchequer finances two to three years down the road.

The first path requires abandoning the memorandum on the State’s bank guarantee, signed with the troika, that commits the Irish State to ensure the continuation of bond repayments to Irish bank bondholders. This step is easy to take.

Within the ECB/EU/IMF team, it was the EU that insisted on underwriting bank bondholders, against the advice of the IMF. Even a simple glance at the numbers above would imply that should the EU continue to adhere to the same position, by 2012-2013 it will have to deal with the worst possible scenario — an insolvent member state with insolvent banking and household sectors. The fallout from this for the EU would be far worse than some €60-90bn in the debt writedowns required to repair the Irish economy.

The next step — after shredding the Irish Government commitment to the bank bondholders — will be to rebuild the banking sector through a structured recapitalisation of the Bank of Ireland and AIB, by a combination of debt-for-equity swap — setting current bondholders to equity holders in the banks — the state purchase of shares in the banks at a heavily discounted price, and a restructuring of Irish bank debts to the ECB. Alongside these financial measures, the banks must be cleansed of their top management and reformed in areas of their long-term strategy and operations.

The state guarantee must remain only for the depositors and even this should be limited, after the reforms take place, to deposits under €200,000. A voluntary insurance scheme should be set up for all deposits in excess of that amount. It can be underwritten, in part, by the State in exchange for premium payments out of deposits. Anyone suggesting that a debt-for-equity swap would result in the Irish banking system collapsing altogether should go back to May this year, when the Bank of Ireland carried an €852m conversion of subordinated debt for equity, netting a capital gain of €233m in the process.

Restructuring bank debt today is the only alternative to a disorderly default in a few years’ time. The latter outcome would imply — following Argentina’s and other recent scenarios — a total stop to all functional banking operations in the country and a full restructuring of the sovereign and bank debts, carried out while the markets panic.

Terms and conditions of such a default, from the point of view of Irish households and companies, will be fully determined not by us, but by the international markets running for cover.

The real tragedy of last week’s ‘rescue’ package for Ireland is that by forcing on to our shoulders the entire burden of banking sector debts, the troika has virtually assured the destruction of the very fabric of this economy that represents the only hope for our recovery.

The Irish economy is an economy with great potential for growth. Our entrepreneurs and exporters, our skilled workers and able and creative businesses can be a real engine of robust recovery, if only we can lift the unsustainable debt burden off our shoulders.

Constantin Gurdgiev is adjunct lecturer in Finance with Trinity College, Dublin

Sunday Independent

The EU-IMF bailout is wrong for Ireland

The following is taken from Debt and Development Coalition Ireland’s publication ‘A Global Justice Perspective on the Irish EU-IMF Loans: Lessons From the Wider World‘ (PDF).

This document outlines lessons from the global debt justice movement in responding to debt crises, provides a background to the Irish EU-IMF loans (up to the 28th November 2010 – before the loan documents were made public), and offers some recommendations from DDCI based on these lessons from our work. It also flags up recommendations from other groups.
Key Lessons highlighted include:
1.  The legitimacy of the IMF as a lending institution is deeply questionable – due to its undemocratic governance structure, the devastating impacts of its policy conditions on the world’s poorest people, and its lack of transparency. Unfortunately the IMF has not adequately reformed its policy conditionality practices since the recent global financial crisis. Since becoming a member of the IMF in 1957, Ireland has failed to influence the IMF to reform in these areas.
2.  The practice of lender policy conditionality hides who are the driving forces behind policy actions taken by borrowing governments.
3.  The precedent of the EU-IMF lender combination has shown the EU to have adopted a tough position toward EU countries in crisis. New proposals on lending practices within the EU are already forthcoming from government and civil society sources and need to be monitored in terms of their implications for international lending practices and any impact on Southern nations.
4.  It has been possible for Southern borrowing countries in debt crises to stand up to lenders and survive. Justice campaigners in Southern countries and some governments, have also demonstrated that there are alternatives to lenders’ policy conditions and the importance of fighting for them
Recommendations from DDCI:

Lesson 1:The IMF and Ireland’s Membership

Recommendation: Fundamental reform of the IMF’s role is long overdue. DDCI has been calling for a set of key reforms in Irish government policy toward the IMF central to which are:

  • An end to the IMF’s practice of attaching economic policy conditions to its loans
  • Fundamental reform to the IMF’s governance structure to include far greater voice and vote for Southern countries (for example through introducing a double majority voting system)

Lesson 2: Policy Conditionality and the EU-IMF Lending Dynamic
Recommendation: If the EU-IMF loans are accepted by Ireland (DDCI is not proposing that the loans should be accepted by Ireland) there must be total transparency so that the roles the EU and IMF are playing as combined lenders are clear:

  • All loan documents must be made public and put before the Dáil for decision. In the case of the potential drawing up of loan documents before the 2010 budget, they must be scrutinised, debated and voted on in the Dáil before the budget is published.
  • The Irish government must make public to the Dáil and the Irish people, the areas of agreement and divergence between the Irish government, the EU and IMF through the full period of negotiation on any loan agreements;
  • All records of dialogue with the EU-IMF lenders should be publicly available now and through all reporting stages on any loans.
  • In any subsequent annual budgets, any lending or review documents should be put to the Dáil for decision after the national budget is agreed so that lending agreements or recommendations from lenders do not take precedent.

Lesson 3: Potential new EU/International approaches to lending and borrowing?
Recommendation: Any proposed new lending or debt management principles that may emerge among EU member states in response to the eurozone crisis must support Southern nations’ right to debt justice.
Recommendations from other groups:
Lesson 4: Fighting for Alternatives
Trade unions and economists are proposing a number of possible options regarding lender responsibilities. Some of the documented ones so far include (in no particular order): ICTU (supporting a write down on all bank bondholders holdings to 10% of their nominal value); Michael Taft / Unite (supporting write downs on bank bondholder debt); Dr Andy Storey (supporting debt default / repudiation); economist David McWilliams (calling for Debt to Equity Swaps). A range of budgetary options which prioritise protecting the majority of people from unjust and damaging budgetary measures and outlining alternative budgets can be found from lots of active social justice civil society groups including: http://www.socialjusticeireland.org; http://www.communityplatform.org; http://www.unitetheunion.org, http://www.ictu.ie, http://www.olderandbolder.ie, among plenty of other groups.


It is still not too late to get the bondholders to take  Debt to Equity Swaps as  belive we in this country of ours do not have the earnings capacity to meet the penal interest rates and the market agrees with me .

The Current spin thet we have to pass this budget is a spin the bondholders are suporting as they are the ones that will get burned if we do not do their bidding we must not allow this budget to get passes it will give all future goverements the excuse to interduce all sorts of tax raising measures as well as the excuses to slash public services and sell off all the countries assets this is why the oppisittion are behiend the seans suporting the commming budget

mortgage crisis on the way?

The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War, but with one crucial difference. Whereas the Land War faced tenant farmers against a relative handful of mostly foreign landlords, the looming Mortgage War will pit recent house buyers against the majority of families who feel they worked hard and made sacrifices to pay off their mortgages, or else decided not to buy during the bubble, and who think those with mortgages should be made to pay them off. Any relief to struggling mortgage-holders will come not out of bank profits – there is no longer any such thing – but from the pockets of other taxpayers.

The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue.

However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly.

source http://thestory.ie/2010/11/08/guess-whos-back-back-again/


I agree ,we are in a holding position currently but it is unsustainable as the banks are having to borrower at 7.34% and are lending at 5% hence to collapse in mortgage lending so as I have said many times before I wouldn’t be a buyer at the current market prices I see at least a 35-40% drop heading our way in the next year as I believe the prices are also been determent by the national average wage as most of the first time buyer are from this category and the banks are now been dictated to be Brussels and I know that Brussels insists a loan ratio of no more than 2.5% salary . So let’s suppose an average industrial wage of 25,000:00 Euro then we will have an average house price of 75,000:00 Euro which is about the average European home price


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