jimg wrote:The crisis in Irish retail banking has nothing at all to do with any of: sub-prime lending, derivatives, liquidity or the global credit markets. No Irish retail bank has had any exposure to the sort of credit derivatives that wrecked the balance sheets of Lehman's, AIG, UBS and the rest.
The Irish retail banking crisis has nothing to do with these factors. Retail banks fail with surprising regularity independently of global trends. The failure of some Irish banks is akin to other business failures in Ireland - hotel groups, construction companies, manufacturers, etc..
It was a very different type of bust but there is no doubt that sentiment towards real estate was affected by a perception that reduced credit would lead to a rise in the cost of credit and make many loan deals that stacked up at say 4% interest costs entirely unviable as spreads widened from 50-100bps to 400-600 bps for development finance. Development finance is still the major piece in the jigsaw that is missing and to date I have other than a few developers raising finance in terms of share placings not seen any idea how that gap is going to be bridged within the current structures.
jimg wrote:Take Anglo for example; I've had a morbid interest in them for a while. Over a year and a half ago, I looked at their consolidated balance sheet for 2007 (just as the property market was beginning to falter) and could not understand it. The were able to claim only 3 billion excess of assets on a balance sheet of 100 billion - which contained over 60 billion worth of property loans. It became immediately obvious that once the bubbly rise in Irish property values faltered, they were doomed. Many people must have come to the same conclusion and the stock price started tanking at the start of 2008. Of course, the usual scapegoats were named - particularly evil short-selling "speculators" (often guessing that they were based in London - suggesting they were English - even worse). The reality was simple - Anglo had no future baring a miracle.
How did Anglo respond? They resorted to short term borrowing - paying higher and higher interest rates. They borrowed from anywhere they could - the markets, institutions and they even started offering ludicrous retail deposit rates - over 7% when the ECB rate was about a third of that. No bank can make profit paying these rates plus costs for their credit. Anglo had effectively become a pyramid scheme desperately trying to find ways to pull in cash to keep the show on the road..
That is a good analysis; if a forecast from peak to trough in property values was 40% clearly â‚¬3bn of capital protection would leave a shortfall of â‚¬21bn; it is however fair to say that whilst values did ultimately sink 40% on commercial assets in the UK and US the speed of the collapse from say October 2007 to March 2009 was unprecendented.
Thankfully values are rising again albeit at a slower pace and it will probably be 2015 before values are back to 2006 levels again on most assets with some very localised asset bubbles not recovering to those levels from 20 - 30 years.
jimg wrote:The government is about to pay between 4 and 10 billion in order to ensure that all the people who joined this particular pyramid scheme get their promised payout. The bill for this largess is to be met by future tax-payers. This is not only unjust, it is very bad policy. I'm not a Keynesian by any means but spending this 4 to 10 billion on infrastructure would do far more to maintain activity in the economy than using it to pay off shareholders and bond holders who had been paid handsomely previously for shouldering risk..
This is where we differ; I look at the macro-economic picture and analyse that sustainable housing development is c50,000 units per year; currently roughly 22,500 units are being built. The costs of not building these houses can be expressed as
Build 22,500 houses = value câ‚¬6.75bn (ave house 300k)
Build 50,000 houses = value câ‚¬15.00bn (ave house 300k)
Lost vat assuming 50% is construction costs = câ‚¬557m p.a.
Lost Stamp Duty assuming an average of 5% of sale price = â‚¬412.5m
Lost PAYE/PRSI assuming 35% of salary for 50,000 workers each earning â‚¬1000 a week = â‚¬1.75bn
Costs of Social Welfare for 50,000 workers at a cost of â‚¬300 p/w = â‚¬1.5bn
Total cost of letting construction run below medium term is â‚¬4.22bn p.a.
jimg wrote:How would I have responded? Like most economists, I would clearly separate the two types of retail bank failures. One is cause by liquidity issues (or panics as they called them in the old days) and others are caused by hopeless insolvency. I have no problem with governments getting involved to help a bank over a panic but there is simply NO VALUE to the taxpayer in keeping insolvent banks alive..
Take a breakdown of the assets in a very negative and unspecific way.
â‚¬30bn overseas investments - peak to now minus 30% â‚¬9bn
â‚¬30bn built Commercial Ireland - peak to trough minus 40% â‚¬12bn
â‚¬30bn undeveloped - peak to trough minus 60% â‚¬18bn
The majority of overseas investments are performing and over the life of the loan values will in most cases present an exit opportunity that involves no loss
The majority of commercial built in Ireland will recover as yields harden - in some very small sub-markets there will be realised losses
The undeveloped landbank is probably most impaired and will remain impaired until the market recovers; however the costs of doing nothing exceed â‚¬4bn p.a. in lost tax receipts and social welfare costs. A pay back of c54 months for this category makes a very compelling case for sorting the issue out.
jimg wrote:Having said this, I believe the national payments and clearing systems must be protected almost at any cost; any threat to the workings of ATM machines, cheque clearing, direct debits and the like could destroy the wider economy. Secondly - and this is a little more painful - I would offer blanket protection to deposit holders for much the same reason. Beyond these imperatives, I see no reason to pour 10s of billions of tax-payers money into maintaining these failed businesses.
Retail banks fail all the time and there is a relatively simple process for allowing this to happen without causing systemic financial panic (as you'll know given your knowledge of the Swedish response) and there are retail banks failing at the moment all over the world - particularly in the US - yet you don't even hear about it in the news..
Without confidence in the wider banking entities there are no ATMs or clearing facilities; I agree that everyone is very sore with banks at the moment as weaknesses in their business models has caused a lot of pain to taxpayers in all Anglo-Saxon economies.
They are however a key part of the way business is done and without them we are unable to function; as painful as it is to hand money out under these circumstances there is I fear no alternative.
jimg wrote:As per the Swedish response, I am also in favour of simply liquidating the loans at current market values even if the market is "depressed" (I simply don't buy the technical analysis hocus-pocus view of markets). The sooner this crap is flushed out of the system and that regular economic activity can return the better. The Japanese alternative (a variation of which you and many others seem to favour) has been proven to be the absolute worst response to a national asset bubble deflation/retail bank crisis.
As you raised with Anglo above a cushion of â‚¬3bn was never going to cover a shortfall estimated to be câ‚¬24bn at trough; the question is do you allow an avoidable fiscal shortfall of â‚¬4bn year on year to persist when there is a way to allow a goverment body to take a medium term view. I think the vlauation process will be key to tax payer value on NAMA; there have to be realisitic discounts and if there is a shortfall the government should receive more equity for the risks taken. However the banks should not be forced to put performing assets into the scheme if the covenant strength and interest cover are deemed adequate by independent experts.