After this weeks action in Ireland where her “bad bank” the National Asset Management Agency (NAMA) began its task of clearing up the debris from the implosion of her property sector I thought that it would be useful to look at the implications of this move and to compare her situation with Greece. Of the two Euro zone countries these were the two whose fiscal deficits looked most likely to get out of control. However their responses to the problems were quite different with Ireland acting decisively in an austerity budget last year and ending up looking to make cuts equivalent to 6% of her Gross Domestic Product (GDP) whilst Greece had to have several bites at the cherry before eventually planning to make cuts this year of around 4% of GDP.So has virtue had its reward?
As the week has gone on more details have come out on the initial stage of NAMA’s operations where she paid 8.5 billion Euros for assets with a face value of 16 billion Euros. The plan is for her to take on bad property based loans so that Ireland’s banking sector can resume normal lending (although after the boom and bust we have been through that may be easier said than done). The average haircut on the first tranche at 47% was higher than expected reflecting the poor quality of the loans made. As I have commented before Anglo-Irish bank appears to have been the lender with the worst quality loan book and now to add to this she is mired in corruption allegations. In total some 81 billion Euros of loans will join NAMA.
A consequence of this and the fact that Ireland’s financial regulator has given guidance on the amount of Tier one capital the banks will require means that her banking sector will require around 32 billion Euros of extra finance. The bank in the worst situation is the nationalised Anglo-Irish bank and the bank in the best is Bank of Ireland. The painful truth is that Bank of Ireland is the only one where state ownership looks likely to be a minority partner.
Also the size of the haircuts at 47% was worse than expected and some analysts now feel that for the rest of the 81 billion Euros the haircuts may be even higher. This is based on the fact that so far investments have mostly been transferred into NAMA rather than land itself and commercial and residential property developments have barely begun to be switched in at all. It will come as no surprise to hear that the Governor of Ireland’s Central Bank is more bullish. But the fact that there is a debate does not sound a good omen.
Numbers on this scale are significant for Ireland which is only a small economy. For example the capital requirements for Anglo-Irish bank are almost the same as how many government bonds Ireland planned to issue this year.So a banking sector implosion has turned into a big burden on the Irish state and will ripple out for years to come.
Ireland now has a delicate balancing act to perform she needs economic growth to get going but she also needs austerity in her public finances, and these are uneasy bedfellows.
Having been forced by various outside influences to start an austerity programme and facing something of a backlash over her previous governments misrepresentation over her economic statistics means that Greece finds it much harder to claim she has been virtuous. Added to this is the fact that her problems came mostly from a bloated public-sector.
This week saw her get away a new 7 year bond issue and so 5 billion Euros found its way into her coffers. As you will have read on here I feel that this was a mistaken strategy. You will have a sense of my surprise when I heard that Greece was very soon afterwards trying to issue 1 billion Euros of an existing 12 year bond. This was compounding a mistake particularly when they were trying to insist on a yield cap of 6% and ended up punishing those who had bought the seven-year bond. In case anybody is wondering how you issue debt, in my view this is how not to do it. Only a third of the requested funds made their way into the new bond. If you were not sure by now that Greece’s authorities were showing signs of desperation, talk of issuing some government debt in US dollars should convince you. Some may wonder if they are trying to trigger an aid package,
Just to show that problems tend to come together Moody’s also downgraded five of Greece’s banks this week and left them on negative watch. A curious move in some ways after the change in European Central Bank collateral rules which is likely to benefit the Greek banking sector but it is also true that the challenges facing Greece as a nation and hence her banking sector are not getting smaller.
A Market Comparison
If we look at comparable government bond yields we see the following. In terms of ten-year yields then Greece is now at 6.53% whilst Ireland is at 4.47%. I wrote earlier this week that Greek yields were double those of Germany’s on this measure well now they are at +3.44% which is more than double. Ireland by contrast is at +1.39% which is within what you might call her recent trading range.
Shorter dated bond yields also give one a clue to see if authorities control of overnight money ripples out through such maturites. Ireland has a 2 3/4 year bond which is yielding 2.78% whilst Greece has a two-year bond yielding 5.79%. The difference is very stark.
1. I am pleased to report that there has been a reward for virtue from the financial markets if you compare Ireland with Greece. That is not the message many (politicians in trouble) want to hear.
2.The best review of the Euro zones rescue package is that ten-year bond yield for Greece are more than a quarter of a point higher than they were the day before the plan. Those who are supporters of global warming theory will be disppointed that so much hot air was expended for so little economic effect.
3. Greece’s debt management agency is either following a rather bizarre strategy or it is trying to deliberately trigger an aid package for Greece.
4. As I have pointed out before what are called successful bond issues can cause indigestion afterwards and it takes time for their full impact to be felt.
5. It would be best to call in the International Monetary Fund now.