And the crisis comes to pass

We have warned time and time again that Ireland was facing a massive fiscal crisis, both on here and on Twitter. We took a look back through the archives to see what we might have called right over the last number of months:

September 11, 2009: ‘A floor in the market’

We questioned just how much nonsense Finance Minister Brian Lenihan spoke in September 2009, where he argued that Ireland had neared the floor in the housing market. Of course, NAMA set its floor in November 2009, and prices have fallen ever since – leading to yet more losses for the taxpayer. We quoted him:

“If a flood of property is dumped on the market, it will be utterly unsustainable. That is one of the reasons we must establish NAMA and try to establish a floor in the market. We are very near it on the basis of the figures and data we have about the yield from property. The yield is at an all time high relative to the assets, which is a clear objective economic indicator that we are approaching the trough. We must banish our devils, the suggestion that we have further to go. That is part of the problem and the reason for the illiquidity in the housing market.”

And posted the video:

There is no doubt that everything said there was a fiction, and it was patently obvious at the time.

December 24, 2009: Morgan Kelly on how we got here

Morgan Kelly published a paper at Christmas 2009, in which he outlined the looming bank crisis and the coming massive mortgage crisis. It was universally ignored. We highlighted it at the time:

I can’t really add much to Mr Kelly’s excellent analysis. What it says to me is that the next 12 to 18 months are going to be among the most difficult, if not the most difficult, time this country has faced. I encourage everyone to read the entire document.

I will emphasise his conclusion:

Despite having pushed the Irish state close to, and quite possibly beyond, the limits ofits fiscal capacity with the NAMA scheme, the Irish banks remain as zombies whose only priority is to reduce their debt, and who face complete destruction from mortgage losses. The issue therefore is not whether the Irish bank bailout will restore the Irish banks sothat they can function as independent commercial entities: it cannot. Rather it is whether the Irish government’s commitments to bank bond holders when added to its existing spend-ing commitments, will overwhelm the fiscal capacity of the Irish state, forcing outside entities such as the IMF and EU to intervene and impose a resolution on the Irish banking system.

February 4, 2010: The Coming Crisis?

It might be news to some people, but the purchasing of Irish bonds by Irish banks was highlighted a long time ago. We highlighted along with many others that Irish banks were buying Irish sovereign bonds and using them as collateral at the ECB. We also emphasised that Ireland was in as worse, if not a worse state than Greece – just that the markets had yet to pay attention to Ireland:

If you thought all of the problems had been sorted, then think again. There are really big problems coming down the road, and very few people seem to be talking about them. So let’s look a little closer at the potential fiscal problems Ireland, and our banks, face.

Everyone is talking about Greece right now, but to me Ireland is no different. It is probably worse. So with these deadlines looming, what is happening? Over the past number of weeks you might have noticed various headlines to do with NAMA delays. Why is this important? Could it be that unless the banks can transfer these junk ‘assets’ from their books, they could face funding difficulties on non-ECB markets?

I could well be wrong, or even cynical, but my feeling is that banks are desperate to get this stuff off their books, in order to be better able to fund themselves after the ECB shuts the discount window. If they don’t get them off their books, and onto the backs of the taxpayer, the banks could simply end up going to the wall, or simply being nationalised.

If you’ve read Morgan Kelly’s excellent analysis of the Irish credit bubble you will be aware of the Irish banking system’s over reliance on international money markets for funding. When the financial crisis hit in September 2008, these money markets froze and Irish banks struggled to get day to day funding. This is what ultimately led to the bank guarantee, and to the opening of what’s called the ECB discount window.

Banks all over Europe were struggling with funding, so the ECB essentially enacted emergency measures to help fund the banks. Irish banks were one of the biggest beneficiaries of the discount (the interest rate charged by the ECB is sometimes called the discount or repo rate). Ireland’s banks have effectively been kept on life support by the ECB since 2008, as McWilliams also noted last year. Essentially Irish banks were buying NTMA-issued sovereign bonds with short-term lending, presenting that as collateral to the ECB and then borrowing cheaply from the ECB. Summed up here – 25% of our deficit in most of 2009 was indirectly funded by the ECB.

When you combine the shutting of the discount window, with the delays in NAMA transfers and ultimately our own State borrowing (indeed we have already borrowed €6.5bn so far this year – 33% of our bond issuance for this year was done in January) and with the likely writedowns of not 30% but 50% on the loanbooks, we are facing a serious crisis. And of course the other factor is the ECB raising interest rates at a time we need them to stay low.

My questions is this: how are we going to pay for all of this?

February 22, 2010: Delay and Pray

This actually sums up how the Irish banks, especially Anglo, have been dealing with our property developers. Rolling over interest, not writing down the loans, not crystalising the losses, doing repayment deals with developers – to drag it out – extending and pretending.

Here it is in a nutshell: NAMA is one massive “Delay and Pray”.

Given that our banks are insolvent, that they are facing massive liquidity issues with the imminent closure of the ECB discount window, they cannot keep the pretence of extending and pretending up forever – and NAMA is, or was supposed to be, the answer to their prayers. You could also argue that Bank of Ireland recently changing its fiscal year was part of this tactic.

The Government would take the crappy loans from the banks (rather a lot), and through some financial voodoo, the losses would still not be crystalised, and rather ingeniously – the debt would not appear as sovereign debt for Ireland, or as debt for the banks, but would instead be dumped into this NAMA bad bank.

And NAMA has one sole purpose – keep the pretence going that someday, somehow, the value of the underlying assets will return to peak prices. Delay and pray. Do not write down the loans. Do not accept the reality of the losses. Do not pass go.

Not only is it unlikely that this will happen, it is almost impossible. Morgan Kelly wrote in December that it could take 50 years for the underlying assets to return to 2006 prices. Last week, in the High Court, we saw development lands being written down by 60% to 98% (in terms of valuation, not borrowing). These figures are the reality of the lands that NAMA is taking charge of. And we are overpaying already. How long do you think it will take rezoned agricultural land bought for €13m at peak, revalued at €600,000 in 2010, to return to €13m? The answer is: it won’t. So much land was rezoned that there is no necessity for rezoning for a further 70 years in many counties. Add to that the 300,000 vacant properties. Add to that little demand. Add to that zombie banks unable or unwilling to lend.

This is the reality of NAMA. Delay and pray.

It logically follows that where the banks lent money with no obvious collateral to back the loan, and where the supposed value of derivative is now zero, the bank sustains a massive capital loss.

However the banks are simply delaying and praying until NAMA takes over the loans, and then NAMA continues the praying.

We are in for one hell of a fiscal mess.

If you hear spin that no one saw this coming, don’t listen. There were plenty of commentators and plenty of warning signs. Unfortunately many people chose not to listen.

3 thoughts on “And the crisis comes to pass”

  1. Blogged this back in 2004 and never thought that the condition of the country would deteriorate so much since then. Sad and sick to read now.

    # We have a booming economy for which everyone takes credit for but which is based largely on inappropriate cheap credit rates ordained from outside the State.
    # We have completely inadequate services in health, law and order and for the disadvantaged and deprived but unending promises of improvement that are rarely delivered.
    # We have a strong foreign industry base thanks to transfer pricing, generous tax rates and light regulation but stagnating indigenous industry due to escalating costs and lack of development.
    # We have a service sector that is manifestly over-pricing in many areas which blames everyone but its own greed for causing the high prices.
    # We have a Government that is unwilling to raise taxes to improve services but very willing to give tax breaks to wealthy tax payers and impose stealth taxes.
    # We have a public sector that accepts politically-inspired benchmarking awards but offers little in return other than interest in further similar awards.
    # We have an administration that expends enormous sums on capital projects but is incapable of managing them on budget and time without selling major rights to private interests.
    # We have a national pension fund which sucks up 1% of national wealth every year to invest throughout the world but is unwilling to make any significant investments in Ireland.
    # We have a political philosophy which seeks to impose greater use of our historic language in Ireland and the EU but fails to adequately protect our heritage, constitution and nationhood.
    # We have a Cabinet that is unable to make timely decisions on key issues – airport terminal, health service reform, housing, traffic and social equality – but very fast to decide on unimportant matters like post codes, decentralisation and e-voting.
    # We have politicians who transfer hundreds of millions of tax receipts to lawyers to probe corruption and wrongdoing but who are unable to accept their responsibilities and often pay scant regard to the truth and ethics.
    # We have a legislature which generates noise and spin but operates for less than half the year and, even then, is very poorly attended and regularly ignored by its proponents.
    # We have an “establishment” which pursues a liberal economic agenda but fails to appreciate that the economy is only one element of a strong, satisfied State.


  2. I just stumbled onto your site.

    Well done for excellent, factually-based analysis of a consistently high standard.

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