Thursday, 31 March 2011 12:12

To Cut or Not to Cut, The Irish Threaten To Play Rough With Those Clippers: Threats of Haircuts Rattle the ECB!

Yesterday, I made it clear that "It Looks Like Ireland Is About To Get Those Leprechaun Clippers Ready – Haircuts, Here We Come!" Today, in the news we see that...

Anglo Irish Bank Posts Record Loss

Anglo Irish Bank said its net loss widened to a record €17.65 billion last year, reflecting the heavy discounts on the transfer of its bad property loans to the government's asset-management agency.

Ireland May Merge Two Banks as Stress Tests to Trigger More Aid

The government is considering folding EBS Building Society, the fifth-largest, into Allied Irish Banks Plc (ALBK), the second- largest, according to two people with knowledge of the situation. An announcement may come today after the central bank publishes the results of bank stress tests at 4:30 p.m. in Dublin, said the people, who declined to be identified because the matter isn’t yet public....

Ireland’s banks were reliant on the European Central Bank for 88.7 billion euros of funding at the end of last month, the Irish central bank said today. They may have borrowed as much as an additional 70.1 billion euros in exceptional liquidity from the Irish central bank, according to figures on March 11.

The government may have to inject 27.5 billion euros extra into the banks in total, according to a survey of 10 analysts and economists by Bloomberg News.

This would exhaust about 80 percent of the bank fund set up last year as part of Ireland’s bailout by the European Union and International Monetary Fund. The fund includes 17.5 billion euros from Ireland’s own resources....

Armed with the stress tests results, Ireland’s month-old Fine Gael-led government will seek to reopen the terms of the country’s 85 billion-euro bailout inked in November. Noonan will bring the results to a meeting of European finance ministers in Budapest starting on April 8 as he pushes for a reduction in the 5.8 percent interest rate on the loans.

The government also said it wants the ECB to provide longer-term financing for the banking system, and is seeking permission to share losses with senior bank bondholders. European policy makers are opposed to imposing losses on bank bondholders, on concern that it may reignite a banking crisis across the euro region.

Irish authorities also want fellow euro members to take direct stakes in the banks or provide insurance against losses for them as it tries to find buyers for lenders.

As a natural result, the ECB members are balking. As reported by ZeroHedge:

There has been disagreement in ECB governing council over new liquidity facility
ECB will not announce plans for a new liquidity facility to help Irish banks on Thursday

Not withstanding the ample evidence and analysis that I included in my post yesterday that clearly illustrated this as a forgone conclusion as early as this time last year..

  1. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
  2. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
  3. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
  4. Beware of the Potential Irish Ponzi Scheme!
  5. Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor!

Amsterdam’s VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the “overbanked” status of many European sovereign nations

[youtube kME6xuf_RKg]

I present to you a historical dance through why this was not only highly visible from afar, but practically unavoidable. Its as simple as this... There is a gigantic capital hole and structural imbalance in many European nations and someone is going to have to pay the piper. Here are my thoughts starting July 2010:

For our professional and institutional subscribers, the Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts are available online. All subscribers have access tos the File Icon Irish Bank Strategy Note which adequately warned before Irish banks dropped 85% in value. The File Icon Ireland public finances projections is also available to all paying members.

For those who don’t believe haircuts are possible, remember Denmark already took the clippers out. Ireland looks like they may be bluffing, but suppose their bluff is called???
From Bloomberg Today: Bondholder Haircut from Ireland May Shut Italy & Spain Out of Funding Markets

Ireland making good on its threat to impose losses on senior bank bondholders would precipitate a funding crisis for lenders across southern Europe, according to CreditSights Inc. “The fallout would be big and it would be bad,” said John Raymond, a London-based analyst at the independent research firm. “The senior unsecured market would shut down, at least for a while. Right now, the bigger and better Spanish and Italian banks can still access the market. That could end.”

The Irish Central Bank will today publish the results of stress tests, requiring the banks to raise another 27.5 billion euros ($39 billion) of capital, according to the median estimate of 10 analysts surveyed by Bloomberg News. At the same time, the nation’s new government, led by Enda Kenny, is seeking to extract better terms on its bailout loan and secure medium-term funding from the European Central Bank to avoid a fire sale of lenders’ assets, threatening to burn bondholders.

Irish banks had about 16.4 billion euros of senior unsecured, unguaranteed bonds and another 20.9 billion euros of government-guaranteed notes outstanding as of Feb. 18, according to the Central Bank of Ireland. While governments have typically stepped in to prop up distressed lenders before senior creditors lose money, that has been changing after the cost to taxpayers of the 2008 financial crisis.

... Pressure on bondholders to share the burden of banks’ losses is growing. In Denmark, the government inflicted so- called haircuts on senior creditors and depositors of regional lender Amagerbanken A/S, which failed after losing money on investments including real-estate loans. Moody’s Investors Service cut ratings of five Danish banks, including Danske Bank A/S, the country’s biggest, pushing up funding costs. Ireland’s government has similar powers to Denmark’s under the terms of its banking act.

And in news just breaking... Ireland Says Four Lenders Need $34 Billion After Stress Tests :

Irish regulators instructed four banks to raise 24 billion euros ($34 billion) in additional capital following stress tests on the nation’s lenders.

Allied Irish Banks Plc (ALBK), the biggest lender during the decade-long economic boom, requires 13.3 billion euros, the central bank in Dublin said today after publishing the results for four banks. Bank of Ireland Plc must get 5.2 billion euros, while Irish Life & Permanent Plc and EBS Building Society make up the remainder, the central bank said.

“Banks will be capitalized as the additional capital requirements announced today provide for future loan losses over the course of the three years on a scale that is unlikely to occur and an additional buffer for subsequent events,” Governor Patrick Honohan said in the statement.

With inflation pressure increasing, haircuts knocking at the door and risks abound, one should expect that rate storm I warned about. There goes those CRE cap rates! You know, "This time is different!" I will go into this topic depth (and in English) in Amsterdam on April 8th. Anybody interested in attending should contact Jacob at the following link: www.seminar.ingref.com.

Last modified on Thursday, 31 March 2011 13:01

3 comments

  • Comment Link Reggie Middleton Thursday, 31 March 2011 14:25 posted by Reggie Middleton

    I never predicted teh ECB and EFSF could never be augmented, but I also never called them robust either. They may be labeled that way, but labels and reality don't always coincide.

    I'm not following the bulk of your comment. What I am saying is that Ireland has the need and the capability to implement haircuts, and I'm saying that this is not a surprise. That very same need is possible for Portugal and Greece, and once one or two of these entities stiff the bondholders, the floodgates are open. The central planning authority can give everybody loans upon the condition of higher taxes and austerity in a recessionary environment with stagflation creeping in the background - good luck with that - or someone has to eat some pain.

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  • Comment Link Jim Thursday, 31 March 2011 14:13 posted by Jim

    You certainly know the Street, Reggia, as anyone who has spent his whole life in the boroughs. However, Ireland certainly won't exhaust the robust ECB and EFSF funds that you predicted could never be augmented or survive until 2012. Before you wear the green and do the jig, consider that a European central authority is bailing governments, who first socialized the banks. And it survived a major election defeat! This ain't Argentina and it has unraveled in CRE in Ireland, while the US is facing a very different RRE disintegration - not a meltdown. The international markets will catch up to Portugal and Spain in time, not what you foresaw and two very different cases, one a ratings collapse of sovereign debt not backed by anything (Portugal) and an amazingly slow disintegration of the RRE in Spain, that the government is trying to bail through the shaky thrifts (not multinationals behind RRE like the US) of the national lenders of Ireland.

    I sure hope that your country analyses are more varied than the tendency of these posts to lump a lot of different scenarios into one, because a lot of different folks along the "chain of life" are going to get eaten different in different countries. And some of these folks are exposed in different currencies, which needs a lot more analysis than a curve pointing to Bob gets pummeled in Asia. Danish krona, Swiss francs, the pound, the euro, the dollar. There will be haircuts in Europe, some more some places and some less. Some devaluations around the corner, but which currencies and when? If Mundell isn't on your bookshelf, it's a great time to revisit some of those questions about currency areas.

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  • Comment Link apeakunderthehood Thursday, 31 March 2011 13:14 posted by apeakunderthehood

    http://apeakunderthehood.blogspot.com/2011/03/fed-speak-gotta-know-your-enemey.html

    Fed Speak... Gotta Know The Enemy
    Thanks Reg

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