Stress and sustainability

The number is out. The banks require another €24 billion of recapitalisation but we may not need to borrow a cent of it.

In a previous post we examined that debt sustainability of the State taking on additional banking-related debt if the bank recapitalisations required the full €35 billion set aside under the “worst case” scenario in the EU/IMF deal.  The conclusion was:

Let’s assume that the “adverse scenario” of the stress tests matches the “worst case” scenario of the EU/IMF deal.  This means a further €35 billion going to the banks, bringing the total cost of the bank bailout up to €81 billion.  Adding the additional €17.5 billion of borrowings that this requires to the existing €35.6 billion of borrowings used for the banks so far means that we will have a €53 billion millstone of bank-related debt weighing us down (as well as the elimination of €20 billion of sovereign savings and the reduction of €7.5 billion in our cash balances).

This €53 billion of debt is sustainable (with sustainable being defined as the ability to avoid default).  We could carry this debt and service the interest.  It is hard to see how we can actually pay it off but having it is unlikely to tip us into default. 

We now know that four of the six banks require an additional €24 billion in recapitalisation funds so this reduction of €11 billion will make the sustainability of this debt even more likely.  But we also learned a few more things.

Irish Life and Permanent requires €4 billion.  According to a statement issued by the company €1.1 billion of this will come from the sale of Irish Life with another €0.6 billion coming from existing company resources.  The State will make up the €2.3 billion shortfall, but will not need to cover the entire €4 billion.

In an interview on RTE’s Six One News, the Minister for Finance, Michael Noonan indicated that part of the cost would be carried by subordinated debt holders.  We looked the numbers in a previous post.  Here is the table again.

The issue of burden sharing is raised 2:50 into the clip that features the Noonan interview on this page.

Per the ECB the first two columns cannot be touched.  Noonan was questioned on the €16 billion of unguaranteed unsecured senior bonds but said there would be no burden sharing here either.  (Though he did suggest this may be returned to in the case of Anglo and INBS may more details of their wind downs are revealed in May).  Anyway, when discussing the subordinated bonds in all the banks he said:

“We can burden share in subordinated bonds and that will give us between five and six billion of the €24 billion.

Six billion is probably a slight exaggeration but a 70% haircut would knock €4.9 billion off the banks’ liabilities and is achievable.

We already knew that €10 billion of the funds would come from the further destruction of the NPRF.  Also, as part of the EU/IMF deal the State was going to have to provide an additional €7.5 billion from the existing €15 billion of cash balances held by the NTMA.

So all told, to get this €24 billion.

• €1.9 billion will come from the existing assets of Irish Life & Permanent
• €4.9 billion will come from burden sharing with subordinated bond holders
• €10 billion will come from the National Pension Reserve Fund
• with the final €7.2 billion coming from existing cash reserves.

This phase of the recapitalisation could be financed without any recourse to additional borrowing.  The debt that has been created by the earlier rounds of the recapitalisation process is €35.6 billion.  This process is a colossal waste of money but this is a debt burden that a country with a GDP of €153.9 billion can carry.  As before, default is an option not an inevitability.  The important things now are to draw a line under this banking fiasco and to get the public deficit under control.  There is still some doubt about our ability to attain either.

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For the day that’s in it

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More self-held bonds?

The February release of the Credit, Money and Banking Statistics does not show too many new or surprising patterns (are we normalising the abnormal).  The previous post looked at central bank borrowings which increased again in February.  Here we will give a quick look at the bonds issued by the covered banks.

The amount of bonds issued by the 20 domestic banks and the subset of the six covered banks are virtually identical as the non-covered domestic banks issue virtually no bonds in Ireland.  We can see that the amount of bonds outstanding fell dramatically once the original guarantee expired in August but has risen substantially in the past two months. 

Who holds these bonds?

The trend of increasing Irish ownership of the covered bonds continues and it is only holdings by Irish residents that increased in February.  What other institution resident in Ireland would be foolish enough to take on additional bank bonds? None.

It is the banks themselves that are holding these “bonds”.

The balance sheet of the covered six now includes €85 billion of bonds issued by Irish residents.  There is €10.3 billion of government bonds, €39.3 billion of private sector bonds (75% of which are from NAMA) and €35.5 billion of bank bonds.

We know that the banks issued €17 billion of bonds to themselves in January.  It is likely that the February increase of €3.7 billion was also down to these activities.  That still leaves about €15 billion of bonds from Irish banks on the covered six balance sheets. 

The covered six are the only significant issuers of bonds among all Irish banks.  We have seen some instances of cross-holdings of the bonds by PTSB and Anglo but full picture of these cross-holdings has not emerged.

Finally it was presumed that these self-issued bonds would reduce the reliance of the banks on the ELA from the Irish Central Bank.  As we have just seen that did not happen as ELA funding rose €20 billion and ECB funding fell €6 billion.  Just what are these self-issued bonds being used for?

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Central Bank reliance rises to €153 billion

About a week ago the Central Bank published an update of their balance sheet for February.  This shows that ‘Other Assets’ which is primarily made up of Emergency Liquidity Assistance (ELA) to the Irish banks had unexpectedly increased from €50.1 billion to €70.1 billion.  To get a complete picture of the reliance of the Irish banks on Central Bank funding this figure needed to be added to the monies the banks have accessed directly through the ECB.

In January this was €93.0 billion, giving a total of about €140 billion (not all of the ‘Other Assets’ category is ELA).  Figures released this morning put the February liability with ECB at €85.6 billion,  which puts the total amount borrowed from the central banks at somewhere around €153 billion.

Here are ECB liabilities of domestic banks since the start of 2007.

And here’s the scary one – the Central Bank’s ‘Other Assets’.

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IL&P and bonds in the covered banks

In the comments of this post we are directed to the 2010 annual report for Irish Life and Permanent (H/T Lorcan Roche Kelly via hoganmahew).  As has been speculated during the week it seems likely that the group will be broken up with Irish Life and Pensions sold and Permanent TSB nationalised.  Anyway our interest here is the holdings of bonds by IL&P in the covered six which we previously looked at here.

The latest report gives a much more detailed insight into this issue.  The report can be read here and the information we’re looking at is from page 218 which gives details of the links between IL&P and the covered banks at the 31st December 2010.

There’s a lot of change going on there!  We also know that IL&P actually held €886 million if Anglo bonds on the 30th June 2010 so it was quiet a fall to have this reduce to just €94 million at the year end.  All told the exposure of the group to bonds of the other covered banks reduced by nearly €2.2 billion during the year. 

It is not clear if the bonds matured, were redeemed or were sold on to other third parties.  It is also not clear which part of the IL&P group holds the bonds – the pensions business of Irish Life or the banking business of Permanent TSB.  Regardless, it is a reasonably positive development (although the money to repay the bonds could now be owed to the ECB) and hopefully is reflective of a general pattern across the covered six that has been them reduce their exposure to each others’ debt.

UPDATE: The 2010 Annual Report for Anglo Irish Bank was released this morning.  It can be read here.  It does not seem to provide the same detail as the IL&P report.  On page 158, though there is the following paragraph:

In addition, in the normal course of business and on arm's length terms, the Group has entered into transactions with Government-related entities, which include financial institutions in which the State has significant influence. The principal banking transactions include taking deposits, investing in Government bonds and debt securities in issue, and providing loans. At 31 December 2010 normal banking transactions outstanding between the Group and such entities amounted to: deposits of €540m (31 December 2009: €436m), Government bonds of €278m (31 December 2009: €1,118m), debt securities issued by State-owned financial institutions of €383m (31 December 2009: €232m), loans and advances to banks of €365m (31 December 2009: €356m) and customer loans of €nil (31 December 2009: €173m).

At the end of 2010, Anglo held €383 million of bonds from other “state-owned financial institutions.  Not massive, but significant nonetheless.

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