Finance

The Irish Central Bank today released its annual report for 2010.

This blog has concentrated on the oddity that is the ELA provided by the Irish Central Bank for a while, so some of the comments made in the report are of interest.

Note 20 (page 105) on the financial statement deals with the ‘other assets’ column.

At the end of December, €49.4bn of the €50.3bn outstanding was accounted for by:

ELA advanced outside the Eurosystem’s monetary policy operations to domestic credit institutions covered by the guarantee

This, of course, is no surprise.

But there are two interesting things in the notes.

First, the Minister for Finance (and therefore the Irish Taxpayer) is fully liable for any losses that occur under this operation, by means of a ‘formal comfort’:

In addition, the Bank received formal comfort from the Minister for Finance such that any shortfall on the liquidation of collateral is made good.

So confident is the Irish Central Bank in this comfort that they carry no provisions on for any losses arising from the ELA operations it conducts:

At the Balance Sheet date no provision for impairment was recognised.

There are five different instruments used to access ELA:

(i) Promissory Notes issued by the Minister for Finance to specific credit institutions and transferrable by deed, (ii) Master Loan Repurchase Deeds covering investment/development loans, (iii) Framework Agreements in respect of Mortgage-Backed Promissory Notes covering non-securitised pools of residential mortgages, (iv) Special Master Repurchase Agreements covering collateral no longer eligible for ECB-related operations and (v) Facility Deeds providing a Government Guarantee

Taking them one by one:

(i) Promissory notes: Issued by the government to recapitalise Anglo Irish Bank and Irish Nationwide.

(ii) Master Loan Repurchase Agreements: Repos on loans for investment/development. I would imagine that the numbers here are fairly small as most of these loans have been moved to NAMA

(iii) Framework Agreements for Mortgage-Backed Promissory Notes: For more on Mortgage Backed Promissory Notes see http://blog.cornerturned.com/2011/01/03/the-irish-variant/

(iv) Special Master Repurchase Agreements: These seem to put an end to the ‘who is the lender of last resort argument’ in the ezone. It seems it is not the ECB, but rather the national NCB. If an instrument is no longer acceptable at the ECB, banks still can turn to their NCB to get liquidity. Therefore, the NCB is the lender of last resort.

(v) Facility Deeds. I have written about these before (see http://blog.cornerturned.com/2011/03/31/something-really-rotten-in-anglo/ ) A Facility Deed is an Unsecured Loan from the Central bank, guaranteed by the Minister for Finance.

All in all, it seems that any doubts that the Irish Taxpayer is fully liable for any losses on Irish Central Bank ELA have been banished by this document.

Let’s hope the CBI manages to unwind its position without incurring any losses on this portfolio on which it has no provisions…

This could be a reaction to this article in Der Speigel

Or, it could be because the EU had to raise €4.75bn for Portugal today.

But, whatever the reason, the ECB today increased the haircuts on all Portuguese Sovereign Debt it accepts for repo operations.

Here is a selection of the Sovereign Bonds with yesterday’s haircut, and today’s.

The haircut increases by 5% across the board for Sovereign issues (Which is quite a hike for bonds that previously attracted haircuts of only 0.5%!)

This is only a selection of the Portuguese debt that has had increased haircuts.

You can check out the full list by comparing yesterday’s Portuguese collateral list here with today’s list (updated this evening) available here

Figures just released by the Irish Central bank show that use of its Emergencgy Liquidity Assistance (ELA) has fallen to end of April to €54.1bn, from €66.8bn in March.

Full spreadsheet is available here

There was also an €8bn reduction in use of ECB facilities. (From €114bn to €106bn)

There is something very notable in the figures though. The liabilities column “Liabilities to other euro area residents in euro” has dropped from €23bn to €8.3bn.

This column reflects the balance in the irish government master account that is held at the Irish central bank (basically, the Irish government’s deposit account).

It is not hard to explain this €14.7bn drop in the account. We know that Minister for Finance, Michael Noonan said he would deposit money at the commercial Irish banks (at the time a figure of €8bn was mentioned), but it seems that he may have deposited much more than that with the banks, or has started to inject the capital as outlined following the PCAR review from the Central Bank.

Comparing the March and April Exchequer statements (March here and April here) we can see that the government ran a deficit of €2.8bn in April. It also paid back a net €1.3bn in short term debt.

This accounts for €4.1bn in the fall in the exchequer account at the central bank.

But the account balance fell by €14.7bn. So we can presume that the government has moved (14.7 – 4.1) €10.6bn to the banks (either as deposits or as capital) in April.

While it is good to see that this number is coming off the banks reliance on Central Bank ELA, the drop in ELA usage does not seem to point to an improvement in market conditions for the Irish Banks (not that this should be news to anyone).

[Update]

Seems my quick analysis might have been correct:

RTRS-IRISH C.BANK – FALL IN LOANS TO IRISH BANKS IS DUE TO TEMPORARY DEPOSITS BY DEBT MGMT AGENCY

 

[Update 2]

Thanks to Eoin (below and on irisheconomy.ie) for this (via bloomberg):

May 13 (Bloomberg) –  Ireland’s National Treasury
Management Agency said an aggregate 19 billion euros was placed with the Irish banks, pending their recapitalization at the end of July.
“On or before July 31, the deposits will be returned to
the State to provide the funds necessary for the
recapitalisations,” the Dublin-based agency said in an e-mailed response to questions. “It should be noted that the deposits have no unusual features and are not restricted in any way.”

So, they are placing the money on deposit with the banks, until they have to give the money to the banks as capital. Hardly an improvement of the overall situation…

AIB announce a buyback offer for all its outstanding Tier 1 and Tier 2 securities:

How much are they likely to save on this?

Well, by currency and haircut, breaks down like this:

So far, so good (from AIB’s point of view).

But, as they point out in their announcement, there is an outstanding issue that still has to be overcome:

Two of the Holders of certain Series of the Securities have since challenged the making of the SLO in proceedings before the High Court. The High Court has set a date of 2 June 2011 to hear the challenges. No assurance can be given as to when the hearing of the challenges will conclude or as to when any judgment will be delivered following such hearing or the timing in relation to any appeal process that may be pursued following any such judgment [sic].

So there might be a few twists in this tale yet.

This blog tends to stay away from politics, it is not really my area, and tends to lead to discussions based on ideology rather than fact.

But, there seems to be some political movements in Europe at the moment that are worth keeping an eye on, from a ‘future of the Euro’ stand point, so please indulge me with this post.

First point of call is a speech given by Jean-Claude Trichet on April 4th in which he talks about the future of the European project. Obviously, Trichet is in favour of a much more integrated Europe, and seems to see the current crisis as an opportunity to increase the power of EU institutions, at the expense of elected politicians. (full speech is well worth a read)

The solution to these problems involves resolutely strengthening economic union by a major change in its governance. As I said, we need to make a “quantum leap” by both reinforcing the fiscal pillar of governance, which is the Stability and Growth Pact, and by creating a new pillar of governance, namely a strong surveillance of competitiveness indicators and imbalances.

Now, with phrases like ‘resolutely strengthening economic union’ ringing in our ears, we can move to a speech given by another eurocrat, Klaus Regling (currently head of the EFSF), in Dublin this week.

The slides from the speech he gave are available here. But we will concentrate on Slide 17:

Regling explains the voting mechanism change in this video, (from 23:30 mins).

So, in future, recommendations from the Commission will be accepted by the Council unless there is a ‘qualified majority’ against them (rather than in favour of them, as was previously the case).

It is hard to see this as anything other than a further erosion of democracy at the centre of Europe. With the political landscape in several eurozone countries becoming less pro-Europe (ref True Finns, LePen in France) and Europe being, as usual, particularly bad at getting its message across, it is hard to see how any ‘sanctions’ imposed by the Commission under the Stability and Growth pact would be viewed as anything other than an attack on the country sanctioned.

This latest change to EU rules (if it is passed by the parliament) could be seen as forcing integration on states that either are not ready for, or do not want, it. In their struggle to force further integration on the eurozone, the commission could be sowing the seeds of its destruction.

Back in January I wrote a bit about the FRNs that the Irish banks were issuing them selves (see here too)

At the time, my thinking was that the bonds would be a mechanism through which the Irish banks would be able to extract themselves from their reliance on Irish Central Bank ELA. As it transpired, that certainly wasn’t the case – with Irish Central Bank ELA growing to €70bn since (currently at €67bn).

Of course, the announcement of the €24bn recapitalisation of the banking system at the end of last month would surely mean that the FRNs could disappear from the bank’s funding needs? Well, it seems not.

The original FRNs are expiring at the moment, as they were all issued with three month maturities. And, surprise, surprise, they are being replaced, rather then retired.

Here is the latest from the NTMA list of instruments issued under the ELG scheme:

This morning’s rollover of the €980m FRN seems to be the end of this round of FRN issues.

Total from round two of the Floating Rate Notes is €17.81bn.

This this means that the Irish banks need : €67bn from the Central Bank PLUS €24bn from the state PLUS €17.8bn from the ECB (secured on a government promise).

Or, to put it another way, it seems that six banks in Ireland are getting €84.8bn of funding without having to produce any real collateral. And yet these same banks still need another €24bn of capital from the state..

I don’t think ‘insolvent’ covers the Irish banking system…

******CONSPIRACY THEORY ALERT!!******

I don’t normally go for conspiracy theories, but two recent blogposts have led me to come come up with an (interesting, but probably completely false) proposition.

The first blogpost is this excellent (tongue in cheek) one from Long or Short capital, where they find the logical end to people calling for the exclusion of certain parameters who’s price volatility is causing movements in inflation. They call it CPI-F (F for flat) and explain it as:

This new CPI, CPI-F (flat), will provide data on all changes in the prices paid by urban consumers for a representative basket of goods and services whose prices demonstrated a slight and consistent level of inflation.

This then leads to a constant 1.5%, which is genius, but completely fails to reflect reality.. (Long or Short are not serious, they are just pointing out the logical end to the ‘change the parameters debate in the US – read the blogpost, it is excellent).

The second blogpost is from Yanis Varoufakis’ blog called ‘It’s the (German) banks, stupid!‘ in which he puts forward a very interesting theory:

But that is the point: Whether the hapless Mr Trichet, the ECB Governor, knows it or not, Germany’s motivation to push for an ECB rate hike is crystal clear: To start the process of debt restructuring instead of relying on mild inflation to do the job that austerity in the peripheral countries could never do.

His (correct, in my opinion) assumption is that ECB rate hikes will force peripheral nations into faster debt restructurings than would otherwise be the case.

Of course, the ECB does not raise rates on a whim. The ECB’s primary concern is inflation – to keep it below, but close to 2%, so it’s monetary policy decisions are largely driven by the eurozone inflation rate.

Time for a couple of charts. First we have the eurozone annual inflation rate for the last 27 months both including and excluding energy (which is most volatile component in the index, and probably the on least effected by e-zone monetary policy):

(Touches of CPI-F about that chart, but bear with me..)

Next we have the weighting of energy in the index for the past 27 months. The index total is 1000:

From the above chart, we can see that Energy increased from 9.56% of the total e-zone inflation index in Jan 2011 to 10.36%. Also, in Jan 2011, energy inflation was running at 12% with the readings for Feb and Mar being 13.1% and 13% respectively..

So, the conspiracy theory runs like this:

Germany decides that it does not like the idea of running high inflation to destroy the debts of the peripheral countries, but knows that something has to be done about them – they are proving to be quite a drag on the whole eurozone. The only other option is restructuring, and if that is to be done, then it should be done sooner rather then later. The easiest way to ensure a quicker restructuring is to raise rates, thereby making repayment impossible for the peripheral nations, and leading to rapid restructuring.

But, of course, the ECB cannot raise rates just to force the peripheral nations in a restructuring scenario. They can only raise rates in the face of increasing inflation. So, (as this completely untrue, but interesting conspiracy theory goes,) they get eurostat to load up the index with the component that has the highest level of inflation, artificially inflating that index, and allowing the ECB to make the rate hikes that will force the peripheral restructuring..

(And, yes for this theory to be true, we also have to have Trichet sitting in his office, stroking a white cat. etc etc)

Enjoy your weekend..

.. and a possible feed through to the Spanish banks.

Today LCH Clearnet increased the margin required on Portuguese sovereign debt from 15% to 25%. (H/T @ftalpha)

So, what might this have to do with Spanish banks? Possibly not much, but there is also a possibility that margin hikes like this one might be the start of Spanish banks returning to the ECB for liquidity in a meaningful way. Here is a chart of net Spanish use of ECB liquidity:

The fall in net liquidity requirements post July 2010 might seem to point to a recovery in the funding position of the Spanish banks. But, there may be another factor at play here. In August 2010 the Spanish banks started joining the European clearing houses (like LCH Clearnet), for background, see FT Alphaville here and FT Trading room report here.

It seems the Spanish banks have been using the Clearing houses since. Banco Popular’s annual report shows that bank’s reliance on the clearing houses at the end of 2010, and (helpfully) the massive increase in that reliance over the 2009 year end:

This is interesting, but what does it have to do with Portuguese Bonds?

Well according to BIS data, Spanish banks hold €8.8bn worth of Portuguese public debt (and a whopping €70.3bn of non-bank private):

Now, today’s margin increase, won’t have the Spanish banks piling into ECB liquidity in a meaningful way in the sort term, but it is going to be worth watching how any future LCH Clearnet margin increases feed through to Spanish bank funding.

According to Banco Popular, the average cost of ‘deposits with Central Counterparties’ was 81bps in 2010. ECB money is now costing 125bps. For banks under interest margin pressure already, this could get messy..

Latest figures from the Irish Central bank show a small fall in the level of Emergency Liquidity Assistance to the end of March. It now stands at €66.79bn, down from €70bn at the end of February.

That there is a drop is good, but that the drop is so small is bad..

When the end of February figures were announced the Central Bank pointed out that €10bn of the increase in ELA usage was due to collateral changes at the ECB and that the €10bn increase would be temporary.

we also have to factor in the March payment by the Irish Government of the first instalment of the promissory notes repayment schedule. That payment was for €3bn:

The effect of this payment is to reduce the balance of the promissory note by €3bn (obviously) so therefore it would have to lead to a €3bn drop in requirement for ELA.

The total drop is €3.3bn, and with €3bn taken care of via the Promissory note payment, effectively the drop is zero.

The other note of interest from today’s figures is the confirmation that the spike in the use of the Marginal lending facility at the end of March did indeed come from an Irish bank (this blog suggested at the time that it might be AIB)

Overall, Irish bank reliance on ELA seems to be maintaining the elevated levels of reliance on very special liquidity – this despite the announced deposit by the minister for finance of €7bn in the Irish banks to help liquidity.