Anglo horrors undermine successful budgetary plan
Saturday September 18 2011
After several weeks of intense market pressure, Ireland's battered economy is finally getting some support from outsider observers, who are trying to bring a semblance of balance to the debate about the economy's fundamentals. The support comes at a vital time when borrowing costs are soaring.
Credit Suisse, Switzerland's second biggest bank, is rightly pointing out that things are far more complex in Ireland than some outside analysts care to admit. This is sensible comment -- much of the commentary on Ireland from Europe and the US has been hopelessly ill-informed and often out of date.
While nobody is trying to deny the monumental scale of the bank rescues, the chief strategy to bring the deficit down remains on track. Spending for 2010 is under control and tax receipts are broadly in line with targets set down by Finance Minister Brian Lenihan in December.
Unfortunately, this core message is not getting across to the markets and the current instability at the top of Government doesn't help. Davy Stockbrokers, which is highly supportive of the budgetary strategy, drew attention to this communication challenge yesterday.
"Ireland still faces many challenges, one of which is to communicate the reality of its stabilisation efforts to a sceptical audience,'' said its analyst Donal O'Mahony.
What makes it difficult to communicate this message is the constant horrors being unearthed at Anglo Irish Bank, via the NAMA process.
The bank is already likely to cost €25bn, but the bill could go higher, chairman Alan Dukes has admitted. It is this potentially larger bill that worries the markets and prompted Barclays this week to say that if the banking costs get much bigger, outside assistance may yet be needed.
While even a sum like €25bn is financially manageable if stretched out over a long time horizon, the markets want the certainty of knowing what the final cost will be. In that context, the Government made a wise move by asking the highly respected financial regulator Matthew Elderfield to come up with a figure that will end all the speculation.
Elderfield will tell the Government next month how much Anglo (which will be split in two) needs in additional capital. Once this figure is disclosed and the markets get a chance to dissect it, there is a real prospect that Ireland's currently elevated bond spreads will fall back towards some kind of norm.
Spain is a good example of this. It was dealing with very high bond spreads only two months ago, but once its banks emerged relatively unscathed from the European stress tests, the bond spreads stopped widening. The Government will be hoping for a similar pattern in October.
In the meantime some basic facts should stop Ireland spiralling towards Greek levels of borrowing costs. For example, Greece was facing an effective interest rate of 11.4pc yesterday for 10-year money. One of the reasons Greece ended up in that position was it had to repay a number of large bonds in 2010, heaping extra funding pressures on itself.
Ireland does have that one core advantage. It has no major bonds to repay this year and has raised virtually its entire fund requirement for 2010 already. As one trader said this week of Ireland's situation, Ireland has no confidence, but lots of cash.
Michael Somers, the former boss of the NTMA, made a huge and largely unnoticed decision in 2008 to raise over €20bn of cash for Ireland. Staff at the NTMA call this the "piggy bank'' for emergencies and its presence is giving comfort to the market, even in the current distress.
The Barclays report this week unnerved markets because the word IMF was used for the first time by a major UK bank. The Government cannot conceive of any circumstances where such an intervention would be necessary. The organisation itself lent support to this yesterday, saying Ireland was not on its watch list.
But this does not mean the current bond yields are to be ignored. They are clearly sending a very strong signal to the Government to keep its budget plan on track and ultimately to do something to bring certainty to the Anglo problem.
So far the Government has angrily rejected any suggestion that bringing certainty to the Anglo problem could involve defaulting on senior bonds. That is regarded as sensible, even by Barclays, which briefly touched upon the idea of doing a "deal'' with bondholders on Thursday.
The Government knows that defaulting on senior bonds in Anglo would have huge implications across the Irish banking sector. Subordinated bonds on the other hand are seen as fair game in the market for some kind of deal, usually via a bond buyback.
A less commented upon worry out there is whether Irish banks can roll over about €25bn debts in September. The €25bn figure itself has already been rubbished by Irish stockbrokers, who say the actual level of debt to be rolled over is far less.
Of course, helping with this issue is the European Central Bank (ECB) which will give cash to the Irish banks in exchange for eligible collateral. This ECB support is being replicated in the bond market, where the ECB is known to have purchased Irish bonds and consequently keeping prices down.
In the end of the day this dual support from the ECB could be the most persuasive factor in convincing outside interests that Ireland is going to get through its current difficulties.
Irish Independent
), ha scatenato una tempesta sull'Irlanda e, a pioggia, sui periferici.
