The latest CPI figures from the CSO show overall annual inflation is running at +2.2%. If we strip out the effect of mortgage interest and energy costs to examine core inflation we see that is running at -0.04% and will likely turn positive next month.
We have spent a great deal of time looking at the liability side of the balance sheets of the covered banks (total liabilities here, bonds here and here, deposits here and ECB borrowings here).
While the liability side garners most of the attention due to the State guarantees that have been given to certain banking liabilities, the source of banking crisis has been the asset side of the bank’s balance sheet. In this piece we will briefly consider the assets of the six covered banks. Here are total assets which show little change.
The book value of the Irish assets of the six covered banks have fallen from €665 billion in mid-2009 to €621 billion now. This €621 billion is currently broken down as follows:
Although the change in the total assets has not been substantial there has been significant changes in the breakdown by category. However, looking at the three main categories of loans, bonds and other assets does not show this immediately.
Although there has been some decline in loans and an increase in debt securities held in recent months most of the action has occurred within these groups. Here are the loans by residency of borrower in the domestic banks.
Again it suggests little movement, though we can see that loans to Irish residents make up the bulk of this asset. Although it appears relatively flat, loans to Irish residents on the covered bank’s balance sheets have declined from €364 billion in June 2009 to €327 billion in January 2011. We can breakdown this category further.
Finally we see some movement. There is a very noticeable decline in loans to the private sector from the six covered banks, which have fallen from €244 billion in June 2009 to €186 billion now. This is not to say that we have paid off this amount of debt. Instead, the National Asset Management Agency (NAMA) has bought some €68 billion of loans off the covered banks. This money has been replaced on the banks balance sheets in two ways
It is because of the combination of these two transfers that the amount of assets held by the banks has remained largely unchanged. In the previous graph above we can see the impact of item 2 above.
Loans to Irish residents from the covered banks under the heading ‘General Government’ increased from essentially nothing in February 2010 to €31 billion in January 2011. This represents the Promissory Notes used to pump money into the banks (mainly Anglo). Like a loan, these promissory notes are a promise from the State to (re)pay money to the banks. Instead of developers having this promise, the taxpayer has. These promissory notes now account for about 10% of the loans issued by the covered banks to Irish residents.
Next we turn to the debt securities held by the covered banks. Like loans we saw from the second graph above that the total shows little movement but the breakdown of the category does as seen here.
The covered banks are holding more and more debt securities issued by Irish residents. These have increased from €11 billion in January 2008 to €84 billion in January 2011. There has been an offsetting decline in the holding of other Eurozone and Rest of the World bonds. So what type of Irish bonds are the covered banks holding?
Everything is going up. The increase in “private sector” bonds here are mainly those issued by NAMA in return for the transfer of developer loans from the banks. Bonds by “monetary financial institutions” are bonds issued by the covered banks themselves. The almost vertical rise seen in January 2011 is because the banks issued €17 billion of bonds to themselves to use as collateral with the ECB. As we saw previously, the remainder of this category is €15 billion of bonds the covered banks hold in each other. Burning these bondholders will just mean more promissory notes will have to be issued.
I cannot really explain the rise in the holdings of “general government” bonds by the covered banks. It seems unusual that at a time when the State was pumping billion to prop up the banks, these very same banks were using €11 billion to buy bonds issued by the State. It appears they now hold about one-eighth of Irish government bonds in issue. Guess who will be hit if there is a sovereign default??
For completeness here is the breakdown of Other Assets since January 2009 which make up about 5% of total assets.
It is important to remember that these are the assets held in Ireland of the covered banks and so not necessarily represent the actual balance sheet position of the banks. For example, the €17 billion of self-held bonds actually have a net balance sheet position of zero as there is a matching liability of €17 billion on the other side of the balance sheet. The effect of the activities of the bank offshore activities is also excluded. Again it could be that the assets are those of foreign-based subsidiaries of the banks which will be matched by liabilities elsewhere.
In an interesting development the Central Bank have also begun to publish a “consolidated” aggregate balance sheet of the covered six banks. Although the details of the consolidation are unclear it is to account for issues like the two mentioned above. This gives a more accurate representation of the third-party assets held by the covered banks. Unfortunately, the Central Bank do not use the same headings and definitions as they do for the aggregate balance sheet data we used above. The Consolidated Balance Sheet of the covered six can be seen here.
There is loads of talk of the growing debt pool that is threatening to drown us. Much of the recent debate has focused on the burden of the bank bailout, but it is important not to forget the biggest reason for our borrowings – the public finances.
At the end of 2007 the National Treasury Management Agency (NTMA) stated the Irish National Debt was €37,559 million which was not a huge increase on the €30,085 million that had formed the National Debt in 1987. Of course, as a ratio of GDP the debt had fallen from more than 100% of GDP t0 25%. What we are concerned with here is what has happened to the National Debt since the end of 2007 and what is likely to happen over the medium term.
Since 2007, we have run substantial Exchequer deficits (% GDP).
These figures exclude any money that was directly pumped into the banks by the Exchequer but does include contributions to the National Pension Reserve Fund. In 2008, €1,690 million was transferred to the NPRF, and because of a frontloading of the 2010 contribution €3,000 million was transferred in 2009. From the total amount of the fund some €10,700 million was used to buy equity and preference shares in the AIB and BOI).
Adding the deficits from 2008-2010 to the 2007 debt, brings up a total of debt €89,939 million. Virtually all of this was due to government deficits, as opposed to banking measures.
In 2009, the Exchequer pumped €4,000 million directly into Anglo Irish Bank and 2010 saw €100 million go into Irish Nationwide and €625 million in the EBS. Adding this €4,725 million to the deficit-related debt gets us to a total of €94,664 which is just over a billion more than the “official” end-2010 debt given by the NTMA of €93,446. (The difference is likely due to the use of some of the cash that the government has on deposit. According to the NTMA there was €15,709 million of cash on deposit in the Exchequer and other accounts at the end of 2010.)
This is not the full story and we must add the €30,850 million of Promissory Notes used to recapitalise Anglo, EBS and INBS in 2010. When added to the NTMA’s figure this brings up a total of €124,296 million, of which €35,575 million or 28.6% is directly related to the bank recapitalisations. Adding the money used in the NPRF will increase this percentage.
Here are the IMF projections of the public deficits (with % of GDP) for the next three years and we will assume that these include everything except banking recapitalisations over that time.
The funding for this comes from the EU/IMF deals and would bring our National Debt up to €167,796 million by the end of 2013. The great unknowns are the amount of additional money that will have to go into the banks and whether the money used to create the National Asset Management Agency (NAMA) will be repaid in full. We know that there will be a further €10 billion bank recapitalisation over the coming weeks (once a new government is formed). This will come from the NPRF so will not result in any additional borrowing.
It is probable that more than this will be required, but how much is anyone’s guess. After this latest recapitalisation we will have put €56,225 million into the banks (€4,675 million via the Exchequer, €20,700 million via the NPRF and €30,850 million through promissory notes). The range of estimates of the full cost are from the current €56 billion to €100 billion and more.
I have no great insight into what the total cost of the bank bailout will be. For sake of argument let’s assume that it will consume the full amount of the €25 billion “contingency fund” set up as part of the EU/IMF deal. This will be on the extreme high side – I hope!
Of this €25 billion, €17.5 billion will be borrowed as part of the EU/IMF deal, with the other €7.5 billion coming from ourselves, which I assume will also be borrowed (though we may be able to use any remaining cash reserves). Anyway, adding these additional funds would bring the full cost of the bank bailout to €81,225 million, of which up to €60,525 million will have been borrowed.
Summing all this together brings up a National Debt of €192,796 million by the end of 2013. This is 113.5% of the IMF’s nominal GDP forecast for 2013. Here is breakdown of the debt and the proportion attributed to each category.
At the end-of 2013 we will have a huge debt. One-fifth will be what we brought with us into the crisis. Less than a third will be due to the bank bailout. About half of our debt will be due to our own deficits. By 2013 the bank recapitalisations will be over, and we may even see some small return on the money poured into AIB and BOI, with the NAMA process also well advanced. However, our Exchequer deficits will remain and will continue to require further borrowings. With the annual deficit still estimated to be 7.5% of GDP in 2013, the 113.5% Debt/GDP ratio at that stage will continue to increase.
The bank bailouts are a colossal waste of money, and do involve huge borrowings, but it is our borrowings for social welfare cash transfers, €29 billion in 2009, and to pay public sector salaries, €20 billion in 2009 (see here) that generate most of our borrowings. The banks are a huge millstone around our necks but it is the ongoing deficits that will sink us if left unchecked. “Burning the (foreign) bondholders” makes for impressive-sounding rhetoric but we need to look closer to home to find the biggest villain of the piece.
The February Exchequer Returns seemed to suggest that there was an improvement in the public finances. RTE led their story with:
The latest Exchequer figures from the Department of Finance show a deficit of €1.945 billion up to the end of February. This compares to a deficit figure of €2.407 billion the same time last year.
This would suggest that there has been a €462 million improvement in the public finances and that the tax and expenditure measures introduced over recent budgets are bringing the deficit under control. Not so fast! Most of the "improvement" of €462 million in the Exchequer Deficit is due to a sleight of hand by the Department of Finance.
In the first two months of 2010, the Exchequer spent €363 million on servicing the National Debt. For 2011 the figure is €104 million - some €259 million lower! With our rate of borrowing our debt servicing costs are rising not falling.
According to the DoF "the majority of the funds used to service the national debt in the early months of 2011 are coming from the Capital Services Redemption Account (CSRA) rather than the Exchequer." I had never heard of the CSRA but it strikes me as unusual that an account with Capital in the name is being used to meet Current expenditure needs. A query by a colleague of mine to the Department yielded this response.
According to the Department’s Information Note, the full debt service cash cost for the first two months of 2011 was €626 million. This is €522 million higher than the total given in the Exchequer Account.
If we use the correct figure for debt interest we can see that the public finances didn't improve by €462 million in the year to February - they deteriorated by a further €60 million. Oh, for a transparent system of the public accounts.
Earlier in the week we looked at the numbers relating to bonds issued by the six covered banks from the Central Banks’ Money, Credit and Banking Statistics. This was a useful analysis, up to a point. We now have a much better set of numbers released by the Central Bank that gives a detailed breakdown of the bonds issued by the covered banks.
The original release is here and the key table is reproduced here with an additional total column providing totals for the individual banks.
The numbers are fairly self explanatory and we can see that there are €63.4 billion of bonds in issue. The balance sheet data from Table 4.2 of the Money, Credit and Banking Statistics that were explored in the post linked above indicated that there were €79.1 billion of bonds issued by these banks. The apparent discrepancy can likely be accounted for by again noting that the banks issued about €17 billion of bonds to themselves in January. So that still leaves us with the question of who holds these €63.4 billion of bonds.
When the December figures were released we looked at the ownership of these bonds and concluded that “the proportion of bond held by Irish residents has been rising since the guarantee was introduced and now stands at just over 50%”. This was for all domestic Irish banks. Since then we have got a breakdown for the six covered banks and the original conclusion remains unchanged.
Of course, what we could not say was who actually holds these bonds. That did not stop some to extend the analysis beyond what it could really do – see 22 minutes into this clip where it was suggested that “half of these bonds are held by Irish credit unions and Irish pension funds”. It is still true that more than half of the bonds are held by Irish residents, but it could be holding companies of foreign banks that are simply domiciled in Ireland, most probably in the IFSC. This suggestion was made elsewhere – see 47.5 minutes into this clip.
Can we cast any light on this issue? Maybe.
Again using the Central Bank’s data on the banks’ balance sheets we see that on the asset side the six covered banks hold €31.8 billion on bonds issued by Irish financial institutions. Now it could be that these are bonds issued by non-covered banks or banks in the IFSC. If we look on the liability side we see that all banks operating in Ireland have issued €50.8 billion of bonds that are held by Irish residents. Irish banks hold €31.8 billion of this (which includes the €17 billion of self-issued bonds). Of the €50.8 billion of bonds in issue from Irish banks held by Irish residents, €50.2 billion has been issued by the six covered banks.
The implication of this should be fairly clear. Of the €63.3 billion of bonds in the covered banks shown in the above table, something in the region of €15 billion is held by the covered banks themselves. As the €17 billion of self-issued bonds in January was excluded from this table it is likely that this €15 billion are bonds the banks hold in each other.
Finally, we can see that all banks operating in Ireland (covered, domestic and IFSC) hold €33.3 billion of bonds issued by Irish financial institutions (which is 99% from the covered six). Domestic or retail banks hold €31.8 billion of these bonds. This means that IFSC banks only hold €1.5 billion of bonds in the covered banks.
What do we conclude?
The covered six have €79 billion of bonds issued. About €17 billion of these are guaranteed self-issued bonds which are being used as collateral with the ECB. Another €15 billion are held by the covered banks themselves. Banks in the IFSC hold only €1.5 billion of these bonds. That accounts for €33.5 billion of the €50 billion of covered bank bonds held by Irish residents.
Who holds the other €16.5 billion? It could be “Irish credit unions and Irish pension funds”. It could be IFSC-based non-banking institutions that do not appear in the Central Bank statistics. We don’t know. We do know that non-Irish residents hold €29 billion of bonds issued by the covered banks. So we get the following table for the €79 billion of bonds in issue.
If the bondholders do get “burned” there will be yet another hole in the balance sheets of the nationalised and part-nationalised banks and they will need to be further recapitalised. (Guess who?) That leaves about €48 billion of bonds, with some unknown quantity up to a maximum of €16.5 billion Irish held, but at least €31.5 billion held by non-Irish investors.
It would be great if we had a breakdown of the holdings outlined here by the four categories used in the table at the top. €40 billion of the bonds are either guaranteed by the State (€21 billion) or secured against collateral like mortgages (€19 billion). That leaves €23.5 billion in play. We could really do with knowing who holds these bonds. It could be the banks themselves!
There probably is some scope for burden-sharing but maybe not as much as first thought and for substantial savings to be made attention will have to turn to the guaranteed and secured bonds. There definitely is not as much to be saved as in August 2008 (the month before the blanket guarantee) when non-Irish residents held €82 billion of bonds issued by the covered banks.
We previously looked at the balance sheet position of deposits in Irish banks (all banks here and the ‘covered’ banks here). While no one disputes that Irish banks are losing deposits, the actual rate of decline is subject to question due to the non-consolidated method the Central Bank uses when compiling the Banking Balance Sheet tables in the Money, Credit and Banking Statistics.
This means that if an Irish bank moves deposits in an internal intra-bank transfer or between subsidiaries it could appear that it is losing deposits if this transfer is to a non-Irish subsidiary. There have been suggestions that about 75% of the apparent €18.5 billion loss of deposits in the covered institutions that occurred in January is due to such transfers. As we have noted most of the changes in deposits in Irish banks has occurred in the ‘Other Financial Intermediaries’.
What we will look at here are private sector deposits of Irish residents. This figures will be changed by the actions of depositors rather than the bank that holds the deposits. First up, are total private sector deposits of Irish residents in banks in Ireland and these are definitely falling.
In August 2009, private sector deposits totalled €187 billion. The January 2011 total is €167 billion. The Central Bank breaks this down into deposits by four sectors:
Deposits across all sectors are falling. Here we isolate Household Deposits. Between January 2010 and January 2011 these fell from €99.5 billion to €94 billion and are on a largely unbroken downward trend.
Across the different deposit options available to households we see that the decrease has been driven by a fall in long term deposits as we can see here.
Deposits in accounts that need more than 3 months notice and mature in less than two years have fallen from €37 billion in January 2009 to €28 billion. This could be caused by falling interest rates but we do not see an increase across the other categories, so these deposits have not been replaced (in Irish banks).
On the business side we see a similar drop in deposits.
Again it appears to be long term deposits that are driving the fall in deposits.
