Recapitalising the banks

We can see the effect of the recent State recapitalisation of the covered banks in the Money, Credit and Banking Statistics.  Here are Irish resident deposits in the covered banks.  Our focus here is on government deposits.

After being below €3 billion for several years, government deposits in the covered banks jumped to €21 billion in April.  This was the money liquidated from the NPRF and borrowed from the EU/IMF that would be used to recapitalise the banks.  This was to be done in March but was delayed until after the general election.

Government deposits stayed above €21 billion until June and in July dropped to €2 billion.  Where did the money go?  The capital and reserves part of the balance sheet shows us.

The fall in deposits from government is offset by the rise in capital in the bank. Our capital.  The covered banks have more capital in them that at any time since 2003.  By any measure the covered banks have “lots” of capital.  Loss losses and write-downs will consume some of this.  How much is the subject of much debate.

There has been some suggestions that the banks have been using this money to buy Irish government bonds.  Here is an extract from this article in the Sunday Business Post discusses the recent falls in Irish government bond yields.

Some caution is required, for a few reasons. It appears that among the buyers of Irish bonds in recent weeks have been the Irish banks themselves.

Following state cash injections under the recapitalisation programme agreed with the EU and the IMF, Irish government bonds have been seen as an attractive place to put some cash, while also supporting the ‘‘home team’’.

It is impossible to say how significant this has been - a number of market sources say it has contributed, but that the international re-rating of Ireland has been more important.

The data do not really support this thesis (yet).

Holding of bonds issued by the government increased from €9.4 billion to €9.6 billion in July.  The covered banks hold about 10% of Irish government debt. 

With volumes low, €200 million may have been enough to have some impact on bond yields.  It is also possible that more significant purchases may have taken place towards the end of July and after the reporting date for the above data.  It will be interesting to watch this number in the August release.

Central Bank Funding stays at €125 billion

Today’s release of the Money, Credit and Banking Statistics by the Central Bank gives us a glimpse into the performance of the banking sector.  One key measure is the reliance of the covered banks (BOI, AIB (+EBS), PTSB and IBRC (Anglo + INSB)) on central bank funding.  This peaked at around €155 billion in February but fell to below €130 billion two months later and has been steady since then.

The mix has been changing slightly.  Since April funding from the European Central Bank’s Main Refinancing Facility has fallen from €74 billion to €68 billion. At the same time funding sourced through the Central Bank of Ireland’s Emergency Liquidity Assistance has risen from €54 billion to €57 billion.

As the collateral requirements for the ECB are higher this suggests that the quality of the collateral offered by the banks has been falling.  The interest rate on the ECB funding is 1.5% while the money received through the ELA is thought to carry an interest rate of around 3.0%.

Evening Echo Article 29/08/11

I wrote an article last week that was carried by Monday’s Evening Echo.  The goal was to highlight some positive elements of the current economic situation.  I must have been in a very good mood as I took this ball and ran with it.  Some revised numbers have been released since this was written but, in the main, it holds up.

Reasons to be cheerful parts one, two and three

The Irish economy has taken a battering over the past four years.  The unemployment rate has risen to 14%, the banking system collapsed with the crash in the property market and a €20 billion hole opened in the public finances. 

These are all problems that will not be resolved easily.  However after four years where the news was unrelentingly negative, we have had occasion recently where some positive economic developments leaked into news cycle.  Here are nine that are worth recounting.

First, there were the preliminary results from Census 2011.  In the run up to the census it was believed that the population was just under 4.5 million.  The census revealed that the population was actually 4,581,269.  There are nearly 100,000 more people living in Ireland than was previously thought. 

There are reasons to believe that the return to emigration, particularly among Irish nationals, is not as large as anecdotal evidence and media reports have been suggesting.

The full impact of these extra 100,000 people will be seen when the CSO revise their population statistics over the next few months.  Although it is possible that some of these extra people could be in the under-16 or over-65 dependency groups, most of them will be in the 16 to 65 age bracket so it is likely there are more people working than was previously estimated by surveys.

Second, the census also confirmed the positive age demographics of the Irish population.  With many developed countries set to face an increased burden due to an aging population, Ireland, in contrast, is experiencing a baby boom.  The natural increase in the population (the difference between births and deaths) was a record 45,000 per annum. 

As recent as 1996, the natural increase was recorded as 18,000 per annum.  Ireland is set to have a young and productive population in the coming years.

Third, the number of people visiting Ireland is increasing.  In the first six months of 2011 three million visitors came to Ireland from abroad.  During the same time in 2010 there were 2.6 million visitors.  This 13% increase in visitors was spread across our main tourist markets; the UK, the US and Europe.  More people visiting the country means more money coming into the country.

Fourth, there is also more money coming into the country as a result of our booming export sector.  Last year there were €44 billion of goods exports from Ireland to the end of June.  This year has already seen €47 billion paid from abroad for goods manufactured in Ireland.

Cork has a vital role to play in Ireland’s exports.  More than 60% of Irish goods exports are in the chemical and pharmaceuticals sector and this industry is heavily concentrated around Cork.  Even in the midst of the global downturn pharmaceutical exports from Ireland increased by 60%.

The pharmaceutical sector is very capital intensive and does not generate the number of jobs that would reflect an industry that dominates our exports.  However, it does provide employment at wages higher than most other sectors. This will be further boosted by the announcement that Sangart are going to create 250 jobs in Carrigtwohill, up from 120 when the project was initially announced just a month ago.

Fifth, the agri-food sector is also on the up.  This sector makes up one-twelfth of our overall exports and is much more labour-intensive than the chemicals sector.  Exports of food and live animals are up 20% on 2010. 

The best performance has been in the dairy sector where exports are up nearly 50% on last year.  Our temperate climate and quality of grazing land means to potential to expand is virtually unlimited as there is huge demand for Irish milk in the powdered milk and baby formula markets.

Sixth, domestic consumption is beginning to stabilise.  The retail sales index is showing a small increase on last year.  This may only be 0.2% but it does indicate that the drops of recent years have ceased.

Sales of new cars have been strong component of retail sales in 2011with 81,175 new passenger cars sold up to the end of July.  By the same time last year 73,846 cars had been sold.  There are many households in serious difficulty but sales of ‘big ticket’ items such as cars are slowly recovering. 

Seventh, figures from the Central Bank show that the balance sheet of the household sector is slowly improving.  At the end of 2008, the household sector has loan liabilities totalling €203 billion.  The most recent figures show that this has fallen to €185 billion.  There has been an €18 billion fall in household debt in just three years.  Most of this is because of repayments.

There have been calls recently for blanket debt forgiveness of mortgages.  It is important to note only 3% of Irish households are in mortgage arrears.  Around half of Irish households do not even have a mortgage.  Data from the Financial Regulator highlights that 90% of mortgages are being repaid according to the terms of the original contract. 

Eighth, the Irish government is benefitting from reduced interest rates.  At the most recent EU summit the interest rate on the money we are borrowing from the EU as part of the EU/IMF programme was reduced from 6% to 4%.  This has the potential to generate savings of close to €1 billion per annum on interest costs.

Ninth, the yields investors require when purchasing Irish government bonds have been falling.  In the run-up to the summit, the two-year bond yield was 23%.  Such a return is indicative that these bonds were considered very risky.

There is €12 billion of Irish government bonds due to mature on the 15th January 2014.  Each holder of that bond will get €100 on that date and €4 per year in interest for holding the bond.  Buying that bond would return around €110 for the investor if it was repaid in full.

On the 18th of July this bond could be bought for just €68.  There were huge doubts Ireland would be able to repay these bonds after the expiry of the EU/IMF program in 2013.  This bond is now trading at €90 which is a huge rise in just a few weeks.

In the context of our overall problems these positive developments are small.  They are not going to provide jobs for the 350,000 unemployed or fix the banks or close the remaining €15 billion budget deficit.

When taken collectively though they do show that the Irish economy is not flat-lining.  The willingness of Wilbur Ross and a group of investors to pump more than €1 billion into Bank of Ireland shows that there are others who have confidence in the Irish economy to recover. 

This recovery will be difficult and there is a lot to be done to get the public finances under control. There will be a huge burden placed on society in trying to achieve this, but it is better to be doing this with a growing population, positive demographics, increasing exports, rising tourism, booming agriculture, stable consumption, reduced household debt, lower interest rates and falling bond yields than without these positive developments.

Retail Sales; Tourist Numbers

The release of the July Retail Sales Index shows a slight rise in retail sales.  Core retail sales (excluding motor trades which make up 21.6% of the July index) rose by by both value and volume when compared to June.

The monthly rise is not suggesting that the decline in retail sales is over and the annual changes for both the value and volume series remained negative as has been the case for over a year now.

The monthly changes show the volatility that highlight that a monthly swing is not to be considered a change in the long run momentum of the series.

One factor related to sales in Ireland (and not confined to retail sales) is the number of visitors from abroad.  An increase in visitors should lead to an increase in consumption. 

The CSO’s Overseas Travel release shows that in the first six months of 2011 there were 3.0 million visitors from abroad compared to 2.6 million in 2010 – an increase of 13%.

Separate data in Table 13 from the CSO’s National Income and Expenditure Accounts show that non-residents spent €3.1 billion in the economy in 2010.  If the 13% increase in numbers is maintained for the year and corresponds to a similar increase in expenditure by non-residents then consumption in this category will rise to around €3.5 billion.

Mortgage Arrears Data

The Financial Regulator has just released the June 2011 update of the Mortgage Arrears Statistics.  The headline figures will get plenty of attention.  Here are some related points.

The number of owner-occupied mortgages in Ireland is now 777,321 and the total balance outstanding on them is €115 billion.  This is down from 782,429 mortgages owing €116 billion in the March release. 

Additional data from the Irish Banking Federation show that around €350 million new mortgage lending was provided to first-time buyers and for top-ups in the March to June period.  Lending to mover-purchasers and for remortgages may mean new lending could be even higher.

The €870 million in the outstanding amount and the €350 million in new lending means that around €1.2 billion of capital repayments were made in the quarter.  The data may be about mortgage arrears but it also shows that substantial mortgage repayments are also being made.

The average balance on all mortgages in Ireland is €148,000.  The average balance of mortgages in arrears is €194,000.

The 55,763 mortgages in arrears have €947 million in arrears owing or nearly €17,000 per mortgage.  For the 40,000 mortgages more than 180 days in arrears the average is €21,500 per mortgage.  Twelve months previously there were 24,000 mortgages in this category with average arrears of €19,500.

There were 6,154 households who moved into mortgage arrears in the second quarter. In the same period around 5,500 households became mortgage free.

Ouch!

Here are two paragraphs extracted from from a New York Times article on possible Republic Presidential nominee Michelle Bachmann.

Bachmann Promises Fast Economic Turnaround With Tax Cuts

Sketching her prescriptions for the economy, Mrs. Bachmann often tells voters that she was one of only a few House Republicans to oppose the debt ceiling agreement this summer. And she draws applause by promising to close the “job-killing” Environmental Protection Agency.

But on Saturday she ventured into less familiar territory, pointing to the example of Ireland: “There are over 600 American companies that have gone to Ireland because of the tax rate,” she said. “Over 100,000 jobs. I want those 100,000 jobs back in the United States.”

HT: Mark Little

Onwards and downwards

As predicted by Cathal in the comments the Irish ten-year bond yield as calculated by Bloomberg has indeed dropped below 9% this week.

This has been a remarkable performance.  It would have been reasonable to expect the surge in the yield in the run up to the EU summit to be reversed.  However, a drop from 14% to 11% would have been enough to achieve that.  Instead the yields have continued onward and downward and are now at 8.8%.