This time last year, this column predicted that Anglo Irish Bank would be nationalised within weeks. That came to pass in late January. At the time, the mainstream view was that Anglo could limp on, but this was codswallop.
The reason for the nationalisation was simple: no one was paying big depositors to stay with Anglo. They simply were not being paid for the reputational risk of being associated with such an outfit.
My argument on the eve of 2009went as follows: ‘‘Despite capital injections and much hot air about the ‘culture of Anglo’, the bank will still go bust and will be nationalised. This is likely to happen in the next few weeks. To save you listening to the usual hindsight in February, here’s a bit of foresight and this is what is likely to happen in the next few weeks.
Corporate depositors – institutions that had kept large deposits with Anglo – will, in the new year, decide that there is no point in keeping money with this bank when they can, just as easily, keep their cash with one of the two big banks. The question they’ll ask themselves is ‘why should I keep my cash in Anglo?’ They are not being paid for specific Anglo risk.”
Anglo was nationalised on January 16.
Now the question for the next few months is whether our big two banks will face a similar crisis of confidence. How will the big hole in their capital bases be addressed, a hole which will widen due to a new wave of mortgage default in 2010?
Will big corporate depositors start to ask why they should keep their money in Bank of Ireland and AIB?
The risk that the banks will have to be nationalised – or something close to it – is now very real. The government draws a distinction between 100 per cent nationalisation and holding a majority stake, but either way we, the taxpayers, are taking control. Let’s put a date on it.
February is my guess. What’s yours? The underlying logic for this is primarily because no one will touch the Irish banks with a bargepole.
Regular readers will know that this column has argued time and again that the scam that is the National Asset Management Agency (Nama) deals only with €90 billion of the €400 billion total loan book the Irish banks have. This rest of their loan books will atrophy in the months and year ahead.
Last Wednesday, the head of AIB declared to shareholders that he had no idea how much capital the bank would need. This would hardly inspire confidence. But it is clear when you examine how this bank blew its balance sheet that the non-developer proportion of its loan book will be negatively affected by increased levels of unemployment, lower incomes, a falling population and ongoing negative equity.
It is clear now that the state is likely to have to introduce a ‘Nama 2’ to deal with mortgage defaults. Anyone with a passing knowledge of economics knows that the bad debt cycle lags behind the economic cycle and becomes apparent only when the banks stop rolling up interest and when people realise they can’t pay now and have no real prospect of paying in the future.
Against this background, the state has to decide whether it can – or would want to – back all these debts by injecting capital and raising the national debt. A more sensible course of action is to realise how bad the situation is and get an accurate figure from the banks about how serious the bad debts will be.
If our debts are 10 per cent of the loan book, the banks need to find €40 billion. If debts are worse – say,15 per cent of the book – the figure goes to €60 billion. The state simply can’t afford this, nor should it have any business worrying about it.
A smarter approach would be to do a deal with the major creditors of the bank – the big bondholders who have billions of euro invested in the banks. Tell them how much we can afford to pay and suggest they should get their acts together now because the guarantee runs out in ten months. In ten months, they will get nothing because the banks will be bust, so do they want to do a deal?
Nothing focuses the mind of a creditor more than the sight of a debtor refusing to pay. The depositors would, of course, be protected, but the bondholders – who got a better return on the basis of taking a risk – should not be.
Even if we did a deal with the creditors, would we be out of the woods? No, because there remains the huge problem of deleveraging, which itself drives the bad debt cycle. Over the past year, with the aid of huge extensions of credit from the European Central Bank (ECB), the banks have managed to avoid the massive deleveraging which has to happen here.
The contraction of credit in the bust is the counterpoint of the expansion of credit in the boom. Put simply, in the boom, our banks borrowed from whoever they could to force credit into the economy. So, in banking parlance, they borrowed ‘short’ (in the short term, from three months out to five years) to lend ‘long’ (lending this money out for 30-year mortgages).
When the market shut down last year, they had to go to the ECB to make up the shortfall – and the shortfall was enormous. The banks’ loans-to-deposit ratios hit 160 per cent in 2008.
Therefore, we will see a huge fall in the amount of credit in the Irish system over the coming years. This could be as big as €100 billion, unless someone else comes in and plugs the gap. Think about the scale of defaults when this comes to pass.
The market knows all this, which is why no one will lend money to the Irish banks on a normal basis until they know everything. The problem is that, once things become apparent, large depositors might just start to take their cash out as they did with Anglo a year ago.
In this scenario, the government would have to nationalise. But it doesn’t have to get that bad for the government to be compelled to nationalise. Further downward movements in the bad debt outlook will require new capital and, if it won’t come from the market, it will have to come from the government .This is likely before St Patrick’s Day.
But does it have to be like this? No, obviously not. The best course of action now would be to give away both main banks free to a European bank, which would deal with the big creditors. This, in a sense, would allow the banks to ‘go bust’ by admitting they were worthless, and by giving the new owners the deposit bases and the branch network free. In return, the new owner would issue its own paper to pay the old creditors at some deep discount, maybe 90 per cent. Problem solved, and we start again. This is what would happen in normal business.
It is called capitalism, and it is our only way out. Otherwise, we will tie ourselves in knots trying to borrow from tomorrow to pay for yesterday.
Better to come clean now, face the music and start again. This is what we would do if a sweet shop went bust; banks are no different.
Well said David. But is the loans to deposit ratio only 160%? Is it not more like 1600%? FDIC mandates a asset to capital ratio of 6% to 8%. Is that the reciprocal of the same thing?
Many things went through my mind reading this- 1 We are all eating Roses (sweets ) this Christmas and many don’t remember that once upon a time these were known as Irish Roses .They changed the name and the shareholders and expanded their markets and now they are a big success than before .Something on the line David is talking about to change the bank shareholders with bondholders ; 2 I think David is optimistic believing that close to St. Patricks Day the great change will occur.It will be a lot sooner and we better get use to it .Next… Read more »
David. The banks were seized by a gang of crooks and used too loot ‘our’ community. The POnzi looting ‘well’ ran dry and the banking crooks and cohorts then, switched the looting stratagem and through their hired hands in the government they are all now looting the public purse. The taxpayers monies, right this second, is been looted. Every penny possible to loot is been looted. The hidden power elites who control and run the banks, in liason with criminal syndicates are driving the looting scam tp its end point which will be bank nationalisation and inevitable liquidation cos the… Read more »
the smell of blood
its easier to put a camel through a needle than translate from anger to action
the people waited in the shannon flood plains until they could no more and now they are gone
All very sensible and businesslike but it won’t happen voluntarily. The “sweetshop” wouldn’t like it known that the real profit was, figuratively speaking, in soaking the allsorts in crystal meth. Taking this article one step further(What an ego I’m developing) if the DOF persist in protecting the banks to the point of damaging Irelands sovereign bond raising capabilities, are we not in serious trouble towards the latter end of 2010? What I’m saying is that, if the billions borrowed last year aren’t enough to tide us over, won’t we run out of cash later on? The ECB has told Greece… Read more »
Save Linehan and Bubblestiltskin finding a €400 billion pot of Gold under a rainbow in the next two weeks we are in for a very rough time. The powers of darkness which have been gathering withdrew their forces for the Christmas period. The brakes have now been released and we are gathering speed freewheeling down the hill. NAMA and the bank guarantees with the ECB support was the equivalent of throwing moneybags on a dyke with a leak. The leak however is about to blow. I was monitoring the activity of Irish bank shares over the last few weeks and… Read more »
If I was a farmer who made 1.5 mil (say) selling land to a looney developer I must be looking at this with glee. Right now, the receivers for the half built development of 50 houses will be looking for a few bob and I’d be looking just to pay for the mortar that stuck the blocks together. I’ll offer half a mil for the lot (after the poor greedy sods invested 4 mil so far). Then I might finished off one or 2 houses and make the rest dafe with a few lads I know in the trade. In… Read more »
This giving away of our retail banking to a foreign entity should be welcomed for the acknowledgement of Ireland being truly globalised. Too often we use hi tech to support old ways rather like the paperless office (ha ha!). David, this article is a recognition of the death of oldfashioned nationhood in an increasingly virtualised world. Bout time the paddies started to embrace the full implications of the what is actually becoming the new world order – the nation of global man/maness.
Uh-oh! Clearly, I was snoozing (reading) and put this up on the last article without realising this new one was here, so here it is again, for those who, ironically, missed it because you were NOT snoozing:
Folks, the Senior Civil Servants get a Christmas (”news-dump”) Present, of having certain pay-cuts reversed, while we lower-orders take the full-brunt of our cuts.
Karl Whelan explains:
http://www.irisheconomy.ie/index.php/2009/12/24/a-christmas-present-for-senior-civil-servants/
This is how those at the top look after one-another’s interests behind-the-scenes.
David, of course we should let them go. However, we have had “too big to fail”, “too connected to fail” – both of which are true. However, the real problem is the egos involved. You see, in their post-colonial-popular-consciousness, both the owners of the sweet shop and its preferential customers have assumed the position of the former colonial oppressor; they are the new aristocracy; the new landlords. They cannot fail. Failure is not an option. They are above the rest of us; above “human”. They are so divorced from reality that even their own “reality” (capitalism) no longer fulfills their… Read more »
I don’ t wish to alarm anybody , but the world has moved on and a banking crisis is so last year . I have been in Dublin now for six days and it this country is not in a recession , it is in a depression ! The shops are empty and nobody is spending .Unless we have changed everything around and its now perfectly normal to have sales before xmas , we are in the shit . I bought a last minute xmas present of a digital camera on a whim . High end shop at the back… Read more »
I was trying to read the comments made on this site this time last year and could not open the comments section.I wanted to compare the various predictions then with now.Can someone help me?
Try this John;
http://www.davidmcwilliams.ie/category/articles/page/4
Who would want our banks, even for free? Anyone taking on the risk would need to be paid for it. Even if given for free, if the discount negotiated with the bondholders is not big enough, the new owners would make a loss.
And. Who is to say the depositors would be guaranteed with a foreign owner? It would fall outside the current guarantee, after that it’s anyone’s guess what could be negotiated on depositor’s behalf.
Paddy
This was Niall Fergusons prediction (prophesy??) for 2009 from the Ides of lat January.
http://www.niallferguson.com/site/FERG/Templates/ArticleItem.aspx?
Al Queda didn’t try to assassinate Obama (as far as we know) nor did he fly to Tehran but he did reassert Americas influence (“The one Eyed Man”).
For the want of a better idea, we should park Michael Martin in Capitol Hill since we’ve lost Ted Kennedy.
He’s the best shot we’ve got to retain US FDI at the moment.
Furrylugs – thanks but I cannot open ‘comments’ !
furrylugs – Ronan must have wraped last years comments in turkey grease paper.I cannot refresh encased mummyfied memories .
AN ECB/IMF ENQUIRY WE REALLY NEED In the coming year massive amounts of our taxes are going to be used in furthering the bailout process and the NAMA (mis)adventure. CG, the Trinity economist, estimates: “The total bill for this bogus ‘rescuing’ of the Irish banking system is likely to be in the neighbourhood of €29-40 billion”. In other words he is projecting A MINIMUM LOSS OF 29,000 EUROS AND UP TO 40,000 EUROS FOR EVERY IRISH HOUSEHOLD. The Department of the Taoiseach and the Department of Finance have each their own academic economist to give advice and these 2 economists… Read more »
Posters –
Expanding on ‘sweetshop’ simile.
One could add, the ‘sweetshop’ takeover crooks started too keep all the chocolate for themselves and, to expand tims point, they got gaga on the sugar from the chocolate, they ate too much and got greedier and greedier for more.
The Guarantee lasts till October 2010. Ten months is a long time given the current situation, and it’s hard to see how the Irish bank-owned state / state-owned banks have much negotiation power. Is there a healthy bank within the Eurozone capable of accepting these ‘freebies’? http://www.independent.ie/business/european/ecb-warns-banks-facing-8364187bn-more-in-writedowns-1981624.html Would any national regulator allow them to? I doubt it very much. DMcW’s: ‘It is called capitalism, and it is our only way out…. Better to come clean now, face the music and start again. This is what we would do if a sweet shop went bust; banks are no different.’ The problem… Read more »
AndrewGMooney, I am afraid the Bank guarantee will not expire in October 2010; It was extended by a Dáil vote on the 3rd of this month; also, the EU Commission agreed to it.
Subordinate bonds will no longer be covered after October 2010, however.
http://www.businessandleadership.com/owner-manager/news/article/18153/leadership/dail-passes-extension-to-state-bank-guarantee
I think it was extended to 2015, but I cannot find the link right now.
This “extension” and indeed the existing arrangement is not worth the paper it is written on were it not for the ultimate underwriter – the ECB. And you have to ask why they are so prepared? Is it Wills’ assertion that the ponzi global movement is preventing capitalism to do its cleansing work or is it (probably in the same context) to keep the gloss on the increasingly undermined Euro? Really, for me what really matters is how we can preserve some semblance of dignity in the majority of our communities while many loose their livelihoods in the midst of… Read more »
We are now
The Lost Atlantis
some of us will morph to Lepracauns and others into Dolphins and the rest will scatter to foreign lands until we meet again in thousands years more time.
With all this mania going on with the banks etc, are the banks seperated from bad loans capable of living or are they like a quadraplegic in need of life support. If the banks were to be nationalised into one bank, with a slimed down network, would RBS hang around. Do the banks make an opperating profit or are they depending on customer payback. If i we cast the banks to the wolves and let someone else take the grief is there a bank in europe that would take on AIB/BOI, then what about Natoinwide and EBS. Probably, morethanlikely, the… Read more »
An interesting idea David, but with the way things are going now , who knows what will happen here over the next twelve months. With the news story on TV 3 on Brian Lenihan’s health , the question now is for how long will he stay in his position. Here we have a dilemma , who will Biffo bring in as in the political game within F.F. Biffo is aware he was there to challenge for Biffo’s job, so will he do a reshuffle and bring in another clown ? F.F live in their own Ireland with their own Banking… Read more »
Floating Vocals
Interesting comment comparisons with this blog last year and this year :
2009 2008
5th Jan 2010 n/a 361
31st Dec n/a 34
24th Dec 48 418
21st Dec 101 153
17th Dec 89 155
Is the paradigm shifting , are we sucked up already?, have we lost hope? , lost ideas? , dont care? , do we need comments in polish and other new tongues instead? , are we fed up repeating ourselves? , etc does it matter ?
“Last Wednesday, the head of AIB declared to shareholders that he had no idea how much capital the bank would need.” I am not sure how to read this. We could read it as classic CYA from the head of AIB. Maybe he does know and the real requirement is massive. AIB have been strangely silent over the last few months. We have wasted billions money bailing out ANIB and INBS. Both had rotten corporate cultures. Both were linked to FF politicians or party backers. Both had the same high risk business model and lived close to the property tycoons.… Read more »
Deco :
In Switzerland it is a crime to reveal a bank secret and otherwise elsewhere the saying goes ‘ silence is golden’.
Morgan Kelly states in his report “The Irish Credit Bubble” of 21th December 2009 “The Irish government was therefore poorly equipped to understand the crisis when it finally occurred in late September 2008. Instead of recognising the borrowing difficulties of Irish banks as the result of well grounded market apprehension about their solvency, the Irish government responded to the crisis as if it were a temporary problem of liquidity in the aftermath of the Lehman collapse.” In trying to identify the failure of the Irish banks, the regulatory function and Government oversight we should also look at the psychological causes… Read more »
Is the big question for 2010;
Are NAMA / Govt Bonds classed as Junk or High Yield?
Wish I knew enough to comment but from articles around on the web, it seems to be a question the smart money is asking?
Anyone venture a prediction?
Ireland manufacturers no cars, and yet the roads are filled with traffic. There are no oil wells and yet fuel is available in every town and village. The money we use daily is no longer denominated in Dublin.
I see no greater logic in banking with BOI / AIB that in driving an O’Toyota filled with O’Shell paid for in O’Euros.
Bail them and then divest them. It’s the only way to remove their management.
Forget’ the causes’ we must move on and ‘Reform’………NOW.
A present for our bankers, and the idiots running the country(politicians, D2, IBEC, ICTU, D4, ISEQ, K-Club clique).
The lessons to be learned from the last decade.
http://www.telegraph.co.uk/finance/personalfinance/investing/6867372/Lessons-to-be-learned-from-the-decade-that-shocked-the-stock-market.html
Number 11. Humility is a great virtue !!!
stand up …walk ….run……and …stop dithering
Tim……assume the mantle of Howard Beale from 1976 movie ‘Network’.
John ALLEN, by the end of the second week in January, there will be a groundswell from the ordinary members of the trade unions that the leadership will attempt to quell; I am hoping that they will not be able to silence the ordinary working people. Those who have lost their jobs deserve to have us all stand up for them in solidarity. They should stand together with their (for now) still-working brethren: the private-sector workers and the public-sector workers. There are about 1,500,000 private-sector workers, over 800,000 of whom are unionised; there are about 320,000 public-sector workers, almost all… Read more »
Hi,
Striking how the below quotes remind me of Ireland.
“For years, the conservatives and socialists who took turns running the country borrowed as if there were no tomorrow. Through mismanagement and nepotism, they drove their country to the brink of bankruptcy. Citizens, for their part, reacted by engaging in corruption and fraud.”
“Conservatives and socialists continued to inflate the government administration to provide jobs to their supporters.”
“We have always been a society built on favors,”
“I would like to see someone finally end up in prison.” If society doesn’t change, he adds, “we are truly lost.”
http://www.spiegel.de/international/europe/0,1518,669235-2,00.html
Irelands problems are in the most part Irish made. It`s been over a year since the bank guarantee and still there is no sign of a new political party coming to the fore. Why is this? Because the majority don’t care. Will we have Lenihans and Cowens and Kennys and Brutons in the Dail in 30 years time? Probably. Last one out of Leitrim turn out the lights.
“I am hoping that they will not be able to silence the ordinary working people. Those who have lost their jobs deserve to have us all stand up for them in solidarity. ” Read the above, above. Utter tosh Union mantra. The trade unions are pushing solely for the conditions of their members even though it would bankrupt the country in a hearthbeat. The dont give a fiddlers. This is berties and cowans legacy where these crowd believe they should have a say in the running of the country. In my view they along with the politicians and bankers should… Read more »
Woe to this and that…and woe to us all and so on. All the marches in the world will do nothing unless some messianic type comes to the fore. And frankly, that’s not something we want either. JohninMunich’s link is an interesting one. Clearly, the government and its civil servants are not disappearing soon. And for other reasons described elsewhere above, forces will build to maintain the status quo and prevent capitalism doing its cleansing best. So, the Euro is in for it and it will drop and drop until we become cost effective. The Euro not only makes everyone… Read more »
Leadership is Needed someone with a Fire element eg Leo or Aries
would suit us best …….anyone interested apply to this Forum c/o Tim & Malcolm
Who really cares about the unemployed (the real unemployed, the folks trying their hardest against the odds, not the dole spongers) ? Virtually no-one. Well, to care for the unemployed in Ireland seems to equate to maintaining the dole payments as high as possible, or fobbing them off on a FAS course to keep them off the live register. This is all well and good, but what an unemployed person really needs is a job. And to maximise the chances of getting a sustainable job, the economy must be as competitive and innovative as possible. Ireland is neither, and shows… Read more »
Hi David, I’m not sure if you read through all of these posts but I have a crackpot theory for you. Imagine this for a headline? June 2012…. Ireland, after the 6th budget in 4 years, Ireland’s NAMA is about to have a fire sale of debt. The international debt markets are awash with all classifications of cross securitized debt (because the capital markets still have not learned any lessons). Ireland is struggling after the 5 sucessive quarters of ECB rate rises, credit has tigtened even further. The nationalised banks AIB and BOI, having already cost 30 billion to nationalise… Read more »
Folks, I found “The 5s” from last March. It is a long post, I’m afraid, but here it is: Folks, here is the full set of “5s” posted by everyone thus far (sorry about falling asleep before doing this last night — oops!). For some reason, the latest posts would not paste onto “Crisis into Opportunity”, so I have been putting them together in a “Word” document that I made earlier. Ruairi’s 5: 1. a re-appraisal of the tax status of any once-off multi-million gains made in the property boom. This would balance societal expectations and hearten true entrepreneurs in… Read more »
I hope your posting of the 5’s again will encourage more contributions from those who read but stay remote from the site , Tim. The newer faces thus far have provided massively valuable comment and insight. Whenever the election comes, I’m going to use the 5’s, like I did with the local elections, to ask some hard policy questions of the candidates. If, as Malcolm suggests, the grouping was refined to mutual agreement, then I think they should be sent by letter to one of the broadsheets or maybe David might co-opt them into an article so thegeneral populace might… Read more »
Tim – Good Morning – Malcolm is definately not a #Leo – both he and you could be ‘good vetters ‘ of potential candidates .If you can find a leo its a great start and becomes so easy afterwards to entertain crowds…eg Ganly – Obama , Clinton….Gay Byrne …Terry Wogan….Hector…..I think you have got the idea now.
Tim – Fantastic Research you contributed – keep building on it.
Spot on analysis. Irish banks credit from wholesale money markets will be on a quarterly basis (at best). The only chances of renewed credit in Q2 of 2010 (i.e. April) is if the situation isn’t as bleak as the markets believe. Our banks might “discover” currently unknown assets (which is possible given their cluelessness), find a buyer for their current assets (foreign subsidiaries) at a high price (why would any other bank do this?) or there’s some new deal with the ECB at close to 0% interest rate accompanied by emergency legislation in line with section 119 of the Treaty… Read more »