We’ve now well and truly progressed to the question not of when but of how much in bailout loans is needed for Ireland, so…
From a note on Friday, we’d point out the estimate of Barclays Capital’s Antonio Garcia Pascual and Pietro Ghezzi (emphasis ours):
[A] bank restructuring and recapitalization fund of about EUR22-37bn… funds to cover the 2011-13 gross funding needs of the Irish treasury including redemptions, budget deficits, and promissory notes, which amount to EUR63bn (EUR23.5bn in 2011, EUR20.7bn in 2012 and EUR18.9bn in 2013).
(As an aside — one point to note about these two analysts’ forecasting abilities, by the way? They saw EU-IMF Irish aid coming way back in September.)
The problem with the first figure in particular, though, is that the Irish bailout is now more or less hostage to whatever future losses by banks remain out there.
Which — even excepting the morass that is Anglo Irish — is amazingly complex and uncertain to quantify.
A series of very black holes
One of the more alarming features of this most recent crisis has been a spool of revelations of slow-motion deposit flight from Bank of Ireland and Allied Irish Banks. This has implications for funding and reliance on the ECB, via consequences for collateral. But it also suggests depositors fear that something dark indeed is lurking within the portions of BoI and AIB’s non-Nama (ie. non-guaranteed) loan portfolios.
And it’s certainly a very black hole to travel down.
The overall context for an unexpected rise in further bank losses is an unexpected further fall in once-frothy commercial property prices – a peak-to-trough decline of up to 55 per cent already having been seen.
And as far as the worst case from here is concerned, interesting to note that analysts from Barclays Capital and Goldman both saw that decline extend to around 60 to 70 per cent by the end of next year at worst, in notes on Irish bank recapitalisation published on Friday.
Feed that assumption into the non-Nama loan-books (BoI, 50 per cent commercial; AIB, 70 per cent, says BarCap) and you start to get losses pictured. BarCap’s Antonio Garcia Pascual and Pietro Ghezzi come to a final figure of €17bn, net of loan-loss provisions. That’s added to €5bn further losses for Anglo Irish to make €22bn extra for the government, or its rescuers, to worry about. Chart via BarCap:
Meanwhile, Goldman’s Nick Kojucharov constructs a central scenario of€13bn in commercial property loan losses across domestic banks rising to €24bn if prices fall by 60 per cent in a worst-case scenario. Chart via Goldman, click to enlarge:
Note that much fewer losses are expected in residential loans.
This has been rather a bone of contention and/or impending sign of an Irish doomsday lately, depending how you look at it. Interesting too to note that both BarCap and Goldman start here with the assumption of €25bn of Irish mortgage loans –25 per cent– lying in zero or negative equity, but also both argue that actual default and loss rates will remain manageable.
Massively complex stuff for the IMF and EU teams to sift through on getting access to the books, however. At any rate, these figures could provide some useful benchmarks, as we wait for the bailout itself.
Nama haircut pain
At the same time, the uncertainty goes on even into Nama itself, presenting even more of a mess to Irish government finances.
One other reason Bank of Ireland and AIB are in a tight spot is because their capital buffers are being drawn down into large (55 per cent on average, although beware averages here) upfront haircuts charged on loans going into the bad bank.
Larger haircuts = less taxpayer cost but also = fewer Nama bonds for banks to use as collateral for funding, by the way. Rather delicate as a bank recapitalisation balancing act.
For their part, BarCap reckon the huge average haircut will allow Nama to break even on its loans, current planned fiscal cuts of €15bn to work, and keep debt to GDP fairly sustainable.
But it’s a good idea to consider what happens if all Nama loans become non-performing and Ireland faces a low-growth scenario, generating a further €15bn in losses to make up from more cuts, according to BarCap.
That’s really the ceiling for BarCap on losses to the sovereign from the banks, and thus an upper limit on the bailout. Although those extra cuts could certainly enliven debate on corporate tax rate reform, to be sure.
Goldman takes a very different approach to Nama, however. In fact — they think Nama’s problem is that it’s already been far too pessimistic:
Under these parameters, estimated losses over the entire loan portfolio of domestic banks rise from €36bn to €58bn, 14% of the aggregate loan book and 36% of GDP. These are no doubt big numbers, and seem more in line with the scale of losses the government has in mind. Nevertheless, we should note that our worst-case estimates still give us LCP loan losses of €24bn, well below the €42bn that will be written off as a result of the NAMA transfers. In fact, the only way to match NAMA’s loss is to assume that 75% of the €57bn land and development loan portfolio of domestic Irish banks is lost.
Something else for the IMF team to pore over, no doubt.
Funding trouble, again
Last, but not least, a quick update on Irish banks’ dire funding straits, specifically their reliance on €130bn of liquidity from the ECB.
BarCap remind that there’s a distinctly German accent to a sizeable portion of those recent borrowings, and also that there’s an apposite calendar date here:
Of the EUR130bn headline borrowing number at the ECB, only EUR95bn relates to domestic Irish banks. Indeed, EUR35bn is linked to non ‘domestic’ Irish banks, which is almost entirely accounted for by the Hypo Re/Depfa group. These borrowings will likely disappear (or be transferred to Germany) on Dec 23, when the 1y Dec09 LTRO matures…
Try not to peek under the gift-wrapping paper before then, of course.
On the other hand, Irish taxpayers must already know what it’s like to find a large surprise when the wrapper comes off (chart via BarCap):