Why the bank bailout won’t be sufficient
The continual pumping of money into the banks doesn’t seem to be working. Dan White predicts a nasty end in sight unless a miracle happens!
Print19 April 2011
The latest bank bailout, which sees the Irish taxpayer pump a further €24bn into our bankrupt banks, will almost certainly prove to be insufficient. With Europe refusing to shoulder the burden of any of the Irish banks’ losses, sovereign debt default, probably accompanied by our departure or ejection from the euro, now looks increasingly likely.
Since the Irish government first unconditionally guaranteed the deposits and bonds of the Irish banks in September 2008 the cost of what we were originally assured would be the “cheapest bailout in history” has steadily risen and now, after the government committed a further €24 billion of our money last month, stands at €70bn.
But even that enormous sum, the equivalent of over 50% of Irish GNP may well prove insufficient to plug the black hole that the banks have become.
Will there be further write offs?
Before the publication of the stress tests conducted by US financial consultancy BlackRock Solutions, which accompanied last month’s banking recapitalisation announcement, the Irish banks had already written off almost €60bn of bad loans. Under BlackRock’s worst-scenario they will have to write off a further e40bn of bad loans. That would bring the total of bad loans written off by the Irish banks to almost €100bn.
If that sounds like an absolutely enormous sum, and it is, it still represents just 24% of the Irish banks’ combined peak loan book of more than €410bn in 2007. However, NAMA has purchased bad loans with a face value of €71m from the Irish banks for just €30bn, a write down of €41bn or just over 60%.
In other words we are asked to believe that after writing down the loans sold to NAMA, which represented only a little over a sixth of their total loans books, that the banks will write down the rest of their loan books by an average of “only” 17%.
More losses lurking?
In fact the disparity between write-offs on NAMA and non-NAMA loans is even wider than these figures suggest. For a start NAMA had originally planned to purchase a further €10bn of bad loans from the banks. While the new government seems to have pulled the plug on further loan purchases by NAMA, it is clear that there are further substantial losses lurking here.
How substantial? Even if only the previous average 60% discount was applied to these loans that translates into a further €6bn of losses bringing the total loss on the €81bn of loans that NAMA was originally meant to purchase to €47bn.
What this means is that once these loans are excluded we are expected to believe that the banks will incur losses of just €53bn or 16% on their remaining loans. That’s simply not credible.
Don’t forget the mortgage issue
The Irish banks have €98m of Irish residential mortgages on their books. With Irish house prices now down by at least 50%, almost half of all mortgages in negative equity and a tenth of all mortgages either in arrears and/or restructured, the banks are looking at serious losses on their Irish mortgages. They also have a further €43bn of UK mortgages where house prices have fallen by approximately 20%.
BlackRock is pencilling in Irish mortgage losses of €16.3bn and a further €620m of mortgage losses in the UK. This means that it is expecting a write-down of 16.6% on the banks Irish mortgages and a write-down of just 1.4% in the UK. Granted the fall in house prices has been less severe in the UK than on this side of the water. This means that arrears and negative equity are less of a problem. Even so I can’t help wondering if a 1.4% write off will eventually prove to be sufficient.
Those damned trackers
However, while one might have some minor quibbles about BlackRock’s estimate of the banks’ likely UK mortgage losses, it is its estimate of Irish losses that looks most suspect. Not alone are negative equity and mounting arrears likely to translate into significant write-offs in the coming years, there is also the matter of tracker mortgages, a subject on which the BlackRock stress tests were silent.
An estimated 55%-60% of the banks’ Irish mortgages are trackers. These are tied to ECB rates with the lender charging the borrower a fixed margin over the official rate. The problem for the Irish banks is that, as concern about their solvency has grown, they haven’t been able to borrow at anything close to official ECB rates for several years.
While, even after this month’s increase, the official ECB rate is still only 1.25%, Irish banks are paying somewhere between 5% and 7% to borrow on the inter-bank market. This means that they are losing a fortune even on tracker mortgages that are fully compliant.
The extent of the likely impact of trackers on the banks’ loan provisions is provided by the fact that someone on a 30-year ECB plus 1% tracker mortgage would require a 17.75% reduction in the amount owed if they were to switch to either an AIB or Bank of Ireland variable rate mortgage to keep their monthly repayments unchanged. For someone on a 35-year mortgage the reduction would have to be 20%.
Combined losses will be huge
In other words, the banks are looking at losses of at least €10bn on their tracker mortgages before they write down a cent on any of their delinquent homeloans. So how much more of a hit are the banks looking at when arrears and negative equity are added to the mix. Call me pessimistic, but I can’t for the life of me see how, when combined with the losses resulting from trackers, the banks can escape with combined losses of much less than €30bn on their Irish mortgage books.
That leaves just €23bn to cover the losses on the Irish banks’ remaining €240bn of loans, a mere 9.5%, if the BlackRock forecast isn’t to be exceeded. But of course it almost certainly will. God only knows what horrors lurk in the banks’ €43.5bn of corporate lending and €36.5bn of loans to SMEs. There is also €12.7bn of non-mortgage personal lending.
Wish for a miracle
If the Irish banks manage to keep losses on these loans under 10% it will be nothing short of a miracle. Far more likely is that the banks will be back for even more capital at some stage within the next two years. If, or more likely when that happens, an Irish sovereign debt default will be inevitable while the resulting ill-feeling, both in Ireland and in Europe, will see us either exiting or being ejected from the single currency.
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