The Bank of Ireland saga continues.
Here is an article from the Irish Independent from Saturday. It begins,
BANK of Ireland (BoI) yesterday raised €2.9bn in fresh short-term funding, believed to be from Royal Bank of Scotland(RBS), as the bank fights to stay out of state control.
And of course RBS is owned by you and me. So a British bank which was nationalized to save it from insolvency, is now lending to an Irish bank to save it from insolvency and being nationalized.
Several questions beyond the simple WHY? First what does RBS get from this deal? Why does the British Government (for their proxies would surely have been consulted) think this is a good thing to spend money on at a time when our banking sector is not healthy enough to stand on its won feet and our public spending is being cut with a savage glee?
And why does the Irish Government prefer this solution plus selling stakes to unidentified investors in New York, to nationalizing via further Irish State support?
The broad details of the deal are that BoI will pay RBS 2.76% above the Libor rate which banks usually charge to lend to each other. The duration of the loan is for 2,2 years. So this is short but not very short. It is the kind of debt that before the crash risk managers smiled upon. Swapping out longer loans for shorter ones of this sort of length. But that was then. These days the banks are a little less sanguine about the brilliance of being dependent on short term loans that have to be rolled. So this is probably the longest RBS would settle for.
The rate speaks for itself. So this could just be RBS thinking here is a way of placing 2.9 Billion in a profitable deal. But I don’t think that explains it. BoI is not a great bet and neither is Ireland as a whole, The implicit government guarantee of not letting ‘to big to fail’ banks go down has to be questioned by the very fact that the Irish government is now hitting bond holders of Junior and unsecured debt for 80-90% losses. (Not that those holding the debt will lose that much since many will have bought the debt more recently at a discount when they [purchased. But this is still making the private bond holders share the pain. So there is no blanket guarantee. So why would RBS want to get involved at such a volatile time?
I think we have to entertain the possibility that RBS is lending to cover larger losses if BoI was to fail. RBS is one of the British banks I have long suspected was heavily exposed to Ireland. I think RBS is trying to save itself via this deal. The banks call it a loan. I see it as a bail out. The two states are using private banks as cover.
The larger question is what the position of the Irish government is and its debt sewer NAMA. NAMA is the Irish ‘bad bank’ which has previously bought up a river of effluent from the Irish Banks. More recently it has been buying less. Why? You could argue, sound business sense. But why would we get an outbreak of that where it has never been seen before.
I think NAMA is hiding its own rising pressure of troubles. This BoI deal suggests to me pressures are growing and options for addressing them are dwindling.
Germany is trying to control an explosive pressure in Greece. The UK is dealing with something so far smaller but potentially larger in Ireland. In Germany the voters are aware of what extra debts and risks they are being forced to shoulder. And they are angry and getting angrier. In the UK the voters are unaware. Unaware of what RBS is doing and what extra risks that exposes the UK tax payer to.
The Irish Independent is now reporting that US billionaire Wilbur Ross is one of the members of a consortium that has bought a majority stake (> 68%) in BoI. The figures being quoted are much less than the RBS loan deal. Could we be looking at a debt-equity swap?
http://www.independent.ie/business/irish/us-billionaire-wilbur-ross-buys-into-boi-in-new-deal-2830557.html
brian t,
that's exactly what occured to me too.
test.
Just want to make sure everyone is clear about this. The RBS loan is NOT the same as the unidentified investors who it turns out include WIbur Ross an American Billionaire.
The loan is separate and parallel to the investors buying shares AND different again from the default on bonds and bond buyback at up to 90% discount.
They are all happening, according to press reports.
Sorry to restate what you all probably understand but I have seen confusion in the comments in some of the papers.
Yep – I know they are two separate deals, but I just thought the timing is odd, and it might make a kind of sense to RBS to be in the consortium too. Maybe they'll take some equity in lieu of interest payments ..?
Wilbur Ross is a distressed debt specialist, got into US bank debt early in the collapse in 2007.
Could RBS be a means to prevent collapse of UK post office accounts?
They're all bloody debt specialists.
That's the sodding problem.
shtove,
Bingo. That's part of what is at stake. And it get's worse, much worse from what I was told. BoI is going to be in a world of pain.
I didn't know about the Post Office and BOI link. Does this mean that when you open an account at the Post Office you are effectively opening an account with BOI?
If BOI are not covered by the Financial Services Compensation Scheme but by the Irish government does that mean that Irish taxpayers will be on the hook for all the PO accounts if/when BOI goes down?
Ewan,
Nogt quite. There is a seperate company. Quite what teh legal and financial arrangement there is between the two I can't say for sure. But they were suposed to be fairly separate.
As for who would guarantee those PO accounts, again I don't know. But I think you are right to sense that there is more to find out .
There is a bigger story but I can't say more at the moment.
What is the guarantee on these accounts worth ?
Are they asset backed or insurance ?
If assets, how long would it take to realise the assets and would 'mark to market' guarantee full value
If insurance backed, is the Ins.Co. good for the money (AIG)
How long does the average saver have to wait between 'credit event' and payout ?
What is the average period between Joe Public experiencing a 'liquidity event' (no access to funds) become a 'solvency event' (due to penalty clauses)
Why anybody trusts the banking system anymore is beyond me, they are all insolvent (they do have some liquidity due to Gov bailout and investor/saver inertia)
If I had any money it would not be in a bank, I would either take the hit from inflation and stash it under my bed, try to hedge with PMs (physical) or lend it to a local enterprise where I could keep an eye on it.
I noticed in the weekend's papers that RBS, Unicredit and Credit Agricole haven't signed up to the IIF's 21% haircut deal which suggests that they're all massively exposed to Greece and can't afford to take any kind of hit at all. For the moment, I guess, as long as they can keep the 'assets' on their books at full price they can keep their heads above water.
The water level keeps on rising though…
Jamie,
That's really interesting. I hadn't noticed that. Given that its those three in particular I am inclined to your view. They are exactly the ones I would have fingered as the exposed.
Thank you for pointing it out.
Here's the article I read:
http://www.guardian.co.uk/business/2011/jul/22/bailout-rescue-euphoria-wanes?INTCMP=SRCH
It's really interesting that the author names these three banks in particular. I wonder how he knows which names to look for among the opt-outs? 😉
There's been stuff breaking on NAMA in Ireland yesterday and today – they have been publishing longish reports for 2010 and commentators are shifting through it all – and also they are formally announcing an initiative for the domestic housing market.
Basically "its all a bit mad, Ted" to quote Dougal of Father Ted fame.
Dispite selling some of the better assets ( in the UK not Ireland ) which it bought at a discount (so therefore a loss on their orginal price) and claiming a profit on these of 305 million euro it has made a net loss of 1.1 billion after 1.4 billion of loan impairments were added in.
Pretty good going for 20 months hard work I'd say. Its a loss of about 2.75 million euro per working day (400 days or so) despite the "positive" sales in the UK.
Most of the remaining property is in the Irish market. What chance of future positive sales exists there?
I suppose generally it would back up your point Golem on pressures mounting on BoI via the direct financial realisation by the state that NAMA actually isn't working as proposed.
There is a mention of a joint troika and government target of NAMA paying back 7.5 billion by 2013 in the CEOs presentation on p.13.
On the same page they say their will be no fire sales. Its begining to look like Custers last stand here. Except much slower and nobody dies.
Also they have formally announced a domestic mortgage 'non-intervention' intervention where they propose protecting mortgage buyers from negative equitity with a type of subvention that could be written off. The state would take the hit. Max Keisler was a panelist on a TV show here when that same idea was mooted to him without getting into detail and I remember he immediately shouted out that it was a another ( albeit little ) ponzi scheme. He was right it seems judging by the details of it emerging currently.
The theory of NAMA was that it would put Irish toxic property debts into suspended animation while it waited for another speculative boom to create a huge upswing and restore 'values' to levels at such the huge debts could be repaid and the previously toxic assets sold at a profit – to people taking out even bigger loans.
It was never going to work as it is dependent on solving the crash of one hugely leveraged property based ponzi scheme by the creation even more largely leveraged property based ponzi scheme. Its all nuts. The only people who benefit are 'the suits' involved with running it they have massive salaries – many of which were highly involved in creating the first national ponzi scheme.
The discredited mainly FF associated developers also get to retain thier lifestyles as well largely.
If anybody interested – but beware the topic is neverending – this is a good blog on it;
http://namawinelake.wordpress.com/
Some of the properties have been identified involved in NAMA loans including quite a few in the UK
Golem this is also possibly driving UK government policy towards Ireland – ie. we are via NAMA big players in the UK property market)
http://namawinelake.wordpress.com/2011/07/28/revealed-at-last-the-nama-properties-subject-to-enforcement-action/
Sorry Golem and all – that last comment is too long.
Joe R
Just seen the NamaWineLake site and read how the Irish Government are intending to raise €1.5 bn of new tax they want in addition to the €2.1bn of extra austerity cuts.
One great idea is to have a "household" tax of €100 on every household in the land ..a totally regressive tax…
while lowering personal tax thresholds , tax credits, bereavement payouts, child benefit, raising carbon tax etc etc… the way this being played out is laid out in exhaustive and scary detail and is a kind of writing on the wall for how these banker lovers operate.
To go into the detail of what is planned after three austerity budgets and over 14% unemployment is chilling. Its like going from threatening war to actually planning the train timetables.
Are the Irish actually going to take this? Would we?
Apologies only saw this now.
The answer is yes I think they will.