Thursday 21 February 2019

Richard Curran: Berlin is risking the EU's future

At loggerheads on and off the pitch: neither Anthony Stokes nor Sami Khedira could keep their eyes open on Friday.
At loggerheads on and off the pitch: neither Anthony Stokes nor Sami Khedira could keep their eyes open on Friday.
Richard Curran

Richard Curran

IT was Germany vs Ireland both on and off the football field last week. Whatever about the soccer clash on Friday night, the Social Democrats wanted to score a hat-trick of concessions from Ireland on various tax measures.

The smaller party in the talks to form a coalition German government with Angela Merkel's Christian Democrats put issues of huge financial importance to Ireland on the negotiating table.

They are hardly alone in having views about Ireland's corporate tax rate, our chances of getting a direct bank bailout from Europe or whether Robbie Keane is getting a little over the hill.

Having a view is one thing, insisting on it forming government policy on issues they are not supposed to have any direct control over is a completely different matter.

Placing two of those three issues into discussions on forming a government is one of the most bizarre twists in the euro crisis and suggests the politics of the eurozone could become unworkable in the future.

What next? Ireland's Budget will be circulating around the German parliament even before we get to see it? Oh sorry – that has already happened.

The Social Democrats are insisting that a new Merkel-led government would seek far-reaching commitments from Dublin in return for any emergency loan facility from the European Stability Mechanism.

Some Germans may be annoyed at the image of the partying Irish of the boom years and how we are "costing them a fortune" in the crash.

There have been many myths circulating around our financial relationship with Germany over the past five years.

In Ireland, the Germans could become the 'new Brits'. In Germany, where Ireland was previously held with a certain level of affection, we are now seen as something of an irritating financial nuisance.

It is time to check out the score between Ireland and Germany in this crisis. How much money have the Germans lost because of Ireland's boom/bust? Well, technically, none. Germany is an important guarantor of the European Central Bank, which has given our banks and our State money.

It is also an important member of the European Commission, whose bailout funds have provided loans to our Government.

It hasn't actually been asked to give any direct financial support but has done so through these proxy organisations, which themselves rely on the financial stability and influence of member countries like Germany.

There is no evidence that Germany has paid a price for lending its support through increased borrowing costs. If anything, it has helped it.

So, firstly, there was the State's bank guarantee, which saw holders of Irish bank bonds get paid in full.

There are conflicting figures around about how much of those tens of billions of euro in bonds were held by German banks and financial institutions. Some have suggested close to one-third were held by German and French banks. Others have suggested that eurozone institutions held just 13 per cent in total.

Anyway, whoever held the senior bonds when they paid out, received the full face value. Some of these bonds traded down from 100 per cent of face value to 70c in the euro, or even below 50c in some cases.

We have no idea how many German banks held on to them or sold them at 70c or 50c. Anonymous investors who bought them at 50c and kept them would have doubled their money.

So it is possible that some German banks took a small loss by losing their nerve and selling those bonds; while others may have held on to them and lost nothing.

The European Central Bank gave over €100bn in emergency liquidity to Irish banks. This was provided at a very low interest rate. That exposure has been reduced and it now stands at €70bn. Assuming Irish banks keep going, it will all be repaid.

When Ireland needed a bailout in December 2010, we got a €22.5bn loan facility from the IMF and the same from the European Financial Stability Mechanism and the European Financial Stability Fund. We also borrowed €3.8bn from the UK, €600m from Sweden and €400m from Denmark.

Our former foes in London charged us 4.5 per cent, which has now been reduced to just 0.18 per cent above Britain's cost of funds. So Her Majesty's coffers make a profit of just 0.18 per cent on it.

Our eurozone partners charged us various rates averaging 6 per cent. This was later reduced to between 3.5 per cent and 4 per cent. The profit margin looks closer to 2 per cent on it. Last year, we spent €1.36bn in interest payments on this bailout money.

We have even paid another €220m on top of that in fees to the troika as handling charges. So we are the only ones losing money there.

The ECB made a profit of €1.4bn on its eurozone market-support operations last year, which would have included support for Ireland. This is part of a €1 trillion liquidity operation by the ECB to the eurozone.

Lending someone money, when nobody else will, is a genuine form of support. Without it, Ireland was banjaxed and facing euro exit, devaluation and all that goes with it.

But we are still a European minnow. Our national debt is now 120 per cent of our GDP. Our economy is just 3 per cent of the eurozone economy. If the corporation tax rate of such a small nation forms part of the discussions in forming a national government in Berlin, the political future of the EU is in real jeopardy.

IBRC sale is an opportunity

HOW much is a performing loan worth? If I owed a bank €1m and was making all the repayments, for how much would that bank be willing to sell that loan?

If I was making all the interest payments but had come to some arrangement about delaying the payment of the principal, how much would it be worth? These are questions that will face the IBRC liquidator and several of the former Anglo Irish Bank's corporate clients.

With final indicative offers submitted on Friday for the first €3.5bn of loans, this could be a golden opportunity for some business borrowers of the bank.

Those who simply cannot pay back all of their loans, are in trouble. The IBRC liquidator will sell on the loans at a discount to whoever wants to take a punt and buy them.

But let's say Client A owes IBRC €100m. So far, Client A has made the repayments and he goes seeking to borrow the money elsewhere to buy out the loan. If he can buy it from IBRC for €95m, he has just made €5m. If he borrows the €95m at a lower interest rate than he currently pays IBRC, he has also made money.

If IBRC liquidator Kieran Wallace doesn't accept the €95m, the loan goes to Nama. Corporate clients don't want to go to Nama, which strengthens Wallace's hand.

But equally, nobody wants to see Nama getting any bigger. The Government, taxpayers and possibly even Nama itself, would rather see loans going to the private sector. Hence, there is an opportunity here.

Also, around €2.5bn of Irish Nationwide home loans are due to transfer to Nama. How many of those will involve re-possessions in the workout of those loans? Probably quite a few. It is hard to see a State agency like Nama instigating home repossessions. That is bad politics. Expect an outside buyer to take these loans at a real rock-bottom price.

Sunday Independent

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