Thursday, 30 September 2010

Ireland in the need of a lucky Shamrock...

Anglo Irish Bank is definitely a black hole for the Irish Government.

I wrote about zombie banks and zombie hotels in Ireland recently.

It looks the zombie bank is decaying more rapidly than expected, pushing the Irish budget in very dangerous waters.

"Ireland faces €34bn bill for Anglo Irish Bank, forced to redraft budget."

"The country has so far ploughed €29.3bn into Anglo Irish Bank, and the country's Central Bank said on Thursday the lender could need an additional $5bn under a worst-case scenario."

In the previous post about Zombie banking in Ireland I indicated the below:

"Total support for Anglo Irish amounts to 22.9 billions Euros so far and will cost 25 billions to the Irish taxpayers according to its CEO Mr Aynsley but S&P put the figure at 35 billions Euros."

Looks like the CEO was a bit too optimistic on his forecast...

But there is also Allied Irish bank and Irish Nationwide in the need of additional support...

"Allied Irish Banks will need to raise an additional €3bn by the end of the year. Support for Irish Nationwide will rise to €5.4bn from €2.7 bn. The €40bn bailout of the banks has cost Irish taxpayers the equivalent of 20pc of GDP."

This is an horror blockbuster movie in the making...When fiction goes beyond reality.

The worst case scenario according to the Guardian is summarised below. I'll go for the worst case given the previous excellent forecast from Anglo Irish's CEO thank you very much.

Murphy's law: 'Everything that can possibly go wrong will go wrong'."

Murphy Junior's law: "My father is too optimistic."

Bailout breakdown:

"Anglo Irish Bank €29.3bn (including €22.9bn already committed by government) – could rise to €34.3bn in worst-case scenario
Allied Irish Banks up to €6.5bn (including €3.5bn already invested by government)

Bank of Ireland €3.5bn (it says it does not need any more capital from government)

Irish Nationwide Building Society €5.4bn (including €2.7bn already committed by government)

Educational Building Society €350m (further requirement for €440m and possibly more expected to come from its new buyer)

Total €45bn, rising to €50bn in worst-case scenario."

By the way NAMA is also taking over 3.35 Billions GBP worth of Ulster loans...

I started drafting this post on the 30th of September, and given I was travelling, a lot of news have been unravelling during my trip:

Allied Irish was nationalised and on the 6th of October, Fitch downgraded Ireland from AA- to A+...

"The ratings could be downgraded further if the economy stagnates and broad-based political support for and implementation of budgetary consolidation weakens," Fitch said.

Get ready for some more downgrades...

"Unlike Greece this spring, it has cash. It has already secured all its borrowing needs until mid-2011. “We’re absolutely funded until next July and we’re not obliged to go to the markets,” says Mr Lenihan. Ireland’s average cost of borrowing this year, moreover, is the same as last year at 4.7 per cent – not the 6.9 per cent reflected by the spike in spreads last week, at which, obviously, no borrowing was taking place."

Well, Mr Lenihan, given the obvious downgrades Ireland just been hit with, get ready for a surprise in mid 2011 when you come back to the market for more funding...

Anglo Irish is a monster that should had never been let to grow unchecked. Where were the regulators and why the government did not step in earlier?

The Financial Times article quoted above goes through the rise and fall of Anglo Irish:

"Anglo Irish Bank, the bank responsible for 90 per cent of Ireland’s €40bn taxpayer-funded bail-out, was originally involved in financing the import of fridges and washing machines for Irish housewives after the trade reforms of the 1960s, writes John Murray Brown."

"By 2007 the bank was half the size of Bank of Ireland and, on a market capitalisation basis, it was briefly Ireland’s largest bank in July that year, valued at a scarcely credible €13.3bn."

"But, like the property market, Anglo was heading for a fall. Essentially a monoline business, it was concentrated in land and development property lending. It is thought 10 developers accounted for half its loan book."

What a sick joke...10 developers = 50% of the loan book. Have they heard about risk concentration?

"It was only later in January 2009 that the government was forced to nationalise Anglo, after another run on deposits following revelations that Sean FitzPatrick, its powerful chairman and former chief executive, had not disclosed to auditors that at the end of 2008 he had €87m of personal borrowings from the bank."

Conflict of interest for Sean FitzPatrick?

I would like to advise Mr Abramovich to get a new team of portfolio managers for his investment vehicle Milhouse.

"Roman Abramovich’s investment vehicle is threatening to sue Ireland over its treatment of junior debtholders in this week’s bail-out of several Irish banks."

Very amusing indeed...

"The bond held by Millhouse was yesterday trading at about 62 per cent of face value, implying that holders do not think they are likely to be paid back in full. But it is above similar bonds from Anglo, which are trading at between 20 and 30 per cent.

Subordinated bonds pay higher yields than senior debt to reflect the fact that they are more likely to take losses if the issuer gets into difficulties."

There are some greedy people, they are some stupid people, and they are also some stupid greedy people.
There is no free-lunch when you buy risky sub debt...If his team had done a proper risk assesment of their investment (which they are supposedly paid for...), they would have seen that the government guarantee's expiry was running out on the Thursday 30th of September.

There should not be bailout for stupid investors....

My very first post on this blog in 2009 was about Dubai and the stupidity of some "portfolio managers":

"Perception of the credit worthiness on Dubai World was all about implicit guarantees from the Dubai Government. Investors invested believing in implicit support. Probably the same investors who believed in the sacro-saint AAA rating issued on dodgy CDOs and CLOs as a gauge of credit quality of the underlying pool of assets in the structure. Probably the same investors who believed that a callable LT2 bond will be called on the call date by the issuer, because it has been market practice in the past. How suprised they were when Deutsche Bank, nearly a year ago in December 2008, decided not to redeem some sub debt on the date of the call! Investors trade sub debt based on the date of the call to calculate the price of the bond."

For Dubai World Debt, if the credit analyst or portfolio managers had done "properly" their job in assessing the risk, they would have read in the bond offering documents that there never was no implicit guarantee from Dubai government and not even a legal guarantee. They just assumed it.

Same applies for the "talented" portfolio managers running Milhouse, they got attracted by the yield of the risky sub debt and believed in an implicit guarantee which had an expiry date which everyone knew about, except them maybe...

My message to them: get real. My message to Mr Abramovich, I know some very talented portfolio managers out there, out of job and very cheap. It might be time for Milhouse to upgrade...

Ireland 5 years CDS is trading wider todat at 451.78 bps, Cumulative Probability of Default is at 32.50 % (Source Credit Market Analysis Ltd).

Anglo Irish Debt Swaps May Pay Out on Burden Sharing:

"There are 674 credit-default swap contracts insuring a net $390 million of Anglo Irish’s senior and subordinated debt, according to Depository Trust & Clearing Corp. data. It now costs 5.2 million euros in advance and 500,000 euros annually to insure 10 million euros of the bank’s junior bonds for five years, implying a more than 82 percent probability of default, according to data provider CMA."

Bye bye Anglo Irish...The game is over.

"The Anglo Irish rescue package will cost every man, woman and child in Ireland as much as 7,500 euros."

The Irish Taxpayers must be thrilled.

And Abramovich should start writing down some of his investment in risky Irish Bank sub debt:

"Lenihan said that, while senior bondholders will be paid in full under the bailout, legislation is being prepared to “address the issue” of junior bondholders taking a loss on their investments."

"After the U.K. government nationalized Bradford & Bingley Plc in 2008, it changed the rules to allow the troubled lender to defer interest on its subordinated debt without that legally constituting a default. Its failure to pay still triggered credit-swaps protecting all the Bingley, England-based bank’s bonds in July."

There will be a restructuring on the debt and a CDS event.

I don't think the current Irish Government will get re-elected...

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