Firesales, Meltdown and Default

March 27, 2011

Whichever way you look at it, the figures don’t add up. Next Thursdays bank stress tests allegedly will once again estimate the total loss exposure within the Irish banking system, but questions will remain as to the accuracy of these losses.

Declan Kiberd makes the excellent point in 4 Business, Sunday Times “Moody’s recently issued research on Irish residential mortgage-backed securities (RMBS): mortgages bundled up and sold to investors. It forecasts loan losses of between 3.5% and 13%, a huge spread that reflects the air of unreality in the mortgage market here.”

…”With the Pcar stress testing, the EU, IMF and ECB are pressing for Irish banks to offload loan portfolios. Speculation focuses on a sum of €80 bn to €85 bn. A firesale of these assets at a discount of 30% could lead to further losses of €25 bn.”

As Kiberd points out ruthless stress testing with an enforced sale of assets could lead to a fiscal and banking meltdown.

In our never never land our economy teeters on a €120 bn guarantee issued by the Irish government made up of  “€20 bn own use bonds, €30 bn  worth of Nama bonds and the rest, emergency liquidity provided by the Central Bank.

Our economy is being dragged into the gutter by the banking sector.

The biggest obstacle to a successful resolution of these problems is the Peter Pan refusal to accept and become responsible for our economic situation. Unfortunately, we have peddled away responsibility for dealing with our problems to the ECB. The reason for this is clear.

The biggest losers in our banking collapse has been the banks and the financial class who’ve operated the economic system in Ireland according to the simple formula: cheap money access from the ECB with no questions asked, balloooning public sector costs, frenzied property bubble, the professions in the financial services sector plus the retail and construction sector in a cross knit investment splurge that was not sustainable.

Its those interests above that stand most to lose in one approach towards a remedy to get the economy online again. That approach means biting the bullet, writing down losses, allowing bondholders to take a hit eg, according to Kiberd, ” €24 bn of bonds are due to mature in 2011 and 2012″.  The method would involve burning bondholders, perhaps debt for equity swaps for bondholders, but even that would not be enough, there is that matter of  €120 bn guarantees the markets with their 10% spreads believe we cannot live up to.

A declining GNP, deflation, 5.8% spread against our ‘bailout’, further austerity maens markets are calling a black hole spiral for the Irish economy that will lead to inevitable default.

The approach has been to avoid firesales in the hopes assets prices will improve. They are in decline, see Moody’s above. If asset prices are in decline, if GNP is in decline and we are caught in the vice grip of deflation, the game is up.

We are being faced with the inevitability of default. We need to forget Nama and LTEV and the hope our economy, a horse facing the Grand National overburdened with weight from the banks,  will survive the course. Firesales should include RMBS bundling at fair write down prices.

Our approach so far has been at all costs through Nama and the banks to turn a blind eye to mortgage default,  to avoid at all costs a write down of losses based on the false view that our economic prospects will improve in the near term. But the economic cost of this has been too much for the Irish economy, we have the IMF here to prove this, plus rating agencies and markets are both denying our false optimism, our wrong call.

Our economy needs to readjust, write down total losses that involve firesales and not pass the cost of keeping assets in suspended animation at the ultimate cost to taxpayers.  The financial class that has manipulated its resolution of the banking crisis based on saving the value of their depleted assets, must face writedown of such losses.

A final obstacle in arriving at a resolution of our banking crisis liest at the foot of the ECB.

Its policy hitherto has been to protect the bondholders of countries at the heart of the eurozone at the expense of the peripheral countries such as Ireland.

It will be an interesting outcome of the stress tests of our banks next Thursday that will see the twin alliance of the Irish and ECB axis
eventually emerge from never never land and face the reality of the rating agencies and the markets.

The markets believe the intervention of the Irish government and the ECB into Ireland’s banking crisis, so far has led a trail only to Ireland’s inevitable default.

The bailout of the Irish banks by the IMF/EFSF has been deemed a failure.

Based on alternatives that have been rejected by the ECB, such as default, burning of bondholders, next up,  is default!



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