Irish Mortgage Brokers Blog

I hope you enjoyed the first round of economic history from 2008 to 2011, I think it is time for round 2.

Alan Greenspan was on CNBC last week and his interview is a very interesting take on Europe - which happens to be the first thing he looks at every day (European Bond Markets). Meanwhile Lloyds are reporting that the risk of a 2nd recession in the UK are higher at c. 25-30%.

Greece is the crisis that just keeps giving, The Telegraph has the usual Eurosceptic line but it isn’t about being smug any more. The Greek referendum call of recent days came out of left field and while it may never actually occur the political optics show that the Aegean issues are far from solved, along with the replacement of military officials (the interpretation being the fear of a coup).

And German joblessness is higher for the first time in 2 years, standing now at 7%. The rate of inflation in Germany is currently 2.6% (HICP at 2.86%), having remained over 2% since January 2011. The issue with that (and unemployment that wasn’t growing) is that it lead to a ‘Goldilocks delusion’ where not cutting rates and fiscally conservative policy was considered best. It seems now that Germany has not decoupled from the rest of Europe.

Growing resentment about profligate EU members along with some fear inducing inflation as well as rising unemployment make for a very grumpy Germany, it does not bide well for negotiations. Perhaps hindsight will equally not bide well for the Germany that handled the Great Recession so well (from an employment perspective) either?

Of course at home here in Ireland we are about to pay €700,000,000.00 to speculative/junk rated bond holders who in any normal circumstances would be jumping for joy at a 50% haircut. Politicians are walking out of the Dail due to the lack of discussion, and bingo halls being raided by cops [irrelevant but a sign of the times!].

The Central Bank of Italy (Banca d’Italia) €-Coin ‘one figure for all European GDP’ statistic is also showing a sharp down-trend at present, negative for the first time since September 2009. Italy, with the worlds 3rd largest debtor at €1.9 trillion Euro, and winner of ’scary chart of the day’ almost every day regarding their bond spreads v.s Germany.

I don’t know of any model that can capture and create metrics out of the information flying around at present. There are interesting twitter based investment tools that use crowd sourced information to imply the trajectory of the markets, but I’m not privy to being under the hood on those.

What I am trying to say is that all of this news doesn’t paint a pretty vista, and in this analysts opinion the October/November 2011 period will be another big turning point or cusp. I last made a call like this in January of 2008 (and while it seemed grim at the time it was understated in retrospect), and during that time I went entirely to cash and advised all of our private clients to do the same until late 08′ early 09′.

Today I am repeating that call - to stay out of the markets for a while and see what comes of this all. You might miss out on the Spring 09′ moment, but you won’t face the burn on the road that gets you there. The news flow is simply too negative at present for confidence to go any other way than down, capital preservation remains key.

Until Central Banks step up to the plate (and it our long held belief that they must and will -they are already our lifeline) with the multi-trillion multi-lateral approach there is no reason to do anything other than earn interest.

David McWilliams hit an interesting point in today’s piece in the Independent about having ‘too much regulation’, and how it may repel new banks from coming here.

in late 2009 I was picked as part of a team that approached PostBank with a view to turning it into an SME business bank - our proposal never even made it as far as board meetings because they were determined to close down rather than continue, we found the whole process perverse at best.

Instead the same investor group will be setting up in the UK, meaning SME’s in Ireland lose out on funding.

It isn’t that new banks don’t want to come here, it is that they are routinely put off from doing so via the Central Bank and the way in which we grant banking licences in this country.

The other regulatory issue is Basel III.

Asking a bank during a time like this to hold more capital makes sense from a risk perspective, but from every other angle it is a noose.

Banks are being asked to deleverage (have fewer loans versus deposits), market forces are making them pay more for deposits than is healthy, they have huge tracker mortgage books that even when they perform create a loss and at the same time we want them to lend.

Simply put, these are not compatible objectives.

Banks HAVE to become zombies in order to continue because it is only with huge liquidity & capital injections at low prices that they could hope to work normally again - and we have already spent all of the money we have on saving them; so their alternative is to grind along trying to make whatever money they can and in a very very long time they will eventually be breaking even (think Japan)

That is the true tragedy of the crisis, if we had let Anglo close (I argued for this here) and only tried to save a few good banks (even though AIB is a banger it is still the owner of half of the payments system that the likes of EBS sit on top of) then we could have had a chance - it would have also required going right down the order of liabilities as follows:

Sharholders - wiped out
Preference Shares - wiped out
Mezz & SubOrd - wiped out
Senior bonds - turned into new equity
Depositors - saved (in order to maintain confidence)

Then we could have given 25bn in low cost money to the banks to make them healthy. Naturally hindsight is 20:20, we are never so prepared for anythin we are for yesterday!

But the new point is clear - regulation in itself is actually a risk, and a systemic one. Regulatory Risk will be a common word in banking vernacular of the future.

The entire justification of regulation and the bearing of its cost on the financial system (which ultimately gets built into consumer prices) is the avoidance of the systemic risk it is meant to mitigate. It didn’t and it won’t in the future so why is more of it now the solution?

Mainly because it sounds good…

There are now four Irish banks paying over 4% for certain deposit products. This is a good rate that outstrips current inflation. But it also spells trouble because banks are built of assets (loans) and liabilities (deposits, bonds, shares).

If they are paying their creditors 4% then they need to make more than that elsewhere to recoup the cost. The issue being that this is not happening. Much of what was taken away from the bank balance sheets to date are commercial property loans. Residential loans are the biggest asset left, and they are not making on average more than 4%.

This is a liquidity exercise and a capital raising exercise. In the past we used to complain about Anglo, and the way that a state bank shouldn’t be paying higher rates than other competitors in the market because it is a direct transfer from taxpayers to savers - that is a mistake.

But it is happening again, and it screams ‘desperation’, our banks are willing to pay twice the rate of some foreign operators in order to attract funds. We’ll update this soon with figures and calculations, just wanted to give a heads up first.

If you would like any advice on deposits (apart from rates which we provide below) then you can call us on 016790990. There may be other issues such as wanting to deal with non-Irish banks, or only banks that are covered by the Irish guarantee, we can guide you through.

Best Demand Account: Nationwide UK (Ireland), ‘Easy Access’ 3%

Best 6 month fixed: KBC Fixed Term 1.75% (CAR 3.58%)

Best 1yr fixed: PTsb ‘Interest First’ 3.71%

Best 18mth fixed: EBS Broker 6.5% (CAR 4.29%)

There are other deposit options with longer terms, and also with different choices or durations than our ‘quick list’; but we wanted to cover the most popular ones primarily so if you have further queries then you know what to do!

The best deposit rates presently available in Ireland are as follows:

Best Demand Account:     Ulsterbank Special Interest Deposit 4%*
Best 1 month deposit:      NIB eSaver 3%
Best 3 month deposit:      PTsb 3mth Fixed 2.5%
Best 6 month deposit:      PTsb Interest First 3.25%
Best 12 month deposit:    Nationwide UK (Irl) 3.65%

We can find the best options for you on other terms or go through the
various deposit choices available if you want help navigating the market
call us on 01 679 0990

*To a maximum of €15,000

bank run as defined by Barron’s dictionary of banking terminology as follows: ‘A series of unexpected cash withdrawals caused by a sudden decline of depositor confidence or the fear that a bank will be closed by the chartering agency. Today the ’silent run’ is much more prevalent than bank runs in the past where customers lined up in front of the tellers window and demanded their cash. Today depositors simply transfer interest rate sensitive funds - called ‘hot money’ to other institutions, also called ‘a run on the bank’.

Several things have been happening in Ireland that feed into this, firstly is that some banks are leaving the country, that partly helps to make the €40bn that left in December make sense (the figure for all of 2010 is about €110bn). Then there are confidence issues with downgrades and the like.

One of the most common personal finance questions I get is about deposits being safe in the bank here, and on sums below €100,000 I hand on heart believe that to be the case.

Efforts to save banks don’t always work, but they are often more successful than efforts to save yourself -if you look at Argentina in the start of the last decade the system was falling apart, Argentinians, desperate to put their cash somewhere safe moved all of their money into Uruguay the so called ‘Switzerland of South America’.

The Uruguayans fearing contagion equally took out all of their money and again, ATM’s stopped working, everybody lost money, Argentinians looking for a safe haven having taken the majority of the damage, a friend in PWC there told me that in effect, Argentinians ensured that fewer Uruguayans took ‘the hit’. Even today, nearly a decade later there is a fundamental mistrust of banks in both of those countries.

In fact, Banc do Brasil in the heart of Montevideo still lies empty as testament to this period. When GMAC fell apart in the US people with more than $100,000 were left wondering for months whether they would get any of the balance over that amount back, and I trust the FDIC far more than the ECB!

I don’t think we will see that in Ireland, a blog post by Lorcan Roche Kelly adequately sums this up. The thing that isn’t being mentioned though is the role of corporate and banking treasury departments in the way that they manage their money and how it is causing the flight of deposits.

Take a pension fund in Arizona, they wanted Euro deposit exposure and they are happy with leaving it in Ireland, but part of their policy is that they can’t keep money on deposit with any institution that is less than A3 or A- (quoting Moody’s & S&P respectively), an upper medium grade rating.

We have passed from upper medium grade last year to lower medium grade, but in 2011 we crossed the Rubicon into the Ba1/BB+ territory which is non-investment grade speculative.

Commonly referred to as ‘junk’, Irish banks earned this esteemed rating on the 11th of February.

What I can say is that any depositors who were holding out before on the corporate deposit side will now be giving up the ghost. The big damage wasn’t done in Q3 or Q4 of last year, it is happening right now. As you read this there is quietly money flowing out of our banks into other banks.

The fact is that even people on the street are afraid, fear doesn’t mean that banks go under, it just exacerbates an existing problem. Banks are a confidence game, I mean that in strict adherence to the nature of the word ‘confidence’ as opposed to implying a ‘con’.

Fractional reserve banking means that they never have the actual cash to hand that is necessary if all liabilities are called in at once; while deposits are ‘capital’ on the balance sheet they constitute a liability to the bank.

To get over this loss of depositor cash banks are increasingly using repurchase markets, often called ‘repos’, currently the main market maker is Goldman Sachs in London and haircuts are in the region of 30% on high quality assets. To address liquidity the banks are leasing out their remaining good assets, but that is different than the issue that is occurring with solvency. The repurchases that could be placed with the ECB or Irish Central Bank are already being done, as was a further €17bn of ’self sold’ or ‘own bond’ issuances under the ELG, effectively any usable asset is on lease.

The tricky situation is that while deposits fly away that banks in fact have fewer liabilities, but at the same time it affects their capital position. That is what the updated PCAR and PLAR reviews are for.

Suffice to say, that somebody somewhere just clocked into work and sat down to their treasury workstation, and the alert came up with an allocation order for part of their assets under management. That alert is saying to move x amount of money away from an Irish bank to another place.

It is mechanical in nature, yes, confidence and news about Ireland plays a part, but with many other funds it is just a domino effect of ratings versus allocation. That is part of the role that treasury managers work with, Irish banks are doing the exact same thing with other banks in other jurisdictions that get similar downgrades.

So the next time you hear that we are downgraded and people say ‘ah sure it doesn’t matter, sure we aren’t out in the market looking for money so it doesn’t affect bond pricing’, be sure to remind them that a corporate can’t list above the credit rating of the sovereign and that mechanical trades will be occurring that make our banks weaker as a result of it. We might not be ‘looking to the markets’ for money, but it doesn’t mean we won’t be looking anywhere for money fairly soon, the biggest damage to deposits to date is likely being done as we speak.

We were delighted to work with Irish Debate on doing a mortgage show, we have been big fans of theirs for a long time so it is especially nice to work with people you already admire. The clip is below, you can tune into Irish Debate at the URL above and follow them on Twitter for timely warning when a new show is coming up @IrishDebate

The Mudaraba contract is essentially a contract partnership in Islamic Finance, the Prophet (PBUH) forbid riba or interest, and for that reason the provision of capital for borrowers is generally not performed as a function of debt, but rather as a function of an equity investment.

In this way a Mudaraba relationship can exist with a depositor, but instead of getting interest the Islamic finance institution will invest it on their behalf. However, unlike western banking accounts, a Mudaraba account does not have capital protection as it would be in breach of the profit and loss sharing rule of sharia’a compliant finance. That is a big downside when you compare it to conventional banking.

This brand of deposit account is interesting because it has no guarantee, and yet people willingly sign up to it because it is handled in a responsible manner, shareholder funds are combined with depositor funds to make investments, and these are not securitized or sold on which encourage the probity and diligent underwriting of the investment. Conventional banking could learn a great deal from this.

The government will be hard pressed to decide who to squeeze next, if you go after the poor (which we take to be people earning less than c. 25k - irrespective of knowing whether this suits them or if they have debt or not) it is politically explosive, they will have a hard time going after the elderly - who have a tendency to not take it lying down (remember the medical cards?), and those who are rich (we take as earning 100k or more p.a. irrespective of debts) have already been hit hard.

What group can you easily strike next? The simple answer is that the people who have money are the target. This doesn’t mean those who earn a lot, rather it will be against those who ‘have’ a lot. The savings rate has been steadily rising (last months 0.2% drop was the first of its kind in almost a year)

which could be due to seasonal factors or it could be a symptom of people not having enough to put by and save.

which could be due to seasonal factors or it could be a symptom of people not having enough to put by and save.

In any economy it is healthy to have money moving around, you get an acceleration effect (and with credit you get a multiplier) on transactions and GDP, one great blockade is if everybody is saving. Keynesian’s may be familiar with the ‘paradox of thrift’ in which you get a situation whereby people saving personally do so for individual reasons, but if everybody does it at the same time (aggregate) then you suddenly have a void left where spending was occurring and it causes stagnation or deflation.

You can’t force people spend, but you can disincentivize them, and for that reason I suspect we will see ‘progressive DIRT tax’ (DIRT stands for ‘deposit interest retention tax) and it is taken at source - which has the added advantage of making it almost impossible to avoid.

The best way (politically) to do this is to have DIRT at 25% up to the deposit protected limit of €100,000 and above that have different tiers that people reach depending on total savings held.

How many people would feel any sympathy for a widower or single parent with €400,000 on deposit who has to pay 80% DIRT on any interest earned on a sum over €250,000? Not many, which makes it politically easy to do. There are no ‘women and children’ to hold out in front of this policy, virtually nobody ever runs out in defence of the rich, particularly not in Ireland where it is almost seen as a sin to get too far ahead.

The politically viable nature of this, the inability to avoid it and the policy advantage of encouraging people not to save too much for too long mean that you can practically bet the family silver on a change in DIRT tax in the coming budget.

DIRT is levied at the time the interest is paid, and for that reason if you have a large deposit and feel this increase is likely (as we do) then it would be a good idea to use the PTsb ‘interest up front’ product right now so that you get your interest done and dusted at 25% rather than taking a bigger hit in the months after Decembers budget.

This would only make sense for people with very large deposits, if you want advice you can call us on 01 6790990, this is not scaremongering, it is merely looking at a situation for what it is, the state need to raise money fast and there is one group out there for whom there is little or no public sympathy who are prime targets.

We are anaesthetized from outrage at this point when it comes to Anglo Irish Bank (or if you are a eurosceptic who doesn’t understand acronyms such as Ambrose Evans-Pricktard we are talking about ‘AIB’).

The latests announcement is that Anglo will be split into a deposit only bank and an asset recovery bank, both of which will be fully legal regulated entities. Let us be the first to congratulate the Minister of Finance for being the only singular individual who owns a bank in Ireland (two lines under the heading ‘resolution proposal’ it says “It will be a stand-alone, regulated bank, completely separated from Anglo’s loan assets and it will be owned directly by the Minister for Finance.”

Fascinating given that for anybody else you can’t have a single owner (see Central Bank: Licensing and Supervision Requirements and Standards section 1.2(iv)).

Speaking over supervision, the same regulatory paper (backed by the Central Bank Acts, 1971 and 1989, the Building Societies Act, 1989, the Trustee Savings Banks Act, 1989, the ACC Bank Act, 1992, the ICC Bank Act, 1992 and various provisions implementing EU Banking Directives) in section 1.3 it requires a ‘wide spread of ownership’ - which no one person can offer, even if they have a personality split ten different ways.

WTF JUST HAPPENED?! Simply put the State just split the bank and took all the liabilities and turned them into a funding mechanism, everything else that isn’t in NAMA already will be chased up. So the dirt that was too bad to pass, or only just toxic enough to hold will be pursued.

Ahh…. the liabilities. Yes, deposits are liabilities, and the state just took them all, and they won’t have any loans (assets) to offset or fund them. A bank with no assets?

What is already happening is that our state owned (or majority state owned) institutions are paying some of the highest interest rates in the market, it’s a distortion and hurts the banks that didn’t do (as much) wrong.

How will it pay interest? There are only two ways, one is a direct and pointless transfer from the Irish taxpayer to the depositors, the other is that the state uses the money.

Think about it, a deposit only bank would only hold liabilities- that’s just plain bad business. So maybe they will need some assets to offset these - odds on favourite: Irish Government Bonds.

Anglo rates go up to c.3.2%, but we have all seen that spreads on our bonds are c.6% so what has really happened is that the state just came up with a really cheap funding sources! Score.

Except that we’re still going to get slapped with the end bill which is being run up in the form of our structural deficit (the difference between what we are taking in as a nation (tax etc) v.s. what we are spending to provide services (public sector/govt. spending). So we have stemmed the bleeding but somewhere in amongst those bandages there is still a cut artery. Dammit, there’s always something to bugg€r up the whole thing isn’t there?

It is nice to finally have a ‘resolution’ to Anglo, in fact, we haven’t resolved anything, this is merely a press release that says ‘we are going to do x’, but ‘x’ hasn’t happened, it’s a statement of intent designed to recapture some credibility. The fact is that Anglo might not even split buildings, all the systems will remain the same, it’s just that on paper and accounting systems one side of the balance sheet will not be tied to the other. This is some f”£k3ed up uncovered territory. A great time to be alive to be honest, we are watching it all unfold.

A special thanks goes out to the bond market, without whom bad management by governments would be allowed to persist. Their indiscriminate way of calling a day of reckoning is a reminder to all the deluded lefties in this world that capitalism isn’t all bad!