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We have warned time and time again that Ireland was facing a massive fiscal crisis, both on here and on Twitter. We took a look back through the archives to see what we might have called right over the last number of months:

September 11, 2009: ‘A floor in the market’

We questioned just how much nonsense Finance Minister Brian Lenihan spoke in September 2009, where he argued that Ireland had neared the floor in the housing market. Of course, NAMA set its floor in November 2009, and prices have fallen ever since – leading to yet more losses for the taxpayer. We quoted him:

“If a flood of property is dumped on the market, it will be utterly unsustainable. That is one of the reasons we must establish NAMA and try to establish a floor in the market. We are very near it on the basis of the figures and data we have about the yield from property. The yield is at an all time high relative to the assets, which is a clear objective economic indicator that we are approaching the trough. We must banish our devils, the suggestion that we have further to go. That is part of the problem and the reason for the illiquidity in the housing market.”

And posted the video:

There is no doubt that everything said there was a fiction, and it was patently obvious at the time.

December 24, 2009: Morgan Kelly on how we got here

Morgan Kelly published a paper at Christmas 2009, in which he outlined the looming bank crisis and the coming massive mortgage crisis. It was universally ignored. We highlighted it at the time:

I can’t really add much to Mr Kelly’s excellent analysis. What it says to me is that the next 12 to 18 months are going to be among the most difficult, if not the most difficult, time this country has faced. I encourage everyone to read the entire document.

I will emphasise his conclusion:

Despite having pushed the Irish state close to, and quite possibly beyond, the limits ofits fiscal capacity with the NAMA scheme, the Irish banks remain as zombies whose only priority is to reduce their debt, and who face complete destruction from mortgage losses. The issue therefore is not whether the Irish bank bailout will restore the Irish banks sothat they can function as independent commercial entities: it cannot. Rather it is whether the Irish government’s commitments to bank bond holders when added to its existing spend-ing commitments, will overwhelm the fiscal capacity of the Irish state, forcing outside entities such as the IMF and EU to intervene and impose a resolution on the Irish banking system.

February 4, 2010: The Coming Crisis?

It might be news to some people, but the purchasing of Irish bonds by Irish banks was highlighted a long time ago. We highlighted along with many others that Irish banks were buying Irish sovereign bonds and using them as collateral at the ECB. We also emphasised that Ireland was in as worse, if not a worse state than Greece – just that the markets had yet to pay attention to Ireland:

If you thought all of the problems had been sorted, then think again. There are really big problems coming down the road, and very few people seem to be talking about them. So let’s look a little closer at the potential fiscal problems Ireland, and our banks, face.

Everyone is talking about Greece right now, but to me Ireland is no different. It is probably worse. So with these deadlines looming, what is happening? Over the past number of weeks you might have noticed various headlines to do with NAMA delays. Why is this important? Could it be that unless the banks can transfer these junk ‘assets’ from their books, they could face funding difficulties on non-ECB markets?

I could well be wrong, or even cynical, but my feeling is that banks are desperate to get this stuff off their books, in order to be better able to fund themselves after the ECB shuts the discount window. If they don’t get them off their books, and onto the backs of the taxpayer, the banks could simply end up going to the wall, or simply being nationalised.

If you’ve read Morgan Kelly’s excellent analysis of the Irish credit bubble you will be aware of the Irish banking system’s over reliance on international money markets for funding. When the financial crisis hit in September 2008, these money markets froze and Irish banks struggled to get day to day funding. This is what ultimately led to the bank guarantee, and to the opening of what’s called the ECB discount window.

Banks all over Europe were struggling with funding, so the ECB essentially enacted emergency measures to help fund the banks. Irish banks were one of the biggest beneficiaries of the discount (the interest rate charged by the ECB is sometimes called the discount or repo rate). Ireland’s banks have effectively been kept on life support by the ECB since 2008, as McWilliams also noted last year. Essentially Irish banks were buying NTMA-issued sovereign bonds with short-term lending, presenting that as collateral to the ECB and then borrowing cheaply from the ECB. Summed up here – 25% of our deficit in most of 2009 was indirectly funded by the ECB.

When you combine the shutting of the discount window, with the delays in NAMA transfers and ultimately our own State borrowing (indeed we have already borrowed €6.5bn so far this year – 33% of our bond issuance for this year was done in January) and with the likely writedowns of not 30% but 50% on the loanbooks, we are facing a serious crisis. And of course the other factor is the ECB raising interest rates at a time we need them to stay low.

My questions is this: how are we going to pay for all of this?

February 22, 2010: Delay and Pray

This actually sums up how the Irish banks, especially Anglo, have been dealing with our property developers. Rolling over interest, not writing down the loans, not crystalising the losses, doing repayment deals with developers – to drag it out – extending and pretending.

Here it is in a nutshell: NAMA is one massive “Delay and Pray”.

Given that our banks are insolvent, that they are facing massive liquidity issues with the imminent closure of the ECB discount window, they cannot keep the pretence of extending and pretending up forever – and NAMA is, or was supposed to be, the answer to their prayers. You could also argue that Bank of Ireland recently changing its fiscal year was part of this tactic.

The Government would take the crappy loans from the banks (rather a lot), and through some financial voodoo, the losses would still not be crystalised, and rather ingeniously – the debt would not appear as sovereign debt for Ireland, or as debt for the banks, but would instead be dumped into this NAMA bad bank.

And NAMA has one sole purpose – keep the pretence going that someday, somehow, the value of the underlying assets will return to peak prices. Delay and pray. Do not write down the loans. Do not accept the reality of the losses. Do not pass go.

Not only is it unlikely that this will happen, it is almost impossible. Morgan Kelly wrote in December that it could take 50 years for the underlying assets to return to 2006 prices. Last week, in the High Court, we saw development lands being written down by 60% to 98% (in terms of valuation, not borrowing). These figures are the reality of the lands that NAMA is taking charge of. And we are overpaying already. How long do you think it will take rezoned agricultural land bought for €13m at peak, revalued at €600,000 in 2010, to return to €13m? The answer is: it won’t. So much land was rezoned that there is no necessity for rezoning for a further 70 years in many counties. Add to that the 300,000 vacant properties. Add to that little demand. Add to that zombie banks unable or unwilling to lend.

This is the reality of NAMA. Delay and pray.

It logically follows that where the banks lent money with no obvious collateral to back the loan, and where the supposed value of derivative is now zero, the bank sustains a massive capital loss.

However the banks are simply delaying and praying until NAMA takes over the loans, and then NAMA continues the praying.

We are in for one hell of a fiscal mess.

If you hear spin that no one saw this coming, don’t listen. There were plenty of commentators and plenty of warning signs. Unfortunately many people chose not to listen.

Been a while since I linked to a Boone and Johnson piece around these parts. This one is required reading…

[..] For Ireland, too, sovereign debt, including bridge financing, will rise close to 150% of GNP by 2014, and is mostly external. But a sovereign default would require a much larger bank bailout than in Greece, potentially leaving private debt almost worthless if official debt has seniority. Total haircuts don’t happen historically – except in the wake of communist takeovers – but it is hard to imagine that private creditors won’t suffer huge losses in net present value.

Given this, we should expect Greek debt yields to rise further, despite the current IMF program. Likewise, an IMF program for Ireland – which seems increasingly likely – will not bring down domestic bond yields and reopen credit markets to any kind of Irish borrower.

If people start to think this way, Portugal, whose already high and growing debt is held largely by non-residents, becomes a candidate for default as well. In that case, it makes little sense to hold Spanish debt, either, which is also mostly external. Spain’s financial exposure to Portugal and its housing-led recession don’t help matters.

And, if Spain is at serious risk of default, government solvency is at risk throughout the eurozone – except in Germany. Perhaps Italy can survive, because most of its debt is held domestically, which makes default less likely. But the size of Italy’s debt – and of Belgium’s – is worrisome.

Given the vulnerability of so many eurozone countries, it appears that Merkel does not understand the immediate implications of her plan. The Germans and other Europeans insist that they will provide new official financing to insolvent countries, thus keeping current bondholders whole, while simultaneously creating a new regime after 2013 under which all this debt could be easily restructured. But, as European Central Bank President Jean-Claude Trichet likes to point out, market participants are good at thinking backwards: if they can see where a Ponzi-type scheme ends, everything unravels.

Word has it that a few media outlets have picked up on Gav and Lorcan’s latest post. Welcome aboard if you’re a first-time reader. Make sure you’ve your spinshield at hand, Government ministers are already out talking nonsense. 

It looks likely to be a wild ride over the next few days. We should know a little more following a meeting of EU finance ministers in Brussels tomorrow evening.

Eyes-peeled for a bail-out involving Ireland and An Other which will be spun as a broader European ‘restructuring’ (possibly of the banking system, not the State, as if it’s still possible to seperate the two) by our Government and thus no fault of their own.

Sure, all the correct decisions have been made and all the right corners turned, remember. Cheapest bank bail-out in the world, lads.

Last week we showed how the most recent Irish Central Bank financial statement showed a large jump in the ‘other assets’ of the bank. We’ve been trying to figure out what exactly is going on. Over the weekend, Lorcan noticed that the data we used last week has since been updated to include the October data. It makes for eye-watering reading – hold onto your hats.

The ‘Other Assets’ of the Central Bank are now at €34.606bn, having jumped from €14.378bn in August and from the €21.195bn in September (which we reported last week). That’s a rise of over 140% from August to October. But what, on the face of it, is going on, and what does it mean?

Here is a chart of the ‘Other Assets’ of the Central Bank from the peak of the property bubble in September 2006 to October 2010:

Here is the table:

When previously contacted, the Central Bank of Ireland gave this description of what is captured by the ‘Other Assets’ column of the Irish Central bank balance sheet:

“The ‘Lending to euro area credit institutions in euro’ columns [including “main refinancing operations” and “longer term refinancing operations”] are Eurosystem operations.

Any other lending undertaken by the Central Bank is captured under the ‘Other Assets’ column, also in Table C2. It should be noted that this column is not exclusively lending, but also captures other certain assets of the Bank.

There is no further detailed information we can provide.

[The sheet being referred to is here, note the columns referred to (f) and (g), while other assets is column (r).]

So, what does this mean?

Well, the total amount of ‘assets’ in the Irish Central Bank has risen by a total of €55.3bn from August to October, from €130.310bn to €185.815bn . But only €35bn of that has been captured by the ECB-related columns in (f) and (g) referred to by the Central Bank above.

The other €20bn has been added to the ‘Other Assets’ column.

All of which seems to point to some euro quantitative easing happening on Dame Street in Dublin. How long will the ECB allow this situation continue?

Something to muse on. Here is a timeline chart. I wonder what it represents…

Most insightful press release of the day goes to… drumroll please… Shell to Sea.

Today marks the 4^th year anniversary of the baton charge and violence by Gardaí against protestors opposed to the Corrib Gas Project.

The 10^th of November 2006 was chosen by the Shell to Sea campaign, as a suitable day of action as it marked the anniversary of the hanging of Ken Saro Wiwa and 8 other Ogoni activists who opposed Shell. Over 200 Gardaí were drafted in under the direction of Superintendent Joe Gannon (then Superintendent in Belmullet).

Ironically Superintendent Joe Gannon is now Superintendent at Pearse Street Garda Station, which today will be the focus of a protest march in opposition to Garda brutality against protestors. This protest was called in light of the violence that was dealt out to students in Dublin last week. Supt. Joe Gannon was present and personally involved in the scene at the Dept of Finance when students were violently removed from the building.

Shell to Sea spokesperson Terence Conway stated “In a investigation into Supt. Joe Gannon’s handling of a protest at Pollathomais Pier in which 20 people were injured, the Garda Ombudsman recommended to Garda Headquarters that disciplinary action be taken against him. However nothing happened and instead Supt Joe Gannon was promoted and has continued to police protests in the same manner that characterised his time down here in Mayo”.

Irish Times report on the Garda Siochana’s decision to reject the recommendation by the Garda Ombudsman is here.

Shady’s back. Back again.

The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War, but with one crucial difference. Whereas the Land War faced tenant farmers against a relative handful of mostly foreign landlords, the looming Mortgage War will pit recent house buyers against the majority of families who feel they worked hard and made sacrifices to pay off their mortgages, or else decided not to buy during the bubble, and who think those with mortgages should be made to pay them off. Any relief to struggling mortgage-holders will come not out of bank profits – there is no longer any such thing – but from the pockets of other taxpayers.

The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue.

However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly.