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The Definitive Unwrapping Of The "Irish Package"

Tyler Durden's picture





 

Everything you desired to know about the "Irish Package" and then
some, dissected with clinical post-mortem precision by Goldman's
Francesco U. Garzarelli. We can only hope the Spanish, Italian and French packages are deemed more satisfactory by the market.

On the Irish Package and EMU Sovereign Debt

In an emergency meeting this afternoon, EU Finance Ministers and the IMF have agreed to extend financial support to Ireland. According to EU Commissioner Rehn, no ‘haircuts’ will be applied to holders of senior bonds issued by the Irish banks. However, we would caution that additional liability management transactions are still likely at the major Irish banks. The agreement will be formalized in coming weeks in a Memorandum of Understanding.

We think the Irish deal will lead to a moderate compression in Irish government bond spreads. The encouraging elements are the relatively speedy negotiations under the emergency framework agreed this Summer, the emphasis given to the recapitalization of domestic banks, and the long maturity of the loans. We provide details below.

Separately, the Eurogroup (comprising the finance ministers of EMU member states) issued a statement summarizing a political agreement on a new sovereign debt crisis resolution mechanism applicable from 2013, forming part of a broader overhaul of the Euro-area fiscal governance framework. The plan envisages a permanent conditional funding facility (ESM), shaped along the lines of the EFSF but of yet unknown size.

In order to gain access to external conditional funding, an EMU sovereign will in the future need to pass a debt sustainability test conducted by the EC and the IMF, in liason with the ECB. A failure to pass would result in debt restructuring involving private sector participation. To facilitate the process, from June 2013, all bonds issued by the EMU member states will include collective action clauses, as is currently the case in the US and the UK. ESM funds will be junior to IMF loans, but senior to existing bondholders.

The ministers’ announcement clearly states that no private sector participation in restructuring procedures will apply ahead of mid-2013. This will validate the upward sloping term structure of peripheral EMU sovereign bond spreads, particularly up to 5-yr maturities. For currently outstanding bond redeeming after June 2013, the impact should be broadly neutral, as the probability of a credit event does not change in light of this announcement, while the benefits from a reduction of liquidity risk (through the permanent ESM) are offset by the uncertainty created by an ex-ante delegation of resolution authority to the EC/IMF.

It is worth bearing in mind that more than three quarters of Eurozone government liabilities (and a bigger share if bonds issued by Germany and France are excluded) are held by Eurozone members, primarily financial institutions. Moreover, the ECB has already purchased around 17% of the combined debt stock of Greece, Ireland and Portugal. The share of public debt of the former two in public sector hands will likely exceed 50% by mid-2013.

In our opinion, the plan is a necessary addition to the Eurozone’s institutional architecture, enhancing its credibility and going in the direction of reducing public resentment towards conditional aid to other member states. But it leaves several open questions, including what happens to existing bond-holders relative to and potential ‘tiering’ of the bond market. A possibility is that issuers may voluntarily include forward starting collective clauses already before 2013.

Overall, the policy announcements made today testify the Eurozone’s authorities’ ongoing resolve to address the repercussions of the credit crisis. As we wrote last week, however, investors are likely to continue to focus on the Iberian peninsula, namely Portugal’s chronic twin deficits, and the potential unrecorded losses in the non-listed Spanish banks. Both the eventual provision of external support to Portugal through arrangements such as those in place for Ireland and a more decisive recapitalization of the Spanish cajas re in our view within the means of the Eurozone financial capabilities and policy domain. But the speed at which the authorities decide to tackle them will dictate how long market volatility will remain in place.

The ECB faces a serious dilemma on Thursday because they have indicated that they'll spell out their exit strategy on this occasion. Our baseline case has been that the Board would rather see the fiscal authorities take responsibility for what are ultimately fiscal problems However, given the recent events, we think they'll be vague with respect to the precise timing of the removal of full allotment. They will also likely say that they stand ready to do what it takes to secure stability, which would mean both further asset purchases and a shift to variables rates for a while for the full-allotment policy.

We remain of the opinion that the risk premium on Italian and Spanish bonds – the larger EMU non-core countries – already largely discount these tensions. Positioning indicators on the EUR (including risk reversals), and our principal component analysis on the percentage of EMU bond spread variance explained by a common factor, suggests that we are far from the level of systemic risk seen in the wake of the Greek rescue, and we do not see this changing.

The Irish Package (jokes to start in 5...4...3...)

The size of the program is €85bn (a little over 50% if Irish GDP), is broadly in line with prior expectations.
Funding of the €85bn package:

The external assistance amounts to € 67.5bn and will be split as follows:

* €22.5bn from the IMF under the Extended Fund Facility, which has longer disbursement (10-yr) and repayment period (after 4.5-yr) than a regular Stand-by Arrangement. The current cost of this IMF loan is 3.12% in the first 3 years and 4% thereafter.

* €22.5bn EFSM (which has a borrowing capacity of € 60bn). This institution will issue bonds broadly matching the maturity of the loans under a joint and several guarantee by EU-27. This is de facto the EU Commission issuing against the EU Budget, as is presently the case for the Eastern Europe balance of payments support program. Bonds issued by the EFSM will compete against those offered by other supranationals, such as the EIB.

* The European Financial Stability Fund is contributing around €17.5bn, which will issue bonds under a pro-rata guarantee by EMU-16 ex Ireland and Greece. The EFSF is AAA-rated, and over-collateralized. It should fund above Libor.

* The UK, Sweden and Denmark are providing around €5bn in bilateral loans, of which €3.5bn is from the UK.

The remaining €17.5bn of the program will come from Ireland (€12.5bn from the National Pension Reserve Fund –currently EUR 24.5bn -and €5 billion from the state’s cash reserves).

The cost and sequencing of the funding:

The statement indicates that, if drawn down in its entirety today, the funding would attract an average interest rate of 5.8%. However, interest is only charged on the amount that is drawn down. The actual blended cost of funds for the first few years will be lower, in the region of 3.5-4.0%. By comparison, Ireland 1-2-yr rates traded at 4.75% last Friday, and 5-10-yr maturities in around 8%. The sequencing of funding has not been announced, but it is likely that the first to tap the market will be the EFSM.

Allocation of the €85bn package:

The program envisages that €35bn will be earmarked for Ireland’s local banks and €50bn for the budgetary requirements of the sovereign.

Bank restructuring:

Of the €35bn for the banks, € 10bn will constitute an immediate injection in banks capital above and beyond what the government has already committed. The remaining €25bn will be provided on a contingent basis in 2011 after new stress tests and liquidity assessment conducted by the Central Bank of Ireland.

The aim of the program is the ‘a recapitalisation, fundamental downsizing, restructuring and re-organisation of the banking sector. To this aim, banks will be required to run down non-core assets, securitize and or sell portfolios or divisions with credit enhancement provided by the State, if needed. The NAMA scheme, currently tasked to purchase €81bn from banks, will be extended to remove remaining vulnerable land and development loans from Bank of Ireland and Allied Irish Bank by end-Q1 2011 (although this is <EUR20mn according to today’s release).

While there is no final word on bondholder participation in the bank recapitalization plans, we believe that forced loss absorption for senior lenders is unlikely given the statements released today (see for ex. those made by Commissioner Rehn). However, we would caution that additional liability management transactions are still likely at the major Irish banks.  In this respect, we acknowledge that the Irish government’s intention to implement a “special legislative regime to resolve distressed credit institutions early in 2011” is likely to create a framework for future burden-sharing by bondholder levels of the capital structure.

In general, we remain of the view that new resolution regimes for banking sectors in Europe are appropriate and that loss absorbing securities should be an integral part of a bank’s capital structure. However, we caution that this should be for future crises and that bondholder write-downs and/or losses should not be forced ahead of equity.

Turning to equities, the Central Bank of Ireland has set a new ongoing minimum capital requirement for AIB, Bank of Ireland, ILP and EBS of 10.5% Core Tier 1, and is requiring these banks to raise sufficient capital to achieve a capital ratio of at least 12% core Tier 1 by the end of February 2011 (May for ILP). Therefore the total capital injection will be EUR 8 bn, taking account of the capital impact of further NAMA transfers. In total, along with early measures to support deleveraging, there will be an additional EUR10bn of capital injected into the banking system.

This means that AIB requires an additional EUR 5.3bn of core Tier 1 capital (bringing its total still to be raised to EUR9.77bn); Bank of Ireland needs an additional EUR2.2bn of core Tier 1 capital; EBS an additional EUR438mn of core Tier 1 capital (for a total to be raised of EUR 963mn) and ILP an additional EUR98mn (for a total of EUR243mn still to be raised).

If the banks are assessed to be at risk of falling below the 10.5% core Tier 1 target after a stress test in March 2011, further capital injections will occur. Importantly, there will also be an independent third party review of asset quality in the banking sector. There will also be a Liquidity Assessment Review (PLAR), to set specific funding targets consistent with Basel 3 for each bank, including the need for each institution to submit asset disposal plans by the end of April 2011.

Conditionality and prospects for the budget:

The remaining € 50bn will cover the financing of state until market access has been restored. We estimate that this amount should be sufficient to cover the new deficit and debt amortizations over the next two years.

The conditions laid out in the program are broadly similar to those contained in the National Recovery Plan released last week. A series of structural reforms has been recommended, but the flexibility of the Irish economy suggests they are not binding. Crucially, the conditionality is understood not to touch the 12.5% corporate tax rate. The target bringing the deficit from an estimated 11.7% at end 2010 to 3% by end 2014 has been extended to 2015 to compensate for weaker growth over the next two years.

The budget vote on December 7 is still in the balance but, in our view, is likely to be passed. The government’s majority has been cut to two with the outcome of the Donegal South West by-election but two independent MPs have also indicated that they will support the budget.

 

 


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Sun, 11/28/2010 - 22:32 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Please tell Ireland what they have won!

It's a dick in a box!

Sun, 11/28/2010 - 23:51 | Link to Comment Double.Eagle.Gold
Double.Eagle.Gold's picture

The holiday version, dib from snl

Mon, 11/29/2010 - 04:33 | Link to Comment AnAnonymous
AnAnonymous's picture

What the Irish have won:

- the capacity to remain in the consumption game instead of watching from the sidelines others eating like pigs in a trough.

-a much better deal than announced: more money for smaller interest.

 

The story has always been about how to get deeper into debt (debt means immediate consumption)

The Irish have luck, twice they found themselves with a strong hand.

Sun, 11/28/2010 - 22:34 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

..

Sun, 11/28/2010 - 22:35 | Link to Comment Cleanclog
Cleanclog's picture

People of Ireland - get really noisy and visible about your displeasure that your futures are to save the banks, yet again.  Do what it takes to make the budget vote on December 7 become a NO to the EU and IMF package.  Default, repudiate, whatever to not have this structure truly destabilize your futures.  

The banks took the risk.  Let them suffer the consequences.  You should not have to slave to bail them out again.

Hurry.  Loud and obvious.  Make your protests count.  Everyone.  Doctors, teachers, cabbies, sewer treatment workers - leave your desks, offices, classrooms, and protest!

Sun, 11/28/2010 - 22:37 | Link to Comment Hedge Jobs
Hedge Jobs's picture

great coverage of all this ZH! this is where you guys are really in your element. and shows how pathetically incapable the MSM is of keeping people in formed. If any one doubts the MSM are not in on the global ponzi just have a look at how hard they try "spin" the very serious shit going down in EU at the moment.

Sun, 11/28/2010 - 22:50 | Link to Comment mikla
mikla's picture

Sun, 11/28/2010 - 22:45 | Link to Comment tahoebumsmith
tahoebumsmith's picture

Just look back to July when the European banks had their stress tests. Seven of the 91 European banks that underwent stress tests failed the healthchecks, the Committee of European Banking Supervisors (CEBS) said. They include five Spanish banks - Diada, Espiga, Banca Civica, Unnim and Cajasur. The other two were Germany's Hypo Real Estate and Greece's ATEbank.

Doesn't even mention Ireland even having any problems, must have missed something in their stress findings. And with the biggest problems being found in Spain? Guess we are just getting started.

Sun, 11/28/2010 - 23:28 | Link to Comment tired1
tired1's picture

More details of the stress tests are leaking out. Apparently the 91 banks being stress-tested were only examined on European sovereign debt losses for the bonds they trade, rather than those they hold to maturity, according to a draft European Central Bank document seen by Bloomberg.

 

http://www.guardian.co.uk/business/2010/jul/23/stress-tests-european-banks

Sun, 11/28/2010 - 22:49 | Link to Comment Id fight Gandhi
Id fight Gandhi's picture

Debt slaves, check
Take pensions, check
Bond holders no loss, check

Shalom!

Sun, 11/28/2010 - 22:52 | Link to Comment Blaise Pascal
Blaise Pascal's picture

This will be only slightly more effective for Ireland than the Treaty of Versailles was for Germany after WW I.

Blaise

Sun, 11/28/2010 - 22:55 | Link to Comment Caviar Emptor
Caviar Emptor's picture

Congrats, ZH, for being right on top of the story from start to finish.

Make no mistake. The Ireland story, as with the rest of the Euro periphery, is all about saving the banks. German and French banks, that is, which have a combined $ 1 Trillion exposure to the PIIGS. Beyond that, I don't think the EU really has any interest in rescuing the Irish state. However keep in mind that the fate of the state and the banks are linked so everything was done to ensure that German and French banks wouldn't collapse. 

The crisis has served to reveal one of the key dirty secrets of the EMU: it was designed as a vehicle to enrich the banks of the core countries by using the periphery much as Wall Street used the US 'provinces' to peddle mortgages and mortgage backed securities. 

Sun, 11/28/2010 - 22:56 | Link to Comment Croesus
Croesus's picture

If the Irish turn their backs on their past today, then they will turn their backs on their future tomorrow.

You are known as Fighters, Ireland. 

Don't ignore your heritage, just when you need it most.

Get MAD. Get REALLY MAD.

http://www.youtube.com/watch?v=1q2twYD59zs&feature=related

 

Sun, 11/28/2010 - 23:25 | Link to Comment web bot
web bot's picture

The global financial system won't make it until 2013...

What we are witnessing is the early stages of the snowball rolling down the hill... This won't last for long.

#uck, every day now on TV you can hear someone talking about default of the USD... Go back 3 years, if anyone would have said something like this then, they'd be given small white pills and shown the door. This is how far things have come.

Sun, 11/28/2010 - 23:58 | Link to Comment Cleanclog
Cleanclog's picture

Stockman on Zakaria today made this point pretty solidly.

Scary. It really is gonna happen.

Mon, 11/29/2010 - 00:50 | Link to Comment knukles
knukles's picture

“In order to gain access to external conditional funding, an EMU sovereign will in the future need to pass a debt sustainability test conducted by the EC and the IMF, in liason with the ECB. A failure to pass would result in debt restructuring involving private sector participation.”

 

In other words, if we the official organs of all seeing and knowing gubamint screw it up so fucking bad that even direct intervention by either Jesus or Mohammed cannot fix it, we’ll throw up our hands, run about in circles searching for sombody to whom we might surrender with dignity and capitulate as market forces tear us to shreds which we probably shouda done in the first place instead of butt-fucking around with this nonsense.  So fuck it, you’ve been warned.    

Mon, 11/29/2010 - 00:05 | Link to Comment hardcleareye
hardcleareye's picture

I was interested in reading how the Irish press covered this issue.  I googled Irish online press and went to about 25 at random of the 70 or so listed.  With the exception of the Irish Independent, the attitude was in essence "resistance is futile" "A difficult but essential deal" (if they covered the issue at all) etc...  The Irish media doesn't appear to support default.  It was an interesting read.....  If the press coverage represent the "pulse" of the people, I doubt that Ireland will default.

Mon, 11/29/2010 - 00:08 | Link to Comment tom a taxpayer
tom a taxpayer's picture

Breaking News - Barney Frank and Richard Simmons fly into Dublin with aid for Ireland.

RTE reporters spotted a jumbo C-135 Stratolifter cargo plane landing with lights out at Dublin airport at 3:40 am. Irish armed forces unloaded hundreds of mysterious pallets from the huge C-135 to a secure airport warehouse, but only two men in trench coats were observed debarking from the C-135 Stratolifter. The two trenchcoaters hurried into a police car and were driven to the posh Merriam Hotel. 

As luck would have it, an Irish Times reporter staggering and looping round-and-round in the revolving front door of the Merriam recognized Barney Frank and Richards Simmons as the trenchcoaters entered the Merriam at 4:40 am. Reporters rushed to Prime Minister Cowen's residence demanding an explanation for the sudden appearance of the mysterious cargo plane and two trenchcoaters in Dublin. At a 6:00 am press conference, Cowen said:

"The Irish government had hoped to announce a great gift to the Irish people later today after the EU meeting. But you kids in the press caught Santa coming down the chimney so I guess we will have to announce this special Christmas gift now. 

"We know this will be a tough Christmas and even tougher next few years as millions of proud Irish citizens bend over and suffer repeated, brutal raping from the EU, IMF, foreign bankers, Irish bankers, and the Irish Government. We think these gang rapes can go much better for everyone involved if the Irish people learn how to relax and limber up. Just like the Chinese do tai chi every morning, we want the Irish people to do yoga every morning.

"Who better than Barney Frank and Richard Simmons to teach the Irish people how to limber up and learn to take 5% or 6.7% or, oh my hold-on-to-your-rosaries, 9% interest from the big swinging dick bankers. Starting next Monday on RTE TV, Barney and Richard will host an early morning yoga exercise show called "Barney and Dick up with the rising sun".

"Barney and Dick delivered a C-135 Stratolifter full of lululemon yoga apparel, enough for every man, woman, and child in Ireland. Yes, Barney, Dick, and the Irish government plan to insure Santa places lululemon yoga apparel under every Christmas tree in Ireland. Ho, Ho, Ho!"

Mon, 11/29/2010 - 01:17 | Link to Comment Lux Fiat
Lux Fiat's picture

For a moment there, I thought that the pallets contained K-Y.  Silly me.

Mon, 11/29/2010 - 00:33 | Link to Comment Lord Welligton
Lord Welligton's picture

"We think the Irish deal will lead to a moderate compression in Irish government bond spreads. The encouraging elements are the relatively speedy negotiations under the emergency framework agreed this Summer, the emphasis given to the recapitalization of domestic banks, and the long maturity of the loans. We provide details below."

That is utter bollocks.

Do people really pay for this shite?

Mon, 11/29/2010 - 00:33 | Link to Comment Lord Welligton
Lord Welligton's picture

"The ministers’ announcement clearly states that no private sector participation in restructuring procedures will apply ahead of mid-2013. This will validate the upward sloping term structure of peripheral EMU sovereign bond spreads, particularly up to 5-yr maturities."

More bollocks.

Do people really pay for this shite?

 

 

Mon, 11/29/2010 - 00:24 | Link to Comment Lord Welligton
Lord Welligton's picture

"We remain of the opinion that the risk premium on Italian and Spanish bonds – the larger EMU non-core countries – already largely discount these tensions."

More bollocks.

Do people really pay for this shite?

 

Mon, 11/29/2010 - 00:25 | Link to Comment Lord Welligton
Lord Welligton's picture

"suggests that we are far from the level of systemic risk seen in the wake of the Greek rescue, and we do not see this changing."

More bollocks.

Do people really pay for this shite?

Mon, 11/29/2010 - 00:31 | Link to Comment Lord Welligton
Lord Welligton's picture

"The Irish Package (jokes to start in 5...4...3...)"

 Racist cunt.

OK. If that's the way you want to play.

How's Peter Sutherland these days?

Is he still "Irish"? Or is he too busy sucking Lucifer’s cock?

He is doing the work of God? No?

In the immortal words of a Deputy in Ireland.

"Fuck you Goldman Sachs. Fuck you."

 

 

 

Mon, 11/29/2010 - 00:56 | Link to Comment knukles
knukles's picture

Do any of these people not realize how they are embarrassing themselves? 
Anymore of this nonsense and Timmah will real and truly need to be replaced at Treasury by somebody the likes of Snooki or Jeremiah Wright to competitively deprecate the confidence in the US dollar.

Mon, 11/29/2010 - 02:01 | Link to Comment slvrizgold
slvrizgold's picture

Euro goes down; gold goes UP.

Yen goes down; gold goes UP.

US dollar goes down; gold goes UP.

Any major currency goes down; gold goes UP.

 

Gold goes up; silver goes UP EVEN MORE.

You know what to do.

Mon, 11/29/2010 - 08:54 | Link to Comment Dan_Sylveste
Dan_Sylveste's picture

But it hasn't.

Mon, 11/29/2010 - 05:28 | Link to Comment oh_bama
oh_bama's picture

The Ireland politicians may be in trouble and lose their jobs. So it is difficult to understand why they agreed with this package. In 8 years they will be paying about 35 billion euros of interests, and that is a solid 20% of their GDP. (assuming their GDP will drop 15% over 5 years and then stablize) What they are smoking? Why defaulting is not an option? For Ireland people for god's sake

Mon, 11/29/2010 - 05:40 | Link to Comment M.B. Drapier
M.B. Drapier's picture

The current Irish government will be out of power by February, so the current opposition parties will be in power to get the blame for the interest payments and economic pain. The government has even made sure that the "pension reserve" SWF will be blown on the banks as part of the EFSF deal, taking away the stimulus money that the opposition was planning to bribe voters with.

Mon, 11/29/2010 - 06:13 | Link to Comment Josephine29
Josephine29's picture

I find the confusion over ther interest rates which are being charged to be typical of the EU. I notice that this Goldmans article waffles on that point. Of course the early cost of funds will be cheaper as the IMF according to its website only charges 3.12%!

However I note that notayesmanseconomics has done his own calculations.

So the remaining funds from the bilateral loans/EFSM/EFSF cost 4. 9 billion less 1.49 billion or 3.41 billion Euros per year. As they are 45 billion in total then the interest rate on them is approximately 7.5%. This is not what it has been badged at.

 

http://notayesmanseconomics.wordpress.com

 

Mon, 11/29/2010 - 07:46 | Link to Comment Mcat
Mcat's picture

Love it. Solving a debt problem with more debt. It's like having a 100 lbs ball and chain tied to your neck for 7 years, and then what happens. What for? To save the World from themselves. The Irish are smart, take the money now, hold election, go back on your word and show Europe the middle finger. 

Mon, 11/29/2010 - 08:31 | Link to Comment cashcow
cashcow's picture

Can someone confirm, but it looks like the current government actions contravene article 29.5.2 of the Irish constitution:

http://bit.ly/fFLnQ5

Such much for democracy.

Do NOT follow this link or you will be banned from the site!