the russian is asking hard questions in blogland…
trueeconomics.blogspot.com/2010/ … temic.html
Let’s do some simple math.
Value (recall - I am factoring referencing to Long Term Economic Value, not the current mark-to-market value, which is even lower):
€10bn in ‘Good’ Anglo can be (optimistically) expected to yield €6-7bn valuation using LTEV;
€25bn in ‘Bad’ Anglo can be (again, optimistically) expected to yield €3-4bn valuation using LTEV.
Total non-Nama book value is therefore around €9-11bn.
Against this value, CB of Ireland holds €11.8bn worth of loans to the Anglo.
Now to the question: Does this mean that CB might be facing a potential significant (€500-2,500mln or so) non-recoverable loss on the repos?
This possibility raises two issues:
If the repos are spread across ‘Good’ and ‘Bad’ bank, then the ‘Good’ bank is hardly a feasible undertaking, as repos alone already exceed the value of the ‘Good’ bank even absent impairments charges, while ‘Bad’ bank has clearly no ability to repay any fraction of these;
If the repos are inherited by the ‘Bad’ bank, then, either CB has to declare a loss (and I am not sure how it can do this), or the taxpayer is on the hook for the repos by having to pay them down through the ‘Bad’ Anglo.
Now, alternatively, let’s ask the following question: to recover CBs repos from non-Nama assets, we need to have a combined ‘Good’ & ‘Bad’ banks recovery rate of 33% (not covering the costs of operating both banks, funding, bond holders etc). And this, once again, refers to the valuations done on the face value of the loans before any recent impairments - before the bubble burst. To recover all other CBs’ funds, plus our own - we need a recovery rate of ca 68% (again ex all costs etc). That’s really highly unlikely, folks.
Quite a dilemma, then, especially since ECB (see here) didn’t approved the repos in the first place… and since Anglo also owes the other Eurozone Central Banks some €12.2bn more.
What could Mr Trichet say about Anglo’s priorities in repaying the loans? Would he be (a) so kind as allow CB of Ireland to recoup its repos, which ECB thought were dodgy enough to refuse to take them itself? or (b) insist that other CBs be repaid first before our own repos are covered? If (a) - I’d say Mrs Merkel would have a few kind words to say to Mr Trichet, given her electorate’s feelings about having to bailout Greece. If (b) - the above potential negative valuation of the repos (the expected loss of €500mln-2,500mln) will have to be multiples larger…
Arra now there must be 10bn of good. The assets available for sale was 7.9bn at ye2009. 6.2bn was rated AA / AAA. Depending on maturities, this should be ok. Now it’s possible that some of this might have been pledged as collateral on derivative contracts, but it should be possible to replace such pledged amounts with nama bonds (
Come to think of it, the NAMA bonds could go into the ‘good bank’ or where does Constantin think they’ll go?