On Fri, Oct 1, 2010 at 9:14 AM, wrote:
Note the Anglo (not Allied) Irish Bank has been split up into a bad bank, the Asset Recovery Bank, and a good bank, the Funding Bank. The Asset Recovery Bank requires 29 bb and the Funding Bank 250 mm Euro. Allied Irish Bank is also to be split eventually into a good bank/bad bank structure.

Where is the Irish government getting 29.3 bb of Euro to recapitalize Anglo Irish Bank?

It doesn’t ‘get’ the money, as you next state.

The government will issue promissory notes to recapitalize Anglo Irish Bank (this is unrelated to the NAMA program activity), which the bank can count towards their capital base.

Right, capital isn’t ‘spent’ until there are losses and depositors want out. It is just ‘counted’

The promissory notes will be amortized over a 10 yr period. Currently the government is estimating that a total of 29.3 bb in capital will need to be provided to Anglo Irish Bank. Of this 29.3 bb, 23 bb has already been given to the bank in the form of promissory notes. The Irish MOF has stated that no additional borrowing will be required this year due to the additional capital support needed.

Right, and going fwd the bank can buy irish debt that will ‘count’ as capital which is the same as the notes it now holds. So in that sense it’s ‘self funding’ and all nothing more than a guarantee of the govt. that we call deposit insurance. But as previously discussed it’s like having a US State provide the deposit insurance over here.

Given the bank related issuance plan, it is my understanding that Ireland’s debt to GDP program will show a significant jump at year end as the European Commission has required Ireland to include this issuance in their reported debt figure. This should not be new information but the headline debt/gdp number, which may break 100% when it is released, may get the markets attention.

Functionally ‘debt’ should include all the deposit guarantees, not just this one. But that’s another story

In addition, the government will fast-track the transfer of Anglo Irish Bank’s remaining bad loans to NAMA in order to be finished by early 2011. The haircut for the remaining 19 bb euro loans to be transferred will be 67% in the base case scenario well above the average of 56% for the first two tranches transferred totaling 16 bb euros. The total transfer of bad loans from Anglo Irish Bank is projected to total €35bn.

Actual losses on that portfolio will be actual losses to Ireland

Current Status of NAMA Program

Program is not completed yet.
81 bb euro face value of loans from 5 different banks, including Anglo Irish Bank, are expected to be transferred to the government (NAMA)
Two tranches of transfers have been completed for a total of 3,518 loans with a face value of 27.2 bb euro
The loans were given a haircut of 52.3% on average. NAMA bond issuance to the banks in exchange for these loans has totaled 13 bb euros
A third tranche is expected to be completed this month (Sept) involving 12 bb euro face value of loans (not including the haircut)

While the ECB does not disclose the collateral it receives in return for loans via its main refinancing operation (MRO) or its long term repo operation (LTRO) it is presumed that the NAMA issued bonds have been given to the ECB as collateral for funding at the policy rate.

Makes sense. Underneath it all the ECB is supporting the funding by buying irish bonds.


By December Allied Irish Bank (not to be confused with Anglo Irish Bank) is scheduled to raise 5.4 bb in capital. A rights issue for approximately 3 bb euro is expected to be fully underwritten by the National Pension Reserve Fund Committee (NPRFC) and offered to existing shareholders. The NPRFC currently holds 15 bb euros in liquid assets according to UBS which would be available for this transaction.

Based on the haircuts used for NAMA transfers, the central bank has requested an additional capital injection for the Irish National Building Society of 2.7 bb euro. The MoF plans to inject this extra capital via promissory notes as well.

One Response

  1. Seems like simple accounting entries.

    Increase in assets: Equities issued by banks
    Increase in Liabilities: Promissory Notes

    Increase in Assets: Promissory Notes
    Increase in Liabilities: Equities issued to the government.

    No money exchanging hands now. The cash flow in the future are in opposite directions. Dividends from banks to the government versus flows from the promissory notes.

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