Cantillon

Inside the world of business

Spain needs good solution to deal with banks' bad assets

SPAIN IS finally having to bite the bullet that the last Irish government chomped on in 2009 when it set up the National Asset Management Agency to purge the banks of their most toxic loans. A shrinking economy, high unemployment, a growing black hole in the banking system and the requirement for €54 billion of fresh capital is forcing Madrid to devise a way of quarantining bad assets at the country’s banks.

The reforms required in Spain – if it is to avoid an EU-IMF bailout – are all the more pressing after Standard Poor’s downgraded 11 Spanish banks amid concerns about the effect of a contracting economy.

The Spanish government faces the same problem Ireland had: how to value bad assets when nobody wants to buy them and how to deal with the heavy losses crystallised as a result. The average 57 per cent haircut imposed by Nama on €74 billion of bank loans exposed deep holes in the Irish banks that were filled by the government but pushed four of the six domestic banks into majority State ownership. Property prices have continued to fall since the State agency valued the loans in November 2009.

But Spain’s difficulty could be Ireland’s opportunity and Minister for Finance Michael Noonan hinted at this during last week’s press conference marking the end of the sixth review of the bailout plan. He was replying to a question about why the technical paper from the Government and the EU-IMF troika on restructuring promissory notes at the former Anglo Irish Bank had been delayed until the end of June. “We are conscious of the situation in Spain as well and that might have an influence on it,” said the Minister.

If Spain requires financial support from the EU bailout fund as a result of heavy banking losses, Ireland could make a case for direct support to its banks, in particular the worst ones that moved the most assets at the heaviest discounts to Nama – Anglo and Irish Nationwide Building Society.

Will investment in reform of business scheme pay off?

FOR CASH-STRAPPED companies, the Business Expansion Scheme (BES) – reformed by Minister for Finance Michael Noonan – offered less relief than may have been hoped last year. With banks continuing to tighten lending practices, the scheme is one way for companies to access much-needed funds via individuals hoping to offset tax bills.

While applications to the scheme fell just 10 per cent – to 352 companies – according to provisional statistics from the Revenue Commissioners, the amount of funding raised was nonetheless considerably lower in 2011. In 2010, 340 investments totalling € 58.6 million were made under the scheme – indicating an average investment of € 172,352. Last year, 274 investments valued at just € 41 million were made, with Davy’s BES fund accounting for about 10 per cent of this. The 30 per cent slide in value terms overall is a far cry from the heady days of 2008 when € 135.8 million was raised through the scheme, showing just how risk averse – or cash-strapped – investors themselves have become.

It is now revitalised as the Employment and Investment Incentive, and companies will hope the new scheme will attract more investors. Since it was approved by the European Commission last November, 58 companies have applied under the scheme and, with broader eligibility, applications may yet surpass last year’s total.

Under the BES, for example, eligibility was restricted to manufacturing and internationally traded services; now most activities, with the exclusion of some, such as financing and land development, are included. Typically, applications jump coming up to the tax filing deadline of October 31st as tax specialists advise on the options.

However, it may yet prove to be a difficult sell in such a volatile economic environment. While the new scheme offers a more attractive investment term at just three years compared to five under the old BES, tax relief available has also been reduced. For some, the risk of investing in a small Irish company may just not be worth tax relief of 30 per cent – particularly when their marginal rate is more than 50 per cent.

Learning the 'tap and swap' dance

SHORTHAND IS always useful in the financial world to explain complex transactions simply and quickly. John Moran, secretary general of the Department of Finance, intriguingly described proposals to restructure the promissory notes at the former Anglo Irish Bank as, among other things, the “tap and swap” proposals.

He made the comments at last week’s press conference at the end of the EU-IMF troika’s review of the bailout programme when Minister for Finance Michael Noonan deferred a query to him. Moran explained the Government would look at the extent of the bad assets at Permanent TSB to be moved into an internal bad bank – okay, “asset management unit” – as part of the proposals on the promissory notes.

As applied to the last payment on the notes, the Government “tapped” its existing bond due in 2025 by borrowing a further €3.46 billion so Irish Bank Resolution Corporation (IBRC) could “swap” them for cash with the National Asset Management Agency.

This deferred the €3.1 billion payment due on March 31st being taken as expenditure on the exchequer’s balance sheet, though Nama is still down this cash until Bank of Ireland secures shareholder approval for the swap.

The longer-term “tap and swap” proposals could involve tapping the EU bailout fund and using the funds to swap the tracker and bad loans at AIB and Permanent TSB, replacing the promissory notes. All that is still up in the air.

The effect of the March 31st transaction with Nama, which has put back the regular repayments of debt by the agency to the banks on its bonds, was not seen in the Central Bank’s figures for bank funding yesterday as the data related to before the IBRC-Nama transaction. But as of the end of March, the figures were going in the right direction – drawings by Government-guaranteed banks from the ECB fell to €65.4 billion at the end of March from €67.2 billion a month earlier.

QUOTE OF THE DAY

"If now we talk about growth, it shouldn’t be understood as a change of direction. That would be a mistake" – German finance minister Wolfgang Schäuble at a press conference with his Spanish counterpart, Luis de Guindos

TODAY

Kerry Group will publish an interim management statement as the company’s shareholders gather for the annual general meeting

ONLINE

You can get the latest news each business day at irishtimes.com/businessor by following us on Twitter at twitter.com/IrishTimesBiz.

We also have a Facebook page at facebook.com/IrishTimesBizwhere you can read the latest business headlines, blog posts and reader polls.