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Wednesday, February 9, 2011
Tuesday, February 8, 2011
Ireland Should Consider Kazakh Move
Ireland's government-in-waiting has come up with the outlines of a plan to deal with the massive burden of bank debt guaranteed by the government-that-was.
The right-of-center Fine Gael is ahead in the opinion polls and likely to be the leading partner in a coalition government after the Feb. 25 general election. The dominant issue in the election campaign is what to do about the blanket guarantee given to holders of bonds issued by Ireland's dysfunctional banks in late 2008. Most voters want to walk away from those guarantees, fearing the banks will never be in a position to repay their debts and taxpayers will have to foot the bill.
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Bloomberg News
Kairat Kelimbetov, CEO of Kazakhstan's Samruk-Kazyna, in Davos last month.
Ireland's euro-zone partners want the government to stick by the 2008 pledge, because they fear the restructuring of bank debt in one member could lead to an investor boycott of other euro-zone banks, forcing them to rely even more on government support.
Fine Gael has proposed a middle way, focusing on the bonds issued by two of Ireland's most reckless lenders, Anglo Irish Bank and the Irish Nationwide Building Society. Both banks bet heavily on a small group of aggressive property developers, both manipulated their balance sheets to make them look stronger than they were, and Anglo also attempted to manipulate its share price. Neither did much lending to households or businesses, and both borrowed heavily in international bond markets to fund their adventures in the international property markets.
But it seems Fine Gael doesn't want to abandon the guarantees for Ireland's less-bad banks, chiefly Bank of Ireland and Allied Irish Banks. They, it is hoped, can one day become functional again, and may perhaps even be sold to a foreign buyer that knows something about banking.
No doubt one of the objections to this course of action is that there aren't too many precedents for restructuring bank debt, in that during the financial crisis financial institutions were either bailed out, sold in haste to apparently viable rivals, or allowed to fail.
Except in Kazakhstan. Like their Irish counterparts, Kazkah banks got a bit too enthusiastic about property development, particularly given the low cost of borrowing in international bond markets during the middle years of the last decade.
Even before the global financial crisis intensified with the collapse of Lehman Brothers in September 2008—the event that triggered the Irish guarantee—it was clear that Kazakh banks had become over-stretched. By the end of 2008, the government had acknowledged that a number of its larger banks were in a mess, owing large amounts to international bond holders but having made long-term loans to property developments with doubtful futures.
International investment banks were hired to advise, and they recommended letting the banks fail. For the Kazakh government, that wasn't an option. "We realized that if we bankrupted them, the next day we would lose the whole banking sector," said Kairat Kelimbetov, chief executive of Samruk-Kazyna, the holding company for the state's stakes in about 400 Kazkah companies. "We had to save those banks."
What the Kazakh government did then is what the Irish government didn't do, and that was to start to talk to the banks' creditors. Through Samruk-Kazyna, it put taxpayers' money on the line, injecting fresh capital into both BTA Bank and Alliance Bank, two major lenders.
But that was part of a deal with bond holders, who wrote down a large part of the debts owed by those banks in an effort to make them viable again, and in return for an equity stake. The restructuring process was completed last September, and Samruk-Kazyna has started to look for foreign banks to take BTA and Alliance off its hands.
"We did our homework, we cleared up the balance sheets," Mr. Kelimbetov said. "We would like to put these problems on the shelf and start a new page. The problem we have is how to manage the banks the right way. Samruk-Kazyna is not a good choice. It definitely should be a private, good bank."
In the process of taking the path less traveled, Samruk-Kazyna has come up with a novel concept, aided by international law firm White & Case. The Kazakh authorities believe many of the loans made by BTA management were fraudulent.
"In BTA, the people loaned money to themselves, withdrew all this money and invested it in Russian real estate, which they bought at stupid and crazy prices," Mr. Kelimbetov said.
Part of the deal with BTA's creditors is that if and when this money is recovered through legal action, Samruk-Kazyna and the creditors will split the proceeds. That gives the creditors an interest in helping Samruk Kazyna recover the funds, which could be as much as $11 billion across the whole banking system.
Behavior very similar to that alleged by the Kazakh government appears to have been a feature of Ireland's banking culture as the day of reckoning neared, though for now the Irish authorities don't appear willing to do much about it. Should that ever change, the Recovery Units issued to the creditors of some Kazakh banks may be an idea worth considering.
It would be premature to describe the Kazakh banking system as having recovered from the financial crisis. The banks still have high levels of non-performing loans, and aren't lending a great deal, which is a problem for the economy. But as in Iceland, the lesson seems to be that if you confront problems in the banking system and require creditors to share the pain of fixing them, the consequences for the broader economy are positive.
The European Bank for Reconstruction and Development expects the Kazakh economy to grow by 5.5% this year, having expanded by 7% in 2010. The economy of Iceland, where holders of bank bonds were also asked to take some pain, is expected to grow by 3%.
A belated effort to confront the truth about its banks may be Ireland's most sensible route. And given international precedents, perhaps the question facing the rest of the euro zone should be how it can help, rather than what it can do to maintain the pretence.
Write to Paul Hannon at paul.hannon@dowjones.com
anglo irish bank, allied irish banks, international bond markets, fine gael, bank of ireland, property developers, dominant issue, nationwide building society, bank debt, property markets, euro zone, financial institutions, coalition government, government support, opinion polls, no doubt, election campaign, balance sheets, dysfunctional, share price
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20020824_057.jpg
Mammoth cave national park
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Monday, February 7, 2011
A Perch In Paradise
A Perch In Paradise
Tachai, Thailand
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Crossing To Holy Island
Crossing To Holy Island
Copyright (c) Stuart Herbert. blog | Twitter | Facebook
Photography: Merthyr Road | Daily Desktop Wallpaper | 25x9 | Twitter.
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Sunday, February 6, 2011
Saturday, February 5, 2011
Burg Ehrenfels on the Rhein River
Burg Ehrenfels on the rhein River
Handheld, taken from a rocking boat so please forgive the blurriness.
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