September 26, 2020

DealBook: Ireland to Liquidate Anglo Irish Bank

An Anglo Irish Bank branch in Belfast, Northern Ireland.Peter Muhly/Agence France-Presse — Getty ImagesAn Anglo Irish Bank branch in Belfast, Northern Ireland.

LONDON – The Irish government passed emergency legislation on Thursday to liquidate Anglo Irish Bank, one of the country’s largest financial institutions.

The legislation, which was signed into law after an all-night parliamentary session, came after negotiations with the European Central Bank over swapping so-called promissory notes, which were used to bail out the Irish lender in 2009, for long-term government bonds.

The move is an effort to reduce Ireland’s debt repayments at a time when the country is still struggling under a cloud of austerity measures and meager economic growth.

The Irish Parliament rushed through the legislation to liquidate Anglo Irish, which was renamed Irish Bank Resolution Corporation after its failure and bailout, because details of the debt-restructuring plan leaked on Wednesday. Politicians had hoped to announce the deal after agreeing on new terms with the European Central Bank.

“I would have preferred to be introducing this bill in tandem with a finalized agreement with the European Central Bank,” the Irish finance minister, Michael Noonan, said in a statement.

The European Central Bank is considering the country’s latest proposals on Thursday, though European policy makers are concerned that a deal with Ireland could set a precedent for other indebted countries, like Spain, whose local banks also are facing mountains of debt.

As part of the deal to save Anglo Irish, Dublin injected more than 30 billion euros ($41 billion) into the local lender, of which around 28 billion euros is still outstanding.

The bailout has saddled the government with 3.1 billion euros in annual interest payments, or roughly the same amount Irish politicians have said they would cut in yearly government spending to reduce the country’s debt levels. The local government has been eager to reduce that multibillion-euro figure by swapping the high-interest debt into long-term government bonds that can be repaid over a longer period.

Ireland racked up huge debts in bailing out Anglo Irish and the rest of the country’s financial industry, eventually requiring a rescue package of 67.5 billion euros from the European Union and the International Monetary Fund in 2010. The authorities have demanded that Irish politicians slash government spending to reduce the country’s debt burden.

Confusion reigned on Thursday at Anglo Irish’s headquarters in Dublin, a day after employees were sent home early in preparation for the government-mandated liquidation.

Some staff members had returned to work, but the atmosphere remained tense, according to a person with direct knowledge of the matter, who spoke on condition of anonymity because he was not authorized to speak publicly.

“People have been told it’s business as usual, but it’s anything but that,” the person said.

The accounting firm KPMG has been appointed to oversee the liquidation.

Under the terms of the liquidation, Anglo Irish’s assets will be transferred to the National Asset Management Agency, the so-called bad bank set up by the government, or sold to outside investors.

Anglo Irish has been at the center of controversy since the beginning of the financial crisis. Three of its former executives, including its former chief executive, Sean FitzPatrick, are facing fraud charges in connection with loans that were improperly administered.

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DealBook: At Davos, Financial Leaders Debate Reform and Monetary Policy

World Economic Forum in Davos
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DAVOS, Switzerland — Jamie Dimon, the chief executive of JPMorgan Chase, apologized again for the bank’s $6 billion trading loss, this time in front of an audience that included the elite of the financial world. But in character for the confident chief executive, it was a diet portion of humble pie.

“If you’re a shareholder of mine, I apologize,” Mr. Dimon said at the World Economic Forum annual meeting here. But he quickly added, “We did have record profits. Life goes on.”

During an often contentious panel discussion in Davos that included several other bank executives, Mr. Dimon clashed with a top official of the International Monetary Fund about whether the banking system was still too dangerous.

Zhu Min, deputy director of the I.M.F., said the financial industry was too large in proportion to the economy. More than four years after the financial crisis, Mr. Min noted that banks still operated on too much borrowed money and still traded in overly complicated derivatives that were impossible for outsiders to understand.

“The whole financial sector is too big,” Mr. Min said.

Mr. Dimon responded that JPMorgan was fulfilling its duty to lend to businesses and governments. He said JPMorgan and other banks no longer dealt with subprime mortgages and some of the other complex financial concoctions that led to the crisis. He also said JPMorgan had not abandoned Spain or Italy despite the risks in those highly indebted countries.

“Everyone I know is trying to do a good job for their clients,” Mr. Dimon said during a debate moderated by Maria Bartiromo of the cable channel CNBC on the opening day of the meeting.

During the same discussion, Axel Weber, the chairman of UBS and former president of the Bundesbank, harshly criticized the European Central Bank and other central banks for keeping interest rates at record lows.

Mr. Weber said it was wrong to combat a crisis caused by excessive borrowing by encouraging even more borrowing. Record low official interest rates and other extraordinary measures to pump cash into the economy would eventually backfire, he said.

“We are trying to solve the crisis with more leveraging,” he said. “We are having a better life at the expense of future generations.”

Mr. Weber was once the front-runner to become president of the European Central Bank. But he resigned as head of the German central bank in 2011 after clashing with other members of the E.C.B. governing council over its purchases of euro zone government bonds.

Mario Draghi, who became president of the European Central Bank instead, has since calmed financial markets with a promise to buy government bonds in whatever amounts needed to contain borrowing costs for countries like Spain.

“I haven’t changed my views too much” on bond purchases, said Mr. Weber, who did not mention Mr. Draghi by name.

Mr. Weber has since presided over attempts by UBS to deal with the aftermath of the financial crisis and wrongdoing by some bank employees. UBS, based in Zurich, agreed to pay a $1.5 billion fine as part of a settlement last month over the manipulation of crucial benchmarks used to set mortgage and other interest rates.

“There have been excesses,” Mr. Weber said on Wednesday. “We need to fix them and move forward.”

Participants in the panel agreed that new bank regulations had fallen far short of what was needed to prevent problems at individual lenders from causing wider economic and financial crises, though they disagreed on what could be done better.

“We just experienced the worst financial crisis since the 1930s,” Mr. Min of the I.M.F. said. “We’re not safer yet.”

Mr. Dimon said conditions for economic growth were good “if we do all the right things.”

“If not,” he added, “we could be experiencing crises for another 10 years.”

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Monti Wins Confidence Vote in Italy’s Lower House

Despite disagreeing on some measures, the main political parties backed the package of tax increases and spending cuts, which passed with a large majority of 495 votes to 88. The measures will now go to the Senate, which is set to vote them before Christmas.

Mr. Monti came into office last month amid an intractable debt crisis with a mandate to spur growth while balancing the budget by 2013. But the package voted on Friday consists primarily of tax increases, not the structural changes to the economy that many experts say are necessary to restart healthy growth.

At a conference in Rome just before the vote in the Lower House, Mr. Monti said Europe’s response to the debt crisis “should be wrapped in a long-term sustainable approach, not just to feed short-term hunger for rigor in some countries.”

“To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the euro zone brings us … the risk of conflicts between the virtuous North and an allegedly vicious South,” he said.

In addition to austerity measures, heavily indebted countries like Italy and Greece are expected to carry out structural reforms that experts say may eventually make their economies competitive with those in northern Europe, particularly Germany’s. That lack of competitiveness has produced a chronic balance of payments deficit in the southern countries that economists say lies at the heart of the euro zone’s troubles.

It was hoped that Italian lawmakers would rally around Mr. Monti’s government of technocrats and make the tough decisions they have avoided in the past. But if his experience with this week’s measures is any guide, his government is bound to hit strong headwinds from vested interests that grip every corner of Italy’s complex, neofeudal economy.

After days of political wrangling in Parliament, the Monti government bowed to pressure from the right — most notably from the party of the former prime minister, Silvio Berlusconi — and dropped some elements of the $40 billion package of spending cuts and revenue increases, including a wealth tax and the speedy liberalization of closed professions like taxi drivers and pharmacists, a plan that drew protests from their powerful guilds. It also scaled back a newly reinstated property tax on primary residences.

After protests from the left and labor unions, most recently with a nation-wide transport system strike that blocked the country on Thursday and Friday, some counting more pensioners than workers among their members, Mr. Monti reinstated inflation increases on low-level pensions that he said would make the measures more equitable.

Mr. Monti has said he wants to make Italy more equitable — especially for young people and women, whom he has called a “wasted resource” — and to help the economy grow. But even as he pledged on Thursday to address labor reform and other structural changes in the coming weeks, he has run up against a wall of vested interests.

“In Italian society, there is no division between left and right; there’s a division between those who are inside or outside some organized groups,” said Sergio Fabbrini, the director of the School of Government at Luiss Guido Carli University in Rome. “All the main political parties from left to right represent the insiders. The left represents the pensioners, the trade unions. The right represent various insiders: the lawyers’ organizations, notaries.”

The only way for young people and women to be represented “is to have a technical government,” he added, “but of course a technical government will have to pass through the approval of the Parliament. And here again the insiders are well organized.”

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G-20 Statement Aims to Reassure World Markets

WASHINGTON — The world’s major economies released an unexpected joint statement Thursday night reiterating their commitment to the stability of banks and financial markets, seeking to soothe nervous investors on six continents.

“We are committed to supporting growth, implementing credible fiscal consolidation plans, and ensuring strong sustainable growth,” said the communiqué from the Group of 20 nations. “This will require a collective and bold action plan with everyone doing their part.”

The statement, however, did not include commitments to new actions, or any talk of additional support for Europe. It also does not hasten the plan of the member nations to announce any actions at a November meeting of heads of state in Cannes, France.

The possibility of more immediate action also was not discussed at a dinner for member finance ministers and central bank governors Thursday night, according to a senior Treasury Department official who insisted on anonymity because the conversations were private.

Instead, the members of the European monetary union expressed their determination to complete a planned expansion of a European bailout fund, so that it can purchase the debt of troubled countries. Other nations expressed their concern and support, the official said.

The snap decision to issue a statement — the dinner was intended as an informal gathering before the opening Friday of the annual meeting of the World Bank and the International Monetary Fund — is a reflection of rising concern about the health of the global economy.

The statement cited problems including indebted countries, fragile banks, turbulent markets, weak growth and “unacceptably high unemployment.”

The I.M.F. -World Bank meeting is traditionally a chance for nations to address problems in the developing world. This year, however, the meeting has been given over to talk about problems in Europe and the United States.

There is growing evidence that those issues are weighing on the economies of developing nations by unsettling their markets.

“The immediate problem at hand is to get growth back on track in developed countries,” the countries Brazil, Russia, India, China and South Africa said in a statement Thursday. In language more often directed at poorer countries, the five nations called on developed countries “to adopt responsible macroeconomic and financial policies.”

Even traditional allies are expressing growing frustration with the political paralysis and economic problems of Europe and the United States.

The leaders of six members of the G-20 released a letter Thursday to Nicolas Sarkozy, president of France, calling for “decisive action to support growth, confidence and credibility.”

The six countries — Australia, Britain, Canada, Indonesia, Mexico and South Korea — have little in common except that they are not members of the European Union. Yet, they stressed the need for stronger steps.

“The barriers to action are now political as much as economic,” the letter said. “We must send a clear signal that we are ready to take the actions necessary to maintain growth and stability for all for the future.”

The United States elevated the meetings of the G-20 during the financial crisis after concluding that its traditional meetings with six other countries — the Group of 7 — were excluding too many important players. The nations now represented at the table account for about 85 percent of global economic output.

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Borrowing Costs Stubbornly High at Spanish Auction

FRANKFURT — As Spain pulled off a successful — if expensive — bond sale Thursday, a top official of the European Central Bank rejected criticism from Germany that the bank has exceeded its authority by aiding Greece and other beleaguered countries in the euro area.

A day after the leaders of France and Germany promised to support Greece’s continued membership in the currency bloc, the German Chancellor, Angela Merkel, adopted a scolding tone, telling indebted countries to “do their homework.”

Appearing at the Frankfurt Motor Show, Mrs. Merkel said it is “worth every effort” to preserve European unity in the debt crisis, but insisted that troubled countries are still responsible for tackling their own problems, according to The Associated Press.

Speaking in Rome, Lorenzo Bini Smaghi, a member of the E.C.B. executive board, said it would be a mistake to leave countries at the mercy of financial markets, which he said are not functioning properly anyway.

He said criticisms of the bank are “the result of inadequate economic analysis, of insufficient knowledge of the crisis in which we find ourselves and of anxiety resulting from experiences in the distant past that are not relevant to the current situation” — an apparent reference to the hyperinflation of the 1920s, which still influences German attitudes toward price stability.

His comments were thus an implicit riposte to German critics who have accused the E.C.B. of betraying its mandate by buying government bonds of Greece, Italy, Spain and other euro area countries to help control their borrowing costs.

Disagreements about E.C.B. crisis policy broke into the open last week after Jürgen Stark, the only German member of the E.C.B. executive board, last week unexpectedly said he would resign. Mr. Stark was a well-known opponent of the bond purchases, which he saw as improper interference by the E.C.B. in government finances.

On Thursday, Spain raised €3.95 billion, or $5.4 billion, of bonds maturing in 2019 and 2020, just short of its maximum target of €4 billion.

But the yields remained near record highs. The bond due Oct. 31, 2020 was sold at an average yield of 5.16 percent, compared with 5.2 percent when it was last sold on Feb. 17. That was also the level at which it was trading on the secondary market before the auction.

The auction was covered two times, a level of bidding that “compared favorably to the last two Spanish auctions,” said Chiara Cremonesi, a fixed-income strategist at UniCredit. “Taking into consideration the current environment, the auction result was not too bad overall.”

As its borrowing costs have soared, the Spanish government has been struggling to rein in spending to avoid being forced into seeking a bailout, as has happened in Greece, Ireland and neighboring Portugal.

On Friday, the Spanish government is set to re-introduce a wealth tax that it removed in April 2008, shortly after José Luis Rodríguez Zapatero was re-elected as prime minister.

Elena Salgado, the finance minister, on Thursday estimated that the tax could yield about €1.08 billion in additional revenue from about 160,000 of Spain’s richest taxpayers.

In 2007, the last year that the wealth tax was collected, revenue from the wealth tax reached €2.12 billion, after more than 900,000 people were charged between 0.2 and 2.5 percent of their declared assets.

In his speech, Mr. Bini Smaghi lowered expectations that the bank might take more radical steps to contain the sovereign debt crisis. Some economists have said the E.C.B. should effectively print money to prevent deflation and a downward spiral caused by government austerity programs and slower growth in the indebted countries.

In a clear response to Germans who say the bank has gone too far already, however, Mr. Bini Smaghi said that there is no evidence that “any of the interventions implemented have undermined the ability of the E.C.B. to maintain price stability in the euro area in the years to come.”

Mrs. Merkel said that Germany has a “duty and responsibility to make its contribution to securing the euro’s future.” But, in a statement that could reinforce perceptions that political leaders are determined move at their own pace and not be driven by financial markets, she said that stabilizing the euro area “won’t happen overnight or with any one-time thunderbolt.”

She once again rejected proposals for euro bonds, or debt backed jointly by all 17 euro-zone nations.

In Spain, Mr. Zapatero’s government has pledged to lower the budget deficit to 6 percent of gross domestic product this year, from 9.2 percent last year. However, that target was set on the assumption that the economy would grow 1.3 percent this year, but the most recent data suggests that growth will in fact fall short of 1 percent for the full year.

The wealth tax is likely to be the last legislative measure taken by the Socialist government before a general election on Nov. 20. Opinion polls indicate that Mariano Rajoy, leader of the main center-right opposition Popular Party, will defeat the Socialist candidate, Alfredo Pérez Rubalcaba, and replace Mr Zapatero as prime minister.

Even though the revived wealth tax will be more narrowly focused than before, the plan has added to tensions over fiscal strategy between the federal government and regional governments that will be collecting the wealth tax on behalf of Madrid. Economists have also questioned the benefit of such a narrow tax — it will affect about 0.7 percent of Spanish taxpayers — at a time when the euro crisis is deepening.

Some regional government controlled by the Popular Party have already declared their opposition to collecting what they consider to be a misguided wealth tax. Mr Rajoy, however, has refused to say whether he would abolish such a tax if elected in November.

Most regional governments are expected to fall short of their budget deficit targets this year, after only eight of the country’s 17 regional governments met last year’s target. Fitch, the credit rating agency, this week lowered the ratings of five regions, warning that “considerable efforts” were still required “in the area of cost control.”

Raphael Minder reported from Madrid.

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Investors Fret at Costs if Rescues Are Needed

But as bank shares plummeted this week, the question on investors’ minds was not whether governments would rescue their banks if necessary. It was how much a bailout might cost them.

Whether it is Société Générale in France, UniCredit in Italy or Santander in Spain, the fear is that already indebted countries will find themselves in deeper trouble if they are forced to rescue some of their biggest banks.

By one measure, according to a recent report from the Peterson Institute for International Economics, 90 of Europe’s biggest banks hold 4.7 trillion euros ($6.7 trillion) in short-term loans that must be repaid over the next two years. That burden alone is more than half of the combined gross domestic product of the 17 nations that share the euro currency.

“This problem has become cancerous,” said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund in London. “France will not hesitate to fiscalize its banks — but it will be very expensive.”

Shares of European bank stocks were volatile on Thursday. Société Générale, which has been the focus of the greatest fears, ended the day up 3.7 percent. But its stock price is still down 16 percent this week — and off almost 43 percent for the year.

Shares of Santander climbed 3.2 percent and UniCredit rose 3.4 percent Thursday. But they, too, were rebounding slightly after big recent sell-offs.

In another danger signal, commercial bank reliance on the European Central Bank for short-term loans spiked to a three-month high on Wednesday. Banks borrowed 4 billion euros, or $5.7 billion, compared with 2 billion euros the day before, according to figures released on Thursday. That would indicate the banks are becoming wary of lending to one another, preferring to borrow from the central bank.

“What strikes me in the crisis of the last few weeks is the large content of self-fulfilling prophesies,” said Paul De Grauwe, an economist in Brussels who advises the president of the European Commission, José Manuel Barroso. “The fear that something bad will happen increases the probability that the something bad occurs.”

Heightening market anxiety is the realization that the banks that have promised to participate in the Greek debt restructuring may face larger losses than expected. Société Générale, which has one of the larger Greek exposures among major European banks, already announced a 268 million euro charge early this month.

What is more, Europe’s latest plan to address its bank problem — endowing its rescue fund, the European Financial Stability Facility, with the power to recapitalize banks — will take at least another month to become functional. Parliaments of the euro area countries must vote on the rescue fund’s new charter, and approval is by no means guaranteed.

Despite statements this week by Société Générale that it is in good condition, unconfirmed rumors have swirled through the markets that some of its lenders — including Singapore and the United States — were threatening to cut their exposure.

Addressing the issue head on, the governor of the French central bank, Christian Noyer, said on Thursday that the latest results of so-called stress tests on French banks demonstrated their health and that they had adequate capital to ride out any difficulties.

“Recent stock market movements won’t affect the financial stability of the banks or the resilience they have shown since the beginning of the crisis,” Mr. Noyer said.

And the agency that regulates French financial markets took pains to warn that “the dissemination of unfounded information is subject to sanction.”

The attacks on French banks began amid speculation that French government debt was about to lose its gilt-edged AAA credit rating.

France’s three largest banks — BNP Paribas, Société Générale, and Crédit Agricole — have bulging portfolios of French government bonds that represent substantial portions of their core capital. The latest worries, focused on the prospect of a lower rating for those bonds, could put pressure on the banks to raise more capital almost immediately if a downgrade occurred.

Jack Ewing contributed reporting from Frankfurt.

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