The Irish Independent reports that Anglo Irish Bank is set to reveal this morning that its bad loan losses for the six months to March amounted to more than €4bn, even worse than previously feared.
This equates to over 5.4pc of the group's €73bn loan book. It also amounts to two-thirds of the €6bn loan loss figure that government-appointed consultants had set out last October as the worst-case scenario for the bank over two years.
However, the rapid deterioration of the economy and broader property market since then has put paid to even PricewaterhouseCooper's bleak assessment.
The scale of the losses, which are likely to have wiped out most of Anglo's €4.9bn equity reserves, has led to a series of crunch talks between the nationalised bank and the Government in recent weeks.
It is understood Finance Minister Brian Lenihan will come out soon after Anglo's figures are unveiled and outline how the State plans to recapitalise the lender over the coming months.
Troubled
The level of the impairment charge is understood to have been driven by the fact that the nationalised lender has a large exposure to a tight group of troubled developers. Anglo's property development loans are estimated to stand at over €18bn.
The PwC report found that it had over €500m out on loan to each of 15 clients. Allied Irish Banks, by comparison, has only four or five developer clients in this space.
It is understood that about €3.7bn of the loan writedown relates to specific non-performing loans, with the remainder made up of catch-all provisions to cover possible future losses. The second category is known in the banking industry as incurred but not reported (IBNR) provisions.
The bank has already signalled it would write off €300m of the €451m it lent to 10 developers -- known as the 'golden circle' or 'Maple 10' -- to buy a 10pc stake in the troubled bank last summer. The deal allowed the developers to use the now-worthless Anglo shares as security for 75pc of the loans.
Market followers will also be keeping a close eye on Anglo's funding profile, particularly after revelations that its deposit base was flattered to the tune of €7.5bn last September by lodgments from Irish Life & Permanent.
The controversial deposits were included in Anglo's accounts as "customer deposits", serving to boost its end-of-year deposit base by 7.8pc to €51.5bn when, in fact, its lodgments were down.
Scandal
Both the 'golden circle' share deal and the deposits scandal are being investigated by a number of parties, including the Office of the Director of Corporate Enforcement and the Garda Fraud Squad, as part of broader probes into the bank.
Anglo is expected to outline its new five-year business plan today, which will see it try to overhaul itself from a property-focused lender to concentrating on corporates and small- and medium-sized businesses.
The Irish Independent also reports that imports in the first two months of the year were down by a quarter on the same period last year, as collapsing consumption and construction trashed demand for goods, machinery and materials.
The adjustment in the economy seems even more rapid than analysts have estimated. After running a deficit of €10bn with the rest of the world in 2007, and €8bn last year, the country's balance of payments could have been in surplus in the first three months of the year, Ronnie O'Toole, chief economist at NIB Bank, said.
Preliminary figures from the Central Statistics Office show imports from Germany plunged over 90pc on the first two months of the year, illustrating the problems facing the world's largest exporting country from the fall in demand for machinery and cars. Irish imports of cars for the first two months plummeted by 74pc, while imports of computer equipment were down 34pc.
The value of imports of machinery and transport equipment from China -- the biggest single category -- was down 32pc in March compared with last year. Imports of general manufactured goods fell 11pc.
Trading partner
Imports from the UK, Ireland's largest trading partner, dropped 30pc, led by a 57pc fall in purchases of machinery and cars. Despite the increase in cross-border shopping, imports from Northern Ireland were down 35pc on January-February of last year.
There are no details as to products but it is likely that construction materials would explain part of the decrease.
Exports to the North fell 26pc and the Republic's cross-border trade surplus rose from €46m in the two months last year to €63m this year.
That was part of a general picture which saw the trade surplus for the first quarter top a record €10bn as exports over the first two months fell just 4pc.
"This implies that, while government borrowing will be very high this year, it will be more than offset by the huge level of private sector savings," Dr O'Toole said.
The Irish Times reports that the nationalised Anglo Irish Bank is set to receive public declarations of support from the Government and the Financial Regulator today when it reports a huge rise in loan losses in the first half of its financial year.
Specific and collective impairment charges will be slightly in excess of €4 billion, it is understood, leading Anglo to breach strict capital rules set out by the regulator. The losses mainly reflect a rapid deterioration in the quality of the bank’s Irish loan book in the six months to March.
This was a tumultuous period for Anglo, in which acute controversy over undeclared director’s loans to former chairman Seán FitzPatrick culminated in the Government’s seizure of the bank in January.
The FitzPatrick loans are the subject of regulatory inquiry, as are deposits of €8 billion lodged in Anglo by Irish Life Permanent last year, and a placement of a 10 per cent stake in Anglo last year to a group of wealthy investors.
Anglo’s losses reflect the outcome of a loan-by-loan assessment of its loan book, which was overseen since nationalisation by Mr FitzPatrick’s successor, Donal O’Connor. This was cross-checked by accountants PricewaterhouseCoopers, who examined the book at the direction of the regulator.
Minister for Finance Brian Lenihan is preparing a statement today in which he is likely to reiterate Anglo’s “systemic” position and signal the Government’s intention to provide new capital to the business. His aim will be to stabilise Anglo, derisk its balance sheet and restructure its organisation.
The comprehensive nature of that project means that Anglo’s capital requirement may well exceed €3 billion, more than twice the €1.5 billion in capital that the Government was willing to provide before it took control of the institution. The money will not be made available until EU approval is received and the bank meets certain conditions, including Cabinet approval for a draft business plan from Anglo’s board.
In light of that, the regulator is prepared to grant a temporary waiver from its capital rules to enable Anglo to continue trading until its balance sheet is bolstered with new capital. The derogation will be highly conditional and it is likely to expire before the end of Anglo’s fiscal year in September.
The regulator’s manoeuvre will provide Anglo with scope to prepare for its property and development loans to be moved into Nama, the National Asset Management Agency.
Anglo is already exercising forbearance with many big clients, some of whom are indebted by hundreds of millions of euros. Following a warning from Mr Lenihan that the Nama process would lead “hopelessly insolvent” borrowers into bankruptcy and liquidation, the position of those clients will come under close review when their loans go to Nama.
The increase in loan losses in Anglo will be scrutinised by stock market analysts who track the performance of Allied Irish Banks and Bank of Ireland. While Mr Lenihan has said Bank of Ireland may not require additional State capital when its loans are transferred into Nama, he has yet to reach a conclusion on AIB.
The Irish Times also reports that a senior Bundesbank auditor admitted yesterday that Depfa bank’s business model was risky even before the Lehman Brothers bankruptcy pushed it, and parent company Hypo Real Estate (HRE), to the brink of collapse last September.
A Bundesbank audit of Depfa’s books last year uncovered 49 violations of “proper business conduct and the functional capability of risk management”, 12 of which were considered “severe”.
A report outlining the concerns was forwarded to the federal government but was not shown to the finance minister or the responsible senior aide. No action was taken before Depfa faced a severe liquidity shortfall at the end of September.
To prop up Depfa and the HRE group, Berlin stepped in with state guarantees totalling €102 billion. Next week it hopes to take control of the HRE group at an extraordinary shareholder’s meeting.
Yesterday, the head auditor of a team that inspected Depfa/HRE’s accounts said that the Dublin bank would have remained risky even if his long list of recommendations had been implemented.
“The refinancing structure at Depfa wouldn’t have changed,” said Manfred Eder of the Bundesbank to a parliamentary inquiry. “Eliminating the shortcomings we discovered would have changed nothing in its business model.”
Bought by HRE in 2007 for over €5 billion, Depfa is a public-sector lender that refinances long-term borrowing through short-term loans.
After September’s collapse of Lehman Brothers, the inter-bank lending market seized up, leaving Depfa without liquidity to refinance its business.
“We never thought this was a real possibility. The results of our report would have looked very differently if we had,” said Mr Eder, describing the effects of the Lehman collapse a “worse-case scenario”.
During the public sitting of the committee, Mr Eder declined to go into detail about the 19-man audit of the operations in Munich and Dublin, describing it only as “anything but business as usual”.
A memorandum of understanding signed by the Irish and German regulators allowed six auditors to head to Dublin in February. They were alarmed at what they found. “Many organisational guidelines didn’t represent in reality the way daily business was conducted,” their report noted. Daily liquidity reports failed to show “all relevant inflows and outflows” and some transactions were booked a day late.
In March, a so-called “stress test” was run to examine the effect on Depfa of a 20-day total collapse in interbank trading. The test revealed that, under theoretical conditions that just six months later became reality, Depfa would survive just a few weeks.
German regulator BaFin filed reports from March to August last year expressing concern about HRE/Depfa. In the last, weeks before the Lehman collapse, it warned that a recent downgrade of the bank’s rating would “burden the group’s already strained liquidity situation”.
The Irish Examiner reports that credit unions want the law changed so that financial institutions can take a cut of delinquent borrowers wages at source to pay-off overdue loans.
Credit unions are coming under pressure as bad debts rise. As many as 121 of the 403 credit unions in the state are operating at a loss, according to figures supplied to the Financial Regulator by the Irish League of Credit Unions (ILCU).
The ILCU has circulated individual credit unions outlining its lobbying of the Department of Justice, Equality & Law Reform seeking the introduction of an alternative mechanism for debt enforcement.
"The league board’s position on the matter is that legislation to allow for attachment of earning orders to be made in civil debt cases would be of substantial benefit to credit unions in the legal debt enforcement process and would be an appropriate alternative to the committal process," credit unions were told in the communication from the ILCU’s legal and secretariat department supervisor Breege-Anne Murphy.
A letter from the Department of Justice, Equality & Law Reform, dated March 27, 2009, told the ILCU, that the current Government legislation programme does not provide for any proposals to amend the law in this area.
"However, the Law Reform Commission (LRC), as part of its current work programme, is examining the law in the area of ‘debt enforcement and securing interests over personal property’.
"The league has now engaged with the LRC on this issue and recently met with representatives of the LRC to discuss debt enforcement by credit unions. The LRC will be issuing a consultation paper on this matter in due course and the league intends to make a submission to this consultation," Ms Murphy told credit union bosses.
The ILCU is surveying credit unions to determine their experiences in the recovery of delinquent loans from initial default right through the legal debt enforcement process.
Ms Murphy said the survey results would inform their submission to the LRC.
The Financial Times reports that General Motors’ board will meet on Friday to give the go-ahead for its planned move into bankruptcy after agreeing an 11th-hour deal with some of its biggest bondholders.
Holders of $27bn of unsecured bonds will get up to 25 per cent of the restructured company – much more than the 10 per cent stake previously proposed – paving the way for the troubled carmaker to spend a shorter period in Chapter 11 protection.
According to people involved, the US government will provide more than $30bn in additional financing to fund GM’s operations during its stay in Chapter 11 with several billion dollars more expected from the Canadian government.
News of the board meeting came as tensions over the fate of GM’s Opel/Vauxhall operations in Europe broke into the open, with German officials accusing Washington of an “ambush” after the failure of critical bail-out talks early on Thursday morning.
The collapse of the talks created growing uncertainty amid the 5,500 Vauxhall workers in the UK. The business secretary, Lord Mandelson, angrily rejected claims by Unite, the union, that one of Vauxhall’s two UK plants was under threat from the restructuring of GM Europe.
He said he had “categorical” commitments from both bidders for GM Europe – Italy’s Fiat and Canada’s Magna – to continue “production and employment by Vauxhall here in the UK”.
With more than 50,000 jobs at stake across Europe, a large proportion in Germany, Berlin has been working hard on a state-backed bail-out for GM’s Opel/Vauxhall businesses, which the carmaker has to spin off as part of its restructuring.
Eight hours of talks between German ministers, led by chancellor Angela Merkel, and GM and the US Treasury, broke up acrimoniously after a last-minute demand for an extra $415m (£260m) that Berlin had understood would be coming from Washington.
“What happened overnight borders on the absurd,” said Karl-Theodor zu Guttenberg, Germany’s economics minister
A senior German official said: “It was an ambush,” adding “no democracy can come up with such a huge amount of money in two days. We have parliament, we have a budget committee, we have laws about these things”.
German officials were also offended that the US Treasury did not dispatch a senior official to the talks.
The US rejected the accusations on Thursday, with a senior US administration official saying negotiations had resumed on Thursday in a “more positive frame of mind”.
The FT also reports that changes to Europe’s costly and fragmented patent system have edged a step closer after EU industry ministers agreed formally to ask the European Court of Justice for its opinion on a potential overhaul.
Ministers, meeting in Brussels on Thursday, said they would consult Europe’s top court on the legality under EU law of introducing specialist courts to handle patent disputes along with a so-called “community patent”.
The latter – which would be a single intellectual property right that would apply across Europe – has been an elusive goal for decades.
At present, rights are granted centrally by the European Patent Office, but these are in fact baskets of national rights, which then have to be enforced by companies and investors by individual countries.
Disquiet about the cost and inefficiency of the current system are long-standing. But efforts to introduce a community patent and more streamlined system for dealing with patent disputes have repeatedly foundered over translation issues and the inability of EU member states to decide on where to locate a central patent court.
In recent months, some fresh progress has been made on the community patent idea – with plans to use automated translation for claims into most languages, and to provide legally binding translations in just three languages.
Plans have also been developed to introduce specialised patent courts, which could run on a regional basis for the first hearing of disputes, with one centralised appeal court. This, it is argued, would simplify litigation and make for more legal consistency.
The Swedish EU presidency, which starts in July, is expected to pursue these proposals. Ewa Björling, trade minister, told the Financial Times she hoped to have an opinion from the ECJ within six months, so the issue could be discussed again by industry ministers in December.
“This [the debate over a community patent] has been going on so long it is time to take responsibility,” she said.
However, although Thursday’s agreement represents significant progress, there are still some issues that have yet to be decided – such as where the new patent courts should be situated. Member states are also understood to be divided about the translation compromise.
Separately, ministers are expected to decide on Friday on proposals which could mean that European cross-border research projects get billions of euros in tax breaks by exempting them from value-added tax.
As part of a broader plan to step up EU investment in research, Brussels has been pushing to create a group of schemes called “European research infrastructure consortium” projects. These would have to be cross-border initiatives, and “non-economic” in nature. However, qualifying projects would be able to apply for exemption from VAT rates – which typically range from 15 to 25 per cent – through a much simpler procedure than at present.
The New York Times says that as the Obama administration tries to steer America toward cleaner sources of energy, it would do well to consider the cautionary tale of this new-generation nuclear reactor site.
The massive power plant under construction on muddy terrain on this Finnish island was supposed to be the showpiece of a nuclear renaissance. The most powerful reactor ever built, its modular design was supposed to make it faster and cheaper to build. And it was supposed to be safer, too.
But things have not gone as planned.
After four years of construction and thousands of defects and deficiencies, the reactor’s 3 billion euro price tag, about $4.2 billion, has climbed at least 50 percent. And while the reactor was originally meant to be completed this summer, Areva, the French company building it, and the utility that ordered it, are no longer willing to make certain predictions on when it will go online.
While the American nuclear industry has predicted clear sailing after its first plants are built, the problems in Europe suggest these obstacles may be hard to avoid.
A new fleet of reactors would be standardized down to “the carpeting and wallpaper,” as Michael J. Wallace, the chairman of UniStar Nuclear Energy — a joint venture between EDF Group and Constellation Energy, the Maryland-based utility — has said repeatedly.
In the end, he says, that standardization will lead to significant savings.
But early experience suggests these new reactors will be no easier or cheaper to build than the ones of a generation ago, when cost overruns — and then accidents at Three Mile Island and Chernobyl — ended the last nuclear construction boom.
In Flamanville, France, a clone of the Finnish reactor now under construction is also behind schedule and overbudget.
In the United States, Florida and Georgia have changed state laws to raise electricity rates so that consumers will foot some of the bill for new nuclear plants in advance, before construction even begins.
“A number of U.S. companies have looked with trepidation on the situation in Finland and at the magnitude of the investment there,” said Paul L. Joskow, a professor of economics at the Massachusetts Institute of Technology, a co-author of an influential report on the future of nuclear power in 2003. “The rollout of new nuclear reactors will be a good deal slower than a lot of people were assuming.”
For nuclear power to have a high impact on reducing greenhouse gases, an average of 12 reactors would have to be built worldwide each year until 2030, according to the Nuclear Energy Agency at the Organization for Economic Cooperation and Development. Right now, there are not even enough reactors under construction to replace those that are reaching the end of their lives.
And of the 45 reactors being built around the world, 22 have encountered construction delays, according to an analysis prepared this year for the German government by Mycle Schneider, an energy analyst and a critic of the nuclear industry. He added that nine do not have official start-up dates.
Most of the new construction is underway in countries like China and Russia, where strong central governments have made nuclear energy a national priority. India also has long seen nuclear as part of a national drive for self-sufficiency and now is seeking new nuclear technologies to reduce its reliance on imported uranium.
By comparison, “the state has been all over the place in the United States and Europe on nuclear power,” Mr. Joskow said.
The United States generates about one-fifth of its electricity from a fleet of 104 reactors, most built in the 1960s and 1970s. Coal still provides about half the country’s power.
To streamline construction, the Nuclear Regulatory Commission in Washington has worked with the industry to approve a handful of designs. Even so, the schedule to certify the most advanced model from Westinghouse, a unit of Toshiba, has slipped during an ongoing review of its ability to withstand the impact of an airliner.
The Nuclear Regulatory Commission has also not yet approved the so-called EPR design under construction in Finland for the American market.
This month, the United States Energy Department produced a short list of four reactor projects eligible for some loan guarantees. In the 2005 energy bill, Congress provided $18.5 billion, but the industry’s hope of winning an additional $50 billion worth of loan guarantees evaporated when that money was stripped from President Obama’s economic stimulus bill.
The industry has had more success in getting states to help raise money. This year, authorities permitted Florida Power & Light to start charging millions of customers several dollars a month to finance four new reactors. Customers of Georgia Power, a subsidiary of the Southern Co., will pay on average $1.30 a month more in 2011, rising to $9.10 by 2017, to help pay for two reactors expected to go online in 2016 or later.
But resistance is mounting. In April, Missouri legislators balked at a preconstruction rate increase, prompting the state’s largest electric utility, Ameren UE, to suspend plans for a $6 billion copy of Areva’s Finnish reactor.
Areva, a conglomerate largely owned by the French state, is heir to that nation’s experience in building nuclear plants. France gets about 80 percent of its power from 58 reactors. But even France has not completed a new reactor since 1999.
After designing an updated plant originally called the European Pressurized Reactor with German participation during the 1990s, the French had trouble selling it at home because of a saturated energy market as well as opposition from Green Party members in the then-coalition government.
So Areva turned to Finland, where utilities and energy-hungry industries like pulp and paper had been lobbying for 15 years for more nuclear power. The project was initially budgeted at $4 billion and Teollisuuden Voima, the Finnish utility, pledged it would be ready in time to help the Finnish government meet its greenhouse gas targets under the Kyoto climate treaty, which runs through 2012.
Areva promised electricity from the reactor could be generated more cheaply than from natural gas plants. Areva also said its model would deliver 1,600 megawatts, or about 10 percent of Finnish power needs.
In 2001, the Finnish parliament narrowly approved construction of a reactor at Olkiluoto, an island on the Baltic Sea. Construction began four years later.
Serious problems first arose over the vast concrete base slab for the foundation of the reactor building, which the country’s Radiation and Nuclear Safety Authority found too porous and prone to corrosion. Since then, the authority has blamed Areva for allowing inexperienced subcontractors to drill holes in the wrong places on a vast steel container that seals the reactor.
In December, the authority warned Anne Lauvergeon, the chief executive of Areva, that “the attitude or lack of professional knowledge of some persons” at Areva was holding up work on safety systems.
Today, the site still teems with 4,000 workmen on round-the-clock shifts. Banners from dozens of subcontractors around Europe flutter in the breeze above temporary offices and makeshift canteens. Some 10,000 people speaking at least eight different languages have worked at the site. About 30 percent of the workforce is Polish, and communication has posed significant challenges.
Areva has acknowledged that the cost of a new reactor today would be as much as 6 billion euros, or $8 billion, double the price offered to the Finns. But Areva said it was not cutting any corners in Finland. The two sides have agreed to arbitration, where they are both claiming more than 1 billion euros in compensation. (Areva blames the Finnish authorities for impeding construction and increasing costs for work it agreed to complete at a fixed price.)
Areva announced a steep drop in earnings last year, which it blamed mostly on mounting losses from the project.
In addition, nuclear safety inspectors in France have found cracks in the concrete base and steel reinforcements in the wrong places at the site in Flamanville. They also have warned Électricité de France, the utility building the reactor, that welders working on the steel container were not properly qualified.
On top of such problems come the recession, weaker energy demand, tight credit and uncertainty over future policies, said Caren Byrd, an executive director of the global utility and power group at Morgan Stanley in New York.
“The warning lights now are flashing more brightly than just a year ago about the cost of new nuclear,” she said.
And Jouni Silvennoinen, the project manager at Olkiluoto, said, “We have had it easy here.” Olkiluoto is at least a geologically stable site. Earthquake risks in places like China and the United States or even the threat of storm surges mean building these reactors will be even trickier elsewhere.
The NYT says: “Why don’t you Bing it?”
A year from now, if you hear someone say that — and actually understand what it means — Bill Gates will be a happy billionaire.
That is because it will be a sign that Microsoft is finally making progress in its quest to challenge Google in the Internet search business.
Bing, the name Microsoft gave to the new search service it unveiled Thursday, is its answer to Google — a noun that once meant little but has become part of the language as a verb that is a synonym for executing a Web search. After months of, uh, searching, Microsoft settled on Bing to replace the all-too-forgettable Live Search, which itself replaced MSN Search.
Microsoft invested billions of dollars in those services and failed to slow Google’s rise, so a new name certainly can’t hurt.
Microsoft’s marketing gurus hope that Bing will evoke neither a type of cherry nor a strip club on “The Sopranos” but rather a sound — the ringing of a bell that signals the “aha” moment when a search leads to an answer.
The name is meant to conjure “the sound of found” as Bing helps people with complex tasks like shopping for a camera, said Yusuf Mehdi, senior vice president of Microsoft’s online audience business group.
And if Bing turns into a verb like, say, Xerox, TiVo or, well, Google, that would be nice too. Steven A. Ballmer, Microsoft’s chief executive, said Thursday that he liked Bing’s potential to “verb up.” Plus, he said, “it works globally, and doesn’t have negative, unusual connotations.”
Some branding experts said choosing the name Bing was a good start, but also the easiest part of the challenge facing the company, since most people turn to Google without even thinking about it.
Michael Cronan, whose consulting firm helped come up with brands like TiVo and Amazon’s Kindle, said Bing’s sound, brevity and “ing” ending were all positives.
“It has a promise that you are going to find what you are looking for, and that’s great,” Mr. Cronan said. “But its success is entirely wrapped up in the quality of the experience that Microsoft can deliver.”
Peter Sealey, a former chief marketing officer at the Coca-Cola Company, said Microsoft should have picked a name that more directly connotes search.
“Bing has no equity; it signals nothing,” Mr. Sealey said. “It is going to be an enormous expense to create an image for this thing called Bing.”
Google’s name is a play on the word googol, which is a 1 followed by 100 zeroes. The company has said the name speaks to its ambitious mission to organize all the world’s information.
Asked about Microsoft’s choice of name at a press conference on Wednesday, Sergey Brin, a Google co-founder, said he did not know enough about the new service to comment on it. Then he deadpanned: “We’ve been pretty happy with the name Google.”
Meanwhile, some tech people were already noting that Bing is also an unfortunate acronym: “But It’s Not Google.”
