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The euro is trading at $1.4096 and at £0.8518.
For live currency updates, check the right-hand column of the Finfacts home page.
The US dollar fell to $1.6038 per euro on Tuesday, July 15, 2008 - an-all time record.
Commodities
The Baltic Dry Index, a measure of shipping costs for commodities, fell 1.5% on Thursday after a rise of rose 0.9% on Wednesday. It plunged 94% from its peak to a 22-year low last December.
The Key Indicator of Global Trade - - Tudor Davies, Motley Fool UK.
Crude oil for September delivery is currently trading on the New York Mercantile Exchange (Nymex) at $66.71 per barrel down 23 cents from Thursday's close. In London, Brent for September delivery is trading on the International Commodities Exchange at $69.46.
The oil price fell Wednesday after the US Energy Department's oil inventory data showed a sharp and unexpected crude supply build last week.
The government report came after the American Petroleum Institute's data on Tuesday also showed crude supplies rose last week. A stronger dollar and the disappointing economic data weighing on US stocks added to the pressure on oil.
Gold spot price
Gold is trading at $934.60 up 90 cents from Thursday's spot price close in New York.
Davy chief economist Rossa White comments: Question of whether NAMA debt is 'off balance sheet' not yet clarified - - "We commented last week on the Eurostat ruling of July 15th on the recording of public interventions to support financial institutions. It certainly seemed to introduce the possibility of keeping the government securities issued by NAMA off the state's balance sheet. Yesterday's draft legislation does not make a call either way, but it certainly leaves open the possibility. Our reading is that as a separate asset management agency with full decision-making powers, NAMA may well be able to stand outside the General Government sector in the eyes of the statisticians.
Some may ask why this matters. On the face of it, that is a legitimate question, as it looks like a statistical quirk rather than changing the government debt picture. But that is to ignore the other side of NAMA's balance sheet. On September 16th, NAMA will have already written down assets to match the (government guaranteed) securities it issues. Let's leave aside the question of their exact value at that point in time for now. If the NAMA securities issued to the banks were added straight to Irish Gross Government Debt it would ignore the offset on the other side of the balance sheet. Ireland would be an outlier in a euro area context, all thanks to its unique banking solution. For those in the market taking a superficial glance at Ireland's debt picture, that matters.
Looking at how NAMA will function, it seems fair to describe it as a separate entity to general government. Under the draft legislation, it will simply step into the banks' shoes, have a borrowing capacity and the freedom to choose who it may sell assets to in the future. One thing that has been barely commented on is what was actually created over time from Sweden's bad banks. For example, new listed property vehicles were created from previously troubled companies, generating a return for taxpayers on flotation. We have learnt to our cost that an almost fully non-quoted and fragmented property industry is not the ideal model."
Davy analyst Emer Lang comments Progressing towards NAMA - - "The much-awaited draft NAMA legislation sets out in some detail the framework for the operation of the 'bad bank' – the preferred solution to ensure the stability of the financial system, protect depositors and free up banks to lend to the real economy. As expected, we are none the wiser in relation to the likely 'haircuts' that will be applied to assets transferring from banks to the agency (€80-90bn book value), although the framework for valuation is set out. Our estimates continue to assume that Allied Irish Banks transfers €30bn at a 20% haircut, while Bank of Ireland transfers €17bn at a 16% haircut.
Following a period of public consultation, the formal publication of the bill is scheduled for September and the Dail will return on September 16th to start debating it.
The average 'haircut' picture will become clearer in September, when the government confirms the amount of bonds that need to be issued. Individual bank 'haircuts' will evolve thereafter as loans are transferred, with the final tally expected on completion of all transfers (target mid-2010). Transfers are expected to commence within weeks of the enactment of the legislation.
As expected, the banks will get short-duration securities in exchange for their loans, carrying a 'market' rate (probably in line with six-month EURIBOR). From NAMA's perspective, the typical 2% margin on those loans that are performing (over 50%) is expected to more than cover the cost of this.
The draft raises the possibility of banks agreeing a fee for servicing loans transferred and does not rule out tax relief; an issue that will be addressed by the Minister on the publication of the bill in September. Our estimates assumed that relief would be confined to overseas assets (less than one-third of the total) so there may be a bit of upside here.
As expected, the intention is that any shortfall down the road will be addressed by way of a levy which, if required, will be introduced in separate legislation.
Banks are entitled to apply to participate. In this respect, foreign banks can apply, but they may choose not to as they are typically covered by the UK insurance scheme.
The principles of the valuation methodology are set out in the draft. It suggests that the discount compared with banks' carrying value will be 'significant', yet the methodology 'will recognise that the current market for property backed loans and the underlying assets are very illiquid' and will not require the banks to accept 'fire-sale' values. Nor will it be guided in its pricing by the property prices, and expectations regarding property prices, that underpinned the original lending decision.
The starting point for valuation is the current market value, both of the collateral (i.e. the property) and the bank's asset (i.e. the loan). The Minister may then make regulations to adjust this market value to the 'long-term economic value', in line with EU guidelines. This will particularly apply to those assets that are 'utterly illiquid'.
There will be a valuation panel to adjudicate on any disputes over valuation. The government has acknowledged that it is the right of all borrowers to have access to the courts but stresses that it has taken 'appropriate steps to ensure that litigation cannot be used to delay or impede the operation of NAMA'."
Goodbody chief economist Dermot O'Leary comments: NAMA: A little bit clearer but September 16th is D-Day - - "While the key issue of the transfer value of the assets that will be moving over to the new National Asset Management Agency (NAMA) is still unknown, yesterday’s release of the draft legislation for the agency is important in a number of respects: (1) A date of September 16th has been set for both the introduction of the final legislation and, more importantly, for the initial estimate of the value of the haircut. While this will not be the final figure (it will take up to nine months for all of the assets (over 10,000 loans) to be transferred and all will be valued on a case by case basis), it will provide the necessary information that international investors, both equity and bond, have been eagerly anticipating, and ;(2) Publishing the draft legislation now allows both public discourse on the topic over the next six weeks; given the scale of the decision, public buy-in is necessary and transparency helps in this regard.
The economic merits of moving the riskier assets off the balance sheets of the banks have been much discussed and there are indeed significant risks involved in the setting up an agency of this size. While we had our doubts about the timing of the setting up of the agency, it is clear that there has already been a huge amount of work gone into the agency and we were pleasantly surprised that such an explicit date was set in relation to more transparency on the issue of the cost to the State and of course the possible capital implications for the banks involved. The legislation published yesterday also gives NAMA wide-ranging powers to maximise the value of the assets for the benefit of the taxpayer, including compulsory purchases in the event of default on the loan and the work-out of unfinished developments. The end goal is to restore a credit flow into the economy and while the economy is likely to continue to suffer, these efforts are a necessary, but not necessarily sufficient, ingredient to a return to a fully functioning banking system. Although there are likely to be obstacles along the way, with the release of the draft legislation and, of course, the information in relation to pricing on September 16th, the picture is now somewhat clearer. See the Financials piece below and our note issued this morning for more details."
Goodbody analyst Eamonn Hughes comments: Impact of draft NAMA legislation on the banks - -"As mentioned above, the government yesterday published the draft National Asset Management Agency (NAMA) Bill. It outlines the functions of NAMA, the legalities of its executive, reporting responsibilities & accountability and its powers in relation to the acquisition of bank assets. It also contains measures to protect NAMA in doing its job, with any legal challenges to be fast-tracked in the courts. Clearly, substantial thought has gone into the drafting of the 150 page legislation, however, investors (bond and equity) are likely to be mostly fixated on the valuation methodology framework.
As had been highlighted by EU guidance in recent months, the base valuation will be “long term economic value” rather than current market value. The long-term economic value is the value that “can reasonably be expected to attain in a stable financial system when current crisis conditions are ameliorated and in which a future price or yield of the asset is consistent with reasonable expectations having regard to the long term historical average”. The legislation allows for the use of market value, however, this option does appear as the exception rather than the rule. General criteria were outlined for determining real economic value, but it’s insufficient, in our view, to allow investors to estimate the “haircut” figure just yet. However, more detailed draft legislation on valuation criteria is to be released in the coming weeks, but more importantly, at the initiation of the legislation in the Dail on September 16th, an estimate of the amount of government bonds to be issued will be supplied, which should give an implied haircut for the banks.
The amount of loans to be transferred is expected to be in the range outlined last April (so, potentially €90bn pre-haircut and a little higher than recent speculation). The loan split is circa 1/3rd development land, 1/3rd work in progress and 1/3rd related investment property loans. In the past, we have estimated AIB’s loan haircut at 17% and 13.5% at BOI and there’s nothing to change that view as yet. On the income side, the bonds being issued will be either Government bonds or Government guaranteed bonds of 6 month maturity (will roll over) and will pay 6 month floating rate, which will negatively impact our net interest income forecasts.
We had previously estimated c5% interest income on existing property assets, with a 4% coupon on the replacement bonds. However, guidance hints at a wider negative spread, with c4% pre haircut income, but only c1% post haircut income initially.. This has the potential to knock c.2% from our end FY11 TNAV (total net asset value) at AIB and 7% at BOI. The lower income spread is not welcome, but with the loan haircuts still outstanding for probably another 6 weeks, investors may continue to sit on the sidelines until there’re in better shape to take a longer term view, particularly in the context of possible equity raisings by both large banks by year end."
