Morgan Kelly is back

Brendan Burgess

Brendan Burgess

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Morgan Kelly addressed the UCD Economics Society and you can watch it on youtube. It's 37 minutes long, but you can easily skip the last 9 minutes which is just a rant about the Irish education system. There is a 30 minute Q&A session afterwards which you can skip as well.

I have transcribed most of it into this thread

But here is the core message:


It seems as if the ECB would like a trial run(at cleaning the banks) in Ireland.

What that means is that there is going to be a big clean up
There will be forclosures on mortgages and on SME loans.

A lot of owners of SMEs borrowed a lot to buy properties, so a lot of these SMEs now have very big losses on property. Banks are not calling in their loans.

If you have a large company with unsustainable debt, you can sell it on. But if you call in the loans of a small company , its main asset is its owner, so that company is gone.

We are going to see a lot of SMEs going under.

The point is - the Irish economy is equivalent to the SMEs.

A lot of them will be wiped out in one go. This is potentially an enormous problem which no one seems to care about.
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and later

This is the existential problem facing the Irish economy - the small businesses and again we know nothing about them.

In very vague terms we know that they have lots of large loans but we don't know what percentage of employment is accounted for by them.

We know nothing about them.

So that is the first problem we face.
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I think it's absolutely extraordinary that he can make these two statements within minutes of each other. The Irish economy is equivalent to the SMEs and we know nothing about them.

If we know nothing about them, how can we say that they are equivalent to the Irish economy?

We would need data on the indebtedness of Irish SMEs.
We would need data on their profitability and cash flow.

The guy from ISME said on the 9 pm RTE 1 News that SMEs have €57 billion of bank debt, €32 billion of which is property related.
 

Attachments

  • AIBs SME loan book.pdf
    47.1 KB · Views: 4
Let's look at AIBs SME loan book which you can see on the attached excerpt from their accounts for 2013.

AIB has €9.6 billion of SME loans,around €4 billion of which is impaired.
AIB has made provisions of around €2.9 billion against these. It doesn't seem to me that they will need to make massive additional provisions against these.

Many businesses in Ireland are profitable before debt repayments but become loss making after debt repayments. The banks recognise this and don't tend to close down these businesses if their profits are the only source of repayments. I really do not think that there will be widespread bank enforced closures of SMEs. Of course, many more pubs and hotels will be seized and sold on. But does this affect the economy if most of them reopen under new ownership freed from the debt overhang? If an Irish exporter of widgets is closed down by the bank, and not reopened, that certainly would affect the Irish economy.

Note that DCB is "Domestic Core Bank" and FSG is "Financial Solutions Group" which is dedicated to supporting business and personal customers in financial difficulties.

In addition, they have €14 billion of what they describe as "property and construction" loans, against which they have made provisions of €7 billion. I don't know if this would be the type of SME debt which Morgan Kelly includes.
 

Attachments

  • AIBs SME loan book.pdf
    47.1 KB · Views: 3
According to the Irish Times, Alan Ahearne does not agree
However, head of economics at NUI Galway and Central Bank commission member Alan Ahearne said the EU-wide bank stress tests could result in banks being told to increase their capital, but would not lead to banks being told to call in loans.


[broken link removed] said there was no sense of the ECB stress tests being “tough for Ireland and soft for everyone else”.



He said the banks were working towards targets for resolving loans for the SME sector and were “much further along” in resolving the issue than they were with the mortgage problem.



“The banks can’t close down the SME sector; it’s their customer base,” he told The Irish Times . Debt forgiveness for SMEs, he said, was an inevitable part of the process.
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I attach the SME extracts from the PCAR which was done as of 31 December 2010

AIB had €19 billion of SME loans - I think that this includes SME loans in the UK as well as Ireland.

Under the stress testing, BlackRock estimated €4 billion of lifetime loan losses

In the latest accounts, the SME loans have dropped to €9.6 billion (€13.8 billion if you include the UK) . So it seems as if their withdrawal of credit from SMEs has reduced their exposure. In any event, they have €2.9 billion in provisions against these €9. 6 billion of SME loans.


AIB and Bank of Ireland had €36 billion of SME loans between them at 31 December 2010 against which they had made €4.5 billion of provisions back then.
 

Attachments

  • SME extract from PCAR.pdf
    190.4 KB · Views: 4
Kelly argues
The ECB will put pressure on Irish banks by way of an experiment
The Irish banks will close down SMEs
As a result, the Irish economy will fail.


I am not sure that any of these three arguments is correct.

1) The Irish banks have made huge provisions and raised large amounts of capital. The ECB may not require them to raise additional capital.
2) Even if they do, Irish banks may not close down SMEs. If a business is profitable before interest and debt repayments, it won't make much sense to close it down.
3) Even if they do close down the SMEs, it does not mean that the Irish economy will suffer. For example, if a bank moves in on a hotel due to excessive debt, the hotel will be sold to a new owner who may invest and develop it.
 
RTE news. Noonan saying Kelly should be taken seriously. "He was right before. The CBI should talk to him."

This is bad. Kelly was absolutely spot on about the developer bubble. That was based on solid evidence which to be fair to him only he could see clearly - the ghost estates were there for all to see.

This time round is completely different. His warnings are self admitted pure speculation, notably:

1) The ECB are going to experiment with us. That is a pure shot in the dark, which has easily been discounted by Ahearne

2) None of us have a clue about what our SMEs are about. This might be a disaster in waiting.
 
I think the big issue that Morgan Kelly is referring to is the bad property loans that are hidden in SME balance sheets. These property loans are typically "non-core" ie the 100 year old "profitable" motor dealer who purchased the proverbial "block of apartments" in 2006. The challenge for the banks now is how to deal with these insolvent SMEs who have good underlying businesses but have been brought to their knees by speculative property purchases.

A few problems that arise :
1) The banks are reluctant to advance any further borrowing to these SMEs, now badly needed for working capital, financing, capital expenditure etc.
2) The banks are tasked with repossessing the property and recovering any shortfall without liquidating what may otherwise be a very successful enterprise. There is a very tricky balancing act to be played out here (largely ignored so far)
3) Personal Guarantees are (allegedly) causing huge friction between banks and business owners.

I think the worry now is that when this is all stress tested (again) shortly under fresh strict rules from the ECB, that the resulting impairment charges will hit hard and may well produce the next crisis. I hope it doesnt come down to a choice for the banks to either keep the SMEs in business (by writing off massive amounts of debt) OR putting the SMEs out of busines in an effort to collect what is owed. Its in no ones interest to try and close down profitable (but bankrupt) enterprises but they cant really afford to write off the debt either. This is very real "Rock" and "hard place" stuff.

I think we should not dismiss Morgan Kelly so readily. I think Minister Noonan is right. This needs to be looked into............The approach adopted so far in relation to SMEs is to ignore the debt but I think that approach cant be followed much longer. The banks under the new stress testing guidelines due to be published later today will need to act, meaning that they either write off the debt or pursue the SMEs for it.
 
The first issue to be determined is whether the Irish banks need additional capital. They got massive infusions of capital back in 2011 so this is unlikely. If this does not happen, Kell's forecast falls.

But let's say it does happen. That the banks need additional capital and the ECB or Central Bank tells them to go after the SMEs.

I doubt if the ECB would. The Central Bank might. It would make absolutely no sense for them to do so, but they have done stupid things before.

Let's take an example of a successful trading business which overborrowed to buy a block of apartments. Let's assume the bank moves in on this. This is not necessarily the end of the Irish economy. If it's a successful business a receiver may well sell it and it could thrive under new owners. Alternatively it might go into administration and be freed of its enormous debt.

What about cases where the owner of a successful company has huge personal debts separate from the business? That could be a barrier for the successful development of the company but the company is unlikely to be closed down as a result. Banks are doing deals. The property will be sold off and the debts will be restructured. If the company can be sold the banks will want it sold probably to a new buyer who can invest in it.

So Kelly's argument falls apart in so many areas. It's a real shame that he won't defend his argument in public. He makes these guerrila attacks and then disappears for months or years at a time and won't deal with the challenges.
 
Brendan Burgess said:
So Kelly's argument falls apart in so many areas. It's a real shame that he won't defend his argument in public. He makes these guerrila attacks and then disappears for months or years at a time and won't deal with the challenges.
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If his argument is so wrong why did Noonan say it should be looked at, why did Dr. Debt agree etc?

About defending his arguments in public, does it matter, half the time he will be right, half the time he will be wrong, but no economist is right all the time so I don't understand why anyone listens to them. They are pure crystal ball merchants.
 
If his argument is so wrong why did Noonan say it should be looked at, why did Dr. Debt agree etc?
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Of course, look into it. But when you look into it, there is nothing in it.

People are overly impressed by one very prominent, very good call by Morgan Kelly in the past. As you point out , economists are right about half the time.

This time he is wrong again.
 
Brendan Burgess said:
People are overly impressed by one very prominent, very good call by Morgan Kelly in the past. .
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Do you have a beef with MK, because to me that's the way you're coming across?

Who is impressed by him by the way? Most people won't even notice what he has to say, it's just a one day wonder.

He seems to be getting a kick out of appearing magically every couple of years. Maybe he's dead serious. But he has just as much chance of getting it right as any Tom, Dick or Harry.
 
Bronte said:
Do you have a beef with MK, because to me that's the way you're coming across?

Who is impressed by him by the way? Most people won't even notice what he has to say, it's just a one day wonder.

He seems to be getting a kick out of appearing magically every couple of years. Maybe he's dead serious. But he has just as much chance of getting it right as any Tom, Dick or Harry.
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He is just the same as any other economist, but my "beef" is that he is treated by people as God.

He has been the lead or second item on the RTE 1 News a few times over the last few days.

The Minister for Finance feels it necessary to comment on his comments

His comments should carry no more weight than any other commentator's comments. Maybe a bit more, because he often challenges the consensus view, which is a good thing. The response should be "Interesting angle, let's check it out, question it, see does it make sense".

Having checked them out, they are not correct. He should acknowledge that and move on.
 
His last outing in 2011 ago frightened the life out of many people.

I challenged him on his analysis and it turned out that there was no basis to it.

http://www.independent.ie/irish-news/anecdotes-led-to-morgan-kelly-claim-26761226.html

[broken link removed]'s foremost 'prophet of doom' Professor Morgan Kelly has admitted that his latest startling pronouncement was based on a 15-month-old newspaper report, which a further investigation by the Sunday Independent has found to be based on a press release backed up in part by "anecdotal evidence".


Prof Kelly shocked an audience at the Kilkenny Arts Festival last weekend by claiming that the losses of the Irish banks could spiral by several billion more than previously estimated as a result of 10,000 mortgages given out at the peak of the bubble to "lawyers, solicitors and estate agents" to purchase properties valued at €1m to €2m, which they can not now repay.
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A lot of SME,s are effectively sole traders,who dabbled in the (certainty) of bricks nd mortar and put their business on the line over that (certainty).
Should that type of SME have big debt outside of that sole traders core business,eg a small local garage owner employing 3 people, there is potential trouble.

As I read it , that SMES/sole traders business rests on that sole trader and would have good value only with his input.
It means if you close him down , you close his Sme?ie 4 jobs gone.Since his business is him.
I would hope Mr Banker would not just look at his short-termism to squeeeze a few bob , but I ain,t confident?
 
There was a nugget in MK's talk which amazingly has got no coverage at all. Maybe it is because he couched it in a form which would escape libel. But he more or less insinuated that AIB being a state owned bank which is now writing down loans will do so on the basis of political patronage. "If you went to the same school as the son of..." was how I think the insinuation went.

If this is happening it is totally outrageous. Noonan thinks MK should be taken seriously. Political patronage in loan write downs by a state owned bank is firmly within the watch of the Department of Finance and Noonan himself. Instead of advising others to listen to MK, Noonan should be talking directly to him to ascertain what basis he has for this claim.
 
He does sum up the moral problem well though - giving 10s or 100s of thousands of taxpayers money to someone is the other side of the writing down mortgages that can never be paid off.
 
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