 I put this presentation together on Wednesday, and it's titled What Is Ireland's Bank Debt and What Can Be Done About It? And if you pay close attention to the morning radio shows and internet news coverage, you might think that this is now an out-of-day presentation because, to coin a phrase, I have in my hand a piece of paper that potentially, supposedly, is going to lead to banking debt peace in our time. In truth, this morning's statement about Ireland merely says that the Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of blah, blah, blah. So it's a commitment to examine. What are they going to examine? Well, let's talk about that. The 63 billion total is 30.7 billion, related to promissory notes. It is 20.7 billion, which is money that came from the National Pension Reserve Fund to acquire stakes in AIB and Bank of Ireland. Then there's an additional 11.4 billion that's been spent on AIB, IBRC and Irish Life Permanent. And we talk about Ireland's bank debt, you can say, okay, we had money in the National Pension Reserve Fund, and if we hadn't put it into AIB and Bank of Ireland, we could have used that to finance budget deficits, and we wouldn't have had to borrow money. That's fine, but there is no specific issue of Irish sovereign debt, there is no specific part of Ireland's EU or IMF debt that is sort of earmarked and has a little stamp on it that says, this is the bank debt. So basically what we have is the promissory notes, which clearly is bank-related debt, and then we have the other stuff, which is we have acquired assets, and there's a question about what those assets are worth at this point. So I'm just going to divide my comments into these two bits and start with what we call the living banks, AIB, Bank of Ireland and Irish Life and Permanent. The government has spent 25.4 billion in acquiring AIB and part of Bank of Ireland. Now those investments are currently held by the National Pension Reserve Fund, and they are valued by the National Pension Reserve Fund, most recently at 9.4 billion. So these have not been great investments for the stage. Now what are they really worth? Most of that 9.4 billion represents the NPRS valuation of its stake in AIB. The book value of the equity in AIB is 14.6 billion, but the bank has very weak operating profits. It has ongoing loan loss write downs, and potentially will need further recapitalization if mortgages and commercial property and other loans that they have end up moving in line as it looks like they will, the central bank's sort of stress scenarios that were done last year. So in my judgment that 9.4 billion valuation looks quite optimistic relative to what anybody in the market would pay to acquire AIB and to acquire part of Bank of Ireland. Then there's Irish Life and Permanent. That's not held by the National Pension Reserve Fund, and we don't know what anybody thinks it's worth. It's not worth a whole lot. I'll tell you that. Irish Life and Permanent is a sort of basket case kind of institution. It is a combination of a reasonably functional insurance element and a dysfunctional banking element. It has about 34 billion in mortgage loans, unfortunately if you've got one, 23 billion of them are tracker mortgages that are sort of ongoing loss making vehicles relative to what a reasonable market cost of funds would be to a bank like this. And it has serious funding problems. It owes nearly as much to central banks as it has by way of deposits. There have been various discussions about what could be done to restore Irish Life and Permanent to some kind of viability, the idea of perhaps carving out the trackers from it and creating some sort of special vehicle. But ultimately that's a form of subsidy from Europe to provide this bank with cheap funding for a long time as it runs down. In terms of market value, the bank would have, I've written here, a limited market value. Now, why does this stuff matter? Well, I wrote here on Wednesday that a European Bank Resolution Scheme is part of Mr. Van Rompuy's genuine EMU proposal. But I think we can start to say today it's one step closer to reality. But we don't have details yet on how something like this would work. Now, how might it work? John referred before to the idea that European banks should be allowed to fail and that it's a business and that bank creditors should be on the hook for losses when they make bad investments. And I think there's now pretty widespread agreement throughout Europe that the Irish model, as was practiced here, we could talk about whether the government made good decisions or not in the past few years. One decision they made that was a particularly bad decision was the bank guarantee. It's pretty widespread, there's pretty widespread agreement that that is not a sustainable model for Europe, that the European taxpayer should not be on the hook. So my suspicion is that if the ESM is allowed to go in and recapitalize banks, that this goes hand in hand with the proposal for a supervisory authority, that means that all of these banks that are going to get investment are going to be analyzed according to a sort of common methodology and that the ESM is not going to be set up as an institution to just walk in and lose money by putting money into dead banks, putting money into insolvent banks. And I don't think anyone in Ireland should hope that the European authorities do that. So, but from our perspective, that suggests a potential problem. If ESM is set up to go in and make investments and purchase shares in banks at market price and not lose money for European taxpayers to get the risk associated with those investments off, let's say the Spanish balance sheet, but not to go in willy-nilly losing money, then we have a problem in terms of, let's say the 25 billion we spent on AIB and Bank of Ireland. Now, we would love if the man from Europe arrived in later this year and offered us 25 billion for AIB and Bank of Ireland, right? We'd bite his hand off. We'd say, yeah, we recap those banks for 25 billion and we'd like the 25 billion back, please. But I suspect ESM is not going to be set up that way. And if you want the European taxpayers to give us back all of our money that we put into those institutions, then you're going to need some sort of separate deal and a separate deal that explicitly involves an agreement to take on losses that we have already taken on and spread them across the European taxpayer. And I suspect that that's not how ESM, at least, is going to be set up. So I'm not saying it can't happen, but it would require a level of negotiation well over and above simply saying, yes, Spanish are getting banks recapped, we want that too. You could argue there's some disadvantages if we end up selling at a relatively, you know, low price. Suppose we've got the NPRF valuation of 9.6 billion. You could say, well, maybe we're selling at a fire sale. We're losing strategic control over these important national assets. You would find that AIB and its policy towards people in mortgage arrears, Irish life impermanent policy towards people in mortgage arrears is not being made by people who work in Marion Street but by people who work in Frankfurt and Brussels. I think probably on balance that might be a good thing. But there are potential disadvantages to selling off these institutions. I think it's outweighed by the advantages. Any funds that are received can be used to pay off debt or if this is what you want to do, potentially to fund productive capital programs, to the government to decide what to do with the money. Probably more importantly, it reduces further uncertainty in relation to the state balance sheet, in relation to if these banks require further recapitalization, well, then that's going to be the European taxpayers issue and not ours. And I think that's removing that sort of tail risk uncertainty as to what happens if the economy gets in a downward cycle and then the banks need recapitalization and we have to spend more money on the banks and so on. That is cut off. There's also the question of whether or not European control of these institutions and a remaking of them in a way to make them marketable and functioning institutions could end up being to the wider benefit of the economy in the sense that if you could come up with a vehicle that removes, let's say, the tracker mortgages from AIB and Irish Life and Permanent, they could be very quickly sort of right sized in a sense. And the sort of ongoing deleveraging process could possibly be ended and they could start lending into the Irish economy again in a normal way, which they're certainly not doing now. So I think there are advantages to those kinds of deal. Which brings us to the dead bank. The issues at the dead bank are really quite different. We own the dead bank, for sure, just like we own AIB, but there's very little point in talking about the value of the IBRC, the equity of the IBRC. Nominally, the bank actually has some equity of $3 billion. But that's one year is promissory, no payments. That's not anything to get too excited about. The real problem is looking at its balance sheet. This is a bank that basically doesn't have any depositors anymore, more or less, no depositors. But a lot of fuss about the various bondholders that it owes money to, most of them got their money. There's very few debt securities left. This $5.4 billion is the balance sheet at the end of 2011. Lots of those guys have been paid off. We've given guarantees to the rest. Basically, this is an institution whose primary reason for existence now is to pay back $40 billion in debts that it owes to the Irish central bank in the form of emergency liquidity assistance. And that's the purpose, essentially, of the promissory notes. Without the promissory notes, if there were no promissory notes, the ELA debts couldn't be repaid. But everything else could. So effectively, that's what they're there for. And this whole schedule that's been come up with for the promissory notes, this $3.1 billion a year until 2020, and then after that, effectively, that's a repayment schedule for emergency liquidity assistance. So if you want to get into the small details of this arrangement, it can get very, very complicated. But the simple summary of it is basically the Irish government has agreed to provide promissory note payments to the IBRC. The IBRC owes the ELA to the Central Bank of Ireland. Central Bank of Ireland takes the ELA. And basically, the money that they created when they went and made loans to Anglo in the first place basically is taken out of circulation. There's no great upside for us in that repayment. Lots of people who have analyzed this have come up with the very clever idea of, we should just write off the ELA. Patrick Honohyn should call up the government and say, it's OK, guys, don't pay back. Well, Patrick's a very smart man. If it was possible, I think he would have done that. Unfortunately, the issuance of ELA is something that is determined, has to be done in agreement with the ECB Governing Council. And the ECB Governing Council views any sort of deferral or open-ended repayment or cancellation of ELA as illegal, and that it breaks the monetary financing prohibition. The government has also provided various legal commitments that these ELA debts would be repaid, separate from the promissory note. Ultimately, what it comes down to is to simply write this thing off would be illegal under European law. Most likely what would end up happening would be the European Central Bank would end up removing the Irish banks from its programs. There would be no more lending from Europe. It would probably trigger a massive demand for repayment. And effectively, it is a decision. It would be a decision to decide to have a national default. Now, people can talk about that, but I mean that's basically what we're talking about. So within the set of options that are available to us that probably make sense, I don't think simply just saying, we're not gonna repay the ELA actually works. My preference is to restructure the promissory notes in a way that allows the bank to work through its current assets that it has and use it to pay off the bondholders that it owes money to, to pay off the ECB to pay off all its creditors. And then at some point in a few years time we can find out, okay, how much do they have left in debts, in ELA debts? And we can start repaying that and we can do it very, very slowly. And this is not something that would require political approval. This simply requires the ECB Governing Council to do their bit and accept that part of the improving the sustainability of the so-called well-performing Irish Adjustment Program that the summit statement refers to is something that the ECB can contribute to and contribute to with a relatively simple decision. The ECB of course doesn't like ELA. It doesn't fit with its standard procedures. It's by definition a loan that is not against the standard Euro system collateral. And they would like to see ELA programs across Europe disappear. So the ECB would prefer something like the Ireland gets a big loan from the ESM to pay off ELA. So let's say we get a 30 year loan from the ESM, pay off the ELA loans and then we can gradually pay back the ESM. That's not my favorite proposal here. The underlying interest rate on loans from the ESM would be higher than the effective cost of the state of the current ELA arrangement. It turns the ELA debt into official debt that is owed to this ESM body that requires political approval throughout Europe to get such a loan. It would be widely seen as a second bailout for Ireland. Even if in Ireland it would just be viewed as swapping one type of debt for another. And at this point with things going the way they're going we have to remember that in extreme scenarios such as a Euro breakup scenario, this will be official debt that will be almost equivalent to owing money to the IMF. Whereas outside the Euro system, the Irish central bank could come up with its own bilateral arrangement in relation to ELA. I'm not saying that that's something that's going to happen but we need to think about the sort of extreme risk scenarios. At the same time, I think still thinking ESM loan to replace the ELA provided there's a very long maturity loan would still be better than the current arrangement. And certainly something should be put in place before next March 31st and a long time before next March 31st. And we can avoid the fiasco that happened this year. So some concluding thoughts. There's absolutely no doubt that Ireland was placed under pretty severe EU pressure to take on large amounts of bank-related debt. Now here I'm not really referring to the September 2008 agreement, we did that on our own. But at subsequent points, in particular in the run up to and after the September 2010 EU IMF agreement, there was severe pressure placed by the EU and in particular the ECB to have Ireland take on large amounts of bank-related debt. Now today, everybody in Europe pretty much agrees that this so-called Irish model for dealing with bank debt doesn't work. So there is a strong moral and practical case for some form of EU assistance. I wrote this on Wednesday and I'm happy to see on Friday that there is some mention of us. But people need to understand that to call today this statement a seismic change, to call it a deal breaker, is getting very far ahead of ourselves. And we've been here before, by governments' statements in the run up to the March 31st promissory note payment. Also talked about we've gotten a deal done and all sorts of things are gonna happen and that's not what happened. The retrofitting of the Irish debt is extremely complex. It's a very sui generis kind of issue at this point. The model that is being worked out by the Europeans for dealing with bank debt is unlikely to involve wholesale losses being put in individual states or being put on the EU. And so it's really a separate sort of an issue and I think that it's going to be up to the Irish government to keep this case on the agenda all the time and to keep working out imaginative and fair ways to resolve this issue. So for good or real, this is an issue that we're going to see a lot more headlines about in the coming months and I'll leave it at that. Okay.