Wednesday, 1 September 2010

Zombieland 2...The sequel...

Welcome to Zombieland 2, the Sequel !!!

The latest trailer featuring:

Zombie banks, zombie hotels, zombie rates, zombie returns and brainless politicians...

What is a zombie bank:

A zombie bank is a financial institution that has an economic net worth less than zero but continues to operate because its ability to repay its debts is shored up by implicit or explicit government credit support. The term was first used by Edward Kane in 1987 to explain the dangers of tolerating a large number of insolvent savings and loan associations and applied to the emerging Japanese crisis in 1993. Zombie institutions face runs by uninsured depositors and margin calls from counterparties in derivatives transactions

We had zombie banks now we have zombie hotels, like in Ireland for example:

"At least 200 hotels opened during Ireland’s decade-long economic boom, leaving a glut of rooms and mountain of debt as the number of visitors dwindles. While some establishments cut their losses and shut, others are lowering prices to stay in business and avoid repaying tax breaks if they were to close.

Irish hotel occupancy slumped to about 54 percent in 2009, the lowest level since the early 1980s, as the economy fell into its worst recession on record, the hotels federation said. In 2007, the height of Ireland’s boom, the figure was 64 percent.

The numbers of trips to Ireland fell 20 percent in the two years through June 2010, the Central Statistics Office said on Aug. 27. Hotels have almost 7 billion euros ($9 billion) in bank borrowings, equivalent to about 111,000 euros per bedroom, according to figures from the industry group.

Sixty percent of hotel loans at Allied Irish Banks Plc, the country’s second-largest lender, are classed as “criticized,” either closely watched or in trouble, Managing Director Colm Doherty said Aug. 4. Britain’s Lloyds Banking Group Plc, among the biggest lenders to Irish hotels, said this month it’s pulling out of Ireland."

Ireland’s National Asset Management Agency, created by the government to purge banks of risky real-estate loans, has taken control of 48 loans secured on hotels. In the latest batch of loans, hotels accounted for 23 percent of the assets bought by the agency.

“The big problem that the industry faces at the moment is that banks are keeping hotels open that would not normally survive,” said Charlie Sheil, manager at Dublin’s four-star Gibson Hotel. “They are being propped up by the banks, which is causing major damage to a lot of the good hotels.”

And this is what happens in a zombie economy suffering from acute deflation.

The Irish banking system is indeed a very big black hole:

“Anglo Irish has proved to be an even larger black hole than anyone imagined,” said Bill Blain, joint head of fixed income at Matrix Group in London. “There are worries that the cost of banking recapitalization is now beyond the reach of the government.”

"Aug. 30 (Bloomberg) -- Ireland’s bank recapitalization may cost a total of 39.9 billion euros, acccording to fixed-income specialist Glas Securities.

A total cost of 39.9 billion euros is a “reasonable forecast,” Dublin-based Glas said in a research note today. The final net cost to the government will probably be 32.9 billion euros after 7 billion euros invested in Bank of Ireland Plc and Allied Irish Banks Plc is recouped."

Allied Irish Bank this month reported a record loss for the first half, losing 2.03 billions Euros over 6 months largely as a result of continued losses on its lending on Irish real estate...and Anglo Irish a whooping 8.2 billions Euros.

Total support for Anglo Irish amounts to 22.9 billions Euros so far and will cost 25 billions to the Irish taxpayers according to its CEO Mr Aynsley but S&P put the figure at 35 billions Euros.

"Yesterday's results also revealed that:

More state cash may be needed, depending on the discount placed on future loans going to NAMA.
About €600m of loans that went into NAMA are worthless as they were secured on nothing more than personal guarantees.
Deposits of €5.5bn have flowed out of the bank in just six months, with the turnover cut in half.
The bank gave €1.1bn of fresh working capital to developers to finish off schemes and developments.
It expects to be forced to take over more struggling businesses, like Arnotts, in Ireland, but also in the US."

Zombie banks often have a large amount of nonperforming assets on their balance sheets which make future earnings very unpredictable...ouch...

This year, Ireland budget deficit will amount to around 29% of GDP...

To conclude, please find below's an extracted comment from Brendan Brown, chief economist at Mitsubishi UFJ Securities International Plc, from a Bloomberg article:

"The biggest danger for European monetary stability is that the ECB pins interest rates near zero for too long. As the world economy rebounds, say, into 2011-12, the ECB will have its eyes on those mega-billions it lent to zombie banks and sovereigns. A significant increase in key money-market rates may be the trigger for an even more threatening round of credit quakes."

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