Monday 24 October 2016

Trichet gave us all a hard lesson in EU 'realpolitik'

Published 13/09/2015 | 02:30

Jean Claude Trichet: laid down law to Noonan
Jean Claude Trichet: laid down law to Noonan

The most dramatic evidence on the closing day of Banking Inquiry hearings was the story Michael Noonan told of the phone calls he had in March 2011 with the then head of the ECB Jean Claude Trichet.

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Trichet warned him that burning €3.7bn worth of Anglo Irish Bank bondholders would be treated by the markets as a default. Trichet warned about a (metaphorical and financial) bomb going off in Dublin and said it might not be possible for those in financial services in Dublin to finance their businesses, according to Noonan.

Trichet, of course, denied saying this at his public appearance in Dublin earlier this year. Noonan told the story well but didn't say too much about his counter-arguments to Trichet's comments.

Of course, Trichet was going to be opposed to the move. Noonan must have expected that. And surely the new Fine Gael government had been given solid advice on the implications of burning those remaining bondholders.

Noonan said he was going to announce the plan following a request from the Government to do so. It is a little perplexing that Noonan didn't fire back the reasons for the move to Trichet and go ahead anyway. He must have expected this reaction and after all he was just minutes away from announcing it in the Dail.

Instead, he spoke to Enda Kenny and then backed away. The story gives the impression that perhaps Noonan was not totally convinced about the merits or consequences of the plan, even though he was very close to pushing the button on it.

Both Fine Gael and Labour had been very bullish while in opposition about re-negotiating the deal. Burning bondholders was part of the rhetoric while Labour's Eamon Gilmore had talked about "our way or Frankfurt's way" in the heat of the pre-election battle.

In the end, Noonan thought the better of going ahead and opted to use whatever limited brownie points Ireland had accumulated to improve other aspects of our debt bailout.

Burning the remaining senior bondholders at that time would have saved around €3.3bn if they got 10c in the euro.

The coalition government went on to get an extension on some debt repayments and reduced interest rates. Getting clearance to replace the Anglo promissory notes will save around €1bn per year in interest and getting permission to replace IMF debt with cheaper borrowing will save another €400m per year in interest.

It was a good deal but not a great deal. Extending debt repayments means we end up paying more but in the latter years the repayments will be relatively lower.

It just makes our debt more manageable in the more immediate and tougher years.

Noonan also told the inquiry that Ireland's debt-to-GDP ratio would come down to under 100pc next year, from a high of 121pc in 2012, and the cost of the banking crisis would come in about €30bn to €35bn.

The banking crisis figure is based on getting all €20bn back from AIB and it isn't clear how much from Permanent TSB. Possible losses on PTSB may be offset by a profit on the remaining 15pc stake held in Bank of Ireland.

These figures do not take into account the interest bill on the borrowed money used to bail out the banks, which will run to billions, and the opportunity cost of the crisis.

Back in 2006, our national debt was €43.7bn or just 25pc of GDP. Today, it is over four times that.

We can give out about Trichet all we like, but he gave us all a hard lesson in EU "realpolitik" and there is very little we can do about it now.

Roll up and get the last of the cut-price hotels

Dalata Hotel Group chief executive Pat McCann is not hanging about. Having spent €524m on hotel acquisitions in the first half of this year, he is ready to go again. This time, it could be a bid for the Gresham Hotel and two other Irish hotels which the group happens to manage.

McCann has just raised €160m in a share placing to fund the next round of acquisitions. Naturally, he has to express reservations about hotels like the Gresham, because he doesn't want to seem too keen with a large cheque book in his pocket.

"We are not going to buy properties just for the sake of buying properties", he said during the week. McCann said he would take a look at it if it comes on the market, but warned: "If it doesn't meet our investment criteria, we won't do it."

He did signal that the Gresham could go for somewhere north of €60m. It is a 301-room hotel, which suggests a price tag of close to €200,000 per room.

The Gresham and Metropole Hotels in Cork were together valued at €48m by their parent company in December 2013. The Metropole recently sold for €5m, reflecting a valuation of around €43m, plus the upside for the Gresham in the last two years. Both hotels together made an operating profit of just €1.8m on a turnover of €17m that year.

McCann has to thread a tricky path here. Raise millions to buy hotels - and then be willing to walk away if the deals don't look right. Could the money end up burning a hole in Dalata's pocket?

Investors are backing the expansion to the hilt. Shares in the group went up to €4.21 last week, despite the placing, on the back of strong half-year figures.

It was the second time Dalata has gone back to the market to add to its war chest. McCann has used the money to build up the largest hotel company in Ireland in the space of less than 18 months.

Some investors feel the real bargains are now gone in Irish hotels. They are likely to be private equity 'buy and flip it' merchants. Dalata has the advantage of being a hotel operator. McCann knows where he can extract further value, synergies and also drive a hotel's business forward.

He knows his business from the ground up. But he is also a man in a fierce hurry.

The right way and the wrong way to close down a business

Clerys has become the template for how not to close a department store. Noel Smyth's approach to closing Boyers, the loss-making part of the Arnotts Group, couldn't be more different.

Clerys owners stripped out ownership of the building from the trading company, charged the trading company huge rent and then flogged off the building, which left staff and creditors to the wolves.

Noel Smyth, who recently took control of Arnotts and Boyers, was never going to make the same mistake.

Boyers put up a notice during the week saying it would be closing in the New Year.

Unions have been consulted. Staff will be given redundancy and possibly the chance to keep a job by transferring to Arnotts. There is no easy way to do it but Smyth appears to be doing the right thing by people involved.

However, he still has not announced the details of his retail partnership to run the Arnotts store. His company is investing around €100m to buy the business but he has yet to tie down the deal over who will run it. There have been conflicting media reports about the status of the deal, originally thought to be with Galen Weston.

Perhaps the Boyers move had to be done and dusted before a contract is signed or maybe Smyth simply couldn't wait any longer on the Boyers issue.

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