Thursday 23 March 2017

Emmet Oliver: Government needs to move very quickly on Greek crisis

As the Greek crisis deepens, reaction in Ireland is a mixture of complacency, denial and self-delusion. The same characteristics were on display when the US sub-prime crisis first erupted in 2007.

Then politicians and analysts here said it was nothing to do with Ireland, we didn't have banks that sold sub-prime mortgages. We were told the financial system here had no great exposure to exotic instruments like CDOs and SIVs etc, it was really a US phenomenon unlikely to touch our shores.

But by September 2007 savers were queuing outside Northern Rock branches and the global inter-bank market was starting to seize up, leaving the Irish banking system dangerously exposed and scratching around for liquidity.

The Greek crisis, described by many as a Lehman Brothers for countries, is being met with similar complacency and self delusion. For example the delusion comes in speeches from cabinet members saying Greece wouldn't be in such mess if it had only taken lessons from Ireland.

While the first six months of the crisis have been all about Greece specifically, there is a tendency to believe the bond market won't take its speculative instincts elsewhere.

There is also a belief that because the government has unveiled a fiscal consolidation plan, and broadly stuck to it so far, the crisis won't envelope this small economy.

There is also a belief, voiced by NTMA chief John Corrigan this week, that we have the financial resources, in extremis, to survive a sovereign debt crisis across Europe.

However, when you are running the highest fiscal deficit in Europe, nothing can be taken for granted. The bond market decides where your borrowing costs go, not John Corrigan or the political establishment in Dublin.

Anyone who takes a cold rationale look at the European bond market this week can see that Greece, Ireland and Portugal are being singled out for special treatment, to varying degrees. Who would have thought that an Irish government, which has imposed such austerity to date, would still be faced with a situation of having to pay 3.5pc for two-year money? The bond market accepts Ireland has a plan to address its indebtedness; it's just not convinced -- yet -- it can be executed.

While some commentators toast NAMA and the recent Bank of Ireland capital raising plan, the bond market takes a different view. It still believes Ireland deserves to pay the third highest risk premium in Europe, after Greece and Portugal.

Even hopelessly indebted Britain is seen as a safe haven in comparison, due to its possession of a rather large printing press.

To head off the fallout from the Greek crisis, Ireland needs to do more convincing. Some details on how it intends to implement its plan in budget 2011 would be nice. The EU Commission has said as much. In March it said the government simply must spell out the kind of "concrete'' measures it intends to take in the years ahead. Some €3bn is meant to be taken out this year, but so far we have heard nothing tangible about how this will be done.

If government wants to avoid the spillover from the Greek crisis, it needs to very quickly start talking up its own plans to get the deficit down and stop dealing in vagueness and self-delusion.

Property meltdown fails to dent the grand plan of DAA

Every day one gets a fresh reminder of the scale of the property crash in Ireland. There is literally not a company which is unaffected by write-downs or losses caused by the collapse in residential and commercial property prices.

Even activity as tangential to the property game as aviation has been hit by the property crash. A property joint venture between the Dublin Airport Authority, Bernard McNamara and Bank of Scotland reported losses earlier this year, for instance.

Annual results this week for the Dublin Airport Authority were predictably pretty challenging, with a one-off charge of €46.5m for restructuring denting the bottom line severely.

But the company seems to be avoiding major problems arising from property write-downs. The airport, of course, is sitting on one of the biggest land banks in Dublin, and outlined plans a few years ago for a giant 350-acre commercial zone called Airport City.

Pushing ahead with this in an environment of frightening vacancy rates all over Dublin would be some challenge.

But the Dublin Airport Authority planners appear to be taking an ultra cautious view of the Irish property market, pointing out this week that Airport City will only be built up over a "25-year timeframe''.

The airport planners are also not just trying to fill this city of the future with offices and half empty hotels; instead the plan is for clean tech companies to take up residence there.

However, 25 years is some time horizon. Those with direct interests in the property game will be hoping this is not a signal of how long things will take to recover.

Market turmoil and falling shares will give Richie Boucher some sleepless nights

A few sleepless nights lie ahead for Bank of Ireland chief Richie Boucher and the well-heeled investment banks underwriting its ambitious rights issue.

Earlier this week the government said the bank's plan to raise €3.4bn of fresh capital was a vote of confidence in Ireland Inc, but already this euphoria has taken a battering.

The first test, getting institutional investors interested in the share placing, was passed with flying colours, but this was before the Greek crisis properly erupted. If the Bank of Ireland capital raising is a play on Ireland, having Irish 10-year bond yields at 5.4pc, doesn't exactly help.

In fact the Bank of Ireland prospectus makes great play of Ireland's improving reputation in capital markets. "The market's perception of Irish sovereign risk has also improved in recent months,'' is the bank's sale pitch, now made somewhat redundant by this weeks events.

The bank's shares slumped by 10pc on Tuesday on the Greek fallout and extreme risk aversion is highly likely over the next six weeks, the period when the bank seeks to finish off its capital raising, with the riskiest part, the right's issue, still to come.

The institutions are taking their shares at €1.53 a share, but events in Greece may yet trim potential for early windfall gains for them. The debt investors, who probably can't believe their luck as they exchange deeply subordinated bonds in an Irish bank for fresh equity at only a 42pc haircut, are simply looking to retain some value on their securities.

The big test is the level of demand for the right's issue, which is meant to raise €1.8bn.

When it is happening the Irish bond market may still be in disarray and some pretty big underwriters may end up being stuck with Bank of Ireland shares in a worse case scenario.

This probably means more sleepless nights for them than Boucher himself.

Irish Independent

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