Tuesday 17 January 2017

Emmet Oliver: Trichet and ECB are the biggest threat to a recovery for Ireland

Published 20/01/2011 | 05:00

Would the real Jean Claude Trichet please stand up. On January 7 the Frenchman said the following at an event in Germany: "Europe has not become an inflation community and it won't become one."

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His comments generated one simple headline around the world, 'Trichet sees no eurozone inflation danger'.

Less than a week later he said this: "Taking into account all the new information and analyses which have become available since our meeting of December 2, 2010, we see evidence of short-term upward pressure on overall inflation''.

That comment generated one simple headline -- 'ECB may be preparing rate tightening strategy'.

While Trichet's monthly commentaries are a study in creative ambiguity, his comments last week about inflation and rates were surprisingly blunt and understandably markets took the clear hint -- a rate rise is on the cards.

Could anyone really interpret this Trichet remark any other way, "we are permanently alert, we are never pre-committed not to move interest rates''.

Yesterday the ECB appeared to be leaving Trichet in an isolated position, as several members of the ECB governing council backtracked furiously and said while inflation might tick up for a short period, it would stay very close to the ECB's 2pc limit.

"We do not see a need for an interest rate change in the foreseeable future,'' said the head of the Austrian Central Bank, Ewald Nowotny this week. Even more stark, Bundesbank president Axel Weber said he expects inflation to stay below 2pc in the "medium term''.

All of this can arguably be explained as the usual guessing game that goes on between the markets and Trichet/ECB, except that the ECB yesterday was scolding the markets for over interpreting last week's comments, which, remember, sent the euro soaring.

But in this case, that charge seems unfair and the problems really relate to the ECB not preparing a coherent, consistent message for investors.

Unfortunately this ambiguous approach leaves recession-battered Ireland in a very tough place. An interest rate hike is now arguably the biggest risk factor facing the Irish economy.

Not only would it pile further pressure on 600,000 homeowners, it would also trip a dangerous switch in the commercial property market, where many developers and businesses have loans tied to the ECB rate.

There is also a gigantic refinancing challenge facing developers this year as they have to take out fresh loans at higher rates, potentially causing them to either collapse or go into arrears, which in turn shatters the business plans of NAMA.

The current funding landscape is already pretty dismal for Ireland, as extremely wide spreads on Irish sovereign debt force up the cost of bank funding, which is then passed on to variable mortgage holders.

Whatever seems to happen Ireland's interest rate requirements never seem to align with those of Germany or so-called "core'' Europe.

Rates were too low when we adopted the euro in 1999, stayed too low during the property boom and now look like being too high when we attempt to exit recession.

Of course Trichet's job is not to worry about growth and recovery in Ireland.

But ironically if the ECB tightens rates later this year, this is only likely to force the Irish banks to increase their dependence on the ECB/Central Bank for liquidity support even more, causing Mr Trichet a fresh headache.

Norkom deal gives tech Ireland a boost

The purchase of IT security company Norkom by BAE -- at a hefty premium -- shows that Irish tech companies are still developing niche products that large multinationals have failed to originate themselves.

To attract a suitor like BAE Systems, Europe's largest defence contractor, indicates that Norkom possesses an impressive intellectual property advantage over other IT specialists.

The pleasing thing is how quickly the firm was able to reach a point where BAE was prepared to make such a generous cash offer. The company is only 12-years-old and only five years a listed company and had four other suitors waving cheques at shareholders, apart from BAE.

Also unlike other Irish tech companies that were purchased by overseas players, like Iona for instance, the management team that has built up Norkom is planning to remain on at the company, helping Ireland to retain much of the intellectual capital that was invested in Norkom on this island.

Few signs of life in the Irish stock exchange

Before the financial crisis erupted, investors used to believe in several ridiculously quaint ideas.

Chief among them was if you wanted to take the true pulse of a country, you looked at its quoted companies and its stock exchange.

This notion was carried even further. If an economy was in recovery mode, you would see it first among quoted companies, who are more disciplined and produce fresher financial statements than private firms.

If you perform that exercise now in Ireland the vital signs are not entirely encouraging, but as ever, it depends when you take the measurements.

The last few years have been horrendous for the Irish stock market, with the ISEQ tumbling from a Celtic Tiger peak of 9,981 in 2007 to this week's small and not perfectly formed 2,932, a crash of over 70pc. The main Irish stock exchange is now only worth €41bn, with CRH making up over a quarter of this diminished value.

But for those who buy on the dips (or arguably the floor), life looks a little different.

The ISEQ is up this year by a perky 47pc, well ahead of the S&P 500 for example. Of course its main attribute is cheapness -- for example FBD could be bought this week for just four times its earnings.

However the bruised ISEQ doesn't even have a positive price earnings (P/E) ratio such is the lack of profits. It does, however, have some decent dividend payers (C&C, FBD, Greencore etc) and actually gives investors some exposure to markets outside recession-clouded Ireland (Ryanair, CRH, Paddy Power).

The property composition of the index has also been reasonably diluted and the old joke about the ISEQ being a giant building site with Ryanair and Elan attached is no longer valid.

Unfortunately none of this seems sufficiently alluring for European investors, who have been looking elsewhere (the FTSE 100 is up 156pc this year so far) for both yield and capital growth. The ISEQ is meanwhile range bound, with the exchange finding very little reason to go beyond 3,000.

Depending on your preferred form of measurement, this is either a once-in-a-lifetime moment to buy, before the banks get fixed up with fresh capital, or is simply the now permanent value of Ireland's quoted companies. Unfortunately by the time we find out, it will be too late to book the profit (or avoid the loss).

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