independent

Thursday 17 April 2014

Richard Curran: The truth behind the two myths of Cowen

THERE are two big myths about former Taoiseach Brian Cowen. The first is that, as Taoiseach, he was totally responsible for the country's awful descent into an IMF bailout in late 2010.

The second is a myth he has propagated himself and it is that as minister for finance he did away with the damaging property tax reliefs that fuelled part of the property bubble.

They are both wrong. In his TG4 interview, his first since leaving politics in 2011, he refutes the idea that it was all his fault and he stands over the bank guarantee. He does, however, suggest that he takes full responsibility for his part in the economic collapse, without identifying what he believes his part was, or what taking responsibility for it actually means.

There is no apology. There are no obvious consequences, other than a cut to his pension, which has been applied to all former Taoisigh. It is a kind of non-responsibility, because it doesn't seem to mean anything.

It is clear that when Brian Cowen took over as Taoiseach in May 2008 the bomb that was Ireland's economic implosion had already been well and truly primed. Cowen could have done little to dismantle it.

Except that he could have stayed on top of what was happening since the previous August in the credit crunch, with a view to formulating a policy response other than the one we got. This consisted of sitting in a room at 2am in late September, with very few independently verifiable facts and a possible run on the banking system about to take place in the morning.

Cowen had played his part in priming the bomb before he became Taoiseach. His biggest mistakes in government were at Cabinet in Bertie Ahern's disastrous second term government from 2002 to 2007.

This brings me to the second myth. When Cowen took over as finance minister in 2004, he ordered a review of property tax reliefs with a view to scrapping them.

When he announced in December 2005 that he was getting rid of them, he actually extended several of them in order to provide an orderly wind-down. Some were extended by six months, others by two years. From inception until mid-2007, these reliefs had a gross Exchequer cost of €3.2bn. Several billion euro worth of construction projects were completed between 2005 and 2007 that should have been stopped.

In his TG4 interview, Cowen said that at every turn he did what he believed was best for the country. He believed in a soft landing. It cost him his political legacy. It will cost others their homes.

By 2003, the Irish banking system had breached several key traditional thresholds. Lending to the property sector was too high, too much money was being sourced in wholesale money markets, traditional loan to deposit ratios were shot to pieces and house price metrics had gone off the charts.

Cowen didn't become minister for finance until 2004. In office, he sanctioned enormous increases in day-to-day expenditure while continuing to cut taxes, including income tax, extending tax reliefs and halving the betting tax in 2006.

In his first budget speech as finance minister in December 2004, he said: "While this is my first budget as minister for finance, it is not the first time I have been involved in the budgetary process. Any budget should reflect government policy and the economic realities of the time, as well as the economic and social demands of the future. The budget is an initiative of government as a whole and not simply the work of the minister for finance."

So it is collective non-responsibility then.

Takeover just won't fly

Seven years ago, it looked like the smartest business coup ever. Ryanair chief executive Michael O'Leary caught Aer Lingus management, staff and the Government completely by surprise when he started buying up shares in the airline. After practically rubbishing his competitor for years, he snapped up 16 per cent of the former national carrier at an average price of €2.42 per share. He later increased it to 29.8 per cent.

Three unsuccessful takeover bids later and O'Leary has spent around €400m of Ryanair money, on an asset that today is valued at around €265m, as Aer Lingus shares trade at €1.67.

O'Leary has his reasons for persevering with a doomed takeover. But shareholders are likely to remain indulgent of O'Leary's project. He has kept the internal takeover team quite small, so it wouldn't interfere with day-to-day management. It clearly hasn't distracted that much and probably has been a bigger distraction to Aer Lingus management than O'Leary's team. When he launched his first bid in 2006, Ryanair was carrying 35 million passengers per year. Now it's 80 million.

O'Leary is likely to use every legal challenge possible to stall the forced sale of the Ryanair stake in Aer Lingus. When the inevitable happens, it will simply be the realisation of an investment that is already lost. But don't bet on an Aer Lingus takeover shortly afterwards. The Government just doesn't really want to sell.

Place your bets here

Up until this year, Paddy Power chief executive Patrick Kennedy hadn't put a foot wrong at what has become a €3bn business. Exponential growth saw the share price rocket and the massive rise in earnings and revenue reported last week show what has been achieved. But such a meteoric rise brings meteoric expectations.

Davy Stockbrokers flagged some time ago that Paddy Power's advance into Italy was proving difficult. Its giant American opportunity, on the back of gambling deregulation there, on closer inspection, looks more like a good long-term opportunity rather than a licence to print money.

Last week's interim figures were brilliant by many companies' standards – a 12 per cent growth in EBIT; 25 per cent growth in EBIT in its Australian online operations. But it was not quite what was expected.

Forces outside the company's control such as currency and sports results were flagged as drags on the second half performance, which never sounds good from a management team.

At €60.55, the shares are down 14 per cent from their high of April. The stock is trading at around 22 times earnings. It warrants a much higher premium than the 13 and 14 times earnings of Ladbrokes and William Hill, but it does look pricey.

rcurran@independent.ie

Sunday Independent

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