Monday 18 December 2017

Emmet Oliver: Department of Finance review will not shock too many

AMID the economic carnage there is no shortage of work these days for sharp-suited consultants capable of writing up reports on what caused the Irish financial crisis.

The Financial Regulator has faced a review, the Central Bank has been reviewed, now it's the turn of the Department of Finance.

While it is understandable all these institutions want to look inward after such an economic catastrophe, the Department of Finance itself has already alluded to why it performed so poorly in the final years of the economic boom.

The Secretary-General of the Department, Kevin Cardiff, told an Oireachtas committee only a few weeks ago that it simply does not have the necessary expertise to engage with the realities of a globalised financial and banking system.

Even those private sector applicants who apply to bulk up the expertise are very often lacking in the kind of skills required, Mr Cardiff also said.

As a result, a whole raft of key functions at the department are sub-contracted out to consultants and advisers, which increases the danger of conflicts of interest, never mind exorbitant fees.

The other key problem seems to be that the heads of the Central Bank and the NTMA appear over time to build up their own empires and their power can sometimes rival that of the minister of the day.

For example, NTMA chief Michael Somers was even allowed to keep his annual salary secret from those who were paying it.

John Hurley, the former governor of the Central Bank, made a whole litany of blunders in his role, but there is no record of the Department of Finance pulling him into line.

Of course the Central Bank is an independent office of the Government, but maybe it's time for a better department with more interventionist instincts -- though the ECB would be unlikely to allow that.

In its defence, the Department of Finance is an arm of the civil service, it does not make the final decisions, ministers do, and often they make atrocious ones regardless of the Sir Humphreys in Merrion Street. Ultimately when the Department of Finance cocks up it costs us all heavily, particularly when the mistakes arise in the budgetary area.

No doubt the review of the Department will discover -- shock horror -- that bad decisions get made because politicians often ride roughshod over their civil servants who are too meek to challenge them.

Like a lot of the other recent reports, would such a finding really constitute new information?

Quinn Insurance now difficult to value

Forget the reports of 40 suitors queuing up to buy Quinn Insurance because when the process gets properly serious the buyers will be whittled down to a shortlist of four to five.

But valuing the business is going to be the most inexact of sciences for this small group. Quinn Insurance lost money in 2009 and 2008, and it's not entirely clear what kind of outturn is likely in 2010. A €10m redundancy charge will have to be included in the 2010 numbers, making things more difficult, and a loss of some kind is likely despite the surgery performed by the administrators.

If a loss is registered for 2010, Quinn Insurance is going into the sales process on the back of three years of losses -- albeit they occurred during the greatest financial crisis since the Great Depression.

Before the credit crunch, the company could manage earnings of €245m or an average of €266m if taken over a five-year time horizon. Clearly those kinds of profits are gone forever -- they were possible because the Irish insurance industry in that period was in something of a 'sweet spot' in terms of profits.

Quinn Insurance itself also bolstered its profits with an aggressive investment performance and pricing strategy, both of which are no longer sustainable.

This is a pity because, these days, profitable insurance companies trade on good multiples. Allianz and Axa are trading at 6.5 and 9.2 times their respective profits. At the lower end, this would have left pre-crisis Quinn Insurance worth something like an eye-watering €1.5bn.

Unfortunately for Quinn, there isn't much earning potential available in Irish insurance these days -- FBD for instance lost €35m in 2009.

With premium income dropping across the industry, investment income recovering but still volatile, property assets needing to be written down, and claims going up due to the recession, valuations for Irish insurance companies are only going one way -- down.

All these arguments are likely to feature in the bids submitted by interested parties. Ultimately, the price will be decided on the basis of whether Quinn Insurance can ever get back to its pre-crash business model, and that seems highly unlikely. Still, the surgery done by the administrators will at least provide evidence to buyers that the new business model, however modest, is a sustainable one.

UK gets to take the scenic route

UK chancellor George Osborne thinks the UK is in danger of becoming the next Greece unless its pushes through harsh austerity measures which started with Tuesday's budget. Osborne has been donning a thick hairshirt and making all sorts of pronouncements about Britain being on the "road to ruin" and such like.

While the UK has a horrible budget deficit of 12.6pc, the road-to-ruin stuff is a little excitable, if not outright ridiculous. The cost of borrowing for Britain -- 3.46pc for 10-year money -- is hardly ruinous and even talk about tackling the budget deficit has pushed down UK government bond yields to their lowest level in a year, never mind what Osborne actually manages to do.

As in Ireland the adjustments are being made on the spending side, with tax increases only providing a quarter of the savings. Osborne and before him the Labour Party have benefited from what I call a "big country privilege". Ireland's fiscal austerity programme started almost two years ago, whereas our British cousins are only starting now and at a slower pace. Would this be anything to do with the UK's size?

The bond market has been ultra-patient with the UK economy and has not forced the country down the fiscal austerity route too early. Ireland, meanwhile, is still paying 5.4pc borrowing costs, despite cutting deeper and faster.

While much of the higher charge we pay relates to the banks, there is little doubt that the UK benefits from the size of its economy. Asset managers, pension funds and banks across Europe have to buy some British gilts, regardless of their rising deficit, whereas Irish government bonds are a take-or-leave investment proposition for these same buyers. Its not fair or very logical, but it is the reality we face as this year's Budget looms.

Irish Independent

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