Saturday 17 February 2018

Emmet Oliver: New reality about Greece could help our predicament

The impossible very quickly becomes the possible when enough pressure is applied. That appears to be the lesson of this week's events in Greece. It is a lesson likely to be applicable to Ireland in time too.

Since the Greek crisis began early last year, the only policy option put on the table by the EU/IMF/ECB was spending reductions, taxation increases and asset sales. (This was accompanied by a more general attempt to get the Greeks to actually pay their taxes and be honest about their debt statistics).

Arguments that holders of Greek debt should be press ganged into sharing some of the burden were dismissed until very recently by the three organisations listed.

They argued that such an approach would cause wider European contagion and Greece's problem was not its overall stock of debt, but its annual budget deficit. Both these objections were later discredited or simply by-passed by events.

The catch-cry of that period was countries aren't like companies -- European debt is and always will be effectively risk free like US Treasury debt.

In other words, debt is debt and, no matter how big, must be paid as per the original conditions under which it was advanced.

However, this argument has crumbled in a matter of just a few days as French and German banks have been 'persuaded' -- mainly by Germany -- that yes they must share some of the burden needed to keep Greece from default in the short term.

In fact, the German and French banks, both with huge exposures to Greek sovereign and Greek bank debt, far from being rigid and un-cooperative, have been strangely mute in their objections to what politicians are essentially imposing upon them.

Of course, what they are getting for rolling over their Greek debt is better than having to deal with a full-on default, but it still means not getting all their money today and hoping to get more of it later. The banks are accepting something a banker should never accept -- money tomorrow is never as valuable as money today.

Under the plan the banks will reinvest half of the proceeds of maturing Greek debt in new 30-year bonds paying 5.5pc interest plus a bonus linked to Greece's GDP growth rate. Of the other half, 30pc would be paid in cash and 20pc would be invested in a "guarantee fund" backed by the wider EU.

While this may ultimately be more than they would get under a default (Citi reckon a default would see haircuts of about 70pc on Greek debt), it is still a larger dollop of burden sharing than any European banks have accepted so far in the financial crisis, with the exception of Denmark and Iceland.

In that context new ground is being broken here. It means that bondholders in Anglo Irish and Irish Nationwide are less secure than ever before, if the three bodies mentioned above are now fully accepting that the private sector must play a part in restructurings of what is sovereign or quasi sovereign debt.

It may also mean that in future Ireland will be able to table some kind of rollover deal, in exchange for avoiding a full messy disorderly default. But ultimately what it means is that EU policy makers are finally recognising that when it comes to debt, countries are not so different to companies after all -- a deal has to be done and debt has to be restructured.

Social media success evades even wily Murdoch

Rupert Murdoch's looks like being the latest corporate remains to be buried in the social media graveyard. Already interred there is Bebo, but Murdoch's outlay on myspace means he may not even care for a decent burial.

Acquired for $580m (€404m) in 2005, the purchase price was regarded as a snip at the time and Murdoch himself -- in a rare brain freeze -- claimed the site was worth an astonishing $12bn. Today its worth $100m at best, with two private equity companies willing to take a risk that it can be re-invented in a way that allows it to avoid its nemesis Facebook. It's all about monetising now, man. With its years of withering losses for Murdoch, myspace is lesson number one in how a social media brand can fizzle and then fade before it adds a single cent to the bottom line.

However it did lose out to Facebook which nowadays turns in a net profit (over nine months) of $335m, on revenue of $1.2bn, a healthy 28pc profit margin -- not something virtually any old media company can boast of.

The problem of course is profits remain all too elusive for social media companies. From Twitter to Groupon there is an ocean of subscribers, but no profits. Groupon in 2010 disclosed 83m subscribers, but a loss of $390m, Twitter meanwhile is also believed to be loss-making.

Subscribers come easily, but those with credit cards at the ready don't.

In May myspace was visited by an astonishing 74m visitors, but this did nothing to move it into the black.

Of course markets ignore the red ink for now -- for example LinkedIn starting trading at 980 times annualised earnings and nobody was looking around for the lifeboats.

With virtually no social media companies coming to market in Ireland, this may just be one of the few global bubbles that Ireland manages to avoid.

Inflated pay in the semi-states an issue for our politicians too

In some respects it is a surprise anyone wants to serve on or chair a State board, including the Dublin Airport Authority (DAA).

The board fees -- ¿16,000 a year -- in corporate terms are miniscule and represent just 17pc of a TD's starting salary.

David Dilger who chaired the DAA up until a few weeks ago was paid ¿31,000 for his work. When he was at Greencore as chief executive he was paid ¿1.4m, including pension contribution.

With fees so low, boards tend to be filled by politi-cal worthies, accountants or solicitors and the usual smattering of worker directors. As a result Irish semi-state boards generally wouldn't scare a mouse, never mind tell a chief executive he needs to adopt some restraint in the ultra sensitive area of pay.

In the light of DAA CEO Declan Collier claiming performance bonuses of ¿106,000, one wonders is the problem the CEO simply not 'getting it', or the boards who fail to confront the chief executive over a pay package completely out of line with current economic realities?

Previous governments thought they were being smart by opening the way for semi-state CEOs to be awarded bonuses of up to 35pc of their basic salary -- which in Collier's case would be approximately the ¿106,000 he was recently awarded. Board members may have had to approve the arrangements as he was contractually entitled to the money.

The theory sounds fine, grow the profits and you grow your remuneration. But, of course, the semi-state sector is replete with businesses that face no effective competition.

From CIE to Bord Gais to the DAA to Bord na Mona, these companies -- in large parts of their operations -- have no competition, making judgments about management performance almost impossible.

Back in the salad days of the boom, it was suggested that the DAA face rigorous competition by giving Terminal 2 over to a private sector player to run, allowing DAA's management of Terminal 1 to be at least benchmarked directly in an Irish context.

Unfortunately the last government, in the form of Noel Dempsey, abandoned such an idea -- after paying ¿700,000 to study the concept first of course.

Any chance of truly benchmarking the DAA was lost after this decision.

While primary responsibility for inflated salaries in the semi-states must attach to those claiming the salaries, the politicians and the semi-state board members themselves are also very much part of the problem.

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