Tuesday 20 March 2018

Richard Curran: May's June jump could smooth the path towards a softer Brexit

The bell tolls for Britain in Europe – but it might be a Brexit-light if May gets her way. Stock picture
The bell tolls for Britain in Europe – but it might be a Brexit-light if May gets her way. Stock picture
Richard Curran

Richard Curran

The simple narrative around Theresa May's decision to call a snap British election is that she wants to crush the Labour Party so she can ram through a hard Brexit in line with most of her public rhetoric on the subject up to now.

Under this simple narrative, the consequent wipeout of the Labour Party in June brings the country even closer to a hard Brexit that will be bad for Ireland.

However, it is just as likely that having triggered Article 50 some semblance of reality is dawning on Theresa May's government about what kind of deal is practical, achievable and what no deal with the EU might actually mean for the British economy.

The first inkling of a change of stance came just two weeks ago when Theresa May acknowledged that a transition arrangement lasting up to several years might be required which would still see the UK part of the EU with its immigration rights, European Court of Justice and bureaucracy up to around 2021 or 2022.

In the meantime, it will have to negotiate how much it will have to pay Brussels by way of compensation for leaving, a bill that could realistically hit £30bn. Immediately, a new phrase entered the post-referendum lexicon - the 'Brexit betrayal'. May was accused by hardline Brexiteers of betraying the vote of the people. Those hard-liners in her own party, who would prefer no EU deal, number more than her current slender majority.

This left her politically vulnerable. The smart thing to do is hold a general election, win a much bigger majority and be politically isolated from accusations of betrayal.

There are signs, not so much of a softening of Downing Street's position, but of reality dawning about what is achievable and best for the UK in the long run.

Recent speculation talked about senior figures accepting privately that they cannot achieve what was promised in the referendum campaign.

More companies are beginning to execute their post-Brexit plans which involve shifting jobs and operations abroad. The FTSE 100 is in negative territory so far this year. Retailers in the UK are beginning to feel the pinch. Inflation is rising. Investment by British companies is slowing down. One company, the London-based currency exchange operator LMAX Exchange, has even stalled its plans to set up a European hub in Dublin.

Having clearly decided that London would lose its passporting rights for financial services, it is now questioning whether this will happen. Does it detect a softer Brexit which might allow a continuation of these rights?

The greatest challenge to a hard Brexit will be the harsh economic reality of it. The greatest challenge to a soft Brexit will be accusations of betrayal from within the most hardline elements of the Conservative Party. A whopping great majority will neuter that. It may allow Theresa May to push through a softer Brexit without relying on votes from outside her own party.

Well, here's to hoping anyway.

Housing pain looks set to continue in log-jammed market

The good news on property prices is, have no fear, this is not a bubble. The bad news is that if you cannot afford to buy a house right now, you might not be able to buy one for a while. This isn't a bubble yet because while house prices are rising at a rapid rate, it is confined to relatively small numbers. During the boom, house prices rose on the back of widespread demand and widespread supply, all paid for by enormous debt.

Ten years ago around one third of every mortgage taken out was a 100pc mortgage. Today, there aren't any. In 2016 almost €40bn worth of new mortgages were given out. Last year it was €5.6bn or just one seventh of the figure a decade earlier.

Just because house prices are rising by close to 20pc per year in places like Longford, Roscommon or the south east, doesn't mean things are getting out of control.

Nationally, house prices are still 30pc below their 2007 peak. Yet, in Dublin for example rents are 8pc higher than they were at the height of the boom.

It is a no-brainer for people who can afford to buy a house with a view to renting it out. Unfortunately, everybody else is log-jammed in a market with huge demand and not enough houses.

There is every reason to think that prices will continue to rise further, but perhaps not as quickly. The areas of the country with house prices that rose by 15pc or more in the year to February 2017 were: border counties (excluding Louth) up 16pc; Midlands up 15pc; West up 19.5pc and the South East up 19pc.

Investors who cannot get a decent return on their money in bonds, savings and other investments have been snapping up properties in regional cities like Galway, Limerick and Cork. Now house prices are starting to rise rapidly in areas which had up to now enjoyed very little gain.

Is it getting out of hand? It depends on your perspective. The average price of a house in Dublin 6 is now €724,000. The median price of house in Clones in Co Monaghan is €50,000.

A bubble isn't the problem with our housing market today. It is simply that the social and financial cost of exorbitant rents and too many people chasing too few houses is likely to continue.

As long as the Central Bank keeps the banks under control on lending, we won't get a chance to go mad again. But the pain is likely to continue.

Noonan should push AIB float button sooner rather than later

One company which cares greatly about the housing market is AIB. The bank has around one-third of new mortgages issued and the performance of the mortgage market in the next few years will be vital not only to its longer term profitability but also to its shorter term value.

Earlier this year Michael Noonan said there were two obvious windows for conducting the IPO of 25pc of the bank - one was late May to June and the other was the autumn.

With the way US stock markets have stalled after an initial Trump bull run, there might be a case for going ASAP. Sentiment towards the Eurozone has improved compared to the US, but political uncertainties in France for example are still a factor.

A new French president will be proclaimed on May 11. If it isn't the "euro-bashing" Marine Le Pen, then the way might be clear for AIB to push the button.

Autumn could get messy as an IPO window. It could be a window for a general election at home - an opportunity that may be seized by Fianna Fail. New government, new rules and more new politics might leave AIB sitting on the IPO runway for even longer.

As the British government prepares to sell off its final 2pc of Lloyds Banking Group at a profit, after beginning the sell-offs in 2013, AIB is at the starting line for a disposal of some the State's ordinary shares in the bank.

It emerged during the week that Canadian investor Prem Watsa bagged €566m in profit from his investment in Bank of Ireland back in the depths of the crash. The state has already got its money back on Bank of Ireland and is sitting on a 14pc stake worth a further €1.2bn.

The State has so far received €6.6bn from AIB in fees, preference share sales and buybacks. There's about another €14bn to go to break even on the bailout. Advisers have already been appointed and some initial presentations to potential investors have been done.

The mood music suggests it won't be long now.

Sunday Indo Business

Business Newsletter

Read the leading stories from the world of Business.

Also in Business