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Government must not throw away our QE edge


BRAVE MOVE, MINISTER: Expect Transport Minister Pascal Donohoe to make his decision on the sale of Aer Lingus out of political, not economic, necessity. Photo: Damien Eagers

BRAVE MOVE, MINISTER: Expect Transport Minister Pascal Donohoe to make his decision on the sale of Aer Lingus out of political, not economic, necessity. Photo: Damien Eagers

BRAVE MOVE, MINISTER: Expect Transport Minister Pascal Donohoe to make his decision on the sale of Aer Lingus out of political, not economic, necessity. Photo: Damien Eagers

Back in the old days, when governments decided to print money they tended to use it to pay contractors to build bridges and roads, pay civil servants higher wages or simply just pay off their sovereign debts.

It meant there was a direct injection of cash into people's pockets.

Money became so devalued, or the story goes of the Weimar Republic in 1920s Germany, that people had to carry their wages home in a wheel barrow.

The very softly named 21st Century version of all this is called Quantitative Easing, or QE. It doesn't sound quite as panicked as "printing money" and since the current financial crisis began it has been used very effectively in the UK (£375bn of QE) and in the USA ($3.3trn of QE).

And there isn't a wheel barrow in site in those countries - so far anyway. That is, with QE, the money goes into the economy in a different way.

In Ireland we should welcome the eurozone's QE because it will give us a little extra tailwind in some parts of the economy. It will keep the euro low against the dollar and sterling.

This is really helpful to us because we export so much to these countries. In the first ten months of 2014 we exported €11bn worth of goods and services to the UK. Yet exports to the four biggest eurozone economies - Germany, France, Italy and Spain - came to €12bn. US exports were €16.2bn.

Exporters will benefit from the weaker euro but the currency has been weak anyway, partially in anticipation of this QE move.

The news should also lift the stock market and that is good for investors and pension funds. It will also reduce the State's cost of borrowing which will be worth a few hundred million per year.

But there are three downsides. Firstly, the move will make more money available for banks to lend.

What if they don't lend it, but use it to buy more government bonds? What will they lend it for? Loan applications that aren't that solid, holidays, paying off credit cards?

It is as if QE has filled up the banks' car tanks with petrol, but what if they still don't want to go anywhere?

Secondly, the Government could see the availability of cheaper borrowing in the bond market as an excuse to throw money around the place. We have a distinct advantage of having done our austerity. We shouldn't waste that with political popularity posturing.

Thirdly, what if this move doesn't work? It is far from clear what Draghi will do then.

QE has come at a good time for us, but we can't blow it.

Government in tailspin over Aer Lingus bid

To sell or not to sell that is the question. Transport Minister Paschal Donohoe was talking tough last week about whether the Government would back a takeover of Aer Lingus by British Airway's owner IAG.

He said he would take "Ireland Inc" into account - whatever that means.

Fianna Fail's Timmy Dooley was more forthright, saying Government should reject an IAG offer because of the airline's ownership of 23 Heathrow slots. Both comments beg the question: why did the Government bother floating Aer Lingus at all, if it plans to reject a sale of its stake to anybody at any price?

Holding on to the Heathrow slots might seem like a good idea, if the airline was still in State hands. Rejecting an offer from IAG could condemn the Aer Lingus to eternal minnow status.

There is nothing wrong with being a minnow if you are State-owned or owned by a very wealthy private investor. It won't work for a market-listed airline.

Nobody would want to buy shares in a plc that simply cannot be taken over at any price. It is too small and too volatile to be an attractive mature dividend play for pension fund investors.

Michael O'Leary is dying to sell. If IAG can deliver a price of around €2.45 Ryanair can walk away with its money back - minus the management time and adviser costs of three unsuccessful bids.

The reality is who better than IAG will come along and when? International aviation is consolidating and Aer Lingus must inevitably in time become part of a major European carrier.

Heathrow slots may be important to Ireland Inc, but are they really that important to Aer Lingus? IAG is a serious player and if it puts a good offer on the table the Government should take it.

It doesn't seem workable for the Government to have its cake and eat it, namely back a takeover, while preserving some side deal on maintaining the Heathrow slots for the likes of Shannon and Cork.

IAG chief executive Willie Walsh could try and do some kind of fudge job on the Heathrow slots but that doesn't mean it will hold water in the future.

Especially with an election coming, expect a thumbs down from Donohoe.

Laya management in big AIG payout - we think

AIG's €80m purchase of Laya Healthcare shows how far the business has come in the last three years. The management team have grown profits and with 478,000 customers, the business has a 23pc market share.

Unfortunately, it is very hard to tie down exactly who has made money here and how much. Back in 2011 Quinn Healthcare was owned by the wider Quinn group and escaped the administration of Quinn Insurance. Quinn Group fell into the control of Anglo Irish Bank which together with Quinn's creditor banks put a new board and management team in place.

It was announced just before Christmas 2011 that the health insurance business had been bought by management backed by a division of Swiss Re which would take over the underwriting of policies.

No sale price was disclosed, so it is impossible to weigh up how well the management team have done out of the whole thing.

In late 2011, Quinn Group CEO Paul O'Brien said: "The disposal of Quinn Healthcare represents another milestone for the group which concludes a complex negotiation and places an end to uncertainty for the healthcare business."

Ownership of the company passed from Quinn Financial Services Holdings to a Jersey-registered firm called Avondhu Ltd. Avondhu doesn't have to file accounts, but it is in fact 70pc owned by the Quinn Group now called Aventas Group, and 30pc owned by Laya management led by Donal Clancy.

Through a very complex shareholder agreement at Avondhu, the 'A' shares held by management only entitled them to 5pc of any dividends paid out until December 2015, after which point their stock will be ranked equally with the 'B' shares of the former Quinn group shareholders. This might complicate the value of management's shares in the takeover just announced.

Other factors might complicate the guesswork as to how much Clancy and his three management colleagues got for their shares, including the fact that the former Quinn group advanced €10.5m to Avondhu Ltd in a loan in 2013.

Clancy and his colleagues have done a good job at Laya. They secured the jobs in Fermoy and added an additional 150 staff, while turning the business around from a loss of €2m in 2011 to a profit of €5.2m just two years later.

They were the right people in the right place at the right time.

We just won't find out how much they got for it.


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