Business podcast: May 5th
Brendan Butler discusses Ibec’s job creation proposals, Declan Stone of Colliers International on the retail property market and Ciaran Hancock on Liberty Mutual’s plans for Quinn Insurance. John Collins presents.
Current Account »
-
-
Business podcast: April 21st
John Collins hosts a discussion of the Nyberg Report on the banking crisis with Simon Carswell, Ciaran Hancock and Colm Keena
-
Business podcast: April 7th
This week with ECB rates on the rise we look at what it might mean for already cash-strapped consumers; how to make your wardrobe make you money and venture capitalists in Silicon Valley are still flashing the cash.
-
Should borrowers be forced to opt for bankruptcy-lite IVAs?
Prize-winning economist Joseph Stiglitz told The Irish Times last week that a percentage of the debt of mortgaged-to-the-hilt people in negative equity should be lopped off. This, he said, would assist economic activity, by alleviating the sense of entrapment that people feel. It’s an easy stimulus that would also create more realistic bank balance sheets. (Read Colm Keena’s interview with Stiglitz here.) It also sounds attractively like getting a voucher for money off after you’ve paid for the (overpriced) goods. Please quote the promotional code “NAMA”.
One day later and the renewed Programme for Government proposed by Fianna Fail and the Green Party were touting the arrival of IVAs, or individual voluntary arrangements, a kind of court-free bankruptcy-lite process currently available to UK residents. Under an IVA, debt-riddled consumers can get a certain percentage of their debts written off if they come clean and – via the mediation of an insolvency adviser (a private company!) – successfully persuade three-quarters of their creditors to agree to a new schedule of reduced repayments. If they do, this is then binding on all the creditors.
Hmmm. This is just not the same thing at all. Sure, it might mean that some people who would be evicted from their homes under the current system would live to pay another loan repayment. Superficially, it seems like a good deal for bedraggled borrowers if they can get 62 per cent of their debts written off (the average last year in the UK). But IVAs can be insidious voluntary arrangements, too. For a start, it stands to reason that lenders would not agree to an IVA if they didn’t think they would work in their favour.
In the middle, a swathe of licensed insolvency advisers take their cut (in the UK, this is usually a couple of grand). That might generate a spot of employment for some out-of-work mortgage brokers: IVAs become next season’s debt consolidation deals. But are commercial insolvency practitioners really the kind of jobs that we want to create? Needless to say while others are enriching themselves on the back of the difficulties you’ve suffered as a result of the mismanaged economy, your credit rating will be flushed down the toilet (not that banks will be lending to anyone anyway).
The scheduled repayments, which typically last three to five years, are rigid, formal agreements: if you can’t keep to it, you are plunged into the very bankruptcy you were hoping to avoid. I know, that sounds a lot like a mortgage or any other loan. But borrowers were motivated by the desire for security (not greed) when they signed up to a mortgage. Sign your name to an IVA and you are effectively admitting culpability: your debt, your problem. That may be fine, but it does absolve the Government from having to force Ireland’s zombie banks to reduce borrowers’ debts in a manner that admits their culpability.
The Government is “overpaying” for the Nama assets by some €7 billion over the current market value. Asked why, Minister for Finance Brian Lenihan said this: “We’re talking about distressed loans, we’re talking about a distressed market, and you are entitled to make some allowance for long-term value… After all, if you look at it from the point of view of the bank – which is not a popular way to look at it, I accept that – why wouldn’t they just hold onto the loans and work them out themselves, if there was absolutely no premium involved?”
If you’re feeling a little shivery reading that, then it’s probably because you know you’re not going to get your “premium”, even though you’re a part of that distressed market too. Instead, you’ll be getting an economy marred by cuts to wages and welfare that will only increase the real value of your debts. Without a corresponding reduction in your loans, this painful slump will last a lot longer for everyone.
Of course, existing court debt enforcement procedures are Dickensian and individual voluntary arrangements – key word “individual” – as they exist in the UK will help reform this particular problem and spare some misery. But they are not the right mechanism to prevent Ireland’s zombie banks from breeding zombie consumers.
-
Chunky sandwiches, even chunkier rents
Where has it all gone wrong for O’Brien’s Irish Sandwich Bars? Was it the unfashionably carb-heavy trademark thick-cut bread? Was it simply that competing franchises were newer, smarter and tastier? After O’Brien’s was placed in examinership by the High Court yesterday, its founder Brody Sweeney was in no doubt that the collapse of the property boom was the fly in the ointment – or the cockroach in the sandwich, as it were. It may have been chunky bread stacked behind its deli counters, but those were even chunkier rents that its franchisees were seeing drain away into the bellies of over-nourished landlords.
“We have had to close a number of stores as some landlords remain intransigent and refuse to reduce rents and some of our franchisees have been struggling to pay their rents for the same reason…” Sweeney is quoted as saying in today’s Irish Times report. You can also read Barry O’Halloran’s analysis and background to the High Court move here.
Of course, it’s not over yet for O’Brien’s: under an examinership, it will be temporarily protected from its creditors while it works on a rescue plan.
If only these same intransigent landlords with their cursed upward-only rent reviews would adopt the same relaxed approach to negotiation that Sweeney claims to have done when he expanded the O’Brien’s franchise overseas. In Making Bread: The Real Way to Start Up and Stay Up in Business, his (perhaps unfortunately titled in retrospect) “how I made it” book, Sweeney describes how in 1997 he was settling into a master franchise deal for 11 countries in Asia with a Singapore-based gentleman by the name of Hugh Hoyes-Cock:
“Just as we were about to sign the agreement, Hugh said to me: ‘What about Laos and Cambodia?’ ‘Go on then,’ I said, ‘you can have them’ – and thus I ‘gave away’ two sovereign countries for nothing!”
These days, we might count ourselves ridiculously lucky to get a free biscuit with our comfort coffees. If that does happen, be aware that the franchisee may merely be de-stocking itself of all O’Brien’s-branded produce as part of a grand plan to start over with a new name on the shopfront – and presumably cheaper lunches for these deflationary times.
-
Bank of Ireland overtakes AIB on market
Bank of Ireland must be taking at least a little satisfaction this week after overtaking rival Allied Irish Banks (AIB) to become the biggest Irish bank in terms of market value.
Bank of Ireland, traditionally second behind AIB, closed at €0.93 on Tuesday, valuing the company at €943 million, compared with AIB’s price of €1.04, valuing the bank at €922 million. (Bank of Ireland may have had a lower share price, but it has 1 million shares in issue, compared with AIB’s 883 million.)
Things got even better for Bank of Ireland today, as the bank closed at €1.33, giving the bank a market value of €1.34 billion, compared with the €1.03 billion value of AIB.
The market is clearly pricing in “the Nama effect” – how much both banks will have to transfer in loans to the State’s “bad bank”, the National Asset Management Agency (Nama), and the likely crystallised losses, capital requirements and, ultimately, the Government’s ownership in each institution. (more…)
-
Desmond entertains in the IFSC
Billionaire financier Dermot Desmond spoke yesterday in a public interview with Newstalk radio station at the National College of Ireland and entertained the audience with his views on the world of business and what has driven him in his wide and varied career and investments.
He opposed the National Asset Management Agency, the State’s “bad bank”, saying that he preferred for the problem property loans to remain within the banks and to be worked out over time. He raised an important point – if the Government feels that an additional €5 billion is enough for Allied Irish Banks and €3.5 billion for Bank of Ireland, why should there have to be further write-downs on their property loans? (more…)
-
Krugman – a laureate but not a Nobel one (technically)
There has been a bit of discussion on this blog and elsewhere about whether Paul Krugman is a Nobel Prize winner or not, with people pointing out that there are only Nobel prizes for literature, chemistry, physiology, peace, physics and medicine, but not the dismal science.
While Krugman, the New York Times columnist and Princeton University professor who has become something of a household name here following his comments on the Irish economy, is indeed listed on the Nobel Prize web site as a laureate, he did not technically win a Nobel. Prof Krugman and other economists are actually recognised with The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. That award was set up by the Swedish Central Bank (“Sveriges Riksbank”) in 1968. In contrast the other prizes have been awarded every year since 1901.
Pedants can now rest easy but use of the Nobel Prize for Economics short-hand will no doubt persist. It should be noted that even on his New York Times bio, it is stated that Krugman was awarded “the Nobel Prize in Economics”.
Anyway all of this is really just a distraction. Like it or not Krugman is one of the world’s most high profile and highly respected economists and his prognosis for Ireland is extremely worrying. Questioning his credentials does nothing to help us re-build the economy.
-
Krugman on Ireland – part 2
Seems we were closer to Boston than Berlin all along, if Nobel award winning economist Paul Krugman is to be believed. Following on from his comments last week at an event for the foreign press, Mr Krugman devotes his column in today’s New York Times to the problems facing our economy and what the US can learn from them.
He suggests that free market excesses drove our housing bubble to the point that “Ireland became in effect a cool, snake-free version of coastal Florida”. Krugman believes that the last remaining hope for Ireland is that a recovery in our big trading partners prompts an export-led recovery at home. Nice to see he’s read the “twenty economists” opinion piece carried in our paper last Friday, which suggests there is little point in establishing Nama without nationalising the banks.
The last line of Krugman’s column should probably be pinned on all the noticeboards in the Central Bank and the Department of Finance:
“And the lesson of Ireland is that you really, really don’t want to put yourself in a position where you have to punish your economy in order to save your banks.”
-
Peak property buyers vs the mortgaged masses
The abolition of mortgage interest tax relief for non first-time buyers, which includes everyone in year eight or more of their mortgage, is just the latest example of Government tinkering with this relief.
At every budget opportunity since the housing market reached its inglorious peak in early 2007, the Government has increased the relief for more recent buyers and decreased it for more established homeowners – an act that could be interpreted as guilt for its part in driving up property prices to levels that would make a New Yorker blush.
In recent years, the monthly value of this interest relief for a first-time buyer, a status that lasts for the first seven years of the mortgage, has increased from €66 to €133, then to €166. Finally, last October, the Government introduced three different first-time buyer rates, with those in the first two years of their mortgage getting tax relief of €208 a month and the value steadily reducing thereafter, with the tax credit for “other buyers” reducing from €100 to €75 a month. This afternoon, the Minister announced that he was abolishing mortgage interest tax relief for these “other buyers” and restricting the relief to the first seven years of the mortgage.
So is this right? People who bought their first homes in the last seven years are lumbered with mortgages that are exponentially higher than older buyers who were picking curtain patterns and putting skylights in their attics long before anyone in Ireland had even heard of IKEA. As interest rates increased, so too did the monthly tax credits. Except interest rates were already falling by the time the Government increased the rates of relief again last October: why else increase the rates again except as some kind of compensatory measure to those unfortunate enough to buy at the top of the market?
Brian Lenihan signalled today that the relief will eventually be phased out for all, presumably as the generation of peak property buyers becomes a proportionately smaller chunk of the total ranks of homeowners. Encouraging people to buy homes they may not be able to afford will no longer be part of the tax system.
Search Current Account
ADVERTISEMENT
