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Inside The World Of Business

Quick ruling on Anglo may help calm market sentiment

HAS THE European Commission learnt the lesson of the Greek debt crisis or is it about to repeat its mistakes with respect to the Irish banks?

Awareness seems finally to be dawning in Brussels that bond market concerns about the ability of Ireland to cover the cost of bailing out Anglo Irish Bank could – if left unchecked – lead to a rerun of the peripheral member debt crisis.

Worryingly, there are a number of similarities between the way the Greek crisis was allowed unfold and the recent flare-up of concern over the cost of the Anglo bailout.

In both cases, the pertinent facts had been in the public domain for months before the crisis broke. Greece admitted cooking its books several months before the bond market woke up to the implications. Likewise, the black hole at Anglo Irish bank and the likely €20 billion plus cost of fixing it was disclosed by the Minister for Finance in the spring.

In both cases, no pre-emptive action was taken by the commission to help avoid a crisis; only when the bond markets scented blood was something done. In the case of Greece the response was too slow and too inadequate to prevent a full-blown sovereign debt crisis. It will become clear pretty shortly whether or not the Anglo Irish problem can be nipped in the bud.

Clearly, if the commission had moved more quickly to put the issue of Anglo Irish’s future to bed before the summer by ruling on the restructuring plan submitted by the Government, much of the angst of the past few weeks could have been avoided. The market would have had the certainty it craves.

Instead the festering issue of Anglo Irish now risks queering the pitch for the all-important refinancing of the other Irish banks outside the two-year old blanket State guarantee. The more bearish now fear that if this goes badly, contagion could spread to Irish bonds and possibly trigger a wider crisis.

Joaquín Almunia, the competition commissioner, seemed to acknowledge as much yesterday and a decision is now expected without delay.

A quick ruling may help calm market sentiment, but the longer the issue is left unresolved the more likely are the bond market vigilantes to get the bit between their teeth and ask questions about Ireland’s ability to fund the rescue of its banks. Tick-tock.

CRH demand overdone

Two weeks ago, CRH, blamed weak US demand for the 77 per cent drop in profits it recorded during the first six months of the year, and said that the failure of that market to pick up as expected meant this year’s earnings would fall short of previous predictions.

News yesterday that US president, Barack Obama, is planning to spend $50 billion (€38.8 billion) on revamping roads, railways and airports helped boost the building materials group’s stock, which added 1.6 per cent to close at €13.665 in Dublin last night.

Obama’s Labor Day announcement was political – an attempt to help his party, the Democrats, fight their corner in mid-term congressional elections in November by demonstrating his administration’s commitment to protecting and creating jobs.

CRH is the biggest supplier of asphalt – which is used to surface roads and airport runways – in the US. A boost in spending in these areas should presumably aid the Irish group’s fortunes. But it has been waiting for over a year for the benefits of another programme announced by the same administration to percolate down to spending at state level. This is taking longer than expected for a number of reasons that are beyond CRH’s control.

This merely illustrates that, while big ticket government spending plans grab headlines, it takes a lot longer for them to deliver real benefits.

It’s reasonable to assume that CRH will gain, but it’s hard to work out when and by how much. There are a few things to factor into calculations. Two weeks ago, the group’s broker, Davy, argued in light of its first-half results, that €12 was a fair price for the stock. It also suggested that CRH could be losing market share in the US.

If CRH’s results mean it is overvalued at anything higher than €12, then yesterday’s opening show of €13.50, fully 12.5 per cent more than the fair value price, would have to limit any scope for real gains. Any fall in market share would also limit the potential of the company and its shareholders to make hay from further infrastructure spending in the US. Either way, yesterday’s demand on the stock looked a little premature and a little overdone.

Cowen’s Fás legacy issue

You’d be inclined to worry about the ability of State training agency Fás to turn out the workforce required to drive recovery. Revelations that issues raised by an EU audit at the accident-prone agency have effectively frozen the State’s ability to apply for up to €211 million in European Social Fund money are just the latest in a long line of financial concerns regarding the agency.

Taoiseach Brian Cowen was quick to attribute the latest mis-step to “legacy issues from the past” and noted that a new chief executive and board were now in place.

According to the EU, those legacy issues occurred under the tenure of his fellow countyman, former Fás secretary general Rody Molloy – a man he previously referred to as an “excellent public servant” – and whose sudden retirement was softened by a significantly enhanced retirement package approved by two Government departments.

Hardly as far removed a “legacy” as the Taoiseach might wish.

Today

The board of State training agency Fás concludes a two-day meeting on its future, after an EU audit raised concerns about the running of training courses under its control, the latest of a series of issues raised about expenditure at the agency.

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