Cantillon

Tue, Mar 6, 2012, 00:00

Inside the world of business

Spectre of default makes Moody’s music less alluring

THE SIREN song of Citi and Moody’s must be hard for the Government to resist.

Agreeing with both institutions’ assessment that Ireland will need a second bailout in 2014 – or some sort of hybrid arrangement which would allow us ease our way back into the market – is very tempting.

Firstly, it would underline the case for revisiting the term of the promissory note by which Anglo Irish Bank and Irish Nationwide have been refinanced at a cost of €36 billion.

Secondly, and more pertinently, agreeing with the sirens would give the Government a very big stick indeed with which to scare the electorate into voting Yes in the coming referendum. A No vote would exclude us from the permanent rescue fund that would be the first port of call for a second bailout.

Finding a way to give further support to Ireland outside the new permanent rescue fund would be very difficult and tiresome, but not impossible. But it is not this possibility that has stopped the Government blatantly playing the bailout card.

What is holding them back is the wider implications that flow from admitting that Ireland will need a second bailout. A bail in of private sector creditors is not mandatory in any further rescue but the prospect of one is almost certainly going to be put on the table. This is because it follows that if a second bailout is needed come the end of 2013 then Ireland’s debt dynamics have failed to reach a sustainable position and thus a cold hard look has to be taken at default.

It is fear of unleashing the related spectre of default that prevents the Government playing up warnings from the likes of Moody’s.

The likely blow out in Irish bond yields and the associated dumping of Irish bonds that would follow will in turn undermine much of the progress towards sustainability made in the last few years and ultimately be self-fulfilling.

McDonald’s side order of €200m

LARGE MULTINATIONALS, particularly in the retail and supermarket sector, tend to get a bad press in Ireland, but they also serve a valuable service for some suppliers.

The announcement by McDonald’s yesterday that it exported €200 million worth of Irish beef, dairy products and eggs last year is a case in point.

Take its purchase of beef. McDonalds is the single largest purchaser of Irish beef. But, out of the 40,000 tonnes of Irish beef bought by McDonald’s last year, only 5,000 or 12.5 per cent is consumed in Ireland.

The rest was sent to McDonald’s branches across Europe.

Similarly, the company exported about €70 million of cheese, and €20 million of eggs and other dairy products which it bought in Ireland.

McDonald’s illustrates an often overlooked fact about foreign-owned multinationals in the retail and food space – they serve a purpose as a valuable route into export markets for Irish food producers and companies.

Many small Irish food producers make their first foray into the British market by building on their established contacts and contracts with British supermarkets operating in Ireland.

While the difficulties faced by small suppliers in securing shelf space and listings with large supermarkets is a very real concern, critics of the dominance of multinational retailers should keep in mind that they also act as crucial gateways into lucrative international markets.

Trouble on cards as retailers seek relief from rising transaction fees

THERE’S EXPECTED to be “standing room only” at a meeting of 40 retailers – including Primark, Dixons and HMV – in Dublin’s Westbury Hotel today to discuss the thorny issue of payment card interchange fees.

A recent rise in these fees – paid by merchants to cardholders’ issuing banks – could cost retailers in Ireland €10 million more a year, according to estimates from payments firm CMS Payments Intelligence, a company that helps retailers “streamline their payments costs”.

The main reason for the higher costs is that Irish banks have been busy switching away from the domestic debit card scheme, Laser, to Visa debit: Permanent TSB switched last year, while Ulster Bank made the move in 2010. Bank of Ireland and AIB are due to follow suit.

This is excellent news for Visa, but hasn’t been so much fun for the retailers, as the cost to merchants of accepting these cards is double that of accepting Laser, says CMS. It believes the higher charges are “likely to be bad news for consumers too”, given the likelihood that retailers will pass them on. For this reason, interchange fees can be regarded as the “hidden” cost of plastic.

“A similar phenomenon happened in the UK, when banks started switching away from Maestro and Solo cards,” says CMS managing director Elley Frost. “We’re now seeing the same trends in Ireland, 18 months later.”

The problem for retailers is that interchange fees are fixed by the card issuers, in this case Visa, and merchants have no negotiating power.

“We don’t know the answer to that,” says Frost. But the meeting today intends to explore some of the options, she adds. Pushing for regulation on the level of interchange fees is the obvious one, for which there are international precedents, most notably Australia, where the central bank forced a cut in the fees in 2003.

But given this is a subject that has been right at the heart of the European Commission’s recent battles with the Visa / MasterCard payment card duopoly, any movement in this area is likely to be hard-fought.

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