Cantillon

Sat, Jul 7, 2012, 01:00

Inside the world of business

Change of tack at ECB a push for reluctant banks

The quarter point cut by the European Central Bank in the top line refi, or refinancing, rate took all the headlines and not surprisingly. Tens of thousands of hard-pressed Irish homeowners have mortgage rates that are linked to the rate set by the ECB and are looking for any relief available.

On the other side of the equation, trackers have long become a loss-maker for lending institutions and the move will only have increased the headache for Irish banks as they look to return to profit. Banks were also dealt another blow as the central bankers gathered in Frankfurt decided also to cut the deposit rate – to zero.

The thinking behind this move by Mario Draghi and his colleagues is to try to get the banking system back on a more normal track. Despite the moderate easing of pressure in recent months, banks across the euro zone continue to lodge in the region of €800 billion every night with the ECB rather than take a chance of lodging it with others in the sector. With the rate at zero, banks choosing to continue doing so will effectively be paying money for the privilege and the ECB clearly hopes it can wean them off what has, for many, effectively become a security blanket.

While the deposit rate cut was not a shock, it was not widely expected and is an indication of the degree to which the ECB is concerned about the failure of banks to get them lending to each other.

“If you can kick-start the money market you go a long way to addressing some of the funding problems that banks face,” ” said James Nixon, chief European economist at SocGen in London. “That may free banks to lend to the economy.”

The worry for the ECB is, what if it doesn’t.

State may appeal Durkan ruling

AS OF yesterday, it appeared that the State was considering appealing this week’s High Court ruling ordering that it pay €31.2 million, plus damages and interest to building company, Durkan New Homes, to compensate it for a property deal that went wrong.

To recap, in 2006, Durkan sold 215 houses through the State’s Affordable Homes Partnership at discounts totalling €31.2 million. In return, the State was to transfer ownership of Harcourt Terrace Garda station, which was due to be vacated.

From the State’s point of view, it was a good deal. Durkan was effectively paying it €31.2 million for a property which was then – in 2006 – valued at €17 million.

The building company wanted the premises as it already owned an adjoining site: it was willing to go way over the odds as it believed it could add considerable value to the enlarged site. Delays in the completion of a new station at Kevin Street led to a series of complications that ultimately prevented the transfer of the Harcourt Terrace property to the builder.

Durkan New Homes sued and the High Court found in its favour this month. The company is not really getting anything out of the case that it it did not already have. Its end of the 2006 deal cost it €31.2 million. It got nothing in return, the State got the benefit of the €31.2 million but failed to uphold its side of the bargain. All Mr Justice Peter Charleton did when he made his order this week was restore the building company to its original position.

Any reading of Justice Charleton’s ruling would show that what should have been a simple property transfer ultimately involved a range of State bodies and agencies, many of which added a layer of complication to what should have been a relatively straightforward property transfer.

Perhaps if the State addressed the cause of these complications, rather than continuing with another round of expensive litigation, it would save a greater portion of taxpayers’ money in the long term.

Incentives name of the alternative energy game

Incentives continue to play a big role in the development of alternative energy, an industry that most western governments have embraced as a way of limiting dependence on oil and gas, cutting carbon emissions and combating global warming.

As a result, they also determine where the investment actually goes. GT Energy this week announced that it has agreed to build five geothermal-powered heat distribution plants in Britain for energy giant, EON.

The company has planning permission for geothermal-powered electricity plants in the Republic and has proposals for Northern Ireland. This week, however, it said that it is shifting its focus away from the Republic to Britain and Northern Ireland because they have incentives for geothermal energy, while the Republic does not.

The problem with incentives is that somebody has to pay for them. Consumers and businesses will pay an additional €32 million this year to cover incentives given to the wind industry.

Minister for Energy and Natural Resources Pat Rabbitte earlier this year ruled out extending such supports to offshore wind, as he said it could result in placing an extra burden on electricity users.

If alternative energy projects are viable businesses in their own right, why do they need incentives in the first place?

The answer, according to GT Energy’s managing director Pádraig Hanly is that energy projects tend to be long-term in nature but many investors want relatively quick returns.

The answer makes sense, and is reasonable in the context of asking investors to back new and developing energy technology. However, it is a lot less reasonable if it means that businesses and consumers have to pay extra simply to deliver returns to impatient investors.

NEXT WEEK

The OECD will publish its annual Employment Outlook in member states on Tuesday.

ONLINE

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