Cantillon

Tue, Nov 6, 2012, 00:00

INSIDE THE WORLD OF BUSINESS

Preferential treatment for Spain?

The revelations in a German newspaper that Spain seems to be getting preferential treatment from the ECB has met with a muted response here.

One reason is that its pretty hard to understand exactly what sort of favour Spain is getting compared to Ireland. Suffice to say when a bank goes to swap a Spanish government bond for cash at the ECB it gets a better deal than if it was trying to swap an Irish bond, even though both bonds carry the same credit rating, ie are equally risky.

This in turn affects the price that banks will pay for Government bonds and thus the amount of debt that Ireland and Spain have to issue to fund themselves.

Things are not helped by the opaque nature of the ECB which rather than confirm or deny the story, has had to investigate itself to see if it’s true. This is not as ridiculous as its sounds as the rules governing refinancing operations are extremely complicated and comparisons are hard unless you have identical bonds. (Some sources say the issue is that short-term Spanish paper is being compared to long-term Irish debt).

Even if there does turn out to have been a mistake, the most likely solution is that the Spanish will be asked to pay more rather than Ireland being allowed pay less. Not a good move when we need all the friends in Europe we can get.

This, combined with the fact that there is much bigger game afoot with the ECB on reducing the costs of the Anglo promissory note, amounts to a compelling argument for not making too much of a fuss.

TODAY

All eyes will be on the US presidential election but aside from the political focus, results are due from DCC and First Derivatives

No rush for new Ryanair aircraft

It is hoping to double the number of passengers it carries to 120 million a year over the next decade, but low-cost airline Ryanair appears to be in no rush to order the new aircraft needed to facilitate such a growth target.

Speaking yesterday, Michael Cawley, deputy chief executive of the airline, said that the only inhibitor to the airline's future growth is having enough aircraft - but talks to order up to 300 new planes appear to be going nowhere fast.

We haven't been able to convince Boeing yet of the merit of our proposition at the price that we want to, but that's only a matter of time, he said.

He may have reason to sound so assured. After all, the airline’s previous deal with the US manufacturer, which it struck with great fanfare back in 2002 for 100 aircraft, was hugely important in the development of the airline over the past decade.

This time around however, Boeing seems to be playing hard ball.

But given that the European manufacturer Airbus is less than keen to engage with Ryanair - or at least that's how Mr Cawley said he sees it - all roads still lead to Seattle.

Unless of course Ryanair is willing to opt for a nascent Chinese or Russian manufacturer.

But, while the onus might be on Ryanair to strike a deal in order to meet its growth targets, Mr Cawley asserted that its under no pressure to do so.

We dont have to do anything, he said. With up to 100 aircraft likely to be out of action this winter because its more profitable to keep them on the ground than fly, Mr Cawley noted that with only a modest increase in the cost of fuel expected for next year, it could be economical to put these back into action.

Doing so would help the airline reach its targets without ordering new aircraft.

Business and the banks

One interesting difference of approach between Allied Irish Banks and Bank of Ireland was lost somewhat in the noise over all of hotter banking issues emerging at the Oireachtas committee hearings last week. It concerned lending to small and medium-sized enterprises.

AIB revealed for the first time at the Oireachtas finance committee the amount of actual new lending to SMEs and not just existing debt to businesses that had been restructured, such as converting overdrafts into term loans.

The bank said that it was 27 per cent of its year-to-date target for lending to SMEs by the end of September and on the way to exceeding the €3.5 billion target for 2012 set by the Government under the terms of State’s deal to bail out the bank. In other words, the bank had sanctioned about €3.3 billion of new lending to SMEs by the end of September. (Draw-downs are a different matter.)

This apparently upbeat note was soured somewhat when the bank later said that just €600 million of approved SME lending so far this year was new money. The bank said that it wasn’t playing with figures but that restructured existing debt to SMEs was within the Credit Review Office definition of what constituted the lending target. Oddly, the bank said that the SME sector wasn’t significant enough for €3.5 billion in new money.

The following day Richie Boucher (left) , chief executive of Bank of Ireland, had a bit of a sideways dig at AIB at the Oireachtas committee, saying that his bank’s target of €3.5 billion was “new and increased lending” to SMEs and that the bank made money from new lending, not from restructuring existing debt.

Amid all the spin and counter-spin over whether the banks are lending to SMEs or not, it was at least refreshing to hear one of the banks break out the new lending figure and shows how transparency helps to clear the clouds around the figures in this ongoing debate. It is also interesting to note the only minority-State-owned Irish bank is lending more new money to SMEs than the almost fully nationalised bank – or it is unsurprising at least.

Number of the day $1.5bn:The amount set aside by HSBC Holdings to cover a potential US fine for breaches of anti-money laundering rules

Quote of the day:"People and holding their breath and turning blue" - Madelynn Matlock of US firm Huntington Asset Advisor on market jitters over EU economics and US elections

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