'Economist' lost in translation

Tue, Nov 20, 2012, 00:00

CANTILLON:There was a wave of French fury at the cover story in the latest edition of the Economist magazine, claiming the Gallic nation was “the time-bomb at the heart of Europe”.

In a 14-page special report, the magazine warns that, unless President François Hollande’s administration increases, and delivers, on reform, France represents a danger to the euro.

French officials accused the magazine of “sensationalism” and said it did not take into account corporate tax rebates unveiled this month which amount to a 6 per cent reduction in labour costs, a measure it believes will add jobs and reduce a ballooning trade deficit.

Public spending cuts announced in that package, along with existing budget measures, should add up to €60 billion in savings over Hollande’s five-year term, the government says, an effort the magazine has not factored in.

Despite the cries of unjust coverage, the 14-page report doesn’t seem to sensationalise the issues. Many economists are sceptical Hollande can hit his goal of cutting the 2013 public deficit to 3 per cent of output. Failure to do so could prompt financial markets to demand higher yields for French bonds.

Indeed the Economist article presciently underpins decisions later this month. For example Moody’s rating agency is due to update its view on France, raising the prospect of a second downgrade after France lost its AAA-rating with Standard Poor’s in January.

The Economist’s Europe editor, who wrote the article, defended it against accusations of being unfair. “The point of this cover and the article is to encourage France,” John Peet said. “Other countries including Greece and Portugal have conducted many reforms. This is not yet the case in France.” Clearly the encouragement got lost in translation.

Creative thinking on pension squeeze

The real prospect of tax relief on pension contributions being cut in the budget has led to a blossoming of creativity in the pensions sector. Many have been scratching their heads to come up with alternatives that provide a gain for the exchequer without disincentivising people from funding their pensions (generating a living for the industry in the process).

Two alternatives are currently doing the rounds.

One is to include pensioners in the PRSI net – they are currently exempt from the 4 per cent levy.

This would have the benefit of being very straightforward to implement and arguably fair, given that it would apply to public service pensions as well as private sector pensions.

However, the Minister for Finance may not relish hundreds of former school teachers marching on the Dáil.

An alternative doing the rounds might be more attractive . It is the introduction of a higher rate Universal Social Charge on pensions in excess of €100,000. They are currently subject to a flat rate of 4 per cent. This obviously has much better “soak the rich” appeal than the PRSI option. But it would also make it easier to leave the marginal rate tax relief in place as the people who avail of them most will pay more tax.

The icing on the cake from the industry point of view would be to remove the cap on the size of pension pot subject to tax relief. This should see an influx of money into pension schemes that is currently being held on deposit in order to keep pensions under the cap.

Accountability for flawed accounting

Accountability in banking may sound like a contradiction in terms given the juicy packages still being paid but there was a rare public example of it arising from the €1.96 million fine imposed on Ulster Bank yesterday.

The settlement between the UK-owned bank and the Central Bank noted that the “compensation packages” of certain unnamed staff had been affected over serious liquidity and capital breaches.

The fact that Ireland’s third-largest bank wasn’t using the right calculations to know whether it had enough cash on hand to repay deposits falling due or capital in reserve for possible losses is deeply worrying. It makes you wonder: if the bank isn’t complying with these basic rules of prudential banking, what else is it doing wrong?

But nothing should surprise from a bank where a technical glitch in an office in Edinburgh shut hundreds of thousands of customers out from their accounts for as long as a month.

The capital breach is the more serious offence here and occurred in March 2011 at a time when the bank’s bad debts were increasing and when it needed to be sure that it had enough in the tank to climb that rising hill.

RBS had to pump more fuel into Ulster Bank and, so far, has filled up its reserves with a whopping £13 billion (€16 billion) of loss-absorbing capital.

Jim Brown, who took over as chief executive of Ulster Bank after the capital breach, was quick to reassure customers they weren’t (on this occasion) affected; the bank mentioned this twice in its short statement.

Holding bankers to account is long overdue. This particular incident follows a letter from the UK regulator to the nine-biggest retail banks and building societies in September asking for the names of senior managers who could be held personally responsible for technical breaches in their operations.

Fining banks might deter breaches but there is no more powerful a deterrent than putting a hand in a banker’s pocket to account for failures.


Shareholders in Glanbia plc hold an extraordinary general meeting in the ongoing process of decoupling the group’s milk processing and food ingredients businesses.


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