Business Week: Fresh concerns for euro zone as Italy rejects Renzi

Also in the news was Brexit in numbers, a common corporate tax, and the Central Bank

Michael Noonan suggested  ECB’s  Mario Draghi, above, would not allow Italian   banks get into difficulty. Photograph: Ralph Orlowski/Reuters

Michael Noonan suggested ECB’s Mario Draghi, above, would not allow Italian banks get into difficulty. Photograph: Ralph Orlowski/Reuters

 

The latest geopolitical tumult came from the euro zone’s third-largest economy as Italy emphatically rejected prime minister Matteo Renzi and his constitutional reform referendum on Sunday.

Renzi, Italy’s youngest ever prime minister, had promised to resign if the referendum was lost – and it took him just 90 minutes after polling stations closed to address the nation and declare the end to be nigh.

Following Britain’s vote to leave the European Union and businessman Donald Trump’s election as US president, the markets have been getting used to uncertainty and, after an initial jitter – even though the result was anticipated – concern later receded.

There are, however, ongoing fears for Italy’s banking sector as its third-largest bank, Monte dei Paschi di Siena, lurched towards a possible state bailout.

Minister for Finance Michael Noonan moved to calm concerns the result posed contagion risks to the Irish banking system.

“There’s no contagion effect any more,” he said. “That’s all in the past now.”

Despite AIB and Bank of Ireland faring among the worst financial institutions in Europe in a stress test of capital strength in July, Noonan nonetheless insisted Irish banks were in a “very strong” position should his prediction prove false.

“This morning the markets went down significantly on all fronts but they recovered very, very quickly,” he said on Monday, as the news of Renzi’s defeat was being digested.

“So, it seems to me now there isn’t a financial crisis coming.”

Political instability

Noonan, in typically mischievous fashion, also suggested the European Central Bank (ECB) president Mario Draghi would not allow a situation to develop whereby the banks in his homeland got into difficulty.

The political instability in Italy had raised expectations that the ECB might continue its asset-buying programme past next March and – later in the week – it said it would do so, but at a slower pace, reducing the amount of purchases from €80 billion to €60 billion.

The bank also kept interest rates on hold as expected.

Speaking after the meeting in Frankfurt, Draghi stressed the bank was leaving open the possibility of increasing the size and scope of the programme if needed.

****

A little closer to home, the Republic’s exposure to the UK’s impending exit from the EU was laid bare in a new report by the Central Statistics Office.

Brexit: Ireland and the UK in Numbers said the UK accounts for €33 billion of Irish exports and is responsible for about 40 per cent of all incoming visitors.

In terms of trade, the Republic exported €15.6 billion (13.9 per cent) of goods exports to the UK last year – the largest of which was meat, which accounted for about €1.9 billion.

There was also significant trade in medical and pharmaceutical products; and organic chemicals.

The UK accounted for an even greater proportion of Irish service exports, taking roughly €18 billion (18 per cent) of the total, with computer and business services accounting for the lion’s share.

On tourism, the total expenditure (excluding fares) by non-residents on overseas trips to the Republic was €4.2 billion in 2015, and expenditure by visitors from Britain accounted for €971 million (23 per cent) of this.

Ratings agency Fitch also expressed concern about what may be coming down the tracks.

Fitch, which measures the ability of businesses and organisations to pay their debts, has revised the outlook for Irish banks to stable from positive.

“Brexit is negative for Ireland’s long-term economic and political prospects, putting pressure on gross domestic product growth and creating uncertainty around relations with Northern Ireland,” it said.

****

It’s not all bad though, according to Green Reit chief executive Pat Gunne, who said UK firms looking to relocate to the Republic after Brexit are already beginning to actively seek office space here.

Addressing shareholders at the property investment group’s annual general meeting in Dublin, Gunne said inquiries had now moved on to “a couple of hardened requirements” for office space, and that agreements will start to be made in the first quarter of 2017.

He acknowledged, however, that most activity remains purely exploratory and said it was “really too early to call” how much business may move to Dublin from London.

In the North, which is likely to be Brexit’s ground zero, secretary of state James Brokenshire was in the United States for a two-day visit in an attempt to woo potential new investors.

Brokenshire told companies of the “outstanding opportunities” in Northern Ireland. The US remains the North’s top foreign direct investor and one of its key export destinations for local businesses.

The outlook for the UK remains grim though, with Simon Kirby, of its National Institute of Economic and Social Research, saying it will have to renegotiate at least 56 trade deals after it withdraws regardless of what deal it secures with Brussels.

“This is an enormous task, taking into account that the recent EU trade deal with Canada took approximately seven years,” he said.

“We’re going to have to do about 56 of these after we’ve negotiated our new relationship with the EU, which might take longer that the two-year withdrawal window.”

****

Back home, another potential headache for Michael Noonan lies in the introduction across Europe of a Common Consolidated Corporate Tax Base (CCCTB).

A new report by the Economic and Social Research Institute (ESRI) warned it would seriously damage Irish investment flows, staunch the State’s tax revenues and spark a swift rise in unemployment.

The ESRI said the introduction of a CCCTB could wipe 1.5 per cent off Irish economic output.

The flow of foreign investment into the State would fall by about 5 per cent, while Irish corporation tax revenues would fall by about 5.5 per cent.

The Government is fiercely opposed to the plan which would essentially force multinationals to apply Ireland’s 12.5 per cent corporate tax rate to a smaller proportion of their income.

****

As rents and property prices continue to rise, the Central Bank said as many as 80 per cent of borrowers currently on standard variable rate mortgages could save money by switching to alternative products.

Speaking at a session of the joint committee on finance, public expenditure and reform, Ed Sibley, director of institutions at the bank, said the level of switching by mortgage customers had more than halved in recent years from a high of 20 per cent to 8 per cent.

Separately, the bank’s relaxation of mortgage lending rules and the Government’s planned intervention to assist first-time buyers were criticised as “not prudent” and likely to generate further house price inflation by Friends First economist Jim Power.

He said the current housing issues could have been better addressed by supply side measures such as reducing VAT in the construction sector, cutting development levies or speeding up planning.

Meanwhile, it emerged the three panel members hearing the Central Bank’s inquiry into Irish Nationwide Building Society are being paid €150 an hour, subject to a maximum of €750 per day.

Inquiry members can also claim travel costs and expenses consistent with “Government circulars and guidance”, the bank told The Irish Times.

The inquiry was established in July last year, following an investigation by the Central Bank into INBS stretching back to 2010.

The inquiry is being chaired by Marian Shanley, a solicitor, with the other members being barrister Ciara McGoldrick and Geoffrey McEnery, a former chief executive of Lloyds TSB Bank in Asia.

The Central Bank is also to increase its staff numbers by 115 on a net basis by the end of this year to help fill key vacancies in its workforce.

This emerged after Fianna Fáil finance spokesman Michael McGrath was told there were currently 149 vacancies.

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