Cantillon

Inside The World Of Business

More proof if it is needed  that Ireland is not Iceland

IT IS HARD not to admire the people of Iceland for their refusal to absolve British and Dutch depositors of the moral hazard incurred when they put their money on deposit with Icelandic banks they had never heard of but which were offering exceptional interest rates.

Finally, somebody somewhere seems to have shouted stop. Specifically, they have challenged the new orthodoxy that taxpayers must shoulder losses associated with national bank collapses because the consequences of not doing so are far worse: pariah status for their country in the international debt markets.

It is the argument that underlies the National Asset Management Agency and the rescue of Anglo Irish Bank in particular. If we don’t keep AIB and Bank of Ireland going – and Anglo on life-support – the ability of the country to borrow will be severely impaired, or so we are told.

Events in Iceland may well prove a test of this hypothesis, assuming the people of Iceland don’t “see sense” and vote through the proposal to repay Icesave depositors in a referendum. Assuming they don’t, it will be interesting to see if the apocalyptic consequences that have been predicted manifest themselves. If they don’t, and such things rarely do, it will call into question the logic of our own bank-friendly approach to dealing with the banks.

Ireland is not Iceland though (in more ways than one, it is clear) and what works there may not work here. Our membership of the EU and the euro zone imposes obligations and constraints, as does the explicit Government guarantee of the banks given in September 2008.

An upsetting of the financial markets apple cart on the scale implied by Iceland’s public revolt over their government’s approach to its banking problems would probably serve Ireland well, given the scale of the problem we face. It would be most unwelcome though for our larger euro zone partners who have more to lose than gain from such a revolution. A recognition of this is one of the reasons that Europe went to such lengths to prevent a collapse of the Irish financial system last year.

While we can admire the people of Iceland, we are thus unlikely to be able to follow them.

What we can do is to recognise – as they have – that what we are being asked to do in terms of Nama is fundamentally unjust and to work to ensure that Europe brings in the financial market reforms needed to ensure that we don’t ever again have to socialise the losses of a dysfunctional financial services industry.

Glanbia: caution or confidence?

WITH OMINOUS phrases like “weak consumer demand”, “difficult year” and “unprecedented trading environment” lacing yesterday’s Glanbia trading statement, the casual reader would never guess that the stock was only the previous day hailed by Davy Research as one of its top 10 stock picks for the year. “Could be the big recovery play in 2010” were its exact words.

So why the caution from Glanbia? Or, to put it another way, why the confidence from Davy?

Analysts at the stockbrokers reckon its share price has been influenced by 2009’s precipitous fall in global dairy market prices perhaps more than it should have been, given the extent of the company’s diversification away from Irish milk processing and into an international nutrition business.

While milk farmers may have reeled from last year’s plunge in commodity prices, for share buyers Glanbia was more easily digested, with its stock climbing 35 per cent over 2009.

Overall, the Irish food and beverage sector finished the year up a tasty 42 per cent – another reason why fellow foodies Kerry and CC are listed alongside Glanbia in the Davy top 10.

Still, Glanbia’s ascent in 2010 is contingent on recent upward momentum in global dairy product prices continuing. It is in many ways a big “if” – and one that explains the food group’s mention of “volatile” markets and “fragile” consumer sentiment in its outlook statement.

The Irish cheese players were not the only dairy company to issue a statement yesterday.

Fonterra Co-operative Group, a New Zealand-based company that also happens to be the world’s largest dairy exporter, noted that milk powder auction prices have fallen for the first time in six months, after reaching a 16-month high in December.

Demand from food manufacturers to rebuild their stocks has now slowed. The question remains whether a period of stability for dairy prices will ensue – at higher levels than in 2009 – or whether Fonterra’s indication that dairy prices may “bounce around” will be the possibly uncomfortable reality for the year ahead.

A few crumbs of comfort

IF YOU’RE one of the band of optimists who believe that “we’ve turned the corner”, yesterday’s trading update from builders’ merchant and DIY specialist Grafton could bolster your confidence. The owner of Woodies, Atlantic Homecare and Heitons did not waste any words, but said that while trade was down, its businesses stabilised through the second half of 2009. Turnover was down 26 per cent at €1.98 billion.

Davy analyst Flor O’Donoghue calculates that this means second-half revenues were €990 million, in line with the first six months of the year and 1.7 per cent ahead of expectations. He also suggests that his firm’s view that Grafton sales will be €1.9 billion this year is “a little tight”. Much of the stabilisation occurred in Britain, where mortgage approvals in November jumped to 60,000 from a low of 27,000 12 months earlier. At the same time, housebuilding has resumed and there were even signs of property price inflation.

Ireland struggled, but there were a few crumbs of comfort. Second-half sales were down 32 per cent, compared to 37 per cent in the preceding six months, which could indicate that we’ve reached a trough.

Nobody can really tell if these signs add up to anything and – pretty sensibly – Grafton itself is cautious about the coming year. However if you’re a Grafton shareholder, you can take comfort from the fact that the group has done a good job of managing its way through the slump.

At the end of the first half last year, it had €270 million in cash balances and it said yesterday that it was continuing to generate cash. It had knocked €56 million of its debts at the 2009 interim stage, cutting them to €380 million, leaving it with a strong balance sheet.

This indicates that Grafton’s decision to cut costs as the recession kicked in two years ago has paid off. It also means it is in a good position to cash in rather than merely stabilise when things recover.

Today

The National Treasury Management Agency will publish its annual report outlining its actions in 2009 to raise money to offset the exchequer deficit. Figures for the performance of the National Pension Reserve Fund will also be published.

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