Cantillon

Inside the world of business

Bailout writing on the wall for Lisbon

THE DENIAL by Germany that it is pushing Portugal to accept a bailout has all the ominous connotations of a football team manager receiving the “full support” of the club chairman.

The parallels between the way events are unfolding with respect to Portugal and the choreography of Ireland’s “decision” to seek aid also indicate that the writing is on the wall for Lisbon.

Portugal and its would-be saviours are currently engaged in the same phoney war that simmered here in November, with their public denials at odds with the private briefings.

The outcome seems inevitable and the timing may become a little clearer tomorrow when Portugal looks to raise €1.3 billion of three- and seven-year bonds.

Yields on Portuguese bonds are already more than 6 per cent and ahead of the “blended” rate being charged to Ireland under its financial support programme.

Any sustained move above these levels would leave Portugal with little choice but to turn to the EU and the IMF. It’s worth noting that – as was the case in Ireland – the pill is being sweetened by briefings to the effect that the conditions attached to the package are unlikely to more stringent than the measures already approved by the Portuguese government in its 2011 Budget.

A significant move this weekend could not be discounted as it would mimic the Irish process, with a euro group meeting already scheduled for Monday evening.

The only missing piece of the jigsaw is why Europe wants to bounce Portugal into a €80 billion rescue at this point. The most likely explanation is it wants the issue resolved now in the belief that it will take some pressure off Spain. This, in turn, will create some space for the delicate job of getting the Germans on board for a bulking up of the rescue fund to allow it to deal with Spain when the time comes.

Debt reduction an option in rescue plans 

THE HIGH Court ruling yesterday on the McInerney companies’ rescue scheme contained hope for anyone looking to buy businesses in the Republic that are overburdened with debt.

Mr Justice Frank Clarke said he saw no reason why the courts should not have the jurisdiction to write down the debt of a secured creditor as part of a rescue plan (or scheme of arrangement, as they are known) in an examinership. He said the law allowed the sum due to secured creditors to be reduced in such schemes. Such a move would not result in the removal of the security; the creditor would remain secured, but for the lower sum.

Debt is a big issue for potential investors interested in buying distressed assets in the Republic. Now that the High Court has said that examinership allows even secured debts to be written down, there is a formal, legally binding structure there to reduce liabilities, making it easier to save some companies.

There is one fly in the ointment: the banks. As they provide much of the work for various professional advisers, they will have no shortage of experts willing to provide them with figures to back up any case that they might make opposing such a move.

Not so funny how banks passed the stress tests

THE EXPLANATION proffered by European Commission vice-president Joaquín Almunia for how AIB passed the European banking stress tests last July – only to need another €3 billion in September – is both alarming and comical.

If the reply given to the question asked by Alan Kelly MEP is correct, it appears that the much- vaunted independent European test amounted to little more than the rubber- stamping of the prudential capital assessment review (PCAR) carried out by the regulator in March.

This proved inadequate because it, in turn, was based on false assumptions about the extent of the haircut that would be applied to loans transferring from the banks into Nama.

That’s the comical part.

The alarming part is that the purpose of the European tests, carried out under the auspices of the London-based Committee of European Banking Supervisors (CEBS), was that it was supposed to allay doubts about the efficacy of the stress tests and other analysis carried out on banks by their own regulators.

The apparent lack of any rigorous challenging of the Irish regulator’s tests casts serious doubts about the value of the thumbs-up given by CEBS to the rest of the European banking system. It comes as no surprise then that it failed to serve its purpose, which was to convince European banks that it was safe to lend to each other, and to peripheral country banks in particular.