Cantillon

Inside the world of business

ESB offer perhaps too good for Viridian to turn down

YESTERDAY’S ANNOUNCEMENT that the ESB is to buy Northern Ireland Electricity (NIE) for €1.25 billion means two State companies will end up owning and managing all of Ireland’s electricity transmission and distribution networks.

The ESB will own the two systems, while its fellow State company, Eirgrid, will manage both. It has been running the Republic’s grid since 2006 and last year bought the System Operator Northern Ireland (SONI), which performs the same task north of the Border.

The deal will also reinforce the ESB’s dominant position in the overall market, as a generator and supplier, and as the owner of key transmission and distribution assets, which get the power from generators to the customers.

The commercial state company has sold some of its older generating plants, which had a capacity of 1,300 mega watts (MW), to Spanish player Endesa, but is building a new 400MW facility in Cork that is likely to be used to near full capacity, as it will be among the most efficient generators in the State. So the ESB will continue to produce much of the electricity we use every day.

Some of its rivals want to see the ESB divest the Republic’s national grid to Eirgrid, and presumably they would not like to see it take over a parallel asset in the North. But the vendor was one of those rivals, Viridian, which has invested heavily in Huntstown Power and Energia, which compete against the State company for custom for large and small businesses, and a supply business in the North, which is also competing with the ESB.

It’s possible that Viridian thought that selling the NIE assets to the ESB would not disadvantage those operations. Or just as possibly, Viridian’s owner, Bahrain-based Arcapita, thought the offer too good to turn down.

Forgiveness on hold

Measures to address mortgage arrears do not fundamentally change the situation in which distressed homeowners find themselves, though the putting in place of a system to try to resolve issues without people having to lose their homes “so far as it is feasible and appropriate be aimed at assisting borrowers to remain in their home” will provide some comfort. Lenders will also be tightly constrained in how they deal with mortgage arrears.

However, two key issues remain. The report makes clear that forbearance is not always the right option. Some homeowners will simply never be able to repay their debt. In such cases, repossessions are likely, though the expert group on mortgage arrears has said it will consider options for such borrowers in the next phase of its work.

The second, and possibly related issue, is debt forgiveness – another matter that has been put off in the interim report. The argument relating to moral hazard emerges again, although this has been somewhat undermined by the bailouts given to the State’s main banks.

While there is some acceptance of the need for debt forgiveness in certain cases, there is no consensus on how such a policy would work. The banks clearly have already made provision in their accounts for debt they do not expect to recover. This, possibly, creates a sum of money that can be used in this context.

The balance rests in weighing the longer-term social and financial cost of doing nothing on one side with the financial implications of providing some limited form of bailout.

Even then, the question remains: who to help, how to choose? The signs from the expert group are that it is not particularly comfortable with the notion of forbearance, and presumably forgiveness, to keep people in homes they cannot afford and should not have acquired.

However, repossession in Ireland carries a particularly sharp sting in the tail. While you lose your home, you do not shed your liability for any outstanding debt. It is yet possible that forgiveness may be used to assist people in this worst-case scenario to at least start afresh with no debt overhang.

Stressing bank security

As ever with the EU, horse-trading over details has delayed publication of the details of the programme to stress test Europe’s banking sector to withstand the impact of a severe economic shock.

It emerged last night that Bank of Ireland and AIB will be among the 91 institutions across the European Union that will go through the exercise. Their inclusion was not unexpected.

Discussions over the scope of the tests and how much detail will be released when they are complete had delayed the announcement.

According to Bloomberg, two German banking sources said a haircut of 16 to 17 per cent off the market price would be applied to Greek debt.

No haircut would be applied to German sovereign bonds, the sources said, and French sovereign bonds would receive a 0.7 per cent markdown. Sovereign bonds of Portugal, Spain, Italy and Ireland would see more significant markdowns, the sources said. A 3 per cent loss will be applied to Spanish bonds.

There is little concern for Irish banks which have already been stress-tested more rigorously than this process will involve by the Financial Regulator.

However, with rumblings emerging within minutes of last night’s announcement that the EU tests were too soft, it is arguable how useful they will be in persuading the markets of the solidity of Europe’s banking sector.

TODAY:

The European Central Bank’s governing council meets to decide on interest rates. While no change is expected, ECB president Jean-Claude Trichet will detail the bank’s current outlook afterwards.

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