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Inside The World Of Business

Consensus on interest rate turn begins to unravel

BRIAN LENIHAN may have declared a turning point in the Irish economy in December but, for heavily indebted mortgage-holders, there is an unwelcome turning point yet to come – the policy turn in euro-zone interest rates that will come courtesy of the European Central Bank (ECB).

Having chipped and slashed away at the euro zone’s key lending rate, bringing it down from 4.5 per cent to a historic low of 1 per cent as recession unfolded, the ECB’s monetary policy committee is now settled in a short-term holding pattern, waiting for the moment at which it will once again become appropriate to nudge rates upwards.

This turning point has until very recently been provisionally pencilled in for the second half of 2010. At some point during this period, the consensus among economists was that the euro-zone economy would be growing strongly enough – and, more specifically, euro-zone inflation would be picking up fast enough – to justify and indeed require a price-containing increase in interest rates.

Lately, however, this consensus has begun to unwind. Rather than bouncing out of recession, the euro zone is limping out of it, with peripheral states like Greece providing a whiff of uncertainty to the euro-zone’s fortunes. While this is ostensibly bad news, it does have the effect of pushing interest rate hikes off the agenda – good news, in other words, for Irish people lumbered with peak-market mortgages.

Yesterday, analysts at NCB Stockbrokers predicted that the ECB, the Bank of England, the US Federal Reserve and the Bank of Japan would not hike rates at all this year. Unless economic growth accelerates significantly, “sometime in 2011” is now the new “second half of 2010”.

That means more breathing space for borrowers – in particular for those whose rates formally track the ECB’s key lending rate. Borrowers on standard variable rates, meanwhile, may still see the cost of their mortgage increase this year, as lenders seek to claw back losses by widening loan margins.

Quinn family’s affairs paint complex picture

Auditor’s reports on the unpublished accounts of unlimited companies don’t make sexy news stories but the “adverse finding” included in the PricewaterhouseCoopers (PwC) report on a Quinn family holding company, filed recently, is a legitimate cause of concern.

According to the report, the directors of Quinn Finance Holding believed it would take a disproportionate amount of time and money to produce consolidated accounts for the group.

The company owns Quinn Finance, which in turn has a stake in a Swedish company that owns property from Central Europe to India.

The group is also involved in the Quinn family’s disastrous involvement with Anglo Irish Bank. Do we take it from the PwC note that the family’s affairs are so complex, no one has a clear picture what the state of play is? PwC posted two reports, one for the 2007 year and one for the 2008 year, so the time issue should be seen in that context.

The Quinn family, and the Quinn Group, are understood to be the largest single customer of Anglo Irish Bank. The Quinn Group includes Quinn Healthcare, Quinn Insurance, and many other important Irish businesses. The group says its profitability and size should be remembered when considering its losses from Anglo, but there is no arguing with the fact that the sums involved are material.

More information as to what is going is not an unreasonable ask, but the family prefers to keep its cards close to its collective chest. We don’t know the stakes involved.

IFSC’s falling tax take not necessarily all bad

You will miss me when I am gone. The latest figures for the tax take from IFSC-based entities highlights both the importance of the sector to the exchequer and also the dangers of relying too heavily on any one particular sector of the economy for tax revenue. Not that Ireland – with its addiction to property taxes – needed any further lessons in this regard.

Tax revenue from the IFSC appears to have fallen in line with overall corporation tax, with its share of the overall corporation tax remaining steady at 16 per cent. But it would be premature to conclude that it will increase in a similar fashion once the international recovery takes root.

You would need first to have a handle on the extent of the losses incurred by IFSC-based entities in 2008 and some understanding of how the various companies plan to use those losses to smooth their tax bills over the coming years.

It would be only prudent to assume that these losses are extremely large. West LB, for example, has reported losses of €473 million at its Dublin operation, in relation to its Kestrel vehicle. As a result West LB is not likely to be paying very much tax in Ireland in the foreseeable future. The carrying forward of losses is presumably the explanation for the tax take in respect of 2009 being down some 25 per cent on 2008 – which was the banking sector’s actual “annus horibilis” .

This trend will most likely continue but it is not necessarily all bad news. Paradoxically, the availability of losses to offset against the already very low tax charge at their Dublin operations may actually count in Ireland’s favour as international banks look to trim operations.

Today

Leading food business Kerry Group publishes preliminary figures for its performance in 2009.

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