Cantillon

Inside The World Of Business

European Monetary Fund project faces complications

THE GERMAN finance minister’s weekend suggestion that the euro zone look at some sort of International Monetary Fund-type structure has been followed by the well-choreographed endorsement of his leader and the admission by the European Commission that work on the “European Monetary Fund” as it will inevitably become known is already under way.

The case for the EMF is a simple one. The Maastricht treaty establishing monetary union quite sensibly rules out bail-outs. However, it cannot – as we have discovered – rule out eurozone members making a mess of their economies to such an extent that they need a bail-out. The only possible lender of last resort is thus the International Monetary Fund, but an IMF intervention in a euro-zone economy would be a mortal blow to the credibility of the euro.

This all seemed somewhat academic when the Maastricht treaty was signed. but as our economic problems and Greece’s subsequently travails have shown, the once unimaginable is now firmly in the realm of the possible. The solution then, is to create a new euro-zone body that can bail out euro-zone members. Simple in theory, but complicated in practice.

Some sources in Brussels seemed to suggest yesterday that it could be done within existing treaties. Angela Merkel, however, has moved quickly to dispel that notion, pointing out that a bail-out of one euro-zone member by other euro-zone members – by whatever route – is just that, a bail-out and is thus forbidden.

Merkel has countenanced changes to the European treaties if necessary, not something one would expect her to suggest lightly given the difficulties involved in passing the Lisbon treaty. But given that Ireland will be close to the top of the list of countries that might need EMF help, its a reasonable assumption that any referendum will be passed here.

More chilling is the unspoken assumption behind the EMF concept that, even if the euro zone weathers the current crisis, there is a growing realisation among euro-zone members of the real prospect of more problems given the mountain of debt members are taking on.

Sterling speculation

AS IF Ireland’s euro exporters didn’t have enough to worry about, it now appears as if the value of sterling is set to slide every time a British newspaper publishes a poll on Cameron v Brown v the other guy. Last week, the pound tumbled – principally against the dollar – apparently because of fears of a hung parliament following a poll that placed Conservative leader David Cameron just two points ahead of Gordon Brown. The uncertainty about who would be left holding the purse-strings was enough to attract a swarm of speculators to currency markets, where concepts such as social responsibility and economic patriotism are non-existent.

The pound’s precipitous fall below the $1.50 mark prompted Liberal Democrat leader Nick Clegg to assure the Financial Times that he would not force a second general election should neither the Conservatives nor Labour win outright. The Lib Dems were “guarantors of fiscal stability”, Clegg declared, which is more than can be said for currency speculators.

Indeed, the recent outpouring of negative sentiment against the euro (a counterbalancing factor for exchange-hit Irish exporters) has been attributed to the increasing ease with which speculators can now make vast bets for a relatively small outlay (a key facet of the subprime housing bubble). One fund manager declared that a fall in transaction costs was allowing traders to sell short (betting on a fall rather than a rise) millions of euro “for the price of a cup of coffee in Starbucks”.

Whether or not the next British government turns out to be strong enough or even inclined to slash the UK economy’s budget deficit will be mostly irrelevant: speculators, as their name implies, trade on gossip and confusion rather than concrete strategies.

No China property tax

INVESTORS IN Shanghai’s property market breathed a sigh of relief yesterday after the threat of a government property tax receded. There was speculation that the proposal would be included in a report to China’s National People’s Congress (NPC) on measures to cool overheating in the country’s property market.

It did not materialise, and as a result, property indices measuring developers in the Shanghai market gained ground.

China Real Estate Opportunities (Creo), the vehicle backed by Richard Barrett’s and Johnny Ronan’s Treasury Holdings, has most of its assets in Shanghai, where, according to its results yesterday, the commercial property market was difficult. During the year, office vacancies in the overall market peaked at around 14 per cent, although that eased as 2009 closed.

Creo’s properties outperformed this, with 79 per cent office occupancy and 97 per cent retail occupancy at the year’s end.

It had a strong rate of renewals and new tenants, and refurbishment and reorganisation boosted gross rental income by 5 per cent per square metre.

Colliers recently published a report predicting that non-residential property will perform better than residential real estate in Shanghai this year. Creo’s exposure is to the commercial, or non-residential, market.

The real focus of government policy in China is the residential market, where it has said that it wants to curb speculation, cool overheating and limit the risk to the banks.

Creo points out that the government has traditionally relied on giving banks loan quotas to slow or accelerate growth. A stimulus package launched last year means that it has been driving growth, but there is always the risk that it will reverse this policy.

TODAY

Irish Stock Exchange chief executive Deirdre Somers and chairman Padraic O’Connor, appear before the Oireachtas Joint Committee on Economic Regulatory Affairs to discuss the regulation of stockbroking firms.

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