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Inside the world of business

It's an ill wind for Ireland as market fills Anglo vacuum

YOU CREATE a vacuum, a market will fill it. It’s pretty simple stuff.

The Government’s decision to unveil its wind-down plan for Anglo Irish Bank three weeks ago without full detail of how it will work or the exact cost created a vacuum, and the markets have been filling it with concerns about what it might involve.

As the two-year banking crisis has taught us, uncertainty is hugely damaging and without a definite plan of action – and the cost involved – the markets and investors get very nervy.

Yesterday, credit ratings agency Moody’s knocked Anglo’s senior debt rating down by three notches to a level just above junk status.

The downgrade came on much speculation that the Government will seek to negotiate a deal with the investors behind the €4.2 billion tranche of senior debt coming out from under the umbrella of a Government guarantee on Thursday.

Minister for Finance Brian Lenihan has made it clear that Anglo’s €2.4 billion of subordinated debt, including the €1.8 billion dated part of which will not be covered by the guarantee from tomorrow, will be on the table in a voluntary buy-back which could help save on the bank’s losses.

However, Lenihan has said that it would be “unthinkable” for the Government to default on senior debt. But clearly he has not ruled out the possibility that Anglo could get these investors into a room and negotiate a discount with them too to share some of the bank’s costs.

These stand at about €25 billion currently but are expected to rise above €28 billion and possibly much higher in a stress scenario.

An announcement on the cost of Anglo’s new funding and asset recovery banks, their establishment – and an estimate on the final bill for Anglo – is expected this week, possibly also on Thursday. The difficulty is that it will be only an estimate as it will be impossible to know what Anglo’s loans sell for over the 15-year wind-down and how much it will cost the Government to fund the bank, its loans and deposits.

Ardagh’s transparent success

THERE COULDN’T be a sharper contrast between the fortunes of Ardagh Glass’s shareholders and the consortium to which the company sold the glass bottle site in Ringsend, Dublin, for €412 million in 2006.

Ardagh has just bought Impress Cooperative, which makes cans for John West, Del Monte and Crown Paints for €1.7 billion – more than three times the value of AIB – and is said to be eyeing part of rival Quinn Group’s glass business in the north.

Investors who came on board the group, chaired by financier Paul Coulson, in 1998, have seen their money multiply by 50 times. In contrast, Becbay, the syndicate that bought the Ringsend site and whose members included the State through the Dublin Docklands Development Authority, has seen about 90 per cent wiped off its investment’s value in four years.

Ardagh’s business might seem a little old-fashioned to smart economy advocates and those who thought that the way to make money was to buy any property at any price – it makes a profit from manufacturing and selling products that people need, and will therefore buy.

The company shifted out of Ringsend and Ireland at a time when manufacturing costs here were rising and, thanks to a speculation binge fuelled by people with more borrowing capacity than brains, so were property values.

The same binge made us think that doing basic things like making and selling goods for which there is a demand was beneath us.

Now that the dust has settled, it might be time to look at how we could bring back some of the Ardaghs of this world, or at least get some of their operations to locate here.

If the reports about its interest in Quinn were true, that would be a start, and if it wanted to set up shop in Dublin, well, there’s a near-perfect industrial site available on the southside of the city’s port.

More advice for Finance

IT WAS interesting to note that the Department of Finance has turned to yet more outside expertise to boost its ranks after much criticism of the department’s failure to spot or indeed do anything about the warnings about an over-heating economy and an inflating property bubble during the boom.

The department has brought in Jim O’Leary, a one-time board member of AIB and formerly a columnist with The Irish Times.

O’Leary joins the department as senior economic adviser in the budget, taxation and economic division, reporting to Michael McGrath, the assistant secretary in charge of this section.

He was chief economist at stockbrokers Davy from 1987 to 2001, and he has been a senior economics lecturer at NUI Maynooth. O’Leary bared his heart in a confessional article in this newspaper during the summer about his role as a non-executive at AIB until 2008, marking the bank’s darkest period over the financial crisis.

The article coincided with a speech at the MacGill Summer School where he said that it was a matter of “profound personal regret” that he did not speak out more strongly during the boom to warn of a possible collapse.

Now he will advise Brian Lenihan on how to pull the purse-strings. He might bring a cross-party view given that he advised Fine Gael on the party’s discussions on a programme for government with the Labour Party in the rainbow coalition days of the mid-1990s.

Today

Senior Ministers including the Taoiseach Brian Cowen and Tánaiste Mary Coughlan will attend the launch of a major new integrated plan for trade, tourism and investment.

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