Cantillon

 

Inside the world of business

Commission's challenge to Government's Anglo stance

EVERY CLOUD has a silver lining and the hard line taken by the European Commission over how we account for the Anglo Irish Bank bailout is no different.

Of the many reasons put forward by the Government for why Anglo Irish Bank simply can’t be wound up is the argument that its €15.1 billion of senior debt has to be honoured and as result the State will have to take this debt onto the national balance sheet in a wind-up.

This would represent a substantial increase in the national debt and result in increased borrowing costs and so on. By keeping the bank alive, the argument goes, its senior debt can be kept off the national balance sheet.

However, the commission’s ruling would appear to negate, or at least challenge this argument. This is because it now appears that all of the capital that is to be injected into Anglo Irish Bank to keep it alive – which could be well north of €22 billion – has to be counted as Government spending and thus goes directly onto the balance sheet as debt.

It does not take a mathematical genius to figure out that it might now make actual sense to close the bank and add its €15.1 billion of senior debt to the national debt pile, rather than keep it going and have to add €22 billion or more to the national debt.

Unfortunately, because the Government and Anglo Irish Bank have chosen not to share with us the basis on which they concluded that keeping the bank going is the least expensive option for the State, we cannot really work out the extent to which the European Commission ruling changes things. But it obviously has some bearing on the cost-benefit analysis and in the interests of transparency some sort of clarification would be welcome.

Equally intriguing in this regard is the ease with which the Government has dismissed the impact of the European Commission’s ruling on Ireland’s standing in the bond market. The market, the Government blithely tells us, will easily distinguish between increases in the national debt related to the underlying economy and the increase associated with Anglo Irish Bank.

This, by any standards, is something of a volte face from the mantra that Anglo had to be kept going to underpin the sovereign rating. Needs must.

Not an ideal scenario

Bank of Ireland has successfully executed the first part of its multi-step refinancing and must be pleased with the level of interest expressed in its €500 million placement given the truly awful backdrop presented by Greece’s woes.

But it’s early days and nothing will be done and dusted until shareholders sign off on the deal at the extraordinary general court. Between now and then the details of the rights issue have to hammered out and the complex debt-for-equity negotiations worked through.

The plan is to have all the ducks in row for the egc, scheduled for May 19th.

This also happens to be the day on which €8.5 billion of Greek debt falls due for repayment and is seen as the outside deadline for agreement between Greece and the IMF/EU on the terms of their €45 billion aid package.

As things stand it looks as if the talks will go down to the wire, given that the German government faces important regional elections on May 10th, and the rescue is deeply unpopular in Germany.

It is not an ideal scenario to put it mildly given that the investment case for Bank of Ireland is essentially that it is a recovery play on the Irish economy, and continuing concern over Greece will inevitable inflict collateral damage on Ireland, both tangible and intangible. Fingers crossed.

More than mere flattery

Given that Microsoft chief executive Steve Ballmer came to town in 2005 when the software giant celebrated 20 years of its Irish operations, Taoiseach Brian Cowen may have felt short changed when having to share the stage with Jan Muehlfeit, chairman of Microsoft Europe, at the Smart Economy in Action event held to mark its 25th anniversary in Dublin yesterday.

But instead he got a welcome boost. While other multinationals have used the recession to raise issues about competitiveness that couldn’t get an airing during the boom, Muehlfeit used yesterday’s platform to point out what Ireland has got right in the last 25 years.

In the late 1980s, he said, we had the foresight to identify the opportunities in the technology sector which led to companies like Microsoft, Intel and IBM establishing their European operations here. Advantages today include our skilled workforce, track record in attracting investment and “smart economy vision” which he ranked ahead of the European Union’s.

The only gap in our offering is infrastructure, which he noted the Taoiseach had committed to addressing in his speech.

Some might say Muehlfeit was simply flattering his hosts but it should be remembered that Microsoft has a host of countries crying out to give a home to the 1,200 jobs it currently locates in Ireland. And Microsoft has more than doubled up its bets in Ireland with the building of its $500 million data centre in Dublin, which is central to its strategy of delivering software over the web.

Muehlfeit raised a few laughs by finishing with a quote from John Lennon: “You may say I’m a dreamer, but I’m not the only one.”

Let’s hope so.


TODAY

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