Cantillon

Inside the world of business

Dukes squares up for Anglo

THE CHAIRMAN-designate of Anglo Irish Bank, Alan Dukes, used the forum of the ISME annual launch yesterday to mount a staunch defence of the bank’s preferred option for the future – the splitting of the bank into a good and bad bank. The robust, almost defiant, tone and content of his speech was presumably intended to quell growing public disquiet about the bank’s preferred strategy – a disquiet founded mainly on growing scepticism about the bank’s contention that it would cost more to close Anglo than keep it open.

What the speech highlighted was an emerging gap between the bank’s position and that of the Government.

While Dukes insisted there was no shift in policy, Brian Lenihan said during the week that he has “no preferred approach” to the future of Anglo Irish Bank. Whether the Minister is mindful of public concern about the merit of keeping Anglo open, or is conscious of the viewpoint of the European Commission, which will ultimately decide the future of the bank, the Government seems to be moving away from definitively giving its support to the option of splitting the bank in two.

Dukes yesterday unequivocally defended the option of dividing the bank into two entities, insisting the taxpayer would incur a greater loss if the bank was wound down. While his appeal to logic was persuasive, his argument fell down on a lack of detail, primarily due to the fact that neither Anglo nor the Government is willing to publish details of the restructuring plan.

Lenihan said during the week that because of the commercial sensitivity of the information and the need to ensure proper protocols are observed in dealing with the commission, it is not appropriate to publish the details of the plan.

There may be some merit in this argument, but by refusing to furnish the taxpayer – who is, of course, the owner of the bank – with details pertaining to the bank, Anglo and the Government run the risk of losing public trust and support in the process.

Windfall tax plan and the corridors of power

ON THE face of it, the Government’s plans to tax windfall profits made by electricity companies on free carbon credits look like a good, old-fashioned racket.

Customers are paying the full price of the greenhouse gases emitted by the plants generating the electricity. But the plant operators do not have to pay the full cost of their emissions until 2012, and are earning tidy profits – up to €200 million according to some estimates – on the difference.

The Government knows this and wants a slice of the action. So it is introducing a windfall tax that it believes will raise €75 million. It intends giving this back to customers that use large amounts of electricity to help ease the burden of their energy bills.

Nobody needs to be told how important it is that we protect jobs, but the fact that the windfall tax exercise is necessary to do this means we should be asking questions about our supposedly competitive electricity market.

Barring the ESB’s domestic charges, the market is wholly deregulated, has several big players and is an all-Ireland market. In addition, there is more and more “cheap” wind power becoming available on the system.

All this should be adding up to competitively priced electricity. So why is that not happening? One answer is that the suppliers are profiteering. They say they are returning the windfall to customers as discounts.

The other is that the market is not working as it should. There are grounds for this, as it is still a work in progress. The real answer is probably a combination of both.

The market is not fully developed, and the various payments that are artificially structured into it, such as the emissions charge, give companies the scope to profiteer. Instead of imposing windfall taxes, the Government needs to establish if its workings can be improved for the benefit of all customers.

Domestic advances no antidote to contagion

AMID LOCAL fear of contagion from the Greek emergency, it is easy to overlook the fact that it’s been a good week for the Irish economy. The number of people signing on fell last month. April tax receipts overshot the Government’s expectations. And retail sales rose for the third month in a row in March.

Davy analyst Rossa White said the figures confirmed that Ireland had indeed exited recession.

Even the banks chipped in with some less than horrendous quarterly trading updates.

Sadly for Irish citizens footing the bill for years of Government extravagance, such positive indicators have not been rewarded in lower borrowing costs for the State. Bond markets haven’t particularly cared of late that Ireland has no major debt refinancing obligations this year. Two-year bond yields have spiked despite this comforting fact. So if these all-powerful bond investors remain unimpressed that Ireland has no major bills looming, just imagine how enamoured they are with news that consumers are buying sofas again.

After a week of serious pressure, the spread on 10-year Irish bonds above the benchmark German rate remained above 3 per cent yesterday: a record high.

The National Treasury Management Agency is now expected to skip the monthly bond auction scheduled for May 18th. Ireland can afford to do this as it’s got a cash cushion from the agency’s policy of borrowing significantly in advance of requirements. But the developments show just how tight a grip that international markets have on the fate of the economy. It ultimately doesn’t matter to investors in Ireland Inc how much Irish shoppers spend or workers earn: contagion worries will cancel out domestic improvements every time.

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