Cantillon

Inside the world of business

Straight-talking Honohan unable to stop ticking clock

PATRICK HONOHAN has made a name for himself by giving straight answers to questions. As such it might be dangerous to read too much into his comments on the merits of turning to the International Monetary Fund (IMF) or the European Financial Stabilisation Fund.

He was more likely to have been merely responding to questions on the issue than attempting to call the bond market’s bluff when he said the IMF and Europe would be unlikely to look for anything more by way of fiscal adjustment than we are already contemplating unilaterally.

But even so, it is the first time a senior official has voiced an opinion as to what might happen if Ireland is unable to access the markets next year at reasonable interest rates. His comments may reassure the Irish public but they have done little for the increasingly febrile bond markets.

Irish bond yields continued on their upward trajectory yesterday, with the panic over a potential default spreading to the short end of the market, despite no prospect of a restructuring being contemplated by anyone in Europe including the Germans this side of 2014.

This can be seen as further evidence that the markets are overreacting. The question for Ireland now is whether calm will return by the time the State runs out of money in mid-2011. The biggest danger in the current bout of turmoil is arguably that the higher yields spike in the current climate – be it for rational or irrational reasons – the longer it will take for them to return to the levels at which Ireland can fund itself on a sustainable basis. Tick-tock.

National pension fund playing the long game

WHEN THE National Pensions Reserve Fund (NPRF)issued its portfolio update for the first nine months of this year on October 30th, it generated some negative headlines relating to the €7 billion “directed investments” in AIB and Bank of Ireland.

The NPRF’s figures put a value on this investment of €6.615 billion at September 30th, suggesting a decline in worth of almost €400 million on its stakes. Cantillon has since been advised that this figure does not capture the full return from the investments to the pension fund. It did not include income of €603 million generated by AIB and B of I.

This was received in cash and transferred to the NPRF’s discretionary portfolio, where it is then available for general investment as part of the fund’s overall strategy.

The €603 million in income comprises: €491 million in consideration from Bank of Ireland which repurchased the warrants issued in conjunction with the 2009 preference share issuance; €60 million in arrangement fees for the 2009 preference share investment (€30 million from each bank); and €52 million in transaction fees from Bank of Ireland relating to the NPRF’s participation in a share placement and rights issue by the bank.

Add this to the directed investment figure and you get a figure of €7.218 billion by way of return at the end of September. This is good news but don’t crack open that bottle of vintage Blue Nun just yet.

The value of both banks has fallen sharply since the end of September as AIB lurches towards effective nationalisation, markets jack up the yields on our bonds, and the Government plans a €6 billion budget adjustment.

The NPRF is also set to underwrite a large capital raising at AIB by paying 50 cent for shares that are currently trading at 35.5 cent.

It seems fair to expect that the fund is going to have to play a very long game to get our

‘Assurance leader’ not living up to his title, sadly

IN THESE dark, dispiriting days for the nation, it’s good to know that PricewaterhouseCoopers employs someone who goes by the title “assurance leader”.

Unfortunately, what Kevin Egan, PwC assurance leader, had to say about the accountancy firm’s latest “snapshot” survey of more than 800 Irish-based business executives was not very reassuring for anyone looking for a job or desperately clinging onto the one they have.

The headline survey results seemed positive. Over half (58 per cent) of the multinational executives participating “confirmed confidence in brand Ireland, revealing they will maintain investment in this country at current levels”, with a further 27 per cent indicating they were considering additional investment.

The survey was conducted at a PwC conference for “business leaders” on Monday and Tuesday, meaning that not even Ireland’s current bond yields were enough to deflate their optimistic mood.

The outlook on employment was not so bright, however.

Half of the Irish company directors polled said they expected growth in turnover over the next 12 months, but only a quarter said they expected to increase their headcount.

Indeed, almost 30 per cent of Irish business executives said they planned to reduce their workforce over the coming year.

Cue Kevin Egan: “The expected growth in turnover over the next 12 months is unlikely to result in significant expansion in employment,” he noted. “There is a sense that any top-line growth is translating directly to bottom-line profit.”

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The Consumer Price Idex for October will be published while the Oireachtas Joint Committee on Finance is to launch a major report on macroeconomic policy and effective fiscal and economic governance. In Korea the G20 Summit gets under way.

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