Cantillon

Inside the world of business

Noonan bangs Geithner's drum

FINANCE MINISTER Michael Noonan appeared to let his guard down yesterday when he called for the European Central Bank to use a wall of money to tackle the spiralling European debt crisis.

He called on the ECB to man up and “go into the market and say, ‘We have a wall of money here and no matter how much speculation there is, we’re going to keep buying Italian bonds or any other euro bonds that are threatened’”.

The willingness of the ECB to follow the advice of the Minister for Finance is debatable at the best of times. The likelihood that it would do the bidding of one of its wards at present is remote, given among other things that it flies in the face of the bank’s position that it will not debase itself to save the euro and the solution must be found by the member states.

As a result of his outburst on RTÉ, Mr Noonan now finds himself somewhat offside with the German chancellor, assuming she was not too busy to listen.

But he does find himself onside with Tim Geithner, the US treasury secretary who has been banging this particular drum for some time. Not surprisingly the large US banks are also of the “big bazooka” school of thought, with Citi’s Willem Buiter currently leading the charge.

Writing in the Financial Times on Tuesday Buiter reiterated the arguments he has made in recent research notes to the effect that the €1 trillion bazooka that is currently being loaded by Europe will not be enough.

It will have to be increased to €2.5 trillion or more before the markets will back down in the face of what they consider superior fire power. The only other alternative to a catastrophic implosion of the euro zone is for the ECB to make up the difference by buying as many Spanish and Italian bonds as it takes, he predicts.

Given the difficulties the current plan has run into, Buiter’s prediction that the ECB will eventually have to step in some time next year is looking more and more prescient.

Denis O'Brien's known unknowns and Eircom

IT RARELY pays to underestimate Denis O’Brien, but the mobile phone magnate’s reported plan to take a tilt at Eircom does seem to be very ambitious.

A formal bid from O’Brien’s Digicel vehicle could be just days away, it has been suggested.

If it does materialise, it will hopefully contain the answer to an obvious question, which is: how would Digicel manage Eircom’s massive debts. They stand at €3.7 billion and are considered unsustainable.

A write-off in the region of €1 billion is already on the table in the negotiations with bondholders that provide the backdrop to the takeover speculation.

Further losses can be expected as Digicel tries to drive a wedge between the various classes of creditors, but the business will still be left with significant debts of between €2 billion and €3 billion.

What is not clear is the extent to which Digicel would be able to use its balance sheet to support a takeover of Eircom or raise funds to invest in the business.

There is only a limited amount of information about Digicel in the public domain, but what is common case is that it has debts of $4.6 billion, and a turnover of $2.23 billion mostly drawn from 11 million customers. Profitability, free cash flow and all that stuff that financiers care about remains closely guarded.

On the face of it, Digicel’s ability to leverage itself further would have to be questioned in the current market, but one has to assume that O’Brien has a solution to the problem.

Watching with interest no doubt are the O’Reilly faction at Independent News Media who must be hoping that even 11 million mobile phone users in the Caribbean and Central America could not fund simultaneous assaults on Eircom and INM where O’Brien has both a 22 per cent stake and ambitions to wrest control.

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TODAY

Live register figures for October are due out this morning.