Inside the world of business
Timely warning for Ireland of looming interest rate rise
THE WARNING by the Bank of International Settlements that global interest rates may have to rise “sooner than may be comfortable” for many economies is both pertinent and timely for Ireland.
With some 32,000 households already defaulting on their mortgages and thousands more struggling with negative equity, Ireland will feel the chill wind of higher European Central Bank (ECB) rates more than most.
This week is expected to see the completion of an initial study that is to form the basis of the Government’s policy response to the issue of household debt levels here, which are among the highest in the euro zone as a percentage of gross domestic product.
The working group is expected to be cool on a debt-forgiveness scheme, for obvious reasons, but is likely to leave the door ajar for further analysis and the costing of a support scheme and whether it could possibly work in an Irish context.
It is believed that it will say instead, for the moment, that the emphasis should be on standardising the process by which banks deal with indebted customers in order to ensure everyone is treated equally.
Debt writeoffs are not ruled out, but are at the discretion of the banks.
The merits or otherwise of this approach will and should be debated. Many may feel that the proposed measures do not go far enough given the extent of the problem and the drag it will place on the economy.
But what is crucial is that some sort of framework is in place before rates go up, which is predicted to be early next year. The sheer scale of the potential problem here means that nascent economic recovery could be jeopardised if the restructuring of household debt that will be inevitably triggered by higher interest rates happens in an uncontrolled fashion.
Turning a deaf ear
THE NOT-UNIMPORTANT matter of fingering how Irish society made such a hash of its economy during the past 10 years or so heard a new voice yesterday when Prof Peadar Kirby launched his latest book, Celtic Tiger in Collapse – Explaining the Weaknesses of the Irish Model.
According to Kirby, part of the answer lies in the role played by the media in disseminating or suppressing the ideas that were being created during the boom years. Although some academics and others were criticising the Irish model when all the damage was being done, their voices rarely made it into the media, according to Kirby. Many people, therefore, never heard the criticisms being made. This contributed to a situation where a whole society lived in a “fantasy world of make believe”.
For Kirby, the important matter is to resist trying to put back together again the model that got us into the mess we now find ourselves in.
No leaks at BP pension fund
NICE TO know there is one place where BP’s gushing oil leak is not blowing a hole – the group’s pension fund. Investment in BP’s own shares and debt being banned, the fund’s biggest holding at end-2008 was instead in rival, Royal Dutch Shell. This is indeed fortuitous.
Like BP, Shell produces a commodity the world needs and generates prodigious cash in the process – some $1.5 billion in operating cash flow a month. Unlike BP, it is not forking out $100 million every day to capture leaking oil, or fighting for its reputation (and more).
Rather, Shell’s cash is going back into the business and shareholders’ pockets: all told, some $40 billion a year goes on capital expenditure and dividends. While its UK rival’s share price has fallen down a well, Shell’s shares have fallen in line with the broader market. – (Copyright The Financial Times Limited 2010)
Foreign banks also reckless
The proposed Finglas Village combined retail and residential development in the northside suburb of Dublin of the same name is pretty much dead at this stage.
The company behind it, Marumba, is in receivership, owing Barclay’s Bank €14 million, which is secured against the development site, which a statement of affairs estimates is now worth €5 million.
The debt won’t end up in Nama, as Barclay’s is not a participating institution in the State’s toxic property loan scheme. The other option is that the receiver, David Carson of Deloitte, will try and find a buyer for the site in a bid to recover as much as possible of the debt for the bank.
If that does happen, it’s unlikely that he’ll get €14 million.
The deal between two of Marumba’s backers, David Courtney and Bernard Doyle, and Barclay’s, has an interesting history.
During a legal action involving the bank and the two developers, the court heard that Barclay’s may have offered generous terms to the two men as it was anxious to get involved in other deals, and knew that they could give it an entree to other big property players.
The case was settled, so we never heard the full story.
The deal was struck when the property boom was heading full steam towards its peak, and both Irish and foreign banks were keen to join the party, so it’s possible that Barclay’s waved a carrott of sorts in front of Courtney and Doyle.
We’re keen to see Irish banks pay for the mess they made during the last decade, but it’s worth remembering that institutions from elsewhere played a role in the Irish property bubble as well, and were just as reckless as the homegrown lenders.
TODAY
Friends First will publish its quarterly economic outlook which is entitled Ireland’s Recovery - Statistical or Real?
The monthly KBC Ireland/ESRI consumer sentiment index will also be published this morning.
This week Current Account covers the new banking regulations, the proposed State-guaranteed business loans, the general level of business lending and how the British budget will impact Northern Ireland.
For regular commentary on business and economic issues visit our blog, Current Account, at www.irishtimes.com/blogs/business
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