Cantillon

 

Inside the world of business

Dr Doom gloomy on Irish debt relief bargaining power

THERE WAS an interesting if predictable view of Ireland’s economic prospects amid a gloomy global backdrop from the economic analysis firm of Nouriel Roubini, the US economist dubbed Dr Doom.

Ireland is more likely to seek a second bailout rather than secure debt relief in exchange for a “yes” vote on EU treaty changes, Roubini Global Economics says.

The firm said in a note circulated this week that it expected Irish GDP to stagnate over the next two years compared with Government estimates of growth of 1.6 per in 2012 and 2.4 per cent in 2013.

Irish government bond yields for 10-year loans remained above 8 per cent, an unsustainable rate, and Roubini’s firm expects borrowing costs to remain “prohibitively high” into the second half of this year when Ireland is supposed to return to the bond markets.

“With GDP set to stagnate next year, it seems unlikely Ireland will be viewed as more solvent to investors next year than it does currently,” economists Megan Greene and Mark Willis say.

They think it unlikely that the troika of the European Commission, IMF and ECB would allow any debt relief for Ireland. Such relief would come in the form of burning senior bank bondholders or extending the term of the €31 billion in promissory notes being used to prop up Anglo Irish Bank and Irish Nationwide.

The exchequer figures for 2011 published yesterday put the hole in the public finance at €24.9 billion, one third bigger than in 2010 due to the huge bank bailouts.

The least the Government can possibly hope for is a restructuring of the promissory notes to reduce the €17 billion interest bill on two zombie banks whose bondholder lenders are being repaid in full.

But, as Roubini’s people point out, treaty changes will only require the approval of nine euro zone countries so the Irish public will have no veto that the Government could use as leverage to negotiate some kind of burden easing.

Small deals for CRH

IT’S A case of steady as she goes at international building materials group CRH, which yesterday announced that it closed a raft of deals in the second half of 2011, bringing its development spend for the year to €593 million.

In the final six months of 2011, CRH spent €407 million on 23 acquisitions, meaning it spent an average of €17.7 million on each. All in all, the purchases will add about €400 million a year to sales. It’s very much in keeping with CRH’s traditional approach of buying small “bolt-on” businesses that can be easily absorbed into the group.

CRH has eased up considerably on acquisitions over the last three years. In 2007, it spent a record €2.2 billion on buying up other businesses. One large business, US asphalt group, Apac, accounted for half that, bolt-ons made up the rest. In 2008, it spent €1 billion, but the rate dropped sharply the following year, when the outlay was just €450 million.

It has stepped up acquisition activity, but Bloxham stockbrokers pointed out yesterday that it was still exercising plenty of caution.

Davy and NCB took a slightly different view, saying that the acquisitions highlight the group’s financial strength and ability to do deals at a time when its rivals are toiling.

Three years ago, the group raised €1.2 billion from shareholders to take advantage of conditions that would allow it to exploit its rivals difficulties and pick up acquisitions at value prices.

Things did not pan out the way the group expected, a fall in interest rates gave others in its business some breathing space, and meant that people were less likely to sell at bargain prices. Nevertheless, the fund raising created an expectation that the group would do a big deal. That did not happen, and the evidence since then indicates that the group is more likely to continue with the more conservative “bolt-on” approach.

Tol will be missed

The departure of Richard Tol from the ESRI is untimely. The research professor specialises in energy policy, an area where the think tank should have much to say now and in the near future.

The introduction of water charges – in line with provisions in the bailout memorandum of understanding with the IMF, the European Commission and the European Central Bank – is a particular policy issue with which the Government is currently battling.

It is an area on which Tol has strong views. The Government’s current plan is somehow to instal over 1.4 million water meters in the space of two years in a project to be undertaken by an entity Irish water that has yet to take full shape.

Tol is deeply sceptical. He reckons it could take a decade to complete the metering project, creating headaches in attempts to deliver on our bailout commitments.

Tol put forward a solution already implemented in other countries – get people to pay for their own meters up front (possibly with a matching credit on charges) and charge those who fail to do so a premium for their water.

In the absence of metering, a flat-rate water charge would be required. This will do nothing to encourage conservation and will surely face the same hysterical reaction that the nominal €100 property charge has triggered.

Given the lack of any detailed political response to Tol’s position perhaps his departure is seen as opportune by a Government little inclined to heed his advice.

ONLINE

You can get the latest news each business day at irishtimes.com/business or by following us on Twitter at twitter.com/IrishTimesBiz. We also have a Facebook page at facebook.com/IrishTimesBiz where you can read the latest business headlines, blog posts and reader polls.

TODAY

IBRC (formerly Anglo Irish Bank) will be in court in Belfast over the Seán Quinn/Ukraine case