Moriarty report fallout set to continue


Cantillon:The coming year should see some interesting legal developments as the fallout from the Moriarty tribunal’s report on the second mobile phone licence competition continues.

On February 11th next the State’s application to have Denis O’Brien and Michael Lowry joined as third parties in the case being taken by Persona, a failed bidder for the licence, against the State, is to be heard.

The State, while stating that it is vigorously defending the competition against Persona’s allegations, is asking the court to have O’Brien and Lowry joined as third parties. It says it is entitled to an indemnity from them.

The argument is that, although the State’s case is that nothing corrupt or untoward took place, if the court finds otherwise, it is the Esat Digifone founder, O’Brien, and the then minister, Lowry, who were up to the alleged no good and should pay the cost.

Both O’Brien and Lowry have said they would welcome the allegations made against the licence award being tested in a court of law.

They say that the case that was made in the tribunal would not survive in the context of the rules that apply in a court hearing.

If the two men are joined to the case, and it goes ahead, then Persona, if it loses the case, could be looking at a legal costs bill that would be a multiple of the one that would apply if there had been only one defendant.

Persona is owned by Dublin businessmen Tony Boyle and Michael McGinley.

Furthermore, Lowry and O’Brien may think that, in public relations terms, the best they can hope for is a failure of the Persona case in the High Court, which they could then use to counter the reputational blow that was the tribunal’s findings.

They are unlikely, on that basis, to agree to any settlement – though there is no reason to believe the State is contemplating any such move. Any dropping of the case by Persona would also constitute a PR win, though of lesser value.

Frustration over bank guarantee

Some people might think that Bank of Ireland chief executive Richie Boucher has a brass neck being “frustrated” at the extension last week of the eligible liabilities guarantee into mid-2013.

After all, Bank of Ireland might not be still here were it not for the support of the State for our banking system in late 2008 when it was on the brink of collapse.

Bank of Ireland might not have been the worst offender in terms of its lending practices in the Celtic Tiger years, but it still required substantial financial support from the Government at the time, along with the comfort that the bank guarantee offered institutions when the markets were closed off to it.

To many, the €449 million it handed over for the guarantee in 2011 was a small price to pay for its survival. There is certainly merit to that argument.

However, it is also not in the long-term interest of the country for the bank and sovereign to be tied together as if in some school sports day father-and-son three-legged race.

Bank of Ireland seems to be heading in the right direction. Of those with restructured loans, 86 per cent are making their payments.

About 400-500 offers to restructure mortgages are being made to borrowers every week, although admittedly these are the least distressed loans on its books.

It has also accessed the capital markets twice in recent weeks, raising about €1.3 billion in the process.

Many close to the top of Bank of Ireland view the bank guarantee as a “lead weight” that holds it back from returning to a path of sustained profitability.

Ratings agency Fitch suggested recently that the guarantee could go in the first half of next year. Boucher going public on this keeps the matter on the boil.

Presumably, the Government would like to end the guarantee, too, if only for its symbolism – although how it will replace the revenue the guarantee generates for the exchequer is not so clear.

Rating agencies not the be all and end all

Governments rail against the power of the ratings agencies, and their ability to undermine a currency or an economy with a single pronouncement. Yet, a review of the reaction in bond markets this year to decisions by the agencies in the sovereign sector does little to support that view.

According to data compiled by Bloomberg, markets moved in the opposite direction to that suggested by a change in rating – up or down – or outlook more than half the time this year.

The review studied 32 upgrades, downgrades and changes in credit outlook this year and found that, in 53 per cent, yields on sovereign securities moved against the direction counselled by the private sector agencies.

Moody’s fared worst, with 56 per cent of its changes ignored by the market against 50 per cent for Standard Poor’s. Overall, the agencies fared worse than their historic average in terms of influencing the market: since 1974, based on 300 ratings actions, the agencies have been ignored a somewhat less than encouraging 47 per cent of the time.

As Bloomberg put it: “For national debt, following decisions of the arbiters of credit risk is less reliable than flipping a coin for determining borrowing costs.”

Moody’s, one of the founders of the ratings game, was at its most pessimistic in a decade this year, according to the analysis, downgraded 6.4 government ratings in the US and Europe for every one upgraded. Standard Poor’s number was a slightly less morose 4.3.

Yet, European bonds are having their best year since 1998, returning 11.5 per cent up to the end of last week, according to the Bank of America Merrill Lynch Euro Government Index. And the peripherals are leading the way, with Greek bonds up 84 per cent and Portuguese debt 55 per cent improved. The price of Irish debt is some 27 per cent up on the start of the year.

The figures would appear bear out some of the complaints of legislators worldwide, pointing to the agencies as lagging economic fundamentals compared to the markets, which critics of rating agencies say tend to more accurately reflect current positions.

Of course, it could just be that impending ratings actions tend to be priced into the market ahead of release.

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