Markets have a memory is now something of a mantra

IT APPEARS Argentina is contemplating a return to the global debt markets, some eight years after it defaulted on its debts of $95 billion (€64.3 billion). Certainly, that is the inference of comments attributed to its economy minister in an interview with the Financial Times.

But first there is the small matter of an accommodation with holders of some $29 billion of bonds who refused the 30 cents on the dollar settlement offered by Argentina in 2005.

The long memory of Argentina’s bondholders rather undermines the arguments put forward by some that Ireland should burn the holders of subordinated Irish bank debt, rather than bend over to accommodate them via Nama and more relevantly the propping up of Anglo Irish Bank.

There is a difference, of course, between sovereign debt and the subordinated debts of a country’s banks, albeit covered by a blanket Government guarantee. But the basic message is the same – the markets do have a memory and will extract a price for default. This has become something of a mantra as far as the Government’s response to the banking crisis goes, and protection of the sovereign rating is the only really consistent element of the policy response.

The decision – as part of the new Programme for Government – to include a specific reference to a bank levy in the Nama legislation is a very big concession indeed when viewed in this regard.

The Minister for Finance has argued against this approach on the basis that it would cast a further shadow over the banks at the wrong time. In theory it would make it even harder for them to find private capital, considering the very real prospect that they will be hit by a levy potentially running into the billions in the future.

Having gone to such lengths over the last 12 months to try to keep the markets happy, the volte face of the levy seems hard to credit.

One possibility is that the Government has come to the view that the banks have no chance of raising equity from the markets for years to come, and the levy is neither here not there. The alternative is that they presume markets will note the caveat attached to the levy (that it will be done with regard to maintaining the sustainability and stability of financial institutions) and see it for what it is: pretty toothless.

Anglo sounds out Asians

Anglo Irish Bank remains deeply involved in investigations arising from the controversies that have blighted it over the past year, while the bank’s new chief executive, Australian banker Mike Aynsley, seems determined to try to bring stability to Anglo’s funding base.

The bank has been sounding out potential investors in Asian capital markets in recent months, trying to reopen credit lines from financial institutions and investors, and to generate interest in the bank’s bonds.

This has rankled with executives at some of the other Irish financial institutions, who are busy approaching the same class of investors and who regard Anglo as a pariah of the banking world.

This has not stopped Allied Irish Banks and Bank of Ireland raising €1 billion and €1.5 billion respectively over the past five weeks through the issuing of debt only partially guaranteed by the Government. Anglo faces greater obstacles, trying to keep staff motivated when it is preparing to lay off employees and shift €28 billion of loans, almost 40 per cent of its book, to Nama.

The bank is expected to inform staff at the end of this month about the number of redundancies sought under restructuring. The plan must be submitted under European Commission state aid rules in November as part of the Government’s €4 billion capital injection to keep Anglo solvent.

The bank and the Government must prove to the Commission that the bank has a viable future, or show plans to wind it down. Recasting the bank as a lender to SMEs, which are crying out for credit, would be a challenge, given that the bank has little or no expertise or nationwide branch infrastructure to service this sector.

The coming weeks will be challenging, as Anglo prepares to chart a future as a reinvented lender with a smaller staff and reduced loan book in a banking sector that is barely functioning.

Exchequer wins yet again

The biggest winner of the proposal to introduce a harmonised rate of tax relief on pension contributions is likely to be the exchequer. Green Party sources have portrayed the measure – to standardise relief at 30 per cent – as one encouraging those paying the basic rate of income tax to start pension saving. To a degree it might.

However, studies by the Central Statistics Office (CSO) and others have found that tax relief is far from the only issue preventing people from investing in their retirement, with inability to afford the expense more often cited as a factor.

Department of Finance estimates in the Commission of Taxation report suggested that introducing relief at the level proposed – albeit by way of a matching contribution rather than more traditional tax relief – would save the Government €120 million per annum in relief to people already putting money into pension plans. If an extra 10 per cent of the workforce was persuaded to open a pension plan as a result of the higher relief, the net annual saving would be €60 million. A 10 per cent uptake would seem generous in light of the lack of success of previous pension initiatives.

Since the National Pensions Review was published four years ago, the few Government initiatives in this area have all had the effect of generating revenue for the Exchequer. It remains unclear how that sits with a report that was designed to address pension coverage and adequacy – neither of which has improved noticeably in the interim.

Today

The Economic and Social Research Institute and the Foundation for Fiscal Studies hold a Budget Perspectives Conference, examining some of the key economic and public finance issues that need to be considered in framing policy for the budget.

Richard Cantillon

Ballyheigue, Co Kerry-born Richard Cantillon can lay claim to be the father of modern economics. His Essai Sur la Nature du Commerce en Général (Essay on the Nature of Commerce in General) was written in 1730 and published in England in 1755, 21 years after his death and some two decades before Adam Smith’s Wealth of Nations.

He is also credited with the origin of the term “entrepreneur”. He enjoyed success as a merchant in London and a banker in Paris, before dying in a house fire allegedly set by a disgruntled employee.

He is a suitable namesake for a new column in which Irish Timesbusiness journalists will endeavour to offer timely analysis and comment on the business and economic issues of the day. This column will appear on Tuesdays, Thursdays and Saturdays.