Pension Reserve Fund to bail out banks - again

CANTILLON:Inside the world of business

Pension Reserve Fund to bail out banks - again

THERE WAS one particularly glaring omission in the scant information provided in the Pre-Budget Outlookon Thursday.

The 2010 pre-budget estimates contain no figure for the potential cost to the exchequer of having to recapitalise the banks as a consequences of their transferring their land and development loans to the National Asset Management Agency.

And it’s a pretty big omission. The five banks included in the scheme are estimated to require about €12 billion in capital if they are to absorb the write-downs on the loans going into Nama.

Anglo Irish will account for about half of this, with AIB and bank of Ireland expected to need up to €2.5 billion and €2 billion respectively.

Including even a fraction of this cost in the estimates for next year would drive a coach and four through the preliminary budgetary arithmetic which plots a course – via cuts of €4 billion – to a stabilisation of the deficit at 2009 levels.

The explanation for not including the recapitalisation costs in the preliminary figures is apparently that the Government believes it will be able to finance the recapitalisation outside of the exchequer proper.

There is still hope that at least some of the fresh capital will be raised by the two big banks themselves, either through asset disposal or rights issues.

The likelihood of this waxes and wanes with the banks’ share prices but is unlikely to make much of a dent in the €12 billion figure.

The next port of call is any surplus cash balances held in the Central Bank. This was the source of the €3 billion injected into Anglo earlier this year.

And failing this, the last resort will be the National Pension Reserve Fund, which coughed up for the AIB and Bank of Ireland equity injections.

Absent some massive cash surplus manifesting itself, it’s very hard to see how the banks will be recapitalised without decimating the NPRF, which stands at about €20 billion.

Doing so primarily to prop up Anglo Irish Bank, which will require about €6 billion of the €12 billion calls into question once again the logic of keeping the bank going.

Paddy wins in France

Some of Paddy Power’s potential competitors in the French market probably sat up and took notice at a remark made by Philippe Germond, chief executive of the Pari Mutuel (PMU), when the pair announced a joint venture on Thursday.

Paddy Power will be providing fixed odds and risk management to the state-owned PMU’s planned sports betting operation, which it will be launching next year when France liberalises its market.

Welcoming the deal, Germond pointed out that the Irish bookmaker only operates in markets where it is authorised to do so.

The remark was a shot across the bows of a number of players who have been offering unlicensed online betting to France’s very enthusiastic punters.

These operators jumped the gun and moved in ahead of France opening up its betting market by issuing licences, leaving themselves outside the law, even though it was about to be changed and was possibly not being enforced.

However, if they want licences in France, they will have to stop operating and apply to the French state, which owns the PMU, whose management is understandably not happy with illegal operators on its own turf.

When the issue of international expansion came up, both Paddy Power’s current chief executive, Patrick Kennedy, and his predecessor, John O’Reilly, always stressed they would only operate within the law in regulated markets.

Its strategy of playing by the rules was one of the reasons that PMU, Europe’s biggest betting business, chose the Irish bookie as its partner, that and the fact that Paddy Power has expertise in fixed odds and risk management that the French player lacks.

Right now the unlicensed players are earning about €250 million a year in gross winnings from French punters.

But as the market opens up, that could turn to €1 billion.

Some of them could well end up wishing that they had also played ball.

Gaming not just for kids

There was further evidence this week that anyone writing off computer games as child’s play is making a serious mistake. Activision Blizzard, a subsidiary of French conglomerate Vivendi, announced that its latest blockbuster video game had generated $310 million in first-day sales in the US and Britain alone.

The ultra-realistic and violent Call of Duty: Modern Warfare 2 has now had the most successful opening day in entertainment history.

Computer game launches now regularly surpass Hollywood. Last year Grand Theft Auto 4, the brainchild of Scottish developers Rockstar, grossed $310 million but that was on sales of 3.6 million, compared to 4.7 million for Modern Warfare 2.

Hollywood’s best has been Dark Knight which grossed $204 million at the US box office in its first five days.

Enterprise policy makers are not blind to these developments and have been trying to foster a local industry.

The poster child is Havok, which sells tools to game developers, and was sold to Intel for over €100 million a few years back. But recent research shows the scale of the challenge of recreating the success of the games business in Scotland.

Researchers from NUI Maynooth and University of Limerick found the industry employs 1,469 people on the island, a 400 per cent increase since 2002, but still small potatoes on the international stage.

Authors Dr Aphra Kerr and Dr Anthony Cawley note that employment in game developers, as opposed to publishers, tends to be small but the Irish industry is making the move from low-end localisation to the more central content creation.

They also note that multinational players like Gala Networks, Goa and Activision Blizzard have located operations here.

The news then that the Government is considering a €100 million cut in the research budget which has attracted foreign investment here couldn’t be worse timed for our nascent games industry.

NEXT WEEK:The Government will learn on Tuesday if international investors are happy to continue to fund our growing budget deficit when the National Treasury Management Agency (NTMA) attempts to raise €750 million to €1 billion through the sale of five- and 10-year bonds. The premium over German bunds will also give a clear indication of how investors view the Irish economy.

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