Somers blames Finance inertia for hindering bonds' liquidity

The transition to the euro could either go without a hitch or could cause unforeseen headaches and problems for the National …

The transition to the euro could either go without a hitch or could cause unforeseen headaches and problems for the National Treasury Management Agency (NTMA), according to its chief executive, Dr Michael Somers.

One of the most professional borrowers in the western world, according to the Institutional Investor magazine, Dr Somers is scathing about what he terms the inertia at the Department of Finance and Central Bank, which he maintains is holding back the development of the Irish Government bond market.

Dr Somers, who later this month will announce £200 million in savings on the national debt of around £29 billion this year, has effectively been in charge of its repayment since the mid-1980s and has worked in the area since the 1970s.

"The Doc", as he is known, is clearly determined to ensure investors will still want to buy Irish paper after the euro's introduction on January 1st. In the past the NTMA had a captive audience with institutions almost obliged to hold Irish government debt. But the euro means that will change, and the institutions have made no secret of the fact that they will be switching to bonds issued by other EU governments, once the currency risk disappears.

READ MORE

From January 1st our Government debt will be just 1 per cent of a huge market. The NTMA's job will be to try to sell Irish debt at the cheapest possible rate. Each one hundredth of a percentage point they have to pay over German rates will cost the taxpayer £3 million.

It will be no easy job. Last week Dr Somers and fellow NTMA director, Mr John Corrigan, were in the US talking to institutions. They have opened negotiations with the World Bank on holding Irish paper, but other banks are less welcoming. Ensuring Ireland retains a high rating with debt agency and that Irish bonds are included in international indices followed by major investors will also be important.

Dr Somers is critical of the Central Bank, claiming that it is hampering the NTMA's efforts. The Central Bank's deadline for dealings for same day payments is between 10 a.m. and 12.30 p.m., he says, compared with 4 p.m. or 5 p.m. internationally. "We need to be able to trade properly for longer hours and cannot do that with our Central Bank," he says.

He also claims the Department of Finance is blocking another plan - the bond exchange programme - where the NTMA plans to buy £13 billion of debt back and reissue it at lower coupon prices, as part of a restructuring of its portfolio. This will greatly increase the liquidity of the market which is the "name of the game".

The Department is reluctant to allow the technical increase in debt to GDP ratios which this restructuring would engender. But perhaps more importantly it is reluctant to change the tax law so that institutions will not incur an additional liability for buying new paper. Overall the State would be no worse off, Dr Somers argues, but the Department's own figures may look a little worse.

Dr Somers is also critical of the Department's refusal to allow tax changes to encourage private investors into the bond market. Investors now have to pay tax at their highest marginal rate of 46 per cent, compared with DIRT at 24 per cent on bank deposits. This simply encourages people to fund the banks rather than the Government, he argues.

Current returns in the bond market are low, but five-year money is available at 3.6 per cent and 10-year at 4.2 per cent.

Getting the Department of Finance to change tack is extremely difficult, he says. He recalls advice given to him when he was entering the Department: "If you try to change things there are three possible results. The first is they may improve, the second they may disimprove or thirdly there may be no change. So as you only have a one in three chance of success - don't change anything.

"That is why there are no fly-overs, no underpasses or decent roads. The Department of Finance simply blocks everything."

Dr Somers left the Department to work for the Central Bank between 1968 and 1970. He returned to Finance as principal officer with responsibility for raising money from 1970 to 1985.

By the mid-1980s he was assistant secretary in Finance and the youngest of 10 personnel at that level, before moving on to the post of secretary at the Department of Defence.

He was brought back from Defence in 1987 to manage the Government's debt by the then Taoiseach, Mr Charles Haughey. Dr Somers and Mr Haughey go back a long way. It was Dr Somers who drafted the Bill allowing for widows and children's pensions in 1968 which Mr Haughey introduced at that time. He still keeps the original copy of that Bill, bearing Mr Haughey's writing, in his office as a memento of a piece of ground-breaking legislation.

Dr Somers argues that the Republic needs to move to a US-type environment where the top echelons of the civil services change with the administration, to effect moderisation. Or, he suggests, the civil service could at least incorporate recent changes to the British model where talented people from the business community come in for a number of years.

"You need to be an extremely determined and stubborn politician to get any change through Finance," he says.

Dr Somers reserves special anger for the £40 million the Government is paying banks and advisers to sell off Telecom Eireann. The NTMA Act of 1990 provides for the agency to advise the Minister on selling off State assets. But this time it was not consulted. "We would have been happy to have advised on that and could have done it far cheaper on behalf of the taxpayer," he says.

Even in times of plenty, value for the taxpayer is extremely important. After all, at the end of 1997 the debt stood at £30.69 billion. He says it is now down to £28.3 billion, pointing to a massive surplus of £1.9 billion, unless substantial extra Government spending of more than £1 billion occurs during the next couple of weeks.

"We are mystified about how this squares with the Government's stated target of a £680 million surplus for 1998," Dr Somers says.