The Great Debate UK

Céad míle fáilte for the new Chinese leader

China’s vice President could have chosen state banquets in Berlin or Paris for his recent trip to Europe. This wasn’t just any visit – it was the introduction of Xi Jinping, the man tipped to become the next Chinese leader, to the world. But instead of either of those venues he chose to tour Croke Park in Dublin indulging in a spot of Gaelic games on the way. After heading to the US, en route to Turkey, Jinping went to Ireland.

The official Chinese itinerary is extremely telling. Beijing chose one of the smallest nations in the currency bloc for Jinping’s visit and this will be followed with a trip by Irish Taoiseach Enda Kenny to China scheduled for next month.

So why did China choose Ireland? The official line is that Ireland and China have a history of friendship and have built up important business and trade links, especially in agriculture where Ireland exports more than EUR 200 million worth of produce to China each year. However, bi-lateral trade between Ireland and China is tiny compared to that between Germany and Beijing. If you read between the lines then the visit may have a subtle subtext.

Interestingly, Ireland could teach China a thing or two. Its low corporate tax rate and stable political climate has attracted some of the world’s largest corporations, many of whom – including Google and Facebook – now base their European operations out of Dublin. Just this week PayPal announced that it was creating 1,000 jobs and establishing a major presence in Ireland in the coming months.

Not even the banking/sovereign debt crisis back in 2010 stopped these companies coming to Ireland; in fact more businesses have moved their headquarters there in the past two years, helping to make use of the excess office space generated by the collapse of some of Ireland’s banking giants.

While some of the world’s most innovative corporate names have been making Dublin their home, China is still viewed with suspicion by the world’s biggest companies, especially in the tech sector. Google and Facebook have limited operations there and while they may desire to tap into the huge demand potential that China offers they are not willing to risk their businesses to patent piracy etc.

So if China’s new leader wants to improve relations with the world’s largest corporations then Ireland is not a bad place to associate himself, especially in light of the strong relationships Dublin has with global business heads.

The euro zone marriage is over

By Laurence Copeland. The opinions expressed are his own.

Under the Arc de Triomphe, tourists can gaze up at the engraved list of Napoleon’s great victories: Austerlitz, Jena, Wagram… Perhaps a similar triumphal arch should be built in Brussels to commemorate the string of victories won by a tiny band of heroic Eurocrats over the mass of their combined electorates: Rome, Maastricht, Lisbon, Wroclaw, and now Berlin, where, to nobody’s surprise, the integrationists in the Bundestag have easily seen off the opposition to their plan to bolster the EFSF. Cue the now-familiar backslapping in Europe after each of their knife-edge victories over the forces of democracy.

The starting point for these Eurocrats/integrationists is that the popular will is simply an obstacle on the road to the ultimate destination of a United States of Europe. Whenever they encounter one of these inconvenient roadblocks, they fume, argue among themselves about the merits of alternative routes until they finally swerve triumphantly round the obstacle, congratulating each other for their ingenuity and skill.

The trouble is that this game gets more dangerous at each stage. In the present case, it is reported that three out of four German voters is opposed to supporting Greece and co., and they’ve not even started paying for it yet. Moreover, it is not as though the largesse is going to create a reservoir of gratitude alongside the Mediterranean – far from it. Judging by reactions in Greece, the outcome will be a legacy of bitterness for decades to come.

It is important to realise that arguments about the cost of saving the euro zone are ultimately sterile, because under current conditions there is no limit to the commitment that the Germans are being asked to make – a point which is not lost on people in Germany. The €440bn additional funding for the EFSF sanctioned by the Bundestag is simply a first instalment, sufficient to cover the cost of propping up the bond markets on the assumption that it will prevent contagion from the Greek imbroglio – which, of course, there already is aplenty. It is several months too late to stop the panic spreading beyond the original porcine four – Portugal, Ireland, Greece and Spain – to engulf Italy and even to some extent France. Back-of-the-envelope calculations (which is as much as it is worth doing) suggest that the amount needed could be of the order of €2 trillion or more, equivalent to about 80 percent of Germany’s national income.

This may seem an enormous sum of money, but it is merely the downpayment on a potentially unending stream of subsidies in the nightmare transfer union scenario, as the Greeks slide back into their old, profligate ways, the Spanish continue to resist labour market reform, and the Italians replace the Berlusconi government with an administration stuffed with ageing ex-Communists.

How long will the Germans carry on financing this orgy? Like a bishop at a Berlusconi bunga-bunga party, they will either explode in a destructive rage or find the temptation to join in irresistible.

Has Ireland de-coupled from the periphery?

By Kathleen Brooks. The opinions expressed are her own.

Ireland is on a wave. After a bad patch and a massive loss of confidence eventually it looks like it has turned a corner and we can start to believe that there may be brighter times ahead. Of course, I could be talking about the Irish rugby team who had a stunning win over Australia at the rugby World Cup in New Zealand. But the economy isn’t doing too badly either.

Data last week showed that the economy grew by a respectable 1.6 percent in the second quarter, after expanding by an even better 1.9 percent in the first three months of this year. This beats the dismal growth rates in the UK and the euro zone, which both came in at 0.2 percent in the three months to June.

More importantly to Dublin, however, has been the drop in Irish bond yields. In recent weeks it has bucked the trend of other euro zone countries with dodgy financials who have seen their bond yields rise, instead its 10-year yield has fallen from a high of 14 percent in July to 8.7 percent at the end of last week. In contrast, Greek yields have risen more than 10 percent over the same period.

So, as ironic as it may seem, during the current period of market turmoil when stocks and other risky assets experienced heavy losses, Irish bond yields were one of the few winners out there along with the dollar and the yen. This is an about turn, back in November when Ireland applied for bailout funds its position was considered so precarious that it caused a wobble in the euro more severe than the decline we have seen in September.

But while officials in Dublin might not be allowing themselves to have grand ideas that Ireland could turn into the next safe haven they will be delighted that their bond yields have fallen as this not only lowers their costs of funding, but also brings them one step closer to achieving their goal of re-entering the capital markets in 2013. The cost to insure Irish debt from default has also fallen by more than 100 basis points over the past few weeks, which suggests investors are more confident that Ireland has stepped back from the edge of the default.

So what has Ireland done right? Growth in the second quarter was driven primarily by exports, which expanded by a whopping 23.9 percent between the second quarter of 2010 and 2011. The industrial (excluding construction) forestry, fishing and agriculture were the only sectors to see positive annual growth rates, but that is still not bad for an economy that just seven months before had to go cap in hand to the IMF and EU for a bailout loan.

Another day, another crisis

By Laurence Copeland. The opinions expressed are his own.

Here we go again – the same sickening feeling, as stock markets reel amid a flight to “safety”. For months, there have been worries about contagion from the Greek imbroglio, and now the nightmare seems to be coming true, as one after another the weak European economies are put to the sword.

First came Greece and Ireland, then Portugal, now it’s the big league – Spain and, even bigger, Italy (and don’t forget Belgium, an accident waiting to happen for many years now, not very important in pure economic terms, but psychologically significant as the home of the whole sorry euro disaster).

In the table below, you can see how much Governments were being forced to pay for borrowing on the markets yesterday (July 11). The rates quoted for Greece, Portugal and Ireland imply that borrowing in the bond markets is for all practical purposes out of the question for those countries, as that has been the case for some months past, but the new development is that Italy and Spain are now being forced to pay 6 percent for 10-year loans, a premium of more than 3 percent compared to Germany.

Matthew Elderfield on re-shaping Ireland’s regulatory system

Matthew Elderfield, Head of Financial Regulation at the Central Bank of Ireland, will lay out his vision for a new Irish regulatory landscape at a Thomson Reuters Newsmaker on Wednesday 6 April.

‘Ireland: Re-shaping the Regulatory and Banking System’ will be hosted by Reuters’ Jodie Ginsberg, UK and Ireland Editor, and will be streamed live to the Reuters UK website as part of our rolling coverage from 0830 BST.

We’re also giving you the chance to submit a question to be put to Elderfield during the Newsmaker. If you have a question on Ireland’s banking and regulatory set-up, then you can leave it as a comment on this page, via our Twitter feed using the hashtag #askelderfield or on our Facebook page.

Defining a post-crisis reputation for brand Ireland

– John Keilthy is Managing Partner of ReputationInc Ireland and is a former business journalist and director and chief operating officer of NCB Group.  Andrew Hammond is a Director in ReputationInc’s London office and was formerly a UK Government Special Adviser. The opinions expressed are their own. –

In recent weeks, the focus for Ireland and indeed the world’s financial markets has been on devising a plan to remedy the country’s precarious banking and fiscal affairs.

With the basis of an agreement having been reached with the IMF and the EU around initiatives to help restore Ireland’s financial credibility internationally, there is now a need to focus attention on restoring the nation’s reputation.

The economic and financial problems that the country faces are still daunting.  However, the nature of the crisis is, in truth, much broader and more serious in as much as the entire foundations of Ireland’s nation brand have also been undermined.

The concept of nation brands is founded on the realisation that, in an ‘overcrowded’ global marketplace, countries are, in effect, competing not just for the favour of investors and the wider financial community, but also for other globally focused stakeholders such as tourists, media, skilled employees, regulators and NGOs.

Thus, economic and financial fundamentals, such as a country’s fiscal position, tax regime, trade balances and business climate are only the most obvious elements of what drives international prosperity, with wider competition between countries, such as that for global talent, also key.  In this ultra-competitive environment, reputation can be a prized asset (or potentially a significant liability) with a direct effect on future political, economic, social and cultural fortunes. Successful countries identify their image and key strengths, and prioritise the appropriate policies to strengthen such attributes.

Countries with a range of branding problems right now, such as Ireland, Greece, Israel, and China, face an uphill battle changing the perception others have of them. However, history has shown that reputation can be recreated and once again become a key driver of not only national pride, but also economic success and what flows from that in terms of wider social and cultural benefits.

Should a country always stand behind its banks?

Ever since the financial crisis broke in 2008 some of the world’s major banks have their governments to thank for their survival. The fates of Royal Bank of Scotland or Citibank would have been much worse without large injections of capital from the UK and U.S. authorities. The UK government pumped more than £37 billion into its largest banks in the immediate aftermath of the Lehman Brothers crisis. Ireland took that a step further when it guaranteed all of its banks’ deposits and liabilities. This was affordable, the Irish government said at the time.

However, this policy failed spectacularly. Ireland’s bailout of its banking sector brought the country to the edge of bankruptcy and forced it to accept a 82 billion euro bailout loan from the IMF/ECB and the European Union. More than 30 billion euros of this loan is to re-capitalise the Irish banking sector and the rest is to shore up the state’s finances. The conditions of the loan mean that Ireland will have to implement harsh austerity measures for many years to come that will inevitably hurt growth.

So should governments always stand behind their banks? There are some success stories. Back in 2008, when the global financial sector teetered on the brink of collapse, it was necessary for the world’s major central banks and governments to offer unlimited support to their banks. The chief reason for this was to ensure that credit flowed through the economy to foster growth. In truth however, a mixture of stringent capital rules caused banks to shrink their balance sheets in the teeth of the recession, which didn’t help the overall economy but did boost their balance sheets. In the first six months of 2010 the UK’s four largest banks: Lloyds Banking Group, Royal Bank of Scotland, Barclays and HSBC (the latter two did not receive bailouts) made combined profits of £13.6 billion. This is a far cry from the £22.3 billion they lost in 2008.

The U.S. banking sector has also seen earnings recover sharply. The Federal Deposit Insurance Corporation (FDIC) announced that the earnings for U.S. banks rose by $14.5 billio in the third quarter of 2010. Now that the banking sector is back on its feet again one can hope that credit conditions will also become more supportive of economic growth. And strong earnings also increase the chances that taxpayers will profit from the capital injections at some point.

So why did things go so wrong for the Irish? There are two reasons. Firstly, the government’s guarantee to cover banks liabilities was too hasty. It didn’t inject capital, instead it promised to write an unlimited number of blank cheques. Secondly, there was a mis-match between the size of the banks’ liabilities and the size of the state. Ireland’s economy was 210 billion euros in 2008, the cost to bailout Anglo Irish Bank alone is at least 30 billion euros, and by some estimates it could be 50 billion. This makes the $40 billion plu capital injection (which then turned into equity) into Citibank look like small change for a $14 trillion economy like the U.S.

The trick is for governments not to bite off more than they can chew, and make sure they have conducted a rigorous analysis of a bank’ liabilities before underwriting its future losses. If you don’t do this then the punishment can be harsh, as Ireland has found out.

On paper Ireland’s banks guarantee doesn’t look like such a good idea, but a bank is also part of a country’s social fabric. Its citizens trust the banks to look after their deposits and expect 24-hour access to their money to fund their living costs – paying for a mortgages, school fees, clothing and food. If customers can’t access their money this hits confidence in the central plank of capitalism – the banks. The US has the FDIC to protect deposits of up to $250,000; Ireland didn’t have an equivalent institution so in October 2008 it had to offer a government guarantee for deposits. This was the right thing to do; however, it should have stopped there. A government should protect the hard-earned savings of its citizens, but it is learning how expensive it can be to essentially take on the risk for banks’ bondholders as well.

from James Saft:

Pension savers get the boot

From Dublin to Paris to Budapest to inside those brown UPS trucks delivering holiday packages, it has been a tough few weeks for savers and retirees.

Moves by the Irish, French and Hungarian governments, and by the famous delivery company, showed that in the post-crisis world retirees, present and future, will be paying much of the price and taking on more of the risk.

This goes beyond merely cutting back on pension benefits, rising to actual appropriation of supposedly long-term retirement assets to help fund short term emergencies.

Let's start with Ireland, which is kicking in 10 billion euros from its National Pensions Reserve Fund into an 85 billion euro package of support for its banks.

Trust me, this does not reduce the risk profile of the NPRF, which was set up as a sovereign wealth fund to help pay for state retirement benefits.

Putting aside jokes about sovereignty and wealth, of which there is appreciably less in Ireland than formerly, this is effectively a transfer of wealth from the Irish people to its banks. Or rather, to the institutions, mostly European banks, which hold Irish bank debt, none of whom as senior creditors will share in the pain.

In many jurisdictions if Ireland were a corporation and the NPRF part of the corporation's pension fund, then making such a move would be illegal, and quite rightly so.

from MacroScope:

Banking on a Portuguese bailout?

Reuters polls of economists over the last few weeks have come up with some pretty firm conclusions about both Ireland and Portugal needing a bailout from the European Union.

Portuguese 10-year government bond yields have hovered stubbornly above 7 percent since the Irish bailout announcement, hitting a euro-lifetime high and giving ammunition to those who say Lisbon will be forced into a bailout.

And of those who hold that view, it’s clear that bank economists have been most vocal in expecting Ireland and Portugal to seek outside help.

Take last week’s poll in which economists said Portugal would follow Ireland in applying for EU funds. Bank-based economists who expected a Portuguese bailout outnumbered those who didn’t almost three-to-one. For non-bank economists – those working at research houses, brokers and wealth management firms – the margin was only two-to-one.

This division was even more marked in the Irish bailout poll we ran three weeks ago. Bank-based economists expecting an Irish bailout outnumbered those who didn’t more than two-to-one. Our sample of non-bank economists were split almost evenly on the subject.

Interestingly, market makers and primary dealers – or banks mandated by government debt agencies to deal their new government bond issues – were staunchest in expecting Irish and Portuguese bailouts.

Of the seven economists polled by Reuters who work for primary dealers of Portuguese debt, six said Lisbon would need to apply for a bailout. For analysts representing primary dealers of Irish debt, four out of five said a bailout was imminent.

from Breakingviews:

Irish bank restructuring has tidy if slow solution

Ireland's bloated banking sector needs fewer, smaller lenders. A sovereign bailout should provide breathing space to perform a radical restructuring. But a fire sale of Irish banking assets is not the only way to cut the banks down to size.

The combined liabilities of Ireland's domestic lenders, both private and state owned, exceed 500 billion euros, or four times Irish GDP. The country's likely 90 billion euro bailout will deliver resources to recapitalize the banks and guarantee wholesale funding for several years. In that time, the sector could be redrawn.

Anglo Irish Bank and Irish Nationwide are already fully state owned and their assets are in run-off. Larger Allied Irish Banks (AIB) and Bank of Ireland have heavy state involvement, and Dublin is poised to take majority control of BoI. The two have approximately 100 billion euros and 121 billion euros of loans respectively, funded by around 61 billion and 75 billion euros of deposits respectively. That implies an uncomfortably high loan-to-deposit ratio of 160 percent.

Jettisoning non-core UK businesses looks like the obvious way to shrink the balance sheets of both AIB and BoI. These have respectively 19 billion euros and 52 billion euros of loan assets. But selling these outright would mean shedding vital deposits as well. And buyers for just the loan assets would probably demand big haircuts right now and perhaps even state guarantees against future losses. The reality is that balance sheet shrinkage is best deferred until markets improve.

But Ireland could make an early start improving AIB's and BoI's funding mix. One way would be to replace a portion of their wholesale liabilities with Anglo Irish's and Irish Nationwide's 27 billion euros of deposits. That would cut AIB's and BoI's loan-to-deposit ratios from around 160 percent to 135 percent.

The Irish banking sector would then have an appropriate structure. Anglo Irish and Irish Nationwide would no longer take deposits, and their remaining assets would run off under direct state ownership.

Left behind would be two strong domestic players, with effective competition ensured by the presence of a decent foreign-owned rival, Ulster Bank. Over time, AIB and BoI could also sell off their non-core assets and further reduce their reliance on wholesale funding. The journey back to sustainability will take time, but the roadmap seems clear.