Roman Abramovich is unhappy. The owner of Chelsea football club thinks that the Irish government is about to let him down, and if it doesn’t see things his way, he’s threatening legal action. Both sides are playing a high-stakes game, where the result could have much more impact on Ireland’s impoverished government than it will on him.

Abramovich’s investment vehicle, Millhouse, bought subordinated, government-guaranteed debt in Irish Nationwide Building Society in August 2009. Millhouse now describes the purchase as its contribution towards the survival of INBS. Possibly the 13 percent coupon also weighed.

The guarantee was for a single year and has expired, along with most of Ireland’s banks, and now the government wants the holders of subordinated debt to “share the burden”. Abramovich’s response raises the possibility of the Russian billionaire enforcing his rights against a country whose people are already suffering.

On Oct. 5 ratings agency Moody’s placed Ireland on credit watch. The central bank now expects growth of just 0.2 percent this year. Unemployment is almost 14 percent, and net emigration has resumed. Debt spreads are widening again.

Millhouse argues that INBS cannot default on the junior obligations unless it is in default on the senior debt, and the government has already pledged to honour the senior obligations. Legislation could impose a haircut on the junior debt, but the move would look uncomfortably like an Irish sovereign default.

Neither side wants to go to law, and the price of the bonds, at 63 percent of par, suggests that an offer at a discount would tempt most holders.

The Irish government is desperately unpopular. If the economy continues to stagnate — UK retailer Tesco said on Oct. 5 that Ireland was its only European territory not to show stronger sales in the first half year — the next administration might argue that abandoning the banks is not a sovereign default, while struggling on with endless austerity makes a full-blown default more likely.

– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

Successful long-term investors buy good assets when nobody wants them, and sell when the risk-averse are piling in. Bonds are considered “safe havens” today, after shares’ lost decade. That could be about to reverse; the great bull market in government bonds is probably over.

Since 1982, when runaway inflation was going to destroy capital, if not capitalism itself, bond investors who took the risk that the beast would be tamed have been hugely rewarded. But the opportunity to buy 10-year U.S. Treasuries on a 14 percent yield followed a bear market that had wiped out the value of fixed-interest securities.

Companies had shown more resilience to rising inflation, so around 1960 in the United States, UK, Germany and Japan, the “yield gap” between government bonds and shares was reversed. For the next half-century, the dividend yield on shares was below that on government bonds. Until now.

In the UK, Germany and Japan, shares now yield more than government debt. In the United States, the gap has shrunk to around 0.3 percent. This, says Citigroup <C.N>, marks the end of the cult of the equity — extinguished by two 50 percent bear markets (after the dotcom mania and then the credit bubble), a glut of equity issuance and the flight of pension funds from shares to bonds.

Yet the funds are buying bonds because they (or their advisers) deem them low-risk, not because they believe them to be cheap. Today’s bond prices signal that inflation will not return for at least a decade, despite sustained and determined efforts from the world’s central banks to stimulate it.

The risk that central banks will succeed is not priced in, while the risk that they won’t, and that economies stagnate (or worse), is priced into shares. Yet companies have rebuilt their balance sheets after the crisis, and despite sluggish top-line growth, dividends — that unsung, vital part of long-term performance – look sustainable.

(Republished on Oct. 19 with the following disclaimer: Neil Collins owned shares in BP when he wrote this article; he bought shares shortly before and after)

BP  and Prudential are two of Britain’s biggest and most respected companies. Their lavish annual reports contain dozens of pages on how these great corporations are run. Both boast of their compliance with the code of corporate governance, which encourages proper boardroom debate to avoid bad decisions, boosts the chairman, and insists that he cannot also be the chief executive, lest one person become too powerful.

At BP, a powerful chairman in the shape of Peter Sutherland was replaced in January by Carl-Henric Svanberg, who had been chief executive of Ericsson. He has been the invisible man at BP.

In normal times, this might not matter. As the company’s oil pollutes the southern coastline of the United States, it’s a PR disaster. In a crisis, the chairman must be seen to be supporting his chief executive. Unfortunately, Svanberg’s chief executive, Tony Hayward, is not media-friendly either.

Hayward is only starting to show that he grasps the severity of the crisis facing BP. The board seems to be further behind. It should have decided to suspend dividend payments until the Macondo incident is closed, before external pressure to do so becomes irresistible.

The failure at Prudential  is a different sort of corporate disaster. Chairman Harvey McGrath has indeed stood right beside Tijane Thiam, his chief executive, throughout the doomed attempt to buy AIA, the Asian insurer.

The Pru board is full of luminaries, some of whom may even understand life insurance company accounts. Yet they allowed an untried executive team to try to pay a high price for a business the Pru couldn’t afford.

– Neil Collins is a Reuters Breakingviews columnist. The opinions expressed are his own –

Election first, manifesto afterwards. While there may be a Conservative prime minister in Downing Street, quite a few among the millions who voted for David Cameron will have a shock when they see the price they are paying for his pact with the more left-leaning Liberal Democrats.

Nobody seriously expected the current 18 percent rate for capital gains tax to last. But the plan to raise it to “rates similar or close to those applied to income” could imply a top rate of 50 percent. The question now is whether it will apply from the date of the emergency budget, promised for 50 days hence, or only from next year.

The Conservatives’ crowd-pleasing pledge to raise the threshold for inheritance tax to a million pounds had already been downgraded to an aspiration. Now that’s gone, at least for this parliament. Meanwhile, “unacceptable bonuses” in banking are to be subjected to “robust action”.

High earners will also get thwacked by changes to income tax and National Insurance, a second income tax. Although there will be a “substantial increase” in the amount individuals can earn before they start paying tax, that will be focused on the lower paid. The give-away will be funded by increasing NI contributions from the better paid. The new effective top rate of tax will be 52 percent.

Tax credits for higher earners will also be reduced. Quite how the proposal will mesh with the impenetrable tangle of these credits that the last Labour government created is left for another day.

At least, those reaching 75 will no longer be obliged to buy an annuity with their pension pot, for which relief much thanks. The bankers are also spared the LibDems’ “mansion tax” on their Chelsea homes, but the proposal to tax planes rather than passengers cannot be good news for their private jets. It’s going to be even tougher at the top.

– Neil Collins is a Reuters Breakingviews columnist. The opinions expressed are his own –

Since Labour came to power in 1997, it has pursued a policy of expanding the numbers employed by the government or its agencies. The result is that today 6.1 million people are on the state payroll, an increase of about 900,000 in 13 years.

They are also paid, if not well, then at least comfortably. The Office of National Statistics calculates that pay in the public sector is now higher than in the private sector (462 pounds and 451 pounds a week respectively). It’s also rising faster (3.7 percent, against 1.8 percent).

Add in greater job security and the final salary pension schemes which are almost extinct everywhere else, and it’s easy to see why those in a recession-wracked private sector are resentful. Yet in over 60 constituencies, more than a third of the workforce is on the state payroll. Apprehensive politicians see public sector employees, along with their families and their client base of welfare claimants, as a block vote.

The last budget sketched a path back towards fiscal stability, but published no individual spending department limits beyond next March. Behind the scenes, departments are planning for draconian measures, while Labour is hoping nobody will notice the mismatch between this silence and its plan to cut 37 billion pounds from public spending by 2014.

Scrapping aircraft carriers, IT systems, ID cards and other follies would hardly dent the problem. Cuts in school building and roads will help, but serious money saving requires frozen and means-tested benefits and, say, a 5.5 percent cut in public sector pay. Even these contentious measures save only 15 billion pounds according to an Financial Times analysis, much less than half the amount required.

No politician has dared admit that public sector cuts of this order are inevitable. The televised debate on April 29 provides almost the last chance to face reality before the vote on May 6, but the numbers are so horrible that the viewers will probably be spared them. After all, there’s an election on — although given the outlook, it’s hard to see why anyone would want to win it.

It’s tough on the flower-growers of east Africa, the salmon-farmers of the Orkney Islands, and almost everyone in or near the airline industry. For the rest of us, the eruption of an unpronounceable volcano is a heaven-sent chance to reflect.

There are many worse fates than being a stranded tourist in a desirable location, especially when you’re having the holiday the next lot booked, as well as your own. A wedding on a far-flung beach, relayed by webcam, avoids the need to mix with all her ghastly relatives.

That business meeting you can’t get to may have been crucial, but it probably isn’t. Many faraway meetings are merely signals that you are more important than your colleagues, especially if you can swing business class, with its few hours of pampered luxury.

However well the video conference works, it just doesn’t have the same cachet as the long-distance flight. Unfortunately for the airlines, far too many of their best customers will find out that the video conference works rather well — and it saves blocking out whole days in your crowded diary.

We love spooking ourselves with disaster stories. Instead, we should consider Iceland’s volcano the way we view hurricanes, as a reminder of the limits of man’s control of the planet. The initial impact of these events may look dramatic, but months later, they are barely a blip on the economic charts. Who now remembers the scare stories about the impact of last winter’s big freeze on output?

Besides, the airline shutdown merely proves once again that man is a problem-solving animal. If we can’t leave the surface of the globe, we will find more ingenious ways of getting across it, and then bore everyone rigid with details of How We Got There Against The Odds.

Having to wait for our ship to come in will teach us patience, just as children who learn to defer gratification do better when they grow up. It may be that the Icelanders are unwittingly doing us a favor. Even if they’re not, it serves the rest of us right for being so beastly to the place.

— Neil Collins is a Reuters columnist. The views expressed are his own –

National Insurance contributions make an unlikely battleground for the British election. They lack the sexiness of income tax cuts. But NI is a bad tax and the Tories are right to pledge to overturn Labour’s plan to raise it.

Unfortunately, their timing smacks of desperation as their poll lead melts away. More to the point, it flies in the face of their commitment to cut Britain’s vast budget deficit.

NI provides a strong incentive to employers to make do with fewer workers. It has long since ceased to provide any insurance, and is a second income tax, with different regulations and exemptions, in all but name. Labour proposes to raise the rate by 2 percent to 25.8 percent next year, with 12 percent from the employee and 13.8 from the employer.

As a result, the state would take 40 pounds of every 100 pounds an employee (on the basic 20 percent rate of income tax) costs his employer. The figure for higher-rate taxpayers is 49 percent, and for top-rate payers, 58 percent.

Unsurprisingly, NI is a powerful revenue raiser. The Treasury projects that the 2 percent increase is worth 7 billion pounds after raising the threshold for the worst-paid workers.

Even after this thumping tax rise, the Centre for Economics and Business Research reckons a further 35 billion pounds of spending cuts and tax rises are needed to hit Labour’s own borrowing target by 2014-15. These are such big numbers that neither party has dared reveal details of what they will do, even though nearly everyone else sees drastic action as inevitable.

If you’ve ever wondered how the big-shot investment bankers “earn” their bonuses, the document launching Britain’s biggest rights issue will give you a clue. Lloyds Banking Group is issuing 36,505,088,579 new shares, to add to the 27,161,682,366 currently in issue.

The new shares will raise 13.5 billion pounds, of which 500 million pounds will disappear in the expenses of the offer. Much of this is paid to the banks which are guaranteeing that Lloyds gets its money, a reward for the risk they are taking that the shareholders will fail to take up their rights.

So just how big is this risk? Here’s one way to look at it. The rights price is 37 pence, and as long as the Lloyds share price remains above that, the risk is minimal. At 37 pence, engorged Lloyds, with 63,666,770,945 in issue, would be capitalised at 23.5 billion pounds, including the 13.5 billion pounds of new money. On Tuesday, the day the issue was priced, with Lloyds old shares at 91 pence, the business was valued at 23.5 billion pounds.

 In other words, for the underwriters to pay up, the value of old Lloyds would have to slump from 23.5 billion pounds to 10 billion pounds – and all by December 11, the day on which the new money is due.

It may be fantasy M&A, but little GFI Securities has a suggestion for putting Cadbury and Hershey together without bankrupting the buyer. Compared to the blunderbuss approach from Kraft, it’s elegant and at least provides some food for thought.The idea is the dual listed company (DLC), a corporate structure that allowed Carnival, the world’s largest cruise line, to take over P&O Princess. Like Cadbury, P&O was a FTSE100 company, and, through the DLC, has been replaced by Carnival in the index.It’s obvious that Hershey is culturally and philosophically the best partner for Cadbury, assuming it is obliged to find one. But Hershey is too small to pay cash, while a Pennsylvania law requires the Hershey Trust to retain control of the business.GFI proposes that Hershey tenders for 11 percent of Cadbury shares at a big premium, followed by a merger of operations, with existing Cadbury shareholders owning 55 percent of Cadbury-Hershey. The vexed issue of control might be tackled by special provisions in the DLC, or by differential voting rights between Cadbury-Hershey plc and Cadbury-Hershey Inc.This is head-banging stuff, even before the little matter of constructing a tax-efficient DLC, something GFI admits would be “highly complex”. In practice, the firm can expect little more than an acknowledgment of its letter to Todd Stitzer, the Cadbury chief executive.Yet it should not be dismissed out of hand. The argument in this takeover battle so far has all been about what price Kraft needs to pay to win, but few doubt what would happen to Cadbury if it did so. The UK employees are right to be apprehensive.Kraft cannot afford an all-cash offer, and UK shareholders tend to sell foreign equity issued in takeovers. Besides, Cadbury is the only way sweet-toothed British investors can find exposure to the sector, and the bulls believe it will be eventually worth much more than 820 pence, the price at which many expect Kraft to win. There is a long way to go with this bid, but something like GFI’s proposal might produce a happier ending than death by cheese slices.