CANTILLON: Inside the world of business
THE DUBAI World default presents no immediate threat to Ireland’s ability to fund its deficit due to the level of pre-funding undertaken by the NTMA, but it is a salutary warning all the same.
The almost immediate widening of the spread between Irish and German bonds in the wake of the Dubai default serves to highlight the fragility of the improvement in sentiment towards Ireland in the international bond markets.
The difference between Irish and German 10-year bond yields rose to 168 basis points, up from a recent low of 134 basis points, but is still well below the 260 basis points peak reached back in January.
The setting up of Nama and last April’s budget may have gone some way towards convincing investors that the Government can get the public finances back under control, but there is clearly a long way to go.
It underlines, if it needed underlining, the necessity of the Government delivering on its target of a €4 billion reduction in Government spending in December’s budget. Any failure in this regard will make a nervous bond market even more wary of Ireland.
The default will also reinforce the argument that the fundamental fiscal policy objective should be to keep borrowing to a minimum at this stage in he crisis.
Although it seems unlikely, the sovereign nature of the Dubai World default does hold out the prospect of a convulsion in the sovereign debt markets along the lines seen in wider credit markets last year.
It shows there is simply no guarantee that, even if it wanted to, the Irish Government could continue to borrow at the current rate.
One unfortunate consequence of all this is that the lesser of two evils argument being advanced for recapitalising Anglo Irish Bank and Irish Nationwide will win the day.
Both banks are, in effect, being kept going because doing so allows the State to avoid having to consolidate their senior debt on to the national balance sheet with possible negative consequences for the cost and availability of borrowing.
A marriage of inconvenience
The potential merger of EBS and Irish Nationwide building societies may leave some feeling a little warmer inside knowing that the Government is eager to create a bank specialising in savings and home loans and that is less hell bent on short-term profits from property.
But in truth such a union would only be the consolidation of a problem.
Irish Nationwide is a financial basket-case facing a Government handout of between €1 billion and €1.5 billion to fill the capital hole left by the discounted sale of €8.3 billion in loans to the National Asset Management Agency (Nama).
EBS requires at least €300 million from the State to meet the capital shortfall after Nama buys up to €927 million in loans.
So, all told, the taxpayer is facing a bill of between €1.3 billion and €1.8 billion for repairing the State’s two building societies.
Fergus Murphy, chief executive at EBS, says that the society would need about €400 million – €300 million for EBS and up to €100 million for taking on the €2 billion rump of Nationwide’s €10.3 billion loan book post-Nama. But this only accounts for the capital needs of the cleansed and merged entity.
A bill of up to €1.8 billion means that the State’s stake in the enlarged lender should be closer to 80 and 90 per cent, not the 40 to 60 per cent suggested speculatively by Mr Murphy on Monday.
This would give the 600,000 members at EBS and Nationwide a minority stake in the new mutual. Irish Life Permanent (ILP) is expected to join the party, once EBS and Irish Nationwide are merged. A strategic investor – most likely ILP, though Bank of Scotland (Ireland) has made noises about wanting to participate – will likely come in to take out some of the State’s stake.
ILP may offload Permanent TSB into the combined EBS/INBS entity with a capital injection of €500 million from the company.
This would give it a stake of about 40 per cent in the so-called third force that may emerge to rival AIB and Bank of Ireland.
Merger discussions started this week between EBS and Irish Nationwide but there is complicated work ahead before the final product of this process is unveiled.
Nama’s legal bonanza
It was hardly a surprise that the seminar on the National Asset Management Agency (Nama) organised by UCD’s Commercial Law Centre was well attended on Thursday.
Among the speakers at the seminar was Nama’s interim chief Brendan McDonagh.
The event was wall-to-wall with lawyers who will presumably be salivating at the prospect of a Government windfall from Nama to tide them over through tough times in the private sector.
The draft Nama business plan says due diligence on the €77 billion in loans moving to the agency from the banks will be €165 million.
In his presentation McDonagh said Nama would not be “a goldmine for advisers”.
A very competitive and thorough public procurement process on due diligence services would “drive costs down”, he said, and that 70 per cent of these costs would be recouped from the banks.
“But these costs pale in significance to the €2.64 billion in fees and expenses that Nama faces over the agency’s 10-year lifespan.”
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