The Irish Independent reports that Irish banks greatly contributed to the broader economic contraction here and played a major role in contributing to the property and construction bubble, ratings agency Standard & Poor's (S&P) said yesterday.
In a significant report on the current state of the European banking sector, S&P said the industry is being pulled through crisis and recession by government and EU support.
S&P said it believes the Irish Government is one of five European governments that has "done the most" for specific banks via nationalisation, recapitalisation guarantees and the purchase of problem assets. The governments of Spain, the UK and Benelux were the others that had done most to shore up their banking sectors.
The agency added that it expects "unsupportive economic conditions to persist" for banks in Ireland, but that AIB will "benefit materially" from the Government's National Asset Management Agency that will remove about €77bn worth of loans from the balance sheets of Irish banks in coming months.
Uncertainty
But S&P yesterday said there remains uncertainty regarding Bank of Ireland's future financial profile following execution of the NAMA plan.
"We believe that the plan and the bank's associated capital raising and restructuring may not strengthen capitalisation and earnings prospects enough to withstand the challenges that we expect to remain," warned the ratings agency.
S&P added that it expects to resolve its placement of Bank of Ireland's and AIB's ratings on credit watch by the end of December. S&P currently has a long-term "A" credit rating and an A-1 short-term rating on both Bank of Ireland and AIB.
The agency noted that Dutch institution Rabobank has been hit by impairment losses in Ireland, and that the financial performance of Denmark's Danske Bank, which owns National Irish Bank, remains "vulnerable" to further deterioration in asset quality within its SME and construction lending portfolios in Ireland, Denmark and Baltic countries.
The Irish Independent also reports that mortgage loans across the euro area grew strongly in October, but overall credit slumped, as the economic downturn curtailed demand for credit and made banks more reluctant to lend.
Loans to the private sector fell 0.2pc during the month, leaving them 0.8pc down from a year earlier, compared with a fall of 0.3pc to September, the European Central Bank said.
However, loans for house purchases grew 10pc, which followed a 9pc rise in September. But total mortgage loans are still 0.1pc down on the same month last year, reflecting earlier falls.
Money-supply growth (M3), which the ECB uses as a gauge of future inflation, and some economists use as a predictor of growth, slowed to an annual 0.3pc in October, the lowest rate since records began in 1981, from 1.8pc in September.
"The eurozone recovery could be held back by a significant number of companies being unable to get the credit that they need," said Howard Archer, chief economist at IHS Global Insight in London.
Muted
"The data point to very muted inflationary pressures and support the case for the ECB to only very gradually withdraw its emergency liquidity measures and to keep interest rates down at 1pc until deep into 2010," he told Bloomberg News.
In contrast with the weakness of loans to companies and households, the annual rate of growth of credit extended to government increased to 15.2pc, from 13.5pc in September.
The figures show that loans to companies were 1.2pc down on October last year -- a significant fall from the 0.2pc decline recorded to September. Consumer credit fell 0.1pc and has been unchanged since August.
The Irish Times reports that the interim head of the National Asset Management Agency (Nama) has said the first bank loans may not be transferred to the agency until the end of January due to delays in the application and approval process.
Speaking at a conference organised by UCD’s Commercial Law Centre, Nama’s interim chief executive, Brendan McDonagh, said while Nama would be set within the next two weeks, the largest loans may not start being transferred until the end of January.
The remaining borrowers who have loans of €77 billion moving to Nama would transfer by a target of the end of July 2010, he said.
The draft business plan, published last month, says that the top 10 borrowers and their €16 billion loans would move to Nama by next month with all €77 billion in loans moving by June-July 2010.
Mr McDonagh said Nama had worked hard in the background with potential participating banks “to move as quickly as possible”.
However, he warned the July 2010 target was “entirely dependent on the readiness of each financial institution in having the information prepared on each individual loan for the Nama due diligence process”.
Nama may take enforcement action against defaulting borrowers before then, he said, but each individual borrower must first be given an opportunity to “present an updated business case within a reasonable timeframe to make a pitch for survival”.
Financial institutions have 60 days from the establishment of Nama to apply to join but must first seek shareholder approval at extraordinary general meetings.
Mr McDonagh expects to be able to sell on overseas property loans faster than domestic loans as foreign markets recover faster than the home market, according to the interim head of the agency.
About 27 per cent of the assets to be acquired by Nama are overseas, primarily in the UK, he said, and he would “expect these markets to recover more quickly”.
Some €22.5 billion of the loans moving to Nama are outside the Republic of Ireland, according to the agency’s draft business plan.
Mr McDonagh said he hoped Nama would at least break even over its 10-year lifetime.
He told the conference the banking sector had paid insufficient attention to basic risk management principles such as stress-testing property lending and to the key issue of supply and demand.
There had been no rigorous analysis of whether the scale of the rise in property prices could be justified by economic fundamentals, he said in his presentation.
Mr McDonagh said Nama would be objective, fair, reasonable, confidential, respectful, cost conscious and realistic.
Gerard Hogan SC told the conference there was nothing in principle within Nama that would lead to a constitutional challenge.
Gerry Keenan, chairman of the Irish Association of Investment Managers, said that he expected bank funding costs to drop significantly by the early part of next year as a result of Nama being established.
The Irish Times also reports that the Dublin Docklands Development Authority said yesterday it would require financial assistance from the State as a result of its purchase of the Irish Glass Bottle site.
The DDDA confirmed it made an operating loss of €27 million last year and faced impairments, losses and writedowns on its property assets totalling €186 million.
The DDDA, set up to regenerate Dublin’s docklands area, ended 2008 with a deficit in its consolidated income and expenditure account of €213 million.
This includes its share of the liability of Becbay Ltd, the company that bought the Irish Glass Bottle site for €400 million at the peak of the property market in January 2007.
Prof Niamh Brennan, appointed chairwoman of the DDDA earlier this year, said the collapse of the property market during 2008 and a plunge in the value of the authority’s assets meant it had been an “exceptionally difficult year”.
Apart from the €27 million operating deficit, the DDDA recorded net liabilities in its consolidated balance sheet, which includes the Becbay liability, of €48.5 million.
Prof Brennan said the authority’s operating losses had continued into 2009. “The authority is currently running a deficit, although the deficit for 2009 would be less than 2008. We believe we can break even. That won’t happen overnight, but the board believes it is an attainable goal,” she said.
Prof Brennan said the significant expense of the Irish Glass Bottle site transaction meant the DDDA would need financial assistance from the State. This could be in the region of €35 million.
Development projects planned by the authority will now be either shelved or cancelled, she said.
“Obviously we have limited means and we have to target our resources in the most effective way. We are trying to focus our resources on the social regeneration work of the authority,” Prof Brennan said. These projects will continue to go ahead, she added.
The DDDA’s social regeneration remit includes a number of education projects such as the funding of local schools and sponsorship of third-level places.
The DDDA’s development projects also include the building of the U2 Tower at Britain Quay. The authority said in October 2008 that this project was on hold for at least a year until market conditions improved.
Prof Brennan said yesterday the DDDA would implement a “new business model . . . which will result in a more conservative approach”.
A High Court ruling against the authority in 2008 in respect of the use of its planning powers would have a “profound impact” on how it conducted its business, she said.
Earlier this month, developer Bernard McNamara began legal action against the DDDA in relation to the Irish Glass Bottle transaction.
Mr McNamara and developer Derek Quinlan were the other stakeholders in Becbay.
Mr McNamara claims that, because of the High Court finding last year that the DDDA acted outside its powers in fast-tracking permission for another docklands development at North Wall Quay, the DDDA was never entitled to enter in November 2006 into an agreement to develop the Irish Glass Bottle site.
The Irish Examiner reports that Finance Minister Brian Lenihan has warned the Government will use its powers under NAMA to ensure banks start lending to cash strapped businesses.
Mr Lenihan disagreed with comments to an Oireachtas committee on Wednesday by outgoing CEO of AIB Eugene Sheehy that credit would not flow automatically once NAMA was set up.
The minister said: "The Government has taken specific powers in the NAMA legislation to make credit available to support the economy. Those powers are in the legislation; the president has signed it."
He also refused to comment on possible tax changes in the budget and stressed the importance of maintaining a competitive corporation tax rate to ensure the US multinationals continued their major role in Ireland. Mr Lenihan was speaking at the Thanksgiving lunch of the American Chamber of Commerce in Dublin.
US multinationals have close to €150 billion invested in Ireland, more than their combined involvement in Brazil, Russia, India and China. The 600 firms employ 100,000 directly and another 200,000 plus in back up services. They also account for 40% of all corporation taxes raised.
Referring to Bank of Ireland’s declaration that it would not need any more State capital, the minister said: "I’m glad to see their optimism but I am not going to discuss any particular institution in advance of the agency valuing their loan books in detail."
Such matters as lending and capital raising would be worked out as NAMA is put into place, he said.
Commenting on the row over the appointment of Colm Doherty to the post of AIB managing director, Mr Lenihan said "cultural hostility to bankers" and over-zealous media attention, not the salary cap of €500,000, delayed the recruitment of new chief for AIB. He also said he accepted comments by former Tánaiste Dick Spring, a government appointee to AIB’s board, that Doherty was the best available candidate.
Paul Duffy, president of the American Chamber of Commerce, stressed the importance of a competitive base as "a pre-condition" for multinationals to continue to play a vital role in the Irish economy.
If a carbon tax is introduced it must not add further to the already high cost of energy in Ireland, he said.
The Financial Times reports that Alistair Darling will admit in next month’s pre-Budget report that the recession has been much deeper than he forecast in March, the Financial Times has learnt.
The chancellor is expected to say that the economy contracted by 4.75 per cent in 2009, shrinking at least one percentage point more than predicted in the Budget. But he will also say that the UK has at last turned a corner and is on the road to recovery, ahead of a probable general election in May.
The Treasury’s forecasts assume the economy has started to grow again in the final three months of this year, Treasury insiders said on Thursday.
Senior officials are minded to stick close to their Budget predictions for 2010 even though the Bank of England has recently become more optimistic, with a central estimate of 2.2 per cent growth.
Mr Darling is likely to forecast output growth of 1 to 1.5 per cent for next year.
If the economy starts to grow as strongly as the Bank expects, however, the chancellor will be able to revise upwards his forecasts in the spring Budget, just weeks before Gordon Brown is likely to call the election.
Mr Darling was tight-lipped about the precise forecasts at Treasury questions in the Commons, telling MPs: “I’m confident we’re coming out of this and I believe we will see growth at the turn of the year.”
Treasury sources said the only way of making the 2009 and 2010 forecasts consistent with each other was for the government to predict the economy was already growing by 0.2-0.4 per cent in the fourth quarter.
Officials said such growth was consistent with early indications from figures such as the output of the service sector which jumped in September, and from business surveys.
The FT also reports that China on Thursday announced it intends to slash its greenhouse gas emissions per unit of economic output by 40-45 per cent by 2020, a key requirement for reaching a global deal to tackle climate change at next month’s Copenhagen conference.
Beijing also said that Wen Jiabao, the premier, would attend the talks. Analysts said the decisions underlined the seriousness with which Beijing is treating the climate change debate.
The carbon intensity target means reducing the amount of carbon produced per unit of gross domestic product, and is not the same as cutting emissions. Indeed, China’s economy will double in size by 2020 at current growth rates and its emissions will be considerably higher even if it meets the new target.
The announcement followed a pledge on Wednesday from the US to cut its emissions by 17 per cent by 2020, provisional on the passage of domestic legislation.
Yvo de Boer, the United Nations’ top climate change official, who will steer the Copenhagen talks, said: “The US commitment to specific, mid-term emission cut targets and China’s commitment to specific action on energy efficiency can unlock two of the last doors to a comprehensive agreement.”
But he said some crucial issues remained unresolved, particularly financial assistance to enable developing countries to cut emissions and cope with the effects of global warming.
“Let there be no doubt that we need continued strong ambition and leadership,” he said. “In particular, we still await clarity from industrialised nations on the provision of large-scale finance to developing countries for immediate and long-term climate action.”
A senior US official told the Financial Times the administration has no imminent plans to table a commitment on finance.
China has not yet set a target date for its carbon emissions to peak. There has been speculation that negotiators would make a commitment in Denmark. Developed countries would like China to set a date of 2025 or before. China is understood to have discussed dates around 2035. In public, China has only said its emissions would peak before 2050, which developed country negotiators regard as too late.
The latest targets show Beijing is putting in place robust policies, but some analysts pushed China to go further. “Given the urgency and magnitude of the climate change crisis, China needs stronger measures,” said Ailun Yang of Greenpeace China.
The New York Times reports that two years ago, Congress ordered the nation’s gasoline refiners to do something that is turning out to be mathematically impossible.
To please the farm lobby and to help wean the nation off oil, Congress mandated that refiners blend a rising volume of ethanol and other biofuels into gasoline. They are supposed to use at least 15 billion gallons of biofuels by 2012, up from less than seven billion gallons in 2007.
But nobody at the time counted on fuel demand falling in the United States, which is what has happened during the recession. And that decline could well continue, as cars become more efficient under other recent government mandates.
At the maximum allowable blend, in which gasoline at the pump contains 10 percent ethanol, updated projections suggest that the country is unlikely to be able to use all the ethanol that Congress has ordered up. So something has to give.
“The market is full,” said Jeff Broin, chief executive of Poet, a company in Sioux Falls, S.D., that produces ethanol.
In theory, the Environmental Protection Agency has the power to solve this problem by tweaking the mandates imposed by Congress, and it may act as early as next week.
Each potential solution would anger one interest group or another, so the agency has been subjected to fierce lobbying, including from members of Congress lining up behind various factions. One possibility is to raise the maximum proportion of ethanol in gasoline to 15 or 20 percent.
But that idea is opposed by some carmakers and pollution experts. They contend that high ethanol blends can cause damage to cars, including making catalytic converters run hotter.
The Alliance of Automobile Manufacturers says it believes this could cause the converters, components that help control pollution, to fail at around 50,000 miles. They are supposed to last for 120,000 to 150,000 miles. “We are sensitive to the issues facing the ethanol industry, but the government must make decisions based on sound science,” said Dave McCurdy, president and chief executive of the alliance, in a letter to the E.P.A.
Another possibility is that the agency could waive the mandates requiring use of a large volume of biofuels. But that would anger farmers, who sell a great deal of corn to ethanol factories, and the members of Congress who represent them. It might also undermine the efforts of companies that are investing millions in factories to make ethanol from waste materials, like corncobs, straw and garbage.
“Ethanol is the only viable, competitive alternative to foreign oil,” said Tom Buis, chief executive of Growth Energy, the ethanol trade group that filed the petition with the E.P.A. to increase the blending percentage. “If we’re going to become less dependent on foreign oil, we’ve got to move forward.”
A third possibility is that the E.P.A. could announce that it is waiting for more data on how cars perform at higher blends, but that would merely put off the hard decision.
When Congress wrote the rules, in 2007, gasoline consumption had been growing for years, and it looked as if the nation would be able to use considerably more ethanol in the future. Gasoline consumption hit a peak of 3.4 billion barrels that year.
But gasoline demand fell in 2008, after soaring gas prices early in the year were followed by the economic crisis. Consumption was slightly less than 3.3 billion barrels last year, and it could end 2009 at about the same level.
With consumers buying more fuel-efficient cars these days, and carmakers rushing to bring even more of those to market, gasoline demand may not recover much in coming years, even as ethanol production soars.
As of yet, not all gasoline is blended with 10 percent ethanol, but that saturation point is rapidly approaching. Under the present rules, the nation could hit the upper limit of its ability to consume ethanol in 2011.
Mr. Buis and others argue that Congress or the E.P.A. must do something if the country is to move to a new generation of biofuels that do not compete with food crops. The possibilities include ethanol made from wood chips, waste paper or agricultural waste like straw and corncobs.
Congress has also passed mandates for the blending of this type of fuel, so that the nation’s total consumption of all renewable fuels, in vehicles and other equipment, is supposed to reach 36 billion gallons in 2022.
Perhaps the easiest way for the country to absorb all the excess ethanol would be to make wider use of an ethanol blend called E85, which contains 85 percent ethanol and 15 percent gasoline. Most cars on the road cannot use it, but in recent years, millions of “flex-fuel” cars have been sold, especially by General Motors. (Any car with a yellow gasoline cap can use E85.)
The problem is that at current prices, E85 does not make economic sense for drivers, and most of them use regular gasoline in their flex-fuel cars. That means gasoline stations have little incentive to install pumps for E85. The fuel can be found in the Corn Belt but is not readily available elsewhere in the country.
Gasoline was selling on average Thursday for $2.63 a gallon, while E85 was selling for $2.23 a gallon. That might make E85 sound like a bargain, but cars go fewer miles on a gallon of ethanol than of gasoline. Adjusted for that factor, E85 on Thursday was effectively 31 cents a gallon more expensive than gasoline.
A return of $4 gasoline might change things, by making E85 a relative bargain and spurring wider use. So would an unexpected spurt in total fuel demand. Otherwise, it is not at all clear how the nation’s coming surplus of ethanol can be absorbed.
Gregory M. Scott, executive vice president of the National Petrochemical and Refiners Association, drives a flex-fuel car in the Washington area, but said he had never put E85 in it.
He said the amount of renewable fuel that Congress had mandated refiners to use, and the amount that can be blended for conventional automobiles, were on a collision course.
“At some point,” he said, “those two lines cross.”
The NYT also reports that Bradley C. Birkenfeld was sentenced to 40 months in prison for helping rich Americans dodge their taxes. Now he is hoping for a bit more — a few billion dollars more.
Mr. Birkenfeld, a former private banker at the Swiss bank UBS, won the enmity of his peers by violating the omerta of Swiss banking: He divulged the tax evasion secrets of UBS, the world’s largest bank by assets, and its well-heeled American clients. As part of a deal with federal prosecutors, he admitted to, among other things, helping to smuggle diamonds in a tube of toothpaste.
Now, as thousands of wealthy Americans seek amnesty for keeping illicit, offshore bank accounts, Mr. Birkenfeld and his lawyers hope to use a new federal whistle-blower law to claim a multibillion-dollar reward from the American government. If they succeed — and legal experts say the odds are pretty good — it would be the largest reward of its kind.
Mr. Birkenfeld, who is to begin his prison term as soon as January, is being represented by the executive director of the National Whistleblowers Center, Stephen M. Kohn. Mr. Kohn successfully represented Linda Tripp, who helped expose the Monica Lewinsky scandal of the Clinton years.
“We are seeking at least several billion dollars,” Mr. Kohn said.
It might seem outlandish that Mr. Birkenfeld, who pleaded guilty in June 2008 to conspiring to defraud the United States government, would seek any reward at all. But experts in whistle-blower cases — who, admittedly, have an interest in fostering such claims — say he has a persuasive case.
“I do think he has a serious claim,” said Erika A. Kelton, a partner at Phillips & Cohen, a law firm that specializes in large whistle-blower claims. “It was very credible, very useful information from inside UBS that he provided. The law is pretty clean on this.”
Mr. Kohn stands to reap a fortune if Mr. Birkenfeld wins his case.
The United States Treasury loses an estimated $100 billion a year to offshore tax cheats, but finding tax dodgers is difficult. The best information, the authorities acknowledge, often comes from insiders. In recent years, the Internal Revenue Service has quietly embraced whistle-blowers like Mr. Birkenfeld to help root out tax cheats.
Federal whistle-blower laws date back to the Civil War, when the government sought to detect wrongdoing by suppliers to Union soldiers. But under a 2006 whistle-blower law, the I.R.S. has sought to further encourage tax informants to come forward, arguing that sometimes it takes a rogue to catch a rogue. Informants now stand to collect 15 to 30 percent of the taxes, fines, penalties and interest ultimately collected by the I.R.S. — billions of dollars, in the case of UBS.
Informants who are convicted of “planning” and “initiating” the schemes are not entitled to bounties. But Mr. Birkenfeld, a 44-year-old American, is not seeking rewards for money collected from his own clients. Instead, his lawyers are arguing that he is entitled to a reward stemming from the thousands of others who have come forward in recent months about hidden, offshore bank accounts.
Mr. Birkenfeld’s lawyers also assert that UBS executives, not Mr. Birkenfeld, planned the schemes. Mr. Kohn argues that Mr. Birkenfeld is entitled to a portion of the money recovered from 52,000 offshore UBS clients whose existence, but generally not names and account details, he described to the I.R.S. and Justice Department.
The names and account details of about 4,450 UBS clients are being turned over the I.R.S. under a settlement with the bank. These people will pay billions of dollars in back taxes, penalties and interest. Scores more are coming forward independently to disclose their assets. More than 14,700 offshore tax evaders emerged under an I.R.S. amnesty program, and while the I.R.S. does not yet know how many are from UBS, it presumes that the majority are. Douglas Shulman, the I.R.S. commissioner, has said that he expects “billions” of dollars to roll in from the amnesty program.
Mr. Birkenfeld’s disclosures, the Justice Department has acknowledged in court filings, were also the crucial factor leading to the criminal investigation of UBS. In February 2008, the bank admitted that it engaged in criminal wrongdoing and enabled tax evasion by selling its offshore banking services to wealthy Americans; it agreed to pay a $780 million fine. Mr. Kohn argued that Mr. Birkenfeld was also entitled to a portion of that settlement.
The Justice Department acknowledges Mr. Birkenfeld’s role in the case. “Without Mr. Birkenfeld walking into the door of the Department of Justice in summer of 2007, I doubt this massive fraud scheme would have been discovered by the United States government,” Kevin M. Downing, the Justice Department prosecutor who handled the UBS investigation, wrote in court papers filed in Mr. Birkenfeld’s case.
But the agency, which did not grant Mr. Birkenfeld immunity from prosecution when he came forward, considers Mr. Birkenfeld more of a tipster or an informant than a formal whistle-blower, in part because while he described the bank’s dealings, he provided few details on actual clients, according to a senior Justice Department official, who spoke on the condition he not be named, given the sensitivity of the matter.
Mr. Kohn contends that Mr. Birkenfeld is entitled to his rewards. “If it’s serious about stopping offshore tax evasion, it will reward Mr. Birkenfeld,” he said.
The I.R.S. declined to comment on Mr. Birkenfeld’s case.
Even if Mr. Birkenfeld wins his case, it is unlikely he will be able to claim any reward until he is freed in 2013. But he could leave jail a rich man — a prospect that troubles some officials involved in the case.
“It creates a pretty unseemly situation,” the senior Justice Department official said.
