Thursday Newspaper Review - Irish Business News and International Stories - - July 07, 2011
By Finfacts Team
Jul 7, 2011 - 7:02 AM

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The Irish Independent reports that investment bank Goldman Sachs could be paid as much as €7.8m for advising the Government on the upcoming recapitalisation of Ireland's banks, Finance Minister Michael Noonan has confirmed.

Goldman's big pay day was revealed in an answer to a parliamentary question from Sinn Fein finance spokesman Pearse Doherty, who asked for details on the professional fees linked to July's €24bn recapitalisation.

AIB, Irish Life & Permanent (IL&P) and the National Treasury Management Agency (NTMA) had previously declined to give details of their fees to this newspaper. BoI has publicly said it expected to pay about €150m for its €5.35bn capital raise.

The information provided to Mr Doherty sheds more light on the professional fees bonanza behind the industry-wide recapitalisation, and includes details on spends by IL&P, AIB and the NTMA as well as more information on BoI's spend.

Mr Noonan told Mr Doherty that the NTMA had appointed London investment banking giant Goldman Sachs as corporate finance advisers to evaluate the banks' plans.

"Fees of up to €7.8m may be payable depending on the completion of transactions and performance," Mr Noonan added, stressing that Goldman was appointed "following a competitive tender evaluation".

An NTMA spokesman declined to comment on the extent of Goldman's fees. The recapitalisation brief represents the second recent NTMA appointment in favour of Goldman, which also advised on Anglo's plan to take over Quinn Insurance. As well as Goldman, the NTMA is also forking out for a legal panel to evaluate the banks' recapitalisation plans, Mr Noonan confirmed.

The panel, which includes A&L Goodbody, Arthur Cox and Matheson Ormsby Prentice, was appointed following a "competitive tender process" and offers "significantly discounted fees" to the NTMA banking unit.

The Finance Minister said AIB had so far spent "circa €6.25m" on its recapitalisation efforts. "AIB's capital raising is not complete so further unquantified fees will be incurred," he added.

IL&P, meanwhile, has spent €2m on "lawyers, investment advisers and underwriters".

"There will be further significant amounts due in relation to the Initial Public Offering/disposal of the life assurance company and other banking business," Mr Noonan added.

The sale of Irish Life Assurance could trigger fees in the tens of millions, market sources say.

The Central Bank, meanwhile, has already confirmed it paid €30m to advisers to carry out the stress tests which set the level of the bank recapitalisations.

The Irish Independent also reports that Irish government debt is at risk of being cut to 'junk' status by ratings agencies for the first time ever, analysts said last night.

The warning comes after Portugal's government rating was cut to junk on Tuesday, prompting a furious response from European leaders.

Moody's cut Portugal's government debt rating four notches on Tuesday, from Baa1 to Ba2. The Ba2 rating is "sub-investment grade", commonly known as junk. It makes Portugal the second European government bond issuer to lose its investment grade status.

Moody's said it made the cut because it was now more likely that Portugal would follow Greece into a second bailout if it couldn't get back into the markets to borrow in 2013.

If that happens there is also a bigger chance that private sector lenders would be forced to play a role in the new bailout, Moody's said.

Analysts said the same concerns would hit Irish debt ratings.

"If Moody's applies the same rationale to Irish debt then they will come to the same conclusion," said Brian Barry, a market analyst at Evolution Securities in London.


In April Moody's cut Ireland's credit rating to Baa3, just a single notch above junk, and said it was keeping the Irish on "outlook on negative".

That view was echoed by Cathal O'Leary of NCB Stockbrokers in Dublin.

"If not re-entering the public funding markets has significance for a sovereign's rating, then clearly if our view proves correct, Ireland will suffer an imminent downgrade," he said.

Last night Moody's refused to comment on any plans to revise its Irish rating, but said in an email to Bloomberg News that: "In the different ratings assigned to European periphery countries, we continue to differentiate significantly in terms of the credit profile."

The yield on Irish two-year government bonds hit an all-time high of 14.69pc and the cost of buying insurance to protect against a default also hit a fresh high yesterday.

The yield on Portugal's two-year bonds was even harder hit, rising to 15.88pc from the previous day's 12.335pc. The yield, or cost of borrowing, shot up as bond investors unable to own poor quality bonds were forced to dump their holdings.

Moody's said Portugal's rating was cut partly on fears that the country will not meet its bailout agreement targets. Meanwhile, Ireland is hitting all of its bailout commitments.

European Commission President Jose Manuel Barroso said the ratings cut so soon after Portugal signed up to its bailout deal was "fuelling speculation in financial markets".

German Finance Minister Wolfgang Schaeuble demanded a limit on what he called an "oligopoly" by rating agencies.

Meanwhile, Germany last night signalled for the first time that Europe should not go to extremes to avoid seeing a technical default.

"If a debt downgrade to selective default is not avoidable then the question is can we limit the period of this rating event to a very short period of time?" Germany's Deputy Finance Minister Joerg Asmussen said yesterday.

Mr Asmussen made the comments in a TV interview. He also pushed a German plan for a buyback of Greek government bonds or a swap of old bond for new as a scheme to get private sector involvement in the second Greek bailout.

That plan had been dumped in favour of a French alternative which is currently being discussed by banking sector executives at talks in Paris.

But Mr Asmussen said the French plan for banks to re-loan money to Greece at higher interest rates after it is repaid is too bank friendly and leaves Greece with a bigger repayment burden.

The Irish Times reports that Germany is trying to revive plans for a Greek debt swap as Europe battles to find a way of ensuring private creditors take part in a new bailout for the country.

The development comes weeks after Berlin withdrew its proposal in light of warnings that it would result in a default rating on the debt. An alternative French initiative emerged last week, but it is now subject to a similar default warning even though it was softer on financial institutions.

Euro-zone officials are known to be examining whether such ratings could be viewed as “temporary” if they are reviewed immediately afterwards on the basis that the position of investors was guaranteed.

This is still seen to be a step too far, and euro-zone finance ministers resolved at the weekend that the ultimate solution should not involve a selective default. Such a manoeuvre would be viewed as inherently risky, with unpredictable market consequences.

However, a well-placed European official said discussions were under way to assess whether default ratings might be imposed “only for a day” and lifted immediately afterwards on the basis that there was no haircut on the investors’ receivables.

The key element of uncertainty was the likely response of markets.

“One can try to predict but it’s not something we can forecast with accuracy, what the reaction would be at this point,” the official said.

Central to the discussion is whether any such action would trigger payouts on credit default swaps, a form of insurance against sovereign default. The authorities do not want to go down that road for fear of prompting contagion in markets.

Still, it is acknowledged that these talks may provide a new opening for the debt-swap plan first mooted by German finance minister Wolfgang Schäuble.

A further consideration is that the authorities are no longer pushing for a deal next week. With no agreement likely before September, sources say this might provide a new opportunity to advance the debt-swap proposal.

Mr Schäuble saw potential to produce a “quantified” private-sector contribution to a new Greek bailout by urging banks which hold the country’s bonds to swap them for new paper with maturities seven years longer.

Credit-rating agencies made clear their distaste for the plan, saying it would result in a credit event. Berlin relented, but it now sees scope to revive the proposal as a result of a negative assessment of the French initiative by Standard Poor’s.

“The model put forward by some French banks is still a good base for discussions and we are currently working on this,” German deputy finance minister Jörg Asmussen said yesterday.

“But since rating agencies have signalled that they will consider modalities [such as] the French proposal as a selective default – that means a rating event – we can also put other options like a bond exchange on the table.”

German chancellor Angela Merkel wants to maximise the private creditor contribution to a new Greek bailout to ensure political support for the endeavour within her own government.

The more banks contribute to the new bailout, the less guarantees would be required from euro-zone governments.

Although German institutions agreed in principle last week to participate in a bail-in scheme similar to the French plan, there was disappointment in Berlin that their likely contribution would be no more than €3.2 billion.

Mr Asmussen said the French plan may involve incentives for private creditors to participate which were “too clear”. While work was under way to amend the proposal, he said other options including the bond swap would also be considered.

“First, one has to look how can one modify the French proposal in a way that it is still attractive to financial institutions,” he said.

One key element of the equation was the interest rate that Greece paid because higher rates had more negative implications for its debt sustainability.

If a “rating event” was not avoidable, however, Mr Asmussen said it should be limited to a short period.

“Then the question is, ‘can we limit the period of this rating event to a very short period of time?’. This is the key: what can we do to limit this period to probably a few weeks or even days?”

Private investor support: French and German plans for Greece 

Germany and France are behind the main plans to enlist private investor support for a second Greek bailout.

Details of the German plan are sketchy, but German finance minister Wolfgang Schäuble set out his thinking in letter last month to his fellow ministers.

“The process has to lead to a qualified and substantial contribution of bondholders to the support effort,” he wrote.

“This can best be reached through a bond swap leading to a prolongation of the outstanding Greek sovereign bonds by seven years, at the same time giving Greece the necessary time to fully implement the necessary reforms and regain market confidence.”

There are two options to the French proposal, which is considered softer on investors but is now the subject of a default warning from Standard & Poor’s.

The first, which is the more detailed of the two, would see French institutions invest at least 70 per cent of the proceeds of their maturing Greek bonds in newly-issued 30-year Greek government bonds.

They would bear interest at 5.5 per cent plus a margin equal to the percentage of real annual growth of the Greek economy, capped at 2.5 per cent and floored at 0 per cent.

Athens would be required to apply a portion of the issuance proceeds to the purchase of zero-coupon 30-year “AAA” -rated bonds issued by one or more sovereigns or European agencies, with the principal and interest from such debt calculated to repay in full the principal amount of the new 30-year bonds.

In the second option, French institutions would invest at least 90 per cent of the proceeds of their maturing Greek bonds in newly-issued five-year Greek government bonds.

The Irish Times also reports that Greece will decide to leave the European Monetary Union (EMU) but Ireland has a good chance of “staying the course”, a British commentator on monetary affairs predicted yesterday.

David Marsh, co-chairman of the monetary think tank Official Monetary and Financial Institutions Forum, told a Dublin audience that Ireland had done the right thing in facing up to its problems early. The country was “taking its medicine”, although he believed it was only about half-way through this process.

Addressing an event at the Institute of International and European Affairs, Mr Marsh said Ireland had a very good chance of staying the course and “coming out as a member of the new euro”, which he believes is likely to be a much more “steely”currency.

He envisages that the EMU is likely to be a “less forgiving, less pleasant place to be” with more fiscal rules.

Mr Marsh, a former European editor of the Financial Times , advised Ireland to forge alliances with countries such as Sweden and Denmark to strengthen its position in Europe.

He believes Greece will leave the EMU, although this will be as a result of a sovereign decision rather than a “diktat” from Europe. One or two other countries might also “find it in their better interests” to leave the single currency, though “not right away”. In the event of a Greek departure, ring-fencing would be necessary to prevent a domino effect from spreading to Spain.

He went on to describe the growing gulf between what he referred to as debtor and creditor countries.

“Creditors have less and less certainty they will be repaid,” he said. “Those that are lent to feel increasingly embittered. They feel the conditions are increasingly onerous and driving them into a spiral of debt-deflation.”

He argued that the euro – which he described as the most emblematic and important European project since the second World War – as originally conceived had come to an end.

He said the EMU’s one-size-fits-all approach meant interest rates descended to German levels. Instead of using low interest rates in a “wise way”, governments “let rip” and decided to go on a “long drawn-out binge”, fuelling consumer booms and speculation in areas such as property.

Mr Marsh said although the UK was not part of the single currency it had been affected by the fallout because it carried out a significant amount of trade with the EMU area.

The Irish Examiner reports that Enterprise Minister Richard Bruton has launched a consultation period to gauge industry and consumer views on how best Government can regulate the grocery goods sector.

Interested parties will now have until September 1 to communicate their views on the proposed statutory code — aimed at guarding against unfair practices in the grocery sector — to the minister.

The announcement, made yesterday, comes after a report by economic consultant John Travers found that the sector couldn’t agree on a voluntary code of practice.

Minister Bruton said he was disappointed by the lack of agreement on a voluntary code, but added that the new code of practice will aim to benefit both industry players and consumers alike.

"Regulation by government should always be a last resort. Where regulation is imposed it should be forensically designed to avoid unnecessary costs on consumers and business, and I’m determined to ensure a fair balance," he said.

Mr Bruton said that job growth and value and fairness for consumers will be the key priorities of the new regulations.

"My job is to protect consumers and enhance employment across the entire economy," Mr Bruton said.

He added: "Prices are already too high in this sector, and consumers deserve choice and the chance to buy high quality products at keen prices."

The Minister’s words were broadly welcomed by industry representatives. The Irish Farmers’ Association (IFA) said that the new regulations will have to provide more fairness for indigenous food producers too.

Meanwhile, Retail Ireland — the IBEC-affiliated representative body urged the Minister to hold off issuing any code of practice until the EU finishes its own review of the wider European grocery sector,
"and then align Irish practice with any European standards that may emerge".

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Europe lashes out over downgrades - - German minister calls for break-up of ratings oligopoly; More worryingly, Italian 10-year yields jumped above 5 per cent for the first time since November 2008. Contagion to Italy could threaten the entire euro project because of the size of its economy.

Schäuble presses case for bond swap - - Berlin seeks rethink over Greek assistance; German politicians have started a new push for Greece’s creditors to agree to a one-off swap of their sovereign bonds for paper with longer maturities but private-sector bondholders said it would not gain traction.

Murdoch investors take fright - - News Corp head denounces hacking but stands by UK boss; Cameron announced separate enquiries into the original police investigation of phone hacking in 2006 and the behaviour of the press but gave no indication of their precise remit, composition or timing.  He condemned the News of the World’s conduct as “absolutely disgusting”. “I’m sure everyone in this House, indeed this country, will be revolted,” he said.

Facebook and Skype in video hookup - - Zuckerberg responds to Google’s new social network; “I think the driving narrative for the next five years isn’t going to be about wiring up the world,” said Mr Zuckerberg, who last week said the new launches would be “awesome”. “It’s about what kind of cool stuff are you going to be able to build, what kinds of social apps can you build now that you have this social infrastructure,” he said. He also confirmed Facebook’s latest user numbers – 750m active users

SEC in China audit deal push - - US regulators seek inspection rights;  The board and SEC last year launched reviews looking at companies with stock trading in the US that had most of their business operations overseas. Many of those companies are based in China and entered the US through reverse mergers, a process whereby they obtained stock listings by acquiring a publicly traded shell company.

Sebastian Mallaby: US power requires economic sacrifice - - Looking into the future, the pendulum seems almost certain to swing back. Even if the US were to maintain military spending at a constant share of its own GDP, the nation’s shrinking weight in the world economy would cause its share of global spending to decline to 39 per cent by 2015.

China’s crossroads It is time to act on call for democracy - - Indeed, members of the political class in Beijing talk casually of the “100 families” that control the country’s politics, military and the commanding heights of the economy. In a private conversation, the scion of one of these families lamented the current state of political affairs and the lack of brave policy initiatives. “When the eunuchs are running the country then the dynasty is nearing its end,” this person said.

Closed encounters: Manufacturers turn to complex supply chains - - A closed supply chain is a highly integrated set of networks in which many of the technologies being applied are developed at least partially by the company orchestrating the system. A large proportion of the components made by key suppliers are unique to the final product.

Access to the New York Times online is free up to 20 articles per month. For subscription information, click here

President Looks for Broader Deal on Deficit Cuts - - President Obama, who will meet with the bipartisan leadership of Congress on Thursday, wants to move well beyond the $2 trillion in savings sought earlier; Senator Bernard Sanders, independent of Vermont, urged the president not to yield to Republican demands to reduce the deficit by cutting hundreds of billions of dollars from Medicare, Medicaid and other domestic spending. He said that “the president has got to demand that at least 50 percent of deficit reduction come from revenues,” including higher taxes on the wealthy and large corporations.

Chinese Investment Buoys U.S. Companies - - Chinese investment has been a lifeline for some smaller American companies, like Stephen C. Kircher’s Solar Power Inc., which got a $33 million investment;
While there is some concern that political tensions could get in the way, the investment money is a huge opportunity for American businesses. The following four small businesses, already the beneficiaries of such investments, illustrate the aims of Chinese investors and the benefits that American companies can take from them — including rescue from a very tough economy.

Taxes and Billionaires - - Nicholas Kristof asks are Congressional Republicans really just trying to protect ordinary American businesses or billionaire fund managers? This carried interest loophole benefits managers of financial partnerships such as hedge funds, private equity funds, venture capital funds and real estate funds — who are among the highest-paid people in the world. John Paulson, a hedge fund manager in New York City, made $4.9 billion last year, top of the chart for hedge fund managers, according to AR Magazine, which follows hedge funds. That’s equivalent to the average per capita income of 184,000 Americans, according to my back-of-envelope calculations based on Census Bureau figures.

Building Boom in China Stirs Fears of Debt Overload  - - Frenzied construction in cities like Wuhan belies signs that development financed with borrowing by local governments could undermine China’s economic progress.

The Murdoch Style, Under Pressure - - Line-skirting has always been part of doing business for Rupert Murdoch, but a voice-mail hacking scandal poses a new type of threat to News Corporation’s image; Over all, revenue from the publishing division of News Corporation accounted for only 17 percent of its revenue in the last nine months. In that time, cable network programming accounted for 61 percent, and film, which includes the 20th Century Fox studio, was 20 percent.

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