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Thursday Newspaper Review - Irish Business News and International Stories - - July 14, 2011
By Finfacts Team
Jul 14, 2011 - 6:29 AM

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The Irish Independent reports that Eurozone leaders are frantically trying to put together a package of proposals for an emergency summit on the euro crisis in the coming days.

Doubts rose over whether the radical changes signalled by finance ministers on Tuesday could be implemented as Greece was hit with another downgrade and borrowing costs for Italy and Spain remained high.

The meeting was to take place tomorrow, but last night sources said that political disagreements had pushed it out until early next week.

Taoiseach Enda Kenny called on his eurozone counterparts to implement the finance ministers' plans, which were welcomed by Michael Noonan as helpful to Ireland.

"There is no point in going to a meeting on Friday unless there will be a decision or set of decisions on the European situation," he said.

It was time for Europe to "grasp the nettle" and set out a comprehensive response to the financial crisis, he added.

Worries grew when German Chancellor Angela Merkel said Greece was funded until September so there was no rush to finalise the details of a second package. "There are no concrete plans for a special summit," a German government spokeswoman said.

Following the downgrading of Ireland to 'junk' status by the ratings agency Moody's, Mr Kenny said the latest revelations about Italy's debt of €1.8 trillion was a cause for concern.

"Moody's problem is not with Ireland. Ireland's problem is with Europe. Moody's has pointed out that Ireland is in a very different set of circumstances from other countries," he said.

Bonds

Irish government bonds were badly battered after the rate cut. The change in rating means many investment funds were forced to sell Irish bonds because when they raised their own cash, they committed to only hold highly rated investments.

To borrow in the normal markets yesterday, Ireland would have had to pay investors a yield of 19.29pc -- up a full per cent since Tuesday's close. The yield to borrow for 10 years is 13.7pc -- almost double the 7pc level that forced the State to seek a bailout last November.

The European Commission condemned Moody's for the downgrade, calling it "incomprehensible". The commission said its data showed Ireland would return to growth this year and that Ireland had shown determined implementation of the bailout programme.

Meanwhile, Italy's treasury officials and key bankers were in crisis mode. Italy hopes to borrow between €3bn and €5bn today on the international money markets by auctioning four sets of bonds. A failed auction would induce panic across the eurozone and beyond.

Reports suggested that Italy's treasury officials were drumming up every available scrap of support for the bond sale, including lobbying Italy's own massive bank sector and large global debt buyers such as China and Japan.

If it fails, there will be real and immediate doubts over the country's ability to meet €900bn of bond repayments over the next four years. That will drive up bond yields further for almost all national and corporate borrowers.

The Italian efforts were boosted when ratings agency Fitch affirmed Italy's AA credit rating.

The 10-year Italian bond yield fell to 5.562pc yesterday.

The Irish Independent also reports that Finance Minister Michael Noonan has said we face several more years of hard budgets and repeated a warning that the size of December's Budget cuts could exceed €3.6bn.

The European Commission and the International Monetary Fund would demand that Ireland keep the deficit at no more than 8.6pc of GDP next year, Mr Noonan said. He hinted last week that €4bn may need to be slashed from state spending.

"Deficit and debt numbers serve to highlight the importance of continuing to implement budgetary and economic policies to return sustainability to our public finances," Mr Noonan told the select committee on finance and public expenditure.

"The task of restoring sustainability to the public finances will be a long one and further difficult choices will have to be made in this regard in Budget 2012," he said.

Mr Noonan added that "economic activity had started to pick up again".

Advice

He gave further details about the Fiscal Advisory Council, which will offer advice on whether budgetary policies are sound and prudent but their views won't be binding.

The five economic advisers won't be paid although support staff, including two economists and two staff, will be paid.

The council was formed as a condition of the bailout.

The Government is spending €300,000 on the council in the final six months of this year and will spend more next year.

It will be chaired by Prof John McHale, of NUI Galway, who predicted it would take a "lot of the Punch and Judy show out of politics".

Mr Noonan also revealed his department had seconded two officials from the Department of Foreign Affairs -- one from Berlin and one from Paris -- to help with languages and negotiations.

The Irish Times reports that Ireland saw its bond yields soar to record highs yesterday after it became the third member of the euro zone to have its credit rating cut below investment grade.

European stock markets enjoyed a relief rally as investors speculated that the recent sell-off sparked by Italian contagion fears may have been overdone, and that a solution to the currency bloc’s sovereign debt crisis may yet be found.

Spanish and Italian debt markets recovered somewhat on hopes that Europe may “sort something out”, a Dublin trader said.

However Irish bonds moved in the opposite direction following Moody’s downgrade of Irish debt to junk status on Tuesday evening.

Yields on Irish two-year money broke through the 20 per cent level yesterday, while 10-year paper traded just above 14 per cent.

Not only did these yields represent euro-era records, they also surpassed anything seen during the currency crisis of the 1990s.

“Until they sort something out in Europe, yields are just going to keep going up,” the trader said.

Citi analyst Jürgen Michels said the sell-off in Irish bonds seen yesterday was likely to continue in the coming weeks. Many investors would only hold bonds that were considered investment grade by credit rating agencies such as Moody’s. However, some investment funds only reshuffle their portfolios at fixed times, for instance when indexes are being rebalanced.

Mr Michels explained that the recent downgrade to junk status of Ireland, Greece and Portugal puts pressure on the holders of the bonds of these countries to offload them “but it does not happen immediately”.

“The pressure will be there in the coming weeks,” he said.

Ireland’s junk rating will make it difficult to get back into the market, he said. “Your investor base is shrinking.”

He said a second Irish bailout was not an option that could be “excluded”.

“It’s more likely than unlikely,” he said.

Reports had suggested that euro zone leaders could come together for an emergency summit tomorrow, although this appeared to have been ruled out last night.

Mr Michels said they must produce a concrete solution.

“If you come together and raise this kind of expectation, then you have to deliver.

“It is not the time for words; it’s the time for deeds.”

When downgrading Ireland, Moody’s said there was an increasing possibility that the involvement of private investors would be required as a precondition for new aid for Ireland.

In a morning note yesterday, Davy Research economist Conall MacCoille argued that it was “not necessarily clear” that this was becoming more likely.

However, he said even the perception of possible private sector participation in a future funding package impaired Ireland’s ability to regain access to private markets in the near term.

“Conditions in European debt markets are likely to deteriorate again unless a sceptical market sees concrete action being taken,” Mr MacCoille said.

Meanwhile credit-default swaps on Portugal and Ireland overtook Venezuela. “It shows how extreme the situation is in Europe that it has overtaken Venezuela,” said Jacques Cailloux, chief European economist for Royal Bank of Scotland Group in London.

“Investors have lost confidence that they’ll get their money back in Ireland and Portugal.”

Contracts on Portuguese debt were at 1,068 basis points yesterday. Swaps on Ireland were at 1,012 basis points. Venezuela default swaps cost 1,001 basis points.

Gold hit a new nominal high yesterday, surging above $1,580 an ounce.

The Irish Times also reports that a group of rebel Irish Life and Permanent shareholders objecting to the State’s takeover of the company has won the right to put four resolutions to a vote at next week’s extraordinary general meeting to block its recapitalisation.

The group is now seeking to have the July 20th meeting reconvened at a later date, claiming that some shareholders submitted proxy votes to the company’s chairman, Alan Cook, before the four resolutions were included.

Shareholders have until next Monday morning, July 18th, to submit proxy votes in relation to the additional egm resolutions.

The shareholder group, led by Malta-based investment firm Scotchstone Capital, is resisting the State’s €3.8 billion recapitalisation, as recommended by the board, which will effectively nationalise the company.

Scotchstone claims that the company’s board wants to “disenfranchise” shareholders by allowing Mr Cook vote on the resolutions in the absence of “explicit proxy directions from shareholders”.

“This effectively means that the chairman will be able to hijack the shareholder vote,” said Piotr Skoczylas, managing director of Scotchstone. It would be physically impossible for most shareholders to give instructions on the new resolutions at short notice, he said.

The group is seeking to stop the recapitalisation, which it claims violates the ownership rights of the company’s shareholders.

The group’s four resolutions agreed by the company propose:

  • the cancellation of the directors’ power to issue shares granted at the annual meeting in May;
  • the appointment of additional financial and legal advisers to review alternative recapitalisation options and to seek investors;
  • an extension to the recapitalisation deadline of July 31st; and the appointment of Mr Skoczylas as a director of the company, subject to regulatory approval.

The company said the board did not support or endorse any of the additional resolutions.

The company told the stock exchange that it had received the resolutions from shareholders holding more than the 3 per cent threshold that allows shareholders to table resolutions.

The dissident shareholder group claims to hold more than 12 per cent of the company’s shares, enabling it to requisition an egm.

Irish Life and Permanent must raise €4 billion by the end of the month on the direction of the Central Bank after the stress tests of the banks last March forced the lenders to raise capital levels.

The company has said it will issue ordinary shares to the Government this month in return for an injection of €3.4 billion in cash and a further €400 million in contingent capital, a loan that will convert to equity if losses rise.

This will leave the State with a stake of more than 99 per cent.

The Irish Examiner reports that a speci9fic ministerial office for the construction industry needs to be established in recognition of its "essential role" to the economy, according to the sector’s main representative body.

The Construction Industry Federation (CIF) has called on the Government to adopt a more enterprise-focused approach towards the sector and recognise that it still has a major role to play in the domestic economy.

Earlier this year, the CIF criticised the Government for risking further damage to the economy by failing to have a national construction plan in place and cutting investment in the sector. The representative body also forecast that the number of jobs lost in the construction sector could exceed 320,000 by the end of this year.

Yesterday, the CIF published a submission paper addressed to the Department of Public Expenditure and Reform, outlining its suggestions for the Government’s current Public Capital Programme, which runs until 2014.

In it, the body suggests the establishment of "alternative funding mechanisms" to help deliver vital projects that can’t be financed within existing Exchequer budgets; the sale of certain State assets and toll-charges for all of the country’s existing motorway network.

"Those who suggest the Public Capital Programme should, or even could, be cut further should look beyond the spin attached to Ireland’s infrastructure investment plans," according to Martin Whelan, the CIF’s director of communications, policy and research.

"Capital investment has accounted for nearly a third of the expenditure cuts since Ireland went into recession, despite comprising only a fraction of overall spending by the Government. The existing Programme envisages a 60% reduction in Exchequer capital investment in 2014 from the peak in 2008; lowering funding below 2% of GDP, well below the European average. When you strip away the non-construction and infrastructure elements of the programme and the inevitable close-out payments for capital works that are completed, the budget for new projects — including education, health, transportation, water, energy and telecommunications is significantly less than these headline figures suggest."

The CIF is seeking a meeting with Mr Howlin to discuss its submission.

Besides a paid subscription, the Financial Times provides the following options:

Conrad Black: Murdoch, like Napoleon, is a great bad man  --  The jailed former owner of The Daily Telegraph writes a balances article on his former rival; He has difficulty keeping friendships; rarely keeps his word for long; is an exploiter of the discomfort of others; and has betrayed every political leader who ever helped him in any country, except Ronald Reagan and perhaps Tony Blair. All his instincts are downmarket; he is not only a tabloid sensationalist; he is a malicious myth-maker, an assassin of the dignity of others and of respected institutions, all in the guise of anti-elitism. He masquerades as a pillar of contemporary, enlightened populism in Britain and sensible conservatism in the US, though he has been assiduously kissing the undercarriage of the rulers of Beijing for years.

Mario Monti: Italy needs an economic overhaul - -  the former Italian EU commissioner writes that economic problems are caused in part by the limited powers, independence and resources given to the competition authority as well as to other regulatory agencies, and also in part by a whole host of restrictions to competition generated by the policies of the government itself. Even the rating agencies, who normally concentrate on short-term financial conditions, have this week emphasised Italy’s weak policies on growth. There can be no clearer reminder that issue is critical to achieving sustained improvements in Italy’s public finances.

IMF urges private sector to share Greek burden - - Fund report says Greece crisis risks spiralling out of control; Poul Thomsen, IMF mission chief for Greece, told reporters that Greece’s debt sustainability was on a “knife-edge”. While a debt writedown was not absolutely necessary, discussions in Europe over the past two months had led authorities in that direction.

Judge appointed to head hacking inquiry - - Cameron outlines terms of media probe; Cameron said: “What this country – and this house – has to confront is an episode that is frankly disgraceful. Accusations of widespread lawbreaking by parts of our press. Alleged corruption by some police officers. A failure of our political system over many, many years to tackle a problem that’s been getting worse.”

Politicians emerge with credit from firestorm - - Fallout for Murdoch’s News Corp will be felt for years; In 2009 Mr Cameron attended the wedding of Rebekah Brooks, News International’s chief executive, as did Gordon Brown, the former Labour prime minister. It was Ms Brooks, as editor of The Sun, who broke the story about Mr Brown’s infant son suffering from cystic fibrosis.

High-frequency traders slowed by headwinds - - Opportunities to make money from faster speeds are drying up; In Aurora, a blue-collar town 35 miles south-west of Chicago, CME Group, the US’s biggest futures exchange, is building a vast data centre that will enable thousands of customers to trade at lightning speed.

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

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Tensions Escalate as Stakes Grow in Fiscal Clash - - Across Washington, officials were weighed down with a sense that they were hurtling toward a crisis, and the pressure was particularly intense on Republican leaders; And the latest bipartisan negotiating session on Wednesday evening ended in heightened tension. Republicans said Mr. Obama had abruptly walked out in an agitated state; Democrats described the president as having summed up with an impassioned case for action before bringing the meeting to a close and leaving; Panic had not yet set in, but the worry and tension were evident as seasoned lawmakers of both parties whose experience told them that Congress always finds a white-knuckle way to avert disaster wondered if this was going to be the time when it did not.

Immigration Audits Bring High Cost - - Workers without proper documentation must be terminated, which small business owners, like David Cox, who owns a nursery, can find devastating; Unscrupulous employers exist, Mr. Regelbrugge said, but more often he sees business owners who are just trying to follow the law. When a new hire produces seemingly legitimate forms of documentation required by the I-9 form, the employer must accept them. (To refuse could expose the owner to charges of employment discrimination.) “The employer is not required to be a forensics expert,” said Monte Lake, an immigration lawyer in Washington.

The Opposing Party - - Nicholas Kristof asks: Confused about the position of Congressional Republicans on the economy? Good. You should be; In the Bush years, Republicans proved themselves reckless both on the spending side (unfunded wars and a prescription drug benefit) and on the revenue side (the Bush tax cuts). Their view then was, as former Treasury Secretary Paul O’Neill quoted Vice President Dick Cheney as saying, “Reagan proved deficits don’t matter.”

Utility Shelves Ambitious Plan to Limit Carbon - - The abandonment of the United States’ most prominent plan to capture carbon dioxide from an existing coal-burning power plant hurts efforts to rein in emissions tied to global warming; Company officials, who plan an announcement on Thursday, said they were dropping the larger, $668 million project because they did not believe state regulators would let the company recover its costs by charging customers, thus leaving it no compelling regulatory or business reason to continue the program.

European Leaders Delay Summit Meeting Over Greece - - Scrambling to contain the euro zone debt crisis, European leaders put off a meeting in order to bridge differences over private investors’ role in a second Greek bailout; The German chancellor, Angela Merkel, was crucial in resisting pressure for a meeting on Friday, arguing that it would be too early to deliver the comprehensive package of measures needed to restore stability to the Eurozone, one official briefed on the discussion said. Merkel is not opposed to holding a meeting of Eurozone leaders soon, said the same official.

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