The Irish Times reports that Anglo Irish Bank shares fell almost 3 per cent yesterday despite the bank reiterating its forecast that earnings would rise 15 per cent for the full year to September 30th amid slower lending, higher bad debts and difficult market conditions.
Anglo said in a trading statement that the economic environment would remain "significantly challenged" and that it would adopt "a very cautious and selective approach" on new lending until next year, with loan growth "moderating further". The bank said its focus would be managing "asset quality" and growing its capital.
The bank said its capital strength positioned it well in a "testing" environment where loan losses would rise and funding costs would remain high.
"Against the backdrop of difficult market conditions, Anglo Irish Bank will report another very good performance in 2008," said chief executive David Drumm.
Anglo's shares climbed 3.8 per cent after the statement before shedding value as European and UK bank shares fell over concerns about credit losses. Anglo has declined 47 per cent this year.
The bank said its full-year earnings per share would rise about 15 per cent this year to 151.4 cent, in line with analysts' forecasts. Anglo expects to grow new lending by 15 per cent, or roughly €10 billion, over the full year.
This compares with a 37 per cent increase in its 2007 full year.
Most of this year's loan growth has been in the six months to March 31st. Anglo expects new loans to grow by about 5 per cent in the second half of its fiscal year.
Ratings agency Fitch affirmed Anglo's debt rating and stable outlook, saying its heavy property exposure was mitigated by the geographic spread of its loans and the security backing each loan.
The bank is forecasting a bad debt charge of 0.13-0.18 per cent of loans for the full year - up from 0.1 per cent at the end of March.
Anglo said that even if impaired loan charges rose to 0.7 per cent - the consensus forecast in the market for 2009, but above the bank's own expectations - it would still remain "highly profitable".
Sebastian Orsi, analyst at stockbrokers Merrion Capital, said Anglo's figures for 2008 reflected a "strong" performance but concerns about future loan losses were likely to "dominate" given weakening economic conditions and because the bank had not provided details on vulnerable loans.
"Non-performing loans is the key to future credit charges."
The bank said Irish residential development accounted for 7 per cent of its €69 billion loan book.
"The Irish residential development sector has continued to deteriorate due to more restricted mortgage availability, particularly in the last quarter,"Anglo said.
The bank said most of its house-builder clients were "sufficiently strong" to repay loans through "a protracted downturn", but it warned that the sector represented the "principal risk" to future loan losses and was "a key focus" for management as it worked "to proactively mitigate against any potential losses".
Anglo said there had been "no significant increase" in impaired commercial property loans and that it had "limited" exposure on loans for speculative development.
The bank said it continued to monitor "closely" the performance of clients and tenants in properties on which its loans were secured.
The Irish Times also reports that Irish shares tumbled again yesterday, with the Iseq index closing down 3.7 per cent as a drop in US retail sales and concerns about credit losses in the banking sector dragged down European bank shares.
The Irish stock market saw a further €2.2 billion wiped off the value of the listed companies, with the banking stocks hit the hardest.
Irish Life Permanent closed down 8 per cent, while Bank of Ireland sank 6.2 per cent, as negative sentiment took hold. AIB came off slightly better, losing 3.6 per cent.
Anglo Irish Bank, which had gained earlier in the day after a cautious but well-received trading statement, eventually closed down 2.8 per cent as the bad economic news in the US filtered across to European markets.
Building materials group CRH, the largest stock on the Iseq index, closed down 5 per cent. About half of the company's revenues come from the US.
After oil prices jumped $3 a barrel to $116 in New York, the airline stocks also suffered. Ryanair, another of the major stocks on the Iseq, plummeted 8.2 per cent.
Earlier in the day, shares in building products group Kingspan had plunged 8 per cent after a report by Goodbody Stockbrokers slashed earning forecasts for the company. By the close of trading, it had clawed back only some of the early morning losses and it finished the session at €7.13, down 6 per cent on the previous day's closing price.
Blaming the worsening conditions in the UK construction sector and lowered expectations for the Irish economy, Goodbody reduced its 2009 earnings per share (eps) estimates for Kingspan by 22 per cent to 62 cent, and cut its 2010 forecast by 28 per cent to 64 cent.
Goodbody construction sector analyst Robert Eason said Kingspan's medium-term growth prospects were underpinned by the company's ability to increase its penetration of its existing markets as well as entry into new markets, which he said could be funded by Kingspan's balance sheet, which is strong compared to its peers.
But a slowdown in the property market and margin pressures from higher input costs, primarily steel, mean the European buildings material sector faces "significant headwinds", he added.
"We continue to take a low conviction stance on the sector," Mr Eason wrote in the report.
Kingspan's share price will remain in the €5.25 to €7.70 range in the short term, according to Goodbody, but the company's medium-term prospects should see the share price reach €10.20.
"Overall, we are cautious in the short term, but remain positive on a longer-term horizon."
Kingspan, which manufactures insulation panels, office flooring, structural supports and storage devices for the building industry, will issue its results for the first half of 2008 on August 27th. Kingspan warned in May of "more challenging" trading conditions.
The Irish Examiner reports that Ryanair said that it could potentially post a moderate profit this year, instead of a loss which it speculated upon earlier this summer.
The airline has basically reiterated that it is still on course to probably break even in its current financial year, which runs until the end of March, but added that any alternative to that outcome would be positive rather than negative.
Chief executive Michael O’Leary said yesterday that Ryanair will be one of the few airlines in Europe to grow strongly this winter and at least break even, if not make a small profit.
This marks a slightly brighter prognosis to the one made by the company in July at the publication of its first-quarter results.
Then, when reporting a year-on-year rise of 12% in first-quarter revenues to €777 million, Ryanair said that given the worsening trading conditions, its full-year outlook remained poor — adding that it expected to record a full-year result of between break even and a loss of €60m.
However, Mr O’Leary is now saying if the airline does make a profit, it will be a small amount. “Essentially, this year we will break even during a year when the price of oil has doubled. The underlying business is still growing at a time when if you take our largest competitor, British Airways, its short-haul traffic is in decline,” he said.
Meanwhile, the report by Britain’s Competition Commission into whether or not airport operator BAA should break up its monopoly ownership of London’s main airports of Heathrow, Gatwick and Stansted, is expected to be published next week.
Last Friday, Mr O’Leary stated in an interview that Ryanair would be interested in buying Stansted — its biggest hub airport — for up to £2 billion (€2.5bn) if it were to come on the market.
Ryanair is expecting BAA — which has already said that it would be unwilling to sell Stansted — to have to offload Gatwick Airport and possibly one of its Scottish airports. Mr O’Leary said that Ryanair could increase Stansted’s passenger numbers from 24m to 40m people by halving landing fees for all airlines.
The Financial Times reports that sterling plunged against the euro and the dollar on Wednesday as the Bank of England gave its bleakest economic assessment for more than a decade and financial markets priced in a series of interest rate cuts.
Mervyn King, the Bank of England governor, said the British economy required a “painful” adjustment to higher energy and food prices, predicting the economy would grind to a halt for a year before recovering, probably to a slower growth path than before. There was “bound to be a quarter or two” of economic contraction, he said. Official figures on Wednesday showed unemployment rose by 60,000 in the second quarter, a jump from the 13,000 recorded in the first quarter.
Mr King predicted inflation would peak at 5 per cent at least, restricting the room for easier monetary policy, but markets immediately interpreted the strong likelihood of recession and a prediction of a rapid decline in inflation next year as a strong signal of lower interest rates to come.
Sterling fell more than 1 per cent against the dollar, the euro and on a trade-weighted basis. At times it lost more than three cents against the dollar and finished the day in London at $1.8712, while the euro gained ground just falling short of 80 pence at £0.7969.
The latest downward lurch for the pound came as advanced economies around the world received a wake-up call that none were immune to the effects of the credit crisis.
In Japan, new data showed the world’s second-largest economy contracted by 0.6 per cent in the second quarter, its worst quarterly performance for seven years. While on Thursday the first estimate of eurozone second quarter growth is expected to show the first contraction since the single currency was launched in 1999.
With the US economy already having contracted at the end of last year, none of the world’s rich economies appears to be able to sustain continued expansion as the credit turmoil progresses.
This anaemic performance is not, however, matched in much of Asia’s emerging economies and oil producers, where expansion has barely dimmed.
Most economists shared the market’s view that the Bank was signalling a bias to start lowering interest rates, probably late this year or early next.
Simon Hayes of Barclays Capital said: “The surprise today was not so much that the next move in rates is likely to be down, but that the Monetary Policy Committee seems happy to nurture this expectation.”
But the Bank is unlikely to feel comfortable with the extreme reaction to its forecasts. Mr King repeatedly insisted the balance to inflation risks were tilted to the upside because it was still unclear if households and companies would begin to behave as if high inflation was normal.
The Bank also published similar inflation and more benign inflation forecasts three months ago, which the markets then interpreted incorrectly as a signal of higher rates to come.
The focus will shift to the eurozone on Thursday with the publication of growth figures for the second quarter. Little hope remains of a revival this year. This month, Jean-Claude Trichet, European Central Bank president, warned the second and third quarters would prove“particularly weak”.
The FT also reports that Spanish cabinet ministers have interrupted their summer breaks to discuss the country’s rapidly deteriorating economy.
In an unprecedented break with tradition, most of the cabinet’s 17 members have postponed their holidays or returned to Madrid.
José Luis Rodriguéz Zapatero, the prime minister, interrupted his holiday in the remote Doñana national park to chair the talks, while Pedro Solbes, finance minister, will hold off until after the conference before starting his break. Cristina Garmendia, science and innovation minister, has returned to Madrid from Marbella, on the Costa del Sol.
Thursday’s cabinet meeting will be the first called in mid-August in living memory. Key ministers and secretaries of state – members of a special economic commission – met late on Wednesday to compare notes.
Some forecasters say that growth this year could drop to about 1 per cent year-on-year, compared with 3.8 per cent between 2006 and 2007.
Mr Solbes recently admitted that Spain might enter technical recession in the final quarter of the year. A growing band of analysts expect year-on-year growth in 2009 to be flat or negative.
Estonia becomes first victim of Baltic recession
The Baltic states’ economies – last year among Europe’s fastest growing – have abruptly gone into reverse and Estonia is already in recession, official figures confirmed on Wednesday.
The downturn in the three states is a grave blow to their hopes of swiftly catching up with the rest of the European Union. Even Estonia, the richest of the three, still only has a gross domestic product per capita of about three quarters of the EU average. “The key thing is that it’s only going to get worse from now on,” Neil Shearing of Capital Economics, who forecasts a 2.5 per cent full-year decline in Estonian GDP, said.
The country’s economy contracted 0.9 per cent in the second quarter compared to the first, during which there was also a 0.5 per cent quarter-on- quarter decline, according to the statistics office. A recession is defined as two consecutive quarters of negative growth.
Latvia is also poised to enter recession by the end of the year and Lithuanian growth is also slowing sharply, though it is likely to escape recession.
Both in Latvia and Estonia policymakers are now scrambling to revise their economic forecasts downwards and to balance budgets that are set to go into the red because of falling tax revenue.
“The situation is quite grave,”said Antoni Espasa, director of the Instituto Flores de Lemus economic forecasting unit in Madrid. “We see growth this year at 1.5 per cent and falling to 0.3 per cent next year.”
After being one of the economic stars of Europe in recent years, Spain has been hit hard by the credit crunch, which exacerbated a housing market collapse last year.
Along with rising joblessness and one of the eurozone’s highest inflation rates, this has battered consumer confidence. Industrial output fell 9 per cent in June – the biggest year-on-year drop in 16 years.
Inflation hit a 16-year high of 5.3 per cent in July, according to data released on Wednesday. However, the figure is expected to ease in coming months, reflecting the recent fall in oil prices. David Vergara, secretary of state for the economy, on Wednesday forecast that inflation would drop to 4 per cent by the end of this year.
After Thursday’s extraordinary cabinet meeting, the government is expected to give details of a series of measures aimed at helping hard-pressed small and medium-sized business, offsetting the downturn in residential construction and encouraging investment in other sectors.
The meeting is intended to show solidarity with voters over the country’s deteriorating economy.
Critics say Mr Zapatero has been too slow to act, after ignoring warning signs of an impending downturn last summer.
Esteban González Pons, spokesman for the opposition Popular party, suggested that the meetings were a“publicity stunt”.
“Spain doesn’t need photo opportunities and a prime minister who looks good,” he said. “It needs a hard-working prime minister who pays attention to the state of the Spanish economy.”
The New York Times reports that another month of weak retail sales in July added to evidence that the spending power of American consumers has weakened considerably, despite the booster shot of billions of dollars from the government’s tax stimulus program.
Even as gasoline prices started to retreat, consumers paid more last month for imported goods, the government reported on Wednesday, as import prices rose at the fastest annual rate in 25 years.
The dour economic data put pressure on stocks, sending the Dow Jones industrial average down 109 points on Wednesday as financial shares fell for a second day. Disappointing earnings reports from John Deere, the farm equipment manufacturer, and the retail giant Macy’s also depressed investors, along with a nearly $3 increase in oil prices, which settled at $116 a barrel. The Standard & Poor’s 500-stock index fell 0.3 percent.
With the stimulus payments at an end, Americans now have fewer buffers between their pocketbooks and higher energy costs, falling home values and the tight credit market. Companies and investors are bracing for spending to fall even further this year.
“I had been hoping that the second half of the year would be better than the first half,”Michael T. Darda, chief economist at the trading and research firm MKM Partners, said.“But we’re not creating jobs in the private sector. You’ve got the credit situation getting tighter, along with stock prices coming down and home values falling. That’s a cocktail that’s going to leave a vicious hangover.”
Retail sales declined 0.1 percent in July, led by a sharp drop in automobile sales, the Commerce Department said. Sales were also weak at restaurants, sporting goods shops and health care stores.
It was the first overall decline in sales since February, and it came after the government mailed $100 billion to millions of Americans from May to July in an effort to shore up consumer confidence and stimulate the economy. Spending subsequently rose in May, but that increase has not been sustained.
“It’s clear that the rebate checks are fading,” Anika Khan, an economist at Wachovia, said. Gasoline prices dropped slightly in July, and Ms. Khan said the report could have been worse had consumers not enjoyed a bit of relief at the pump.
There were a handful of bright spots. Excluding motor vehicles, July sales rose 0.4 percent as Americans spent more on electronics, furniture, food and Internet purchases. Sales growth in June was also revised higher.
But the modest increase may have reflected higher prices rather than more demand. Inflation continues to hurt consumers, who paid 1.7 percent more for imported products last month, according to a separate report from the Labor Department.
Import prices are 21.6 percent higher than a year ago, the biggest annual increase since records began in 1982. Industrial supplies, petroleum, and foods and beverages accounted for most of the increase.
Export prices are also rising — by 1.4 percent in July alone — which could tamp down foreign demand and hurt American businesses. The dollar is strengthening against the euro, which has dropped nearly 7 cents, or 4.4 percent, in the last two weeks. The euro settled slightly up on Wednesday, at $1.4934.
In privately tracked sales figures released last week, many department stores and clothing outlets reported significant declines in sales at stores that had been open at least a year.
High-end and midtier retailers like Saks, Kohl’s, J. C. Penney and Target all reported sales declines, as did Gap and other popular clothing stores.
Americans did more of their shopping at wholesale clubs and discount outlets, although even the big-box stores are seeing signs of a slowdown. Wal-Mart’s sales failed to match expectations last month, and the company said that business would worsen in August. Wal-Mart also said that shopping patterns indicated that more customers were living paycheck to paycheck.
As with many economic reports, the government acknowledged a large degree of statistical uncertainty in Wednesday’s retail sales figures. The Census Bureau said it did not have enough evidence to conclude that the change in retail sales was “different than zero.”
The NYT also reports that a legal dispute involving model railroad hobbyists has resulted in a major courtroom victory for the free software movement also known as open-source software.
In a ruling Wednesday, the federal appeals court in Washington said that just because a software programmer gave his work away did not mean it could not be protected.
The decision legitimizes the use of commercial contracts for the distribution of computer software and digital artistic works for the public good. The court ruling also bolsters the open-source movement by easing the concerns of large organizations about relying on free software from hobbyists and hackers who have freely contributed time and energy without pay.
It also has implications for the Creative Commons license, a framework for modifying and sharing creative works that was developed in 2002 by Larry Lessig, a law professor at Stanford.
That license is now used widely by organizations like M.I.T. for distributing courseware, and Wikipedia, the Web-based encyclopedia. In March, the rock band Nine Inch Nails released a collection of musical tracks under a Creative Commons license.
The ambiguity facing open-source licensing has been one of the hurdles facing the movement, said Joichi Ito, the chief executive of Creative Commons.
“From a practical business perspective when big companies and their legal teams look at Creative Commons there are a number of questions,”he said. “It’s been one of the things their legal teams throw at us.”
The appeals court decision reverses a San Francisco federal court ruling over the misappropriation of a software program by a company that publishes model train hobbyist software.
The free software, or open source, community has quarreled for several years with Matthew A. Katzer, a Portland, Ore., businessman who owns Kam Industries. Previously, Mr. Katzer has sued free software developers for patent infringement and the free software community has argued that he had failed to disclose earlier technology, known as prior art, in his patent filings.
A lawyer for Mr. Katzer did not return calls asking for comment.
In March 2006, Robert G. Jacobsen, a physics professor at the University of California, Berkeley, filed a lawsuit against Mr. Katzer claiming that his company was distributing a commercial software program that had taken software code from the Java Model Railroad Interface project and was redistributing the program without the credits required as part of the open-source license it was distributed under.
The decision to appeal the lower court ruling, which said that the terms of the open-source contract were overly broad, was intensely debated within the free software movement. Some open-source advocates had worried that a loss before the appeals court would have been a disaster for the community, which has grown as an economic force during the last quarter century.
“I was terrified that we would lose,”Mr. Jacobsen said.“But I thought it was the right thing to do.”
There has long been a link between model train hobbyists and the free software movement. During the 1950s, for example, hobbyists who worked on the wiring of the Massachusetts Institute of Technology model railroad club project were informally known as “hackers,” according to “Hackers: Heroes of the Computer Revolution” by Steven Levy. The term evolved to include people who developed and programmed computers and who passionately believed that software codes should be freely shared.
Mr. Jacobsen said he believed that the court’s ruling was significant for the free software movement because it had thrived not on monetary gain but on individual credit for contributions.
“We don’t charge for this and so all we really get is credit,”he said, adding that anyone is free to use and modify the programming instructions created by his group as long as they retain the credit and distribute them with the programmer’s instructions.