The Irish Independent reports that Brian Cowen's first budget since becoming Taoiseach was in shreds last night after an embarrassing double collapse on two key planks of the Government's economic plans.
Budget 2009 was ripped apart by the embarrassing climbdown on the medical cards for the over-70s and the exemption of minimum-wage workers from the 1pc income levy.
The Government is now also facing a new raft of protests over crippling education cuts. Elderly groups also plan to stage further protests outside the Dail today, despite the changes to the medical card scheme announced yesterday.
As the Taoiseach flew out to China last night, he left behind a weakened coalition and huge cracks within his own party, less than six months after taking over as leader.
Fighting back the tears, Health Minister Mary Harney earlier finally apologised for the upset and confusion caused by the medical card fiasco.
"I deeply regret the fact, yes, I am sorry that that would happen. Of course I am," she told RTE news.
Although she does not plan to resign over the controversy, Ms Harney failed to give direct answers on when she will move on from her post or if she will run in the next general election.
Finance Minister Brian Lenihan now has to re-draft parts of the Budget following the row-back and find where the Government will now attempt to make savings.
He must replace the €60m required to keep the low-income workers out of the income levy, while it is still not clear if Ms Harney will raise the €100m savings required to fill the gap in her budget.
Under the changes announced yesterday, up to 20,000 of the 350,000 over-70s who currently have a full medical card are expected to lose the benefit from January, despite the changes in eligibility.
These 20,000 -- who are among a group of 140,000 over-70s who got the card regardless of means -- will fall outside the new cut-off eligibility point.
Volunteer
Pensioners over 70 will have to effectively "rat" on themselves if they are earning too much to be entitled to a card. Those currently eligible will not have to undergo a means test, but will have to volunteer to return their cards if their income is over the threshold.
Everyone else will simply keep their medical card.
Announcing the latest u-turn on eligibility, Ms Harney said it will now be based on gross income -- €700 a week for single person and €1,400 for a married couple.
Despite the second climbdown on eligibility levels in the space of a week, the minister insisted the €100m savings targeted by the abolition of automatic entitlement would still be achieved.
The Government will now ask GPs who received €640 a year in capitation fees for each non-means-tested card holder to reduce this sum.
Meanwhile, following the education cuts, unions and managers have predicted chaos and "logistical nightmares" in schools from January.
The National Parents Council called on all parents to express their "horror" at the restrictions placed on second-level schools.
And pressure is building up on the Government to do yet another u-turn -- this time on the ending of substitute cover for teachers on uncertified sick leave, or those on official school business.
"The proposal is unacceptable and unworkable," said Ferdia Kelly, general secretary of the managers' body the JMB.
"Our members are furious and outraged that the department would contemplate making schools unmanageable by creating a serious health and safety risk. Boards of management and school management will not be able to stand over this risk.
"Should this proposal go ahead, schools will not be in a position to open in January," he warned.
Mr Cowen told the Dail that confusion and anxiety had been caused to large numbers of older people who would not have been affected by the proposals.
Difficult and challenging measures will have to be implemented in line with the budget announcements, he added.
"It is inevitable in regard to such difficult decisions, which come after a long period of sustained economic growth and substantial increments to benefits for taxpayers in budgets, that the adjustment to the new economic and fiscal environment is difficult,"he said.
Fine Gael leader Enda Kenny appealed to the Taoiseach for a "categorical assurance" that when he"rams this shameful, disgraceful and callous decision through, he will not follow it with similar decisions on electricity, telephone and travel allowances."
Labour leader Eamon Gilmore said the Taoiseach was leaving behind the "biggest budget shambles" for years. "Your budget is a mess," he said.
The Irish Independent also reports that a year ago to the week, Michael Taggart, as the frontman of Taggart Holdings, won the coveted "industry" section of the Ernst & Young Entrepreneur of the Year award at a ceremony in Citywest Hotel.
But following months of searching for a fresh investor which never materialised, the group's two main bankers, Ulster Bank and Bank of Ireland, called for an administrator. The group's most recent publicly available set of accounts show it had a debt pile in the region of £95.1m (€122.5m) at the end of 2006.
The move has turned the affable Derryman into the public face of an embattled sector where banks face massive loan writedowns over the next few years. While Irish banks largely avoided the "toxic" US subprime-type investments that caused the crisis, investors have become much more concerned about "hidden nasties" lurking in their own loan books.
Goodbody Stockbrokers said last week that it expects, for example, Allied Irish Banks to write off €4.5bn of its loan book over the three years to the end of 2010, Bank of Ireland €4.3bn, Anglo Irish Bank €2.1bn, and Irish Life & Permanent almost €300m -- a total of €11.2bn.
By the time the banks have come through the down part of the cycle in 2011, AIB will have written off 10pc of its Irish property-related loans -- driven by a 17.2pc loss on its residential development book, according to the broker. It predicts Bank of Ireland will have to take a red pen to 16.8pc of loans to housebuilders and Anglo 13.7pc.
Goodbody sees commercial development as the second main point of weakness, followed, at some distance, by residential and commercial investments. The level of loan losses the broker expects is much higher than any of the banks have signalled.
But the extent to which lenders are rolling up interest on loans to developers is also unclear.
It is hoped that a report being prepared for the Government by PricewaterhouseCoopers on Irish banks, due next month, will give a clear assessment of where any problems may lie.
The Irish Times reports that Government intervention in European financial markets is beginning to reap real rewards, as the cost of borrowing for banks fell to its lowest level yesterday since before the collapse of Lehman Brothers.
The London inter-bank offered rate, or Libor, which is the borrowing rate that banks charge each other, dropped 3 basis points to 4.96 per cent yesterday, the lowest level since September 12th, the Friday before Lehman failed. Moreover, the overnight dollar rate also declined, as it slid 23 basis points to 1.28 per cent, below the Federal Reserve's target for the first time since October 3rd
However, despite the fall in the cost of inter-bank borrowing, the majority of global markets declined yesterday on the back of disappointing earnings and lower forecasts. For once, the Irish market out-performed the trend, as it advanced by 4.5 per cent.
Ten of the 18 western European markets fell back yesterday. The Dow Jones Stoxx 600 declined by 0.5 per cent to 220.90. In Germany, reinsurance firm Hannover Re fell by 13 per cent after posting a loss, and the DAX finished the day down by 1.1 per cent.
In France, a € 10.5 billion injection into six banks, in the form of subordinated bonds, saw the CAC 40 close up marginally by 0.8 per cent. Banks Societe Generale and BNP Paribas performed strongly, closing up by 10 per cent and 7.5 per cent respectively.
French finance minister Christine Lagarde said that the move was indispensable if banks were to be "in a position to finance the economy properly".
The International Monetary Fund said more European banks may fail as they struggle to raise fresh capital from investors. In its annual review of the European economy published yesterday, the Washington-based lender said financial markets are now "paying increasing attention" to pure leverage rather than accounting for how risky it is.
By that measure, Europe's banks score less favourably than those in the US, it said. As sovereign wealth funds and investors show diminished appetite for putting money into banks and volatile markets make it hard to raise capital, Europe's financial institutions will find their ability to raise funds falling and the need for government support growing, the IMF said. "While recapitalising initially went well, it is now likely to slow," it said in the report.
In the UK, the FTSE 100 fell for the first time in three days, giving up 52.94 points, or 1.2 per cent, to finish down at 4,229.73, as bank stocks including HSBC and RBOS fell.
US stocks fell more than 2 per cent as companies cut their earnings outlooks and automotive stocks pulled shares lower.
In Hong Kong, the Hang Seng Index closed 281.84 points lower at 15,041.17 after opening 1.9 per cent higher.
In the US, poor earnings results saw indices fall. By 11.59am, the SP 500 had lost 24.16, or 2.5 per cent, to fall back to 961.24, while the Dow Jones Industrial Average slipped 187.25, or 2 per cent, to 9,078.18.
The euro fell to a three-year low against the yen yesterday, on speculation central banks will lower borrowing costs to limit the global economic slump, encouraging investors to sell higher-yielding assets funded in Japan. It also dropped to a 19-month low against the dollar, on bets the European Central Bank will cut interest rates at a faster pace than the Federal Reserve.
By 10.52am in New York, the yen had appreciated by 2 per cent to 133.25 per euro, while the euro fell by 1.2 per cent to $1.3188 from $1.3344, after touching $1.3154, the lowest level since March 2007
The Irish Times also reports that the banks' efforts to recover Taggart loans could hit the value of other assets they hold.
The Taggart group's problems present the Irish banks with a tough dilemma, and could yet provide the rest of us with the answer to a question that a lot of people have been asking since the Government rode to our financial institutions' rescue.
That question is: How much are the properties used by developers to secure bank loans that they cannot repay actually worth now?
Taggart's woes could help answer this, because the companies placed in administration in Northern Ireland, and in receivership in the Republic, are the ultimate owners of development land bought with secured loans from leading Irish banks.
Market analysts agree that a sale of the group's properties, albeit in distressed circumstances, could well put a floor on the value of secured development land on both sides of the Border, and could potentially force banks to write down the value of similar assets on their books, particularly where the developer is having trouble meeting repayments.
That's where their dilemma lies. In an effort to recover loans from one business, they could ultimately hit the value of other assets on their balance sheets. This could have implications for all Irish banks, which loaned €86.7 billion to property developers in the 12 months ended last June. It also has implications for Irish taxpayers, as it is effectively their cash that the Government is using to underwrite its guarantee of bank liabilities valued at €485 billion.
In the Republic, where a sale of Taggart's assets seems probable, PriceWaterhouseCoopers is the receiver of four sites. One in Trim includes a finished housing development, and the units there are selling. The others are in Kinsealy, Co Dublin, Kinnegad, in Co Westmeath and Muff in Co Donegal. If Kinnegad and Kinsealy were sold, the deal could conceivably give a guide as to how the market values two distinct types of development land, the midlands commuter belt and a premier Dublin address.
Analysts do point out that the banks could argue that the values would mark an "artificial low", but they agree that prices paid would be concrete, and the first indication we've had for a while of real values, as there is little or no market for development land anywhere in Ireland at the moment.
The institutions which sought the appointment of a receiver and administrator to Taggart were Bank of Ireland and Ulster Bank, with which the group did a lot of business. They may not be the only ones affected.
In some cases, particularly in the Republic, the banks could have the option of putting the properties in a separate company set up specifically to hold these assets - known as a specific purpose vehicle or SPV.
This would allow them to take the properties off their balance sheets, and hold off on a sale until conditions improve. That could still involve revaluing the assets, or it might just postpone the day when they have to put a firm price on the property.
One analyst yesterday commented that an SPV set up to hold distressed assets could potentially end up with the title to a lot of properties over the course of the next year or two.
Where the properties include houses, they can use the sale price of the units involved to arrive at a fair-value estimate. This does not apply to development where nothing is built, and which could be going through various stages in the planning process.
The failure of a major Irish property developer with an exposure to markets on both sides of the Border, and obligations to some of the country's major financial institutions, did not deter investors from buying bank shares on the Dublin market yesterday, even though most observers believe Taggart will not the be last to find itself in hot water.
The Irish Examiner reports that even allowing for the strong links culturally with Europe, modern Ireland has looked to Britain, the US, and further afield as the driver of its exports.
The point was well made over the weekend when figures were released showing that a mere 30% of Irish food exports go to continental Europe with the rest shipped to Britain and other world markets.
The point was also made that the depreciation of sterling and the dollar by up to 15% in the first half of this year means profits are being eroded when it comes to currency translation from those
Of the €8 billion in food and drink exported from this country last year just €2.5 billion was sold in Europe, where 15 countries share the common currency.
Yet despite this apparent opportunity knocking on our doorsteps Bord Bia has to keep reminding us to ignore Europe at our peril.
Bord Bia chief executive Aidan Cotter highlighted anomalies in Paris last Sunday at SIAL, where the world’s biannual trade show is taking place.
Apart from the lack of currency exchange risk Cotter also pointed out in diplomatic language that it was difficult for Irish companies selling in Britain and the US to achieve price increases to compensate for the currency losses they suffer as a result of the stronger euro.
Competition in these markets is huge.
Tesco is conducting an all-out war on its low-cost rivals Aldi and Lidl in the Irish and British markets and Cotter said the current environment is making it tough on consumers, suppliers and the retail multiples.
Slowing growth and falling incomes is forcing retailers to cut prices as they battle to retain their share of falling disposable income.
Caught in the middle of this are the food producers and processors who are also encountering fierce pressure from the multiples to cut their prices.
That is happening here as well as in Britain and indeed is something that Cotter and Bord Bia would be familiar with first-hand — hence the gentle nudge to Irish food groups to think beyond their comfort zones and look to Europe to protect their own business interests.
Reports in the British media in particular have highlighted in recent weeks that the Tescos of this world are putting enormous pressure on their suppliers to cut their prices, as it responds to the need to lower prices as recession starts to hit incomes.
There is mounting evidence that multiples in the Irish market are also starting to come down heavy on their suppliers.
It has been reported Tesco in Britain has demanded one-off cash payments from suppliers and better terms from suppliers to bolster its fight against Aldi and Lidl.
In its defence Tesco says all it is doing is looking after the interests of its customers who expect it to deliver the best deal on prices it can in order to keep its customers coming though its doors.
New figures show that Tesco’s plan to rebrand itself as “Britain’s biggest discounter” is not having the impact is hoped it would.
Last week, Aldi announced it had its strongest week on record, starting on September 29. A spokesman said the majority of its growth was coming from the big four supermarkets, particularly Tesco.
As the competition gets even fiercer Irish food groups will get caught in the pincer movement between consumers and the big multiples and some will struggle to survive.
In that sense Aidan Cotter’s suggestion that Irish food firms should put a much greater focus on the eurozone — where there are less multiples to contend with and deals are honoured — seems to make a lot of sense.
The Financial Times reports that Switzerland should be placed on an international blacklist of tax havens, the German government said on Tuesday as it joined a dozen other countries to turn up the heat on territories that profit from tax evasion.
“Switzerland offers conditions that invite the German taxpayer to evade taxes. Therefore, in my view, Switzerland belongs on such a list,”Peer Steinbrück, German finance minister said at a conference in Paris.
Eric Woerth, the French budget minister who organised the conference, raised the prospect of retaliatory measures next year against territories that refused to exchange tax information with authorities in other countries, in line with a code drawn up by the Organisation for Economic Co-operation and Development.
Mr Woerth suggested restrictions on mergers and acquisitions, reductions in dividend payments or higher capital gains tax on individuals could be applied against companies and people in tax havens.
France and Germany are determined to raise the pressure on countries that refuse to exchange tax records. They believe the financial crisis, with calls for fresh market regulation and a downturn in tax receipts, will inject political impetus into the OECD’s hitherto technical efforts to clampdown on unco-operative tax havens. “Time is running out for countries not complying with OECD standards”, said Stephen Timms, UK treasury minister, who took part in the meeting.
Mr Woerth said the tone of the meeting was “offensive, not at all diplomatic”. Austria, Luxembourg and Switzerland, which all have a tradition of bank secrecy, refused to attend, as did the US. The 17 governments represented at the meeting agreed that the OECD should publish a revised blacklist of tax havens by summer 2009 ahead of a summit of leaders of G8 industrialised nations.
The existing blacklist of “non-co-operative” countries contains only three names: Andorra, Liechtenstein and Monaco. But Paris and Berlin say there are several other countries that have promised to comply with OECD standards but have since dragged their feet.
These include Panama, Gibraltar and Bahrain. The meeting also took aim at Singapore and Hong Kong for not doing enough to share tax information. The OECD will draw up a list of retaliatory measures that could be deployed against recalcitrant countries.
The 17 governments called for changes to the European Union’s withholding tax directive, extending it beyond bank interest to other financial products and even capital gains tax.
But Mr Steinbrück said he would not wait for an international accord to take action against tax havens.
The German finance ministry said Berlin would immediately take measures, including enhancing the supervision of domestic banks and insurance groups with subsidiaries in offshore financial centres and extending the prudential duties of these institutions to their offshore subsidiaries.
The ministry said it would amend the German tax legislation so that countries that did not abide by the OECD’s transparency and information exchange principles would no longer benefit from a tax exemption on dividends and would face legal restrictions in business transactions.
The FT also reports that the US Federal Reserve on Tuesday said it would finance up to $540bn (€410bn) in purchases of short-term debt from money market mutual funds to shore up a key pillar of the US financial system.
Money market funds have faced severe redemption pressures since the financial crisis deepened last month, forcing them to raise cash by scaling back their short-term lending to banks and selling their holdings of commercial paper.
This retreat has contributed both to a freeze in the interbank market and a steep decline in activity in the commercial paper market, which has made it difficult for banks and companies to raise short-term funds.
The Fed move highlights the extent to which policymakers are concerned about US money markets, even as conditions have improved, with interbank rates dropping. Policymakers are also worried that moves to prop up US banks may have undermined money funds, which compete with bank savings accounts.
“The short-term debt markets have been under considerable stress in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs,” the Fed said.
Lawrence Fink, chief executive of BlackRock, the asset management group, said: “This is a very big event. This is the first thawing that I really see in terms of helping the commercial paper market unravel itself.”
Under the scheme the US central bank will lend money to five special purpose vehicles, to be managed by JPMorgan Chase, tasked with purchasing assets from money market funds. These assets are low-risk paper, including certificates of deposit, bank notes and commercial paper with three-month maturities or less.
The creation of an extra liquidity facility on Tuesday was seen as complementing a move the Fed announced two weeks ago to create a vehicle aimed at purchasing potentially unlimited amounts of three-month debt from banks and non-financial companies. The size of the Fed’s balance sheet has nearly doubled.
Each of the five vehicles may purchase paper from 10 financial institutions. The overall size of the programme is capped at $600bn – with the Fed funding 90 per cent and the funds, which sell assets, taking the first 10 per cent of losses.
The Fed announced its plan as money markets thawed. Overnight dollar Libor declined 23 basis points to 1.28 per cent, below the Fed’s target rate of 1.5 per cent. Three-month dollar Libor eased to 3.83 per cent, its lowest fix in nearly a month. Three-month Libor was fixing about 2.80 per cent prior to upheavals and has yet to reflect the Fed’s rate cut of 50bp.
STATEMENT
The Federal Reserve Board on Tuesday announced the creation of the Money Market Investor Funding Facility (MMIFF), which will support a private-sector initiative designed to provide liquidity to U.S. money market investors.
Under the MMIFF, authorized by the Board under Section 13(3) of the Federal Reserve Act, the Federal Reserve Bank of New York (FRBNY) will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors.
The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs. By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments. Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households.
The MMIFF complements the previously announced Commercial Paper Funding Facility (CPFF), which on October 27, 2008 will begin funding purchases of highly rated, U.S.-dollar denominated, three-month, unsecured and asset-backed commercial paper issued by U.S. issuers, as well as the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), announced on September 19, 2008, which extends loans to banking organizations to purchase asset backed commercial paper from money market mutual funds. The AMLF, CPFF, and MMIFF are all intended to improve liquidity in short-term debt markets and thereby increase the availability of credit.
The New York Times reports that falling confidence in the corporate sector sent stocks lower on Tuesday as investors digested a discouraging batch of earnings reports and a new initiative from the Federal Reserve to shore up money-market mutual funds.
The Dow Jones industrial average fell 231.77 points, or 2.5 percent, to 9,033.66 after Caterpillar and DuPont, two members of the blue-chip index, said their earnings declined in the third quarter and suggested a bleak outlook for the economy.
Caterpillar, a top maker of earthmoving equipment, called the current situation“the worst in years.”
Policy makers and economists have warned that the economy is in for a rough ride over the next few months as the credit crisis hurts businesses and consumer demand. The job market is expected to weaken further and the housing slump has shown no evidence of letting up.
In the credit markets, however, signs of improvement continued to appear. Borrowing rates between banks dropped again, a crucial show of confidence among financial institutions. The benchmark rate for overnight interbank loans, known as Libor, dropped to its lowest level in more than a month, a significant improvement from just a few days ago when it neared record highs.
But stock investors seemed more focused on the corporate sector, including a report that the billionaire investor Kirk Kerkorian had started to sell his stake in Ford Motor. Mr. Kerkorian said his investment company, Tracinda, sold 7.3 million shares of Ford stock on Monday at a huge loss and intended to further reduce its remaining 6.1 percent stake. The move underscored the weakening state of Ford and its two Detroit rivals, General Motors and Chrysler, which are in merger talks.
The broader Standard & Poor’s 500-stock index lost 30.35 points, or 3.1 percent, to 955.05, and the Nasdaq composite dropped 73.35 points, or 4.1 percent, to 1,696.68. Technology stocks led the declines, a day after Texas Instruments said sales would fall short of expectations. Texas Instruments shares dropped 6.3 percent.
Shares of Ford fell 6.9 percent. Caterpillar dropped 5 percent and DuPont was off by 8 percent.
Investors may also have sold shares to lock in gains from Monday’s 413-point rally in the Dow.
European stocks ended mixed, turning mostly lower in the afternoon a day after France announced a big injection of cash into French banks.
Under the plan announced late Monday by the French finance minister, Christine Lagarde, the government will buy 10.5 billion euros, or about $14 billion, of subordinated debt from six major lenders in exchange for a pledge that they will increase lending to businesses and consumers.
Shares in London and Frankfurt fell more than 1 percent. In Paris, stocks rose 0.8 percent. Oil prices fell $3.36 to settle at $70.89 a barrel in New York trading.
Interest rates were lower.
The Treasury’s benchmark 10-year bill was up 27/32, at 102 4/32, and the yield, which moves in the opposite direction from the price, was at 3.74 percent, down from 3.84 percent late Monday.
The NYT also reports that at the beginning of the year, OPEC producers felt confident that strong economic growth and tight supplies would keep oil prices high. When oil crossed the $100-a-barrel threshold in February, the cartel’s president blamed speculators and said there was not much OPEC could do.
But now, panic is gripping producers as prices drop. Oil is down by half since July, and the speed of the decline has stunned oil-rich governments that have become dependent on high prices.
As the global economy continues to weaken, the Organization of the Petroleum Exporting Countries faces its toughest test in years.
The problem for the oil exporters, who meet for an emergency session in Vienna on Friday, is to find a way to stop the price drop at a time when oil consumption is falling markedly in industrialized countries. Even the Chinese economy, long the biggest engine of growth for oil demand, seems to be cooling.
Most analysts expect the group to announce a production cut of at least a million barrels a day, which would be more than 1 percent of the world oil supply. Chakib Khelil, OPEC’s president, said last week that an output cut was “obvious” and suggested the group might meet often in coming months for further adjustments.
History suggests that OPEC will face a tough time propping up prices as oil consumption slows and the world teeters on the edge of a global recession, analysts said. Some experts warn that if the cartel took too much oil off the market, it could push prices up so much as to worsen the global economic crisis.
“OPEC’s problem is they don’t know how much demand is falling,”said Jan Stuart, an energy economist at UBS.“So the risk they run is either they don’t do enough, or they do too much. That’s a tough choice.”
Nobuo Tanaka, the executive director of the International Energy Agency, said a cut in production could harm consumers and delay an economic recovery. “The slowdown may be prolonged,” Mr. Tanaka told reporters on Monday in Paris, where the energy agency, which advises industrialized countries, is based.
Oil prices settled at $70.89 a barrel on Tuesday, down $3.36 and near the 14-month low they reached last week.
The biggest question is what price the cartel is prepared to defend. In 2000, producers adopted a price band of $22 to $28 a barrel, and adjusted production levels accordingly. The mechanism was imperfect, and many producers felt it constrained them, but it basically worked to ensure stability in oil markets.
But defending a price requires spare capacity, so that production can be raised if prices get too high, as well as discipline on the part of OPEC members, so that production can be lowered when prices fall. OPEC abandoned its price band when its spare capacity virtually disappeared in 2005 amid rapidly rising global oil demand.
Now, with consumption growth slowing sharply and new oil projects coming online, some spare capacity has become available.
Lawrence Eagles, an oil analyst at JPMorgan, said in a research note that he thought the “price-band mechanism offers the best way for OPEC to manage the market under current conditions.” Mr. Eagles said OPEC did not want prices to slip below $70 a barrel, and would be more comfortable with prices around $80.
The cartel, which controls 40 percent of the world’s oil exports, has found it difficult in the past to get all its members to abide by production cuts. When prices fall, producers have an incentive to increase their output to maximize revenue, not stick with OPEC quotas.
Producers are aware that high prices pose a risk to the global economy. Oil consumption is already falling sharply in developed countries, and there is a rising risk that oil demand could slow even in fast-growing developing nations.
OPEC’s researchers recently downgraded their forecasts for global oil demand because of the financial crisis. OPEC expects global demand to rise 550,000 barrels a day this year, to 86.5 million barrels a day.
For many analysts, these expectations are still too optimistic. A growing number of independent experts now say they believe that global oil consumption may fall this year, for the first time since 1993.
“OPEC will have to decide how far it can ignore the global economic crisis and pressure from consuming countries,”wrote researchers at the Center for Global Energy Studies, a London consulting group founded by Sheik Ahmed Zaki Yamani, a former Saudi oil minister. “The real danger is that a big cut will send prices soaring again, putting the global economy at even greater risk.”
Some producers may feel they have little choice. Many exporters have become used to high prices, which feed growing government and social budgets. The group’s 13 members earned $730 billion from oil and gas exports last year, up 12 percent from the previous year, according to OPEC statistics. This year they are on track to hit $1 trillion.
Not all oil producers are affected by falling prices in the same way. Iran and Venezuela, for example, need $95 a barrel to balance their budgets, according to various estimates. Both Nigeria and Iraq recently said they would reduce their budgets for next year because of lower prices.
Iran’s oil minister, Gholamhossein Nozari, has been among the most vocal proponents of an aggressive reduction in output, suggesting OPEC may have to cut production by as much as 2.5 million barrels a day. “The era of cheap oil is finished,” he told reporters in Tehran on Tuesday.
His comments came as Iran, Russia and Qatar discussed the creation of an OPEC-like group for natural gas exports, according to Reuters. The three countries, the biggest holders of gas reserves, will form a “big gas troika” that will meet each quarter, according to Alexei Miller, the chief executive of Gazprom, Russia’s state-owned natural gas giant.
Even conservative oil producers allied with the United States, like Saudi Arabia, may take the view at Friday’s meeting that prices have fallen too much. In the absence of an official price target, Saudi experts estimate the kingdom needs oil at $50 to $55 a barrel to balance its budget. A production cut would be a major turnaround for the Saudis, who have recently been pumping full out and had been eager to see oil prices fall below $100 a barrel.
Outside of OPEC, producers like Russia are also threatened by a prolonged period of lower prices. Last month, the Russian government sent a high-level delegation to attend an OPEC meeting as observers, a sign that Moscow is anxious.
“OPEC will have to act like a cartel for the first time in six years if they want to stabilize the markets,”said Lawrence Goldstein, an energy economist. “The problem is they’ve been fairly ineffective as a cartel. But they are good at crisis management. And this is a crisis for them.”
