The Irish Independent reports that Nobel prize-winning economist Professor Robert Engle says the markets are unsure whether the Government's bank-bailout strategy will work but adds that there are signs the global economy is recovering.
Speaking at a conference in Dublin yesterday, Prof Engle said a decline in volatility on global markets was a signal that the uncertainty about the future had declined. "I think that's evidence that the financial markets see green shoots," he said.
However, Prof Engle cautioned that major co-ordinated international effort was needed to ensure that risk in markets could be managed properly.
He expressed limited knowledge on the Government's plan to bail out the banks through NAMA, but said given the recent movements on our credit default swaps -- the insurance products to cover Irish government bonds -- it was evident that the market had a lot of concern over whether the NAMA system was going to work.
Rescue
And he added he did not feel the US bank rescue plan, involving a similar approach to NAMA, was going to be effective.
In light of the decision by Standard & Poor's to downgrade Irish debt again yesterday, Prof Engle said the rating agencies were trying to compensate for their failings last year by being more proactive in their moves to re-rate sovereign debt.
While he declined to agree that they may be "over-compensating" for their failures last year, he said they were generally out of date with their ratings.
He said the credit default swaps had already risen for Ireland last week, and that the latest downgrade from S&P was merely catching up with that.
During his address, the Professor of Finance at New York University outlined his work on the modelling of risk and how it could be applied to investing in markets, in particular to identify hedges against market volatility.
He said it might be possible to assemble effective hedges against a variety of market drivers, with gold and treasury bonds highlighted as providing effective hedges against the most recent market turmoil.
The Irish Independent also reports that employees at Beru Electronics, one of Tralee's biggest manufacturing plants, were yesterday called into a meeting with management to discuss the company's future.
However, the 200 employees were told that further circumstances had to be clarified with management in Germany before plans for the future of the plant could be fully laid out.
Speculation increased last week about the future of the Co Kerry plant, which is already implementing a number of cost cutting measures, including short time.
Tralee is already reeling from heavy job losses.
The number of unemployed in the town now stands at over 6,200.
The Tralee plant concentrates on the manufacture of glow plugs and the Irish costs and production levels are being compared with those of another glow plug production plant in Ludwigsburg in Germany.
It is understood a decision is to be taken as to whether the Tralee glow plug operation will be moved to Germany.
Some 80pc of the Tralee operation is based on glow plug production, and a removal of this would almost certainly close the plant, union sources say.
Earlier this year some 20 workers were laid off under a voluntary redundancy package under terms agreed between management and SIPTU, which represents the workers.
The Irish Times reports that the cost of Government borrowing is set to rise after credit rating agency Standard & Poor’s cut Ireland’s sovereign debt rating for the second time in three months yesterday and warned that the soaring cost of bailing out the banking sector could lead to further downgrades.
Ireland is now rated “AA” with a negative outlook, S&P said. The agency removed Ireland’s “AAA” rating, the highest possible, in March, downgrading it to “AA+”.
S&P said it believed the cost to the Government of propping up the banking sector was now “significantly higher”. It estimates that recapitalising the banks will now cost taxpayers €20-€25 billion, up from its previous estimate of €15-€20 billion.
S&P analyst David Beers said the proposed National Asset Management Agency (Nama) was “uncertain” to work because of the risk that the bank assets would deteriorate in value by more than the Government expects at the time that they purchase the assets.
Losses announced at Anglo Irish Bank also “highlight both the continued fragility of the Irish banking sector and its reliance on the government for ongoing financial support”, S&P added.
As a result, Ireland could see its net general government debt climb to more than 120 per cent of gross domestic product (GDP) – a level that is higher than for other “AA” rated euro-zone countries.
Mr Beers said a further downgrade was not “inevitable”, but that a negative outlook meant there was a one in three chance the Republic’s credit rating would be taken down a further notch.
In a statement, the Department of Finance said the ratings downgrade “reflects developments which have taken place over the last while” and that there was “full recognition” that the transfer of assets to Nama would have to be “carefully implemented”.
However, Fine Gael finance spokesman Richard Burton said the move, coming just days after the Government suffered a severe drubbing in the local and European elections, was “more evidence that Fianna Fáil is unable to save the economy”. The decision to establish Nama had to be reversed and Anglo Irish Bank must be wound down, he said.
“The electorate has given the Government a massive vote of no confidence about the economy. Now Standard & Poor’s has done the same,” he said.
“This downgrade of our public finances, together with the sharp rise in the share price of the banks in recent weeks, suggests a growing market consensus that Nama involves a massive transfer of wealth and resources from the taxpayer to bank investors, because the State is going to overpay for the banks’ toxic loans,” he said.
NCB economics analyst Brian Devine said further downgrades were likely. “Ireland will likely be further downgraded in the future to bring it into line with where it is trading in the bond and credit-default swaps markets,” he said.
Despite the setback posed by the lower credit rating, Ireland is unlikely to default on its debt obligations or turn to the International Monetary Fund for help, according to Royal Bank of Scotland (RBS). “Ireland has many, many problems and we continue to view it as the weakest fiscal risk in the European Monetary Union, but investors should not leap to the view that this is an Iceland in disguise,” said Harvinder Sian, a bond strategist at RBS in London.
Investors demanded higher returns to hold Irish bonds after the downgrade. The spread between Irish bonds to the 10-year benchmark German Bunds widened by four basis points to 203 basis points.
The cost of protecting investors against a default on Government debt through credit default swaps, a proxy measure of financial risks, increased yesterday morning from 214 basis points to 226 basis points, according to figures from Deutsche Bank AG. This means it now costs €226,000 per year to insure an exposure of €10 million of Irish government bonds.
Rival rating agency Fitch cut Ireland’s “AAA” rating to “AA+” in April. Moody’s has retained its “AAA” rating to date, but has placed it on a negative outlook.
Last week, the Government said it would inject €4 billion into Anglo Irish Bank, in addition to the €7 billion already injected into AIB and Bank of Ireland. Anglo Irish is likely to need a further €3.5 billion if the quality of its underperforming loans continues to deteriorate.
The Irish Times also reports that Ryanair chief executive Michael O’Leary sold five million shares in the airline at €3.75 a share on June 5th.
The sale, before taxes, is worth €18.75 million to Mr O’Leary.
The sale is equivalent to 0.34 per cent of the airline’s shares and reduces Mr O’Leary’s holding to just over 4 per cent or 60 million shares.
Ryanair shares were lower in Dublin in early trade, slipping 2 per cent to €3.67.
Last week Ryanair was defeated in two motions at the Aer Lingus annual general meeting that sought to reduce the pay of the airline’s chairman and other board members.
Ryanair holds a stake of 29.8 per cent in Aer Lingus, and is the largest shareholder in the former State airline.
Last Tuesday Ryanair announced its first full-year loss in 20 years after it wrote down the value of its stake in Aer Lingus by €222 million, which contributed to a net loss of €169.2 million for the 12 months to the end of March 2009.
Ryanair is predicting profits of between €200 million and €300 million depending on fuel costs and average fares for this year and that passenger numbers will rise 15 per cent to 67 million.
Separately yesterday, airlines called for concerted action to prevent another runaway surge in oil prices as the International Air Transport Association (IATA) nearly doubled its forecast of industry losses to $9 billion (€6.4 billion) in 2009.
The head of the Geneva-based airline lobby lambasted “greedy speculation” in oil markets and accused governments of squandering money raised from aviation while carriers suffered.
“This is the most difficult situation the industry has faced,” said IATA director general Giovanni Bisignani.
However, John Leahy, commercial director at European aircraft manufacturer Airbus, said while 2009 would be tough, plans by United Airlines to order as many as 150 new planes from Airbus or rival Boeing showed the market was starting to turn.
The Irish Examiner reports that Setanta Sports, the Irish-founded sports broad-caster, could go into administration within the next couple of days.
The company’s board held a crisis meeting yesterday to decide on its immediate steps after attempts to raise funds to meet payments to both the English and Scottish premier leagues failed.
While weekend reports suggesting the company could cease broadcasting within days seem wide of the mark, such an outcome is a real possibility down the line. In the meantime, however, accountancy giant Deloitte is expected to be named as administrator to the firm this week.
Such an outcome could result in the sale of the broadcast rights Setanta has, at heavily discounted prices.
Earlier this year, Sky Sports won five of the six British television transmission rights packages for the English Premiership for the autumn 2010 to summer 2013 tranche, effectively slashing Setanta’s share of the British sports broadcasting market in the process.
Setanta has only around 1.2 million subscribers across Britain and Ireland, while a figure of closer to 1.9 million is seen as necessary for the company to just break even financially.
Setanta has been looking for fresh capital since the beginning of this year to allow it meet payments for broadcasting rights. The company is estimated to be losing around £100 million (€115m) a year.
Just last week, Setanta refused to comment on reports that it had missed a £3m payment owed to the Scottish Premier League (SPL) relating to its rights to transmit live games.
The SPL has had to pay its member clubs their share of that money out of its own funds.
A previous £10m missed payment to the Football Association in England – relating to coverage of the FA Cup – which was eventually paid, was not, Setanta claimed, a sign of it being in financial trouble.
The broadcaster still owes the Premier League in England a £35m rights payment by next Monday.
The London-headquartered Balderton Capital (which is headed by former Esat Digifone chief, Barry Maloney), private equity house Doughty Hanson (which also owns TV3 here) and Goldman Sachs all have stakes in Setanta and the latter two recently wrote down the value of their investments to zero over concern for the business model.
The Financial Times reports that France and Germany set their sights on Monday on a combined effort to steer the European Union out of economic crisis and away from political discord after scoring election triumphs that contrasted with a disaster for the UK’s ruling Labour party.
“This success at the European parliament elections requires us to go further,” said Nicolas Sarkozy, France’s president. “Europe must change. Reforms must continue.”
Mr Sarkozy and Angela Merkel, Germany’s chancellor, will meet in Paris on Thursday to prepare for an EU summit on June 18 that will focus on tightening financial regulation and sharing the cost of climate change policies. EU leaders will also consider making a binding proposal to the European parliament that José Manuel Barroso should serve a second five-year term as European Commission president.
But the humiliation of Britain’s Labour party, which finished third behind the Eurosceptic Conservative opposition and the anti-EU UK Independence party, has transfixed continental European leaders, who were watching nervously to see how long Gordon Brown, the UK premier, could cling to power.
Across Europe, policymakers almost unanimously expect the Conservatives to win power at the UK’s next general election, due in less than a year. Their fear is that Mr Brown’s authority may already be so weakened that the UK will hold an early election, followed by a referendum that a Conservative government would call on the EU’s Lisbon reform treaty, with the aim of killing it once and for all.
Irish voters rejected Lisbon in June 2008, but EU leaders are expected at next week’s summit to offer Ireland legal guarantees on taxation, neutrality and ethical issues to pave the way for a second Irish referendum, probably in October. Latest opinion polls show the Yes camp leading with 54 per cent support.
David Cameron, Conservative leader, called Mr Barroso on Sunday night to reassure him the Conservatives wanted to work with other centre-right parties in the parliament, in spite of pulling out of the mainstream European People’s party.
Memories remain painfully fresh in Brussels of the tensions between London and other EU capitals during the last period of Tory rule from 1979 to 1997.
The poll produced a big victory for Europe’s centre-right parties, which will remain the largest group in the EU legislature, controlling 263 of its 736 seats, according to almost final results. Socialists will hold 163 seats and centrist liberals 80 and Greens 52.
With a record low turnout of 42.9 per cent, the seventh successive fall in a EU-wide ballot, the election disappointed those who had hoped to proclaim it an advertisement for multinational European democracy.
The FT also reports that Citigroup on Monday confirmed it would launch a long-awaited $33bn capital raising this week in a move aimed at allaying investors’ fears over the offering and concerns over mounting regulatory pressure.
The announcement came as the Federal Deposit Insurance Corporation, one of Citi’s regulators, continued to press the bank to replace Vikram Pandit, Citi’s chief executive, and his closest lieutenants, according to people close to the situation.
However, the FDIC has so far failed to persuade Citi’s other main regulators – the Treasury, the Office of the Comptroller of the Currency and the Federal Reserve – to oust Mr Pandit and his team.
Citi will begin a conversion of preferred shares into common stock held by the US government and other shareholders this week, as reported by the Financial Times on Saturday.
The exchange offer, which was announced several weeks ago, will help Citi to bolster its ailing balance sheet and plug a $5.5bn capital shortfall found by the recent government “stress tests”. After the conversion of its preferred shares, the government will own a stake of about 34 per cent in Citi.
The FT reported on Saturday that, in recent weeks, Citi had decided to delay its capital raise after the FDIC had threatened to lower a crucial financial health rating.
Citi on Monday said suggestions that federal banking agencies delayed regulatory approvals for the offer were “entirely incorrect”.
But people close to the situation said the issue was not regulatory approval but Citi executives’ belief they could not proceed with the offer until the row with the FDIC over the financial rating had been resolved.
The FDIC declined to comment.
People close to the situation said tensions between Citi and the FDIC, which has argued the institutions should replace Mr Pandit, a former investment banker, with an experienced commercial banker, remained high.
The launch of Citi’s offer will come as a relief to several hedge funds. Many have been buying Citi’s preferred shares while shorting its common stock in the hope of profiting from the conversion and further delays in the offering could have forced them to cover their short positions at a loss.
The repayment of government funds likely to be announced on Tuesday by up to 10 rival banks, including JPMorgan Chase and Goldman, has given Citi an added incentive to raise capital and mend its finances.
Separately, Bank of America announced on Monday that two more directors had left its board. Jackie Ward and Patricia Mitchell are leaving the bank, joining Temple Sloan and Robert Tillman in the ranks of BofA’s recently departed board members.
The New York Times reports that the rising unemployment rate is giving President Obama’s critics an opportunity to raise questions about the effectiveness of his recovery plan and his economic leadership. The huge budget deficit is focusing fresh concern on the national debt.
So Mr. Obama began a new effort on Monday to show that his stimulus plan was yielding concrete benefits, saying that his administration expects to save or create 600,000 more jobs this summer, as the federal government spends billions to expand care at health centers, spruce up national parks, hire teachers and improve military facilities.
At a meeting with Mr. Obama and the cabinet, Vice President Joseph R. Biden Jr. outlined 10 major initiatives that he said would “build momentum and accelerate job growth” over the next 100 days. After Mr. Biden ticked off a list of programs — including water and waste projects in rural America and rehabilitation of 98 airports and 1,500 highways — the president took aim at his critics.
“Now I know that there are some who, despite all evidence to the contrary, still don’t believe in the necessity and promise of the recovery act,” Mr. Obama said, “and I would suggest to them that they talk to the companies who, because of this plan, scrapped the idea of laying off employees and in fact decided to hire employees. Tell that to the Americans who receive that unexpected call saying, ‘Come back to work.’ “
A little less than four months after he signed the $787 billion American Recovery and Reinvestment Act into law, Mr. Obama is now in the position of trying to convince Americans that the stimulus measure — his signature legislative achievement thus far — is working, even as the job losses mount.
On Friday, the Department of Labor reported that unemployment was now 9.4 percent, the highest in 25 years, although the rate of monthly job losses dropped off in May. The president’s top aides spent the weekend trying to tamp down expectations that the unemployment rate would turn around anytime soon. One adviser, Austan Goolsbee, told Fox News the nation was in for “a rough patch,” a phrase often invoked by Mr. Obama’s predecessor, George W. Bush
With Mr. Obama talking up the stimulus bill, Republicans went on the offensive.
“The Obama administration is continuing to fabricate job creation numbers related to the stimulus,” Tony Fratto, a deputy press secretary in the Bush administration, said in an e-mail message to reporters. He added, “Their so-called models would not stand the light of day.”
The administration maintains that 150,000 jobs were either created or saved in the first 100 days after Mr. Obama signed the stimulus bill on Feb. 17. The 600,000 figure the president discussed Monday is not new; it was made public by Mr. Biden on May 13. It includes 125,000 part-time summer jobs for teenagers, which the administration counts as 62,500 full-time job equivalents.
Independent experts say those figures — estimates based on macroeconomic models and projections — are plausible, although they say it is very difficult to measure the number of jobs created. But Republicans say the teenage jobs estimate proves that there is less than meets the eye to the stimulus package.
“The administration looks dramatically out of touch as they highlight the creation of temporary summer employment in the face of job losses unseen in decades, record unemployment and massive deficits,” said Representative Eric Cantor of Virginia, the House Republican whip.
In preparing his report to the president, Mr. Biden said he had asked cabinet secretaries to give him a list of projects “that they were absolutely certain of they could get up and running in the second hundred days.”
The Department of Health and Human Services, the White House said, will either build or expand 1,129 health centers to provide service to approximately 300,000 additional patients across the country. The Justice Department will hire or keep approximately 5,000 law enforcement officers on the job. The Department of Veterans Affairs will begin improvements at 90 veterans medical centers across 38 states.
By spotlighting specific projects that he expects will get under way this summer, Mr. Obama may be trying to use his presidential platform to prod states into spending the federal dollars at a critical period, when the weather is more conducive to construction projects in the Northeast and teenagers are free to work, giving a temporary boost to the job market, said Mark Zandi, chief economist at Moody’s Economy.com.
“The economy is at a very key juncture,” Mr. Zandi said. “We are right at a turning point from recession to recovery. If they can juice things up just even a bit, that may make a big difference.”
But complicating Mr. Obama’s efforts are the predictions of two of his own economic advisers: Jared Bernstein, the top economist for the vice president, and Christina D. Romer, the chairwoman of the White House Council of Economic Advisers. In January, 10 days before Mr. Obama was inaugurated, they released a report forecasting that the unemployment rate would remain at 8 percent or below in 2009 if the plan were enacted.
“When they passed this spending plan, Democrats said it would immediately create jobs,” said Representative John A. Boehner of Ohio, the House Republican leader, “yet nearly four months later, unemployment has continued to climb and none of their rosy predictions have come true.”
Mr. Bernstein, addressing reporters on Monday at a contentious White House briefing, conceded that his forecast had been “clearly too optimistic.” He said it had not taken into account figures from the fourth quarter of last year, because those numbers were not available at the time. But he said unemployment would be higher were it not for the economic recovery package.
“Job losses would have been deeper,” Mr. Bernstein said. “The unemployment rate would have been — by our estimate, by the end of next year would have been between one and a half and two points higher than it otherwise will be.”
The NYT also reports that after just a few months of relief at the pump, cheap gasoline is disappearing.
Gas prices have risen 41 days in a row, to a national average of almost $2.62 a gallon. That is a sharp increase from the low of $1.62 a gallon that prevailed at the end of last year.
Refinery problems are producing especially high prices in the Midwest, a region that was already reeling from the economic crisis. Michigan, the state with the highest unemployment rate, at 12.9 percent, is now paying the highest gasoline prices, averaging $2.93 a gallon.
The national jump in prices, far larger than the normal seasonal increase, is pulling billions of dollars from the pockets of drivers. It threatens to curtail a modest recovery in consumer spending on items like apparel and electronics.
After increasing 62 percent since December, the price of gasoline is actually lagging behind the increase in the price of oil, which has doubled in the same period, to more than $68 in recent days. Analysts say the increase is being driven by investor expectations of an economic recovery, the recent fall of the dollar against other currencies and, to a lesser extent, the success of oil-exporting countries in curtailing supplies.
Whatever the reasons, Dawn Cunningham, a sales representative from Elk Grove Village, Ill., was not happy as she spent $45 the other day to fill the tank of her Honda Pilot sport utility vehicle. “My husband and I both took pay cuts recently, and now the rising price of gas is taking even more out of our pockets,” she said.
Prices remain well below those of last summer, when the national average for regular gasoline soared above $4, but economists say the recent gains are a growing economic problem and may presage a rise in the overall inflation rate.
“This hits everyone,” said Robert J. Shiller, an economist at Yale. “It has the potential to affect your confidence.” He said that the recent rise in gasoline prices could effectively offset the new $400 to $800 payroll tax cut most employees are receiving this year as part of the Obama administration’s effort to stimulate the economy.
Consumers last summer were pulling $1.5 billion a day from their wallets to fuel their vehicles. By January, as oil prices collapsed, they were spending only $600 million a day. But now they are back to daily spending of around $1 billion, Tom Kloza, chief oil analyst at the Oil Price Information Service, said.
The price increase mystifies some analysts, who say that oil demand remains weak. According to the International Energy Agency, worldwide demand is down 2.6 million barrels a day from last year, mostly because of declines in driving and slower economic activity in the United States and other industrialized countries. Oil inventories are high.
“I’m scratching my head,” said Adam Sieminski, chief energy economist at Deutsche Bank, who attributes oil’s rise to an influx of investment dollars. “Right now, the sense is the economy is on a path toward improvement, and there is a lot of cash sitting on the sidelines. So hedge funds, sovereign funds, pension funds are investing in futures and oil stocks and commodity indexes.”
Glenn Darden, chief executive of Quicksilver Resources, an independent oil and natural gas producer in Fort Worth, predicted that oil prices would keep rising. “We were below the cost of drilling and production costs, so that situation could not last,” he said. “Oil being at $70 or $80 or $100 a barrel is where it’s going.”
Crude oil settled Monday in New York trading at $68.09 a barrel.
Because of the economic downturn, petroleum refiners around the country slowed gasoline production at the end of last year, and more recently they took extra time to complete the switch from winter to summer fuel blends.
Several refineries in the Midwest had temporary maintenance delays and problems, including at the large BP refinery in Whiting, Ind., which has had to retool its operations to refine fuels from Canadian oil sands.
“You are entering the highest demand season of the year with tight supply, and that supply may not catch up with demand until the fall,” said Lewis Adam, president of ADMO Energy, a consulting company.
The increase since the beginning of the year has been especially brisk in Illinois, Indiana, Ohio and Michigan, states already hit hard by the decline in the automobile industry and slumping home prices.
“Every penny counts,” said Mayor Valerie Knol of Farmington, Mich., who said that people in her area typically drive long distances for work and do not have ready access to mass transit. She added that the extra money people were spending on gas was money they would otherwise spend going out or buying goods.
Molly Maloney, 17, winced the other day as she pumped $40 worth of gas into her Toyota Camry at a station in Westlake, Ohio, that was selling its regular blend for $2.75 a gallon. She is looking for a job in a tight economy, and the high gas prices are crimping her search.
“I’m just blindly applying to any place that’s close to my house, so I won’t have to drive very far,” she said. “It’s just crazy.”
Experts who follow the auto industry see a silver lining of sorts in the rising prices. The government, which recently bailed out two of the three Detroit carmakers, is pressing the companies to build smaller, more fuel-efficient cars.
“The manufacturers need high gas prices for people to accept those cars,” said Maryann Keller, an automotive consultant. “Gasoline prices motivate behavior.”
