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News : International Last Updated: Aug 11, 2010 - 3:11:41 PM


Wednesday Newspaper Review - Irish Business News and International Stories - - August 11, 2010
By Finfacts Team
Aug 11, 2010 - 8:10:46 AM

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The Irish Independent reports that the Department of Finance last night admitted it does not know how much the Anglo Irish Bank bailout will cost, despite promises by Finance Minister Brian Lenihan that the bill would not run to more than €23bn.

As critics raised the spectre of a black hole swallowing billions more in taxpayers' cash, the European Commission gave the Government permission to plough another €10bn into the embattled bank -- on top of the €14bn already approved.  But the department yesterday admitted there was a "significant risk" the Anglo bill might rise even further. Industry sources suggested that Anglo could need another €2.5bn, depending on the discount the State's bad bank NAMA applies to the troubled Anglo loans it takes on later in the year.

The fresh admission comes just weeks after Mr Lenihan insisted he was "confident" the cost of saving Anglo and Irish Nationwide would be no more than "€23bn to €25bn".

Opposition politicians have slammed the cost of the bailout, saying the money would end up in a black hole and never be seen again.

Sources last night said the ultimate cost of Anglo's bailout would not be known until the nationalised bank has transferred all €36bn of loans earmarked for NAMA.

The first €9bn was transferred at a discount of 55pc earlier in the summer, but the discount rate for the remaining €27bn will not be known for several months.

"If the discount rate rises to 65pc, you could be talking about Anglo needing another €2.5bn," one source said.

In its statement, the Department of Finance admitted there was "considerable uncertainty" around the discounts that would be applied to the rest of Anglo's NAMA transfers.

The loss Anglo may take on the rest of its loan book is listed as another "uncertainty", as well as the outcome of the European Commission's decision on Anglo's restructuring plan.

"Because of the uncertainty facing the bank, there is a significant risk that further capital will be required by it in the future," the department said.

News of further capital demands came after the Government was given EU permission to put another €10bn into Anglo -- higher than the €8.6bn mooted in March.

In granting approval for the latest €10bn of support, the commission's vice president for competition, Joaquin Almunia, stressed that Anglo would have to "restructure profoundly" and tackle the "weaknesses of the past business model".

The commission is weighing up Anglo's restructuring plans and is expected to give a decision in September.

"They seem to be saying that if the commission doesn't feel that Anglo's plan is feasible and completely changes the way that the bank does its business then they (the commission) aren't going to say yes," one source said.

The department attributed the need for yesterday's extra €1.4bn to a technical accounting issue.

Officials said that when Anglo passes its loans over to Nama it gets bonds in return that are essentially IOUs from the State. Anglo expects to hold these IOUs for between five and 10 years.

As the IOUs won't be paid out immediately, Anglo will value them at less than their face value, so every €10m of IOUs might only be worth €8m in the bank's accounts.

That difference between the face value and the holding value could leave Anglo short of capital, so the State has asked for permission to pump in another €1.4bn to plug that hole.

"(The extra €1.4bn) is to cater for that uncertainty and to eliminate the need for a further state aid application to the EU Commission should any capital need eventually arise," the department stressed.

Fine Gael enterprise spokesman Richard Bruton expressed outrage at the extra €1.4bn, demanding that NAMA stops accepting loans from the zombie bank.

"It is intolerable that scarce taxpayers' money is being continuously poured into a bank that will never lend a red cent to business and will form no part of Ireland's economic recovery," Mr Bruton said.

Noose

"It is now critical that NAMA ceases purchasing loans from Anglo, because as the losses on these loans crystallise the need to pour more capital into the bank arises, merely adding to the problem and tightening the noose around the already overburdened taxpayers' necks.

"As was stated by Anglo chief executive Mike Aynsley, the 'lion's share' of the money being put into Anglo would 'never be seen again' and it would 'end up in a black hole'. That represents a depressing reality for the taxpayer, who is being subjected to increased energy charges, multiple levies and a Government that has no jobs plan," he said.

Labour's finance spokeswoman Joan Burton said Anglo had become the "hole that keeps on growing".

"It's taxpayers who are on the hook for these vast sums of money," she stressed. "It's a bottomless pit that keeps getting deeper. These are just vast sums of money and an honest and independent assessment of the bank is urgently needed."

The Irish Independent also reports that the interest rate on new government borrowing is again higher than it was 12 months ago, as the gains from the recent stress testing of EU banks evaporate.

The yield that investors demand for lending to Ireland for 10 years rose a further 0.19pc (19 basis points) to more than 5.2pc yesterday.

This is 30 basis points more than the same day in 2009, and six basis points above the level six months ago. The difference between the yield on German government bonds was the highest for two weeks.

The new rise came as the National Treasury Management Agency, which handles the national debt, announced that it would raise fresh borrowing next week through the auction of bonds repayable in 2014 and 2020.

The amount will be announced on Friday but is likely to be the typical €1.5bn monthly auction.

There seems little doubt that the money will be raised, however, there will be disappointment that the recent falls in yields have not been sustained.

The Irish 10-year yield fell below 5pc after the two big Irish banks passed the EU stress test two week ago. There was a general fall in yields in peripheral euro countries after figures about banks' holding of government debt were published.

Spanish debt

Spain saw the biggest fall, but rates are also rising there. Yesterday, 10-year Spanish government debt was yielding a quarter percentage point higher than a year ago.

"There have been some bad headlines about Ireland's banking sector and its fiscal outlook," said Padhraic Garvey, head of developed markets debt strategy at ING.

"Irish bonds have held up remarkably well until now. The market seems to be catching up on negative news, perhaps using the upcoming bond sale as an excuse to sell."

On Monday, Standard & Poor's said it would not rule out further credit-rating downgrades on Anglo Irish Bank.

The increase in yields came against the background of a general rise in eurozone bonds, especially on those repayable in 30 years. One reason was expectations that the US Federal Reserve would signal it is ready to take steps to support growth, which might mean more purchases of US bonds.

The moves were exacerbated by low trading volumes, said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London.

"Plenty of scepticism remains, and fiscal retrenchment is a long, hard slog for most peripheral countries," said Mr Jellinek.

"Additionally, trading liquidity has been low. With the summer holidays in full swing, spread volatility should remain an issue for investors."

The Irish Times reports that pharmaceutical firm Elan has decided not to spin off its drug delivery business Elan Drug Technologies (EDT) in the immediate future due to concerns over its valuation.

The firm had first looked at the possibility of hiving off EDT from its bioneurology business back in 2008 before the credit crunch hit.

Last April Elan again said it was exploring off-loading the business, but it indicated yesterday that current market conditions were not conducive to getting the right price.

In 2008 it had valued EDT at about $1 billion (€750m).

According to the firm, in which Johnson Johnson took an 18.4 per cent stake for $885 million last year, although “it makes strategic and financial sense to separate the businesses”, due to current market conditions it has determined it will “not start a process to pursue a separation of the EDT business at this time”.

Elan has also announced plans to restructure its debt by retiring up to $500 million in outstanding debt due to mature in November 2011 and November 2013 respectively through a combination of cash on hand and the proceeds of a planned refinancing.

If this proceeds as expected, Elan would reduce its gross debt by 20 per cent, and would see its gross debt fall to about $1.24 billion.

The maturity profile of the firm’s outstanding debt would also be extended, with no required debt repayments until November 2013.

The firm would also use proceeds from its sale of a stake to Johnson Johnson last year, as per the deal agreement, to potentially reduce the amount of debt due in November 2013 by up to $190 million, from $615 million to $425 million.

Restructuring the firm’s debt would also reduce annual interest costs by between $5 million and $10 million.

Jack Gorman, analyst at Davy Stockbrokers, described Elan’s move to extend its debt maturity profile as “no bad thing in the current markets”.

Elan also confirmed its financial guidance for 2010 and expects revenues to grow over 2009, with expenses in the range of $475 million to $525 million, and adjusted EBITDA of more than $150 million.

It did, however, adjust its gross cash/investments expectation to end 2010 with cash and investments approaching $400 million, compared to $500 million previously.

For 2011, Elan expects to be cash-flow positive, with expenses at a similar level to this year.

Separately, the firm announced that a mid-stage trial of its Alzheimer’s drug ELND005 failed to show “statistical significance” but that it would nonetheless proceed with late-stage phase III trials.

In order to fund these trials it is thought likely that Elan and its Canadian partner Transition Therapeutics Inc (TTHI) could be looking to bring in another partner.

Doing so would “make sense”, said Mr Gorman, given “Elan’s balance sheet and its key skills in discovery and early research”.

The Irish Times also reports that the McCormick Macnaughton Caterpillar dealership in the Republic has been taken over by Canadian firm Finning, but the group’s rental businesses have ceased trading.

Assets belonging to three rental-related companies in the McCormick Macnaughton group, including three premises, will be sold off at an auction scheduled for September 4th.

Management at Finning, the world’s largest Caterpillar dealer, took over the running of the dealership in west Dublin on Monday, with staff training taking place over the weekend.

General manager Seán Madigan said that all 69 jobs were safe at the moment. “We are still reviewing the business . . . We may even look to recruit,” he said.

McCormick Macnaughton, which has been in business for more than 60 years, had been the country’s main dealer in the machinery brand, but ran into financial difficulty earlier this year. As well as being appointed as the Caterpillar dealer for the Republic, Finning has acquired assets from McCormick Macnaughton for €2.7 million. This includes equipment and specialist tools but not premises.

While Finning is operating from the company’s recently completed office complex at Aerodrome Business Park, Mr Madigan said the premises would not be the company’s long-term home.

Finning’s takeover of the Caterpillar business comes after the company took over McCormick Macnaughton’s Northern Ireland Caterpillar dealership last week.

Mr Madigan said the company had no interest in the McCormick Macnaughton rental business in the Republic, but was focusing on the construction and power generator side of the business.

The Vancouver-based company has been a Caterpillar distributor since 1933, and has operations in western Canada, Chile, Argentina, Bolivia, Uruguay, Britain and now Ireland.

Ulster Bank appointed a receiver to three other companies controlled by the Macnaughton family two weeks ago in an effort to recover debts. The three companies are two rental companies, Mac Rental Ltd, Mac Rental Holdings and Mancasal Ltd, a property holding company. Assets belonging to these companies, and their operations in Dublin, Galway and Cork, will be sold at an auction on September 4th organised by Wilson Auctioneers.

McCormick Macnaughton is owned by businessman Malcolm Macnaughton and has been in existence for more than 60 years. It has branches in Dublin, Cork and Lisburn. Earlier this year, the company moved to a new head office complex at Aerodrome Business Park at Rathcoole, off the Naas Road in Dublin, moving from its well-known premises near the Red Cow roundabout.

The site was developed just as the property market was beginning to decline, while the company’s core business – the sale and rental of construction machinery – was seriously affected by the collapse in the construction sector.

The most recent accounts filed for the company show that the debts of McCormick Macnaughton are guaranteed by the group’s overall company, Ballymana Holdings, which made a loss of €13 million in 2008 – compared to a profit of €7 million the previous year, as turnover plummeted 35 per cent to €123 million.

The Irish Examiner reports that a massive €750 million regeneration project for one of the country’s most iconic industrial sites was unveiled last night with the promise of up to 1,200 construction jobs.

The redevelopment of the 24-acre Marina Commercial Park (MCP) in the heart of Cork city’s docklands is expected to create a further 5,000 jobs once completed.

It has the largest private river frontage in Cork city and has 500,000 square feet of buildings with 150 businesses on site, employing approximately 1,500 people.

MCP director Gerry Wycherley said he wants to establish a vibrant, socially inclusive community within the city’s south docklands, where people will live, work and enjoy their leisure time.

"We are confident that our proposed development will provide significant economic and employment benefit for the people of Cork into the future," he said.

The proposed development features:

* More than 800 apartments, providing homes for up to 2,230 people.

* A marina where they can park their boats.

* A range of community amenities.

* A visitor and science centre, the Ford Experience, which is expected to attract up to 300,000 visitors annually.

* A new central plaza to provide a hub for the community, including a creche and library.

City manager Joe Gavin said: "
This 24-acre site is at the heart of Cork’s docklands and the announcement is a crucial step in realising Cork City Council’s vision for the whole docklands area."

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Editor's Picks:

Chinese economy cools further  - - Industrial production and retail growth slacken; Most economists argue that China is witnessing a controlled slowing from the potential overheating of earlier in the year, rather than a new slump. “The key data point to a moderate slowdown rather than a sharp downturn,” said Brian Jackson at Royal Bank of Canada.

China banks told to account for loans - - Rmb2,300bn lending gone off balance sheet; The China Banking Regulatory Commission, China’s banking regulator, has told lenders they must put all loans sold or transferred to lightly regulated Chinese trust companies back on their books and stop using “informal securitisation” to evade regulatory requirements.

Fed downgrades recovery outlook - - Monetary policy bias shifts toward easing; The move signals a significant shift in thinking at the Fed, which only a few months ago was tilting towards tightening monetary policy to fend off inflation as the economic recovery gathered strength.

No evidence of Toyota throttle faults  -- Details point to driver error; A preliminary US government investigation has found no evidence of defects in Toyota’s electronic throttle control systems, pointing instead to driver error as the main cause of accidents blamed on unintended acceleration.

Promoting exports full of risk for world economy - - Manufacturing lobbies seizing control of government policy would be unwise; A recent paper by three economists from the International Trade Commission, a federal agency, calculates that 39 per cent of the jobs supported by goods exports are actually in service companies. The authors’ conclusion seems to be that government export promotion will thus help create service-sector jobs. It might be more apposite to conclude that promoting efficiency in the domestic service sector is one of the best ways of boosting exports.

Farmers set to cash in on grain shortage - - High prices are set to boost hard-pressed sector although many will miss out on a significant portion of the possible gains, having forward sold their crops in a hedge against weak prices

Right to demand time off for training under threat - - UK workers’ right to demand time off for training could be scrapped as part of a government review into red tape. John Hayes, the skills minister, will launch a five-week consultation.

Heatwave hits Russian growth forecast - - Russia has begun counting the economic toll of the worst heatwave since records began as economists warned that the wildfires and disastrous summer harvest could wipe 1 per cent off growth.

Zapatero considers easing austerity - - The prime minister raises the possibility of reversing some of the harsh spending cuts announced in May, which helped restore confidence in the country’s economy; “In 10 to 15 days we will be able to give some positive news in relation to restoring investment activity in infrastructure, which will affect most regions and would provide relief, an important boost, to construction companies,” he told a news conference in Mallorca after meeting King Juan Carlos at the monarch’s summer residence.

French industrial production falls - - France’s economic recovery appears to be flagging after industrial production plunged in June, in stark contrast to a resurgent Germany .

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Editor's Picks:

Colorado Race Could Reassure Obama and Democrats - - Senator Michael Bennet won a Democratic primary battle with backing from President Obama, while an insurgent beat the party favorite in the Republican Senate primary; 

Russian Fires Raise Fears of Radioactivity - - There is concern that fallout from the Chernobyl nuclear disaster 24 years ago could be carried in plumes. Above, Kustarevka, southeast of Moscow.

The Well-Grounded Senator - - The NYT in an editorial says when Jon Tester goes home to Montana during the Congressional recess, you’re more likely to find him on a tractor than out fund-raising for his next campaign; Congress used to be dominated by farmers, and it is unfortunate that Mr. Tester and Senator Charles Grassley of Iowa are the only ones left in the Senate who still actively work the fields.

Study Looks at Tax Cut Lapse for Rich - - Taxes would not rise for 98 percent of American households under the president’s plan; those earning $1 million or more would pay an average $100,000 more than they are now.

Fed Move on Debt Signals Concern About Economy  - -By buying government debt, the Fed is taking a step to maintain the large amount of money that it began pumping into the economy in 2007.

For Those With Jobs, a Recession With Benefits - - For the employed, wages are rising and lack of inflation is strengthening purchasing power; Something similar happened during the Great Depression, notes Bruce Judson of the Yale School of Management. Falling prices meant that workers who held their jobs received a surprisingly strong effective pay raise.



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