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News : Irish Last Updated: Apr 4, 2013 - 1:37 PM

Thursday Newspaper Review - Irish Business News and International Stories - - April 04, 2013
By Finfacts Team
Apr 4, 2013 - 11:58 AM

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The Irish Independent reports that the IMF has launched a blistering attack on EU leaders for failing to deliver on their promise of a bank debt deal for Ireland.

The latest IMF review of Ireland's progress under the bailout set out a stark vision of a lost decade before families get back to pre-crash living standards.

Ireland is doing enough to get out of the bailout by the end of the year, but risks falling back into a new bailout unless Europe helps ease the bank debt burden, the International Monetary Fund warns.

Many experts saw the report as a warning to the EU and European Central Bank that both need to do a lot more to help Ireland out of its excruciatingly heavy debt.

The Government is already meeting the IMF's call for extra judges to speed up home repossessions and to deal with the unfolding mortgage crisis.

But the international lender also wants tougher laws, which would see quick repossessions where borrowers have not paid any substantial part of their mortgage or agreed to a plan of repayment.

And what will really cause alarm is the IMF's stark warning about the risks faced by the country if it does not get further help from Europe.

It said that the recent deal to stretch out the repayment of Anglo debt had provided a significant reduction in borrowing needs over the next 10 years -- but our national debt of €192bn had been "little affected". It said that European leaders needed to deliver on their commitment to break the link between the State and its banking debts to "assure the durability of Ireland's exit" from the bailout programme.

"Even with continued strong policy implementation, a durable exit (from the bailout) cannot be assured without timely and forceful delivery of European pledges," it said.

The IMF called for the new eurozone bailout fund to be used to be used to deal with the €32bn of taxpayers' money that went into AIB, Bank of Ireland and Permanent TSB.

It said this would pump much-needed cash back into state coffers and make it easier for the banks to access cheap money to support lending. But this is being strongly resisted by Germany, the Netherlands, Finland and other eurozone states.

The IMF staff report said Irish households had suffered the largest fall in wealth in the EU due to the 50pc drop in house prices. And it went on to paint a grim picture of the current situation.

"Household debt remains high, curtailing consumption, and financial distress affects many households," it said.

It warned that on current growth rates, it would take a further 10 years for living standards to recover to the levels last seen in the boom in 2006.

The IMF pointed out the predicted recovery date of 2024 for Ireland was slower than other European countries which had gone through similar "boom bust" cycles. Sweden recovered after five years and Finland was back after seven, following economic crashes in the late 1980s.

Although there was little disagreement on the call for an EU bank debt deal, government sources played down the report, saying it was not the same as a formal bailout review.

A spokesman said Finance Minister Michael Noonan had repeatedly referred to making a "sustainable" exit from the bailout. "It is fair to say we are focused on making a sustainable exit from the programme. We are working with the troika to see what supports are there," the spokesman said.

Coalition sources said there were a number of concessions required from all three of the bailout partners – the EU, ECB and IMF itself – including: breaking the link between bank and sovereign debt; maturity and repayment of bailout loans from the lenders; and access to the new EU bailout fund.


But the IMF also sounded warnings about unemployment and the process of re-training.

It said the biggest danger in the country's "acute unemployment crisis" was the fact that over 60pc of people on the live register had now been out of work for a year and 30pc for over two years.

When the unemployed were added to those working fewer hours than they wanted, the total was a "staggering" 23pc of the workforce, it said.

The IMF has also complained abut the "slow progress" in dealing with the 123,000 people with mortgage arrears of more than 90 days.

The IMF also ruled out any general mortgage debt writedowns as "unaffordable and ill-targeted", saying that 84pc were still paying their mortgages.

The Irish Independent also reports that the Central Bank here holds €115.4bn of Irish government bonds, after its holdings of the debt surged by 28pc in February, following the liquidation of the former Anglo Irish Bank.

The amount of long-term bonds being held by the bank on Dame Street increased from €90.3bn in January. The increase will be closely watched by European Central Bank officials, who will monitor the debt pile to make sure the Central Bank isn't being used to bankroll government spending.

The Dail passed legislation to liquidate the Irish Bank Resolution Corporation (IBRC) during a hasty late-night session in early February under a plan to deal with the massive annual repayments due under the controversial promissory-note deal.

With IBRC in liquidation, the Central Bank became the economic owner of the promissory notes.

They were replaced by the Government with a series of longer-term, floating-rate bonds to the value of €25bn and with maturities of up to 40 years.

The holdings will be closely watched by ECB president Mario Draghi, who has never given overt approval for the promissory-note swap.

At an ECB press conference after the IBRC was liquidated, Mr Draghi cryptically said that the governing council had taken note of it – ECB speak to confirm its awareness of the deal.

Promissory note

The role of the ECB in the deal was to ensure that any agreement would not constitute monetary financing.

The ECB president told MEPs that the deal would be examined later in the year in order to ensure that it was in conformity with article 123 of the ECB's treaty, which blocks the bank from engaging in monetary financing.

And he said the Central Bank's disposal policy for the bonds was crucial.

Under the Frankfurt bank's rules, monetary financing is strictly prohibited for any member state. The ECB will therefore be keeping a close watch to ensure that the Central Bank disposes of the bonds as planned.

The Government has said that €500m worth will be sold by the end of next year, with another €500m sold between 2015 and 2018, a further €1bn between 2019 and 2023 and €2bn per year after 2024.

Just days after the promissory note deal, Jens Weidmann, the head of the German Bundesbank and a member of the ECB's Governing Council, warned that it was dangerously close to breaking EU monetary rules.

He appeared to cast doubt over the agreement, stating the ECB had to make sure the transaction conforms with the Euro bloc's rules

The Department of Finance stressed that the deal is solid.

The Irish Times reports that Ireland’s banks by the European Stability Mechanism (ESM), Europe’s permanent bank bailout fund, “could play an invaluable role” in the recovery of the economy, according to a new report from the International Monetary Fund.

The ninth IMF review of Ireland’s bailout programme highlights the risks facing Ireland’s economic recovery, despite acknowledging solid progress achieved to date.

The report warned that the prospects for Irish economic recovery remain highly uncertain over the medium term. Because of this, Ireland cannot be assured of staying free of dependence on the EU-IMF loans, it said.

The Government has achieved strong policy implementation of the bailout programme so far, the report stated, and the fund acknowledged the State’s success in raising money from private investors in the bond market.

But the report also noted high public and private debt and problems in the banking sector, which include low levels of bank lending as significant obstacles to recovery.

“Continued weak growth would likely erode confidence and potentially undermine market access as a recovery is critical to putting Ireland’s debt on a downward path.”

Leaked details
The high level of risk was also reflected in the European Commission

’s parallel quarterly report, leaked details of which were published by the Irish Times yesterday.

The IMF report echoes the EU Commission’s which criticised overspending on health expenditure and warned of problems associated with high levels of unemployment and rising numbers of non-performing loans.

Referring to inadequate progress by banks in tackling problem mortgages, the IMF argued that a sharp improvement is needed in dealing with non-performing loans.

It says if the economy were to grow by half a per cent in coming years, “Ireland’s debt ratio would continue to rise, reaching some 134 per cent of gross domestic product by 2018. Debt levels above 120 per cent of GDP are viewed by economists as putting a government at risk of default. Moreover, higher loan losses associated with rising unemployment and weaker asset prices would generate new capital needs once banks’ buffers are exhausted, which could further raise debt ratios in the medium term.

Positive outcome

“Were such a scenario to arise, Ireland’s ability to rely fully on the market to cover its large-post programme financing needs could easily become strained.”

The report suggested those risks could be mitigated if support was received from the ESM to recapitalise Irish banks retrospectively.

The report rules out general debt relief for distressed mortgages on the basis it would be “unaffordable and ill-targeted as 84 per cent of mortgages [of principal homes] are not in arrears even though many of these are in negative equity”.

When the numbers of unemployed people are added to involuntary part-time workers and those in marginal jobs, the rate of unemployment and underemployment rises to a “staggering 23 per cent”.

Separate figures published by the Department of Finance show tax receipts and public spending in the first three months of the year were in line with targets in last December’s budget. A continued narrowing of the deficit ensured the quarterly EU-IMF budgetary target was also met.

The Irish Times also reports that the Irish services sector expanded in march, but the rate of growth slowed for the second month in a row.

The NCB Services Purchasing Managers' Index recorded a reading of 52.3 last month, with growth in new exports fuelling an overall rise in the index measuring new business. That was the eighth consecutive increase for new business, and the 20th for new exports.

Some 26 per cent of firms reported a rise in overall business activity over the month; only 18 per cent said it fell.

The growth in new business also had a knock on effect for employment, which registered a reading of 53.4 for the month.

But higher fuel costs continued to put pressure on service providers,pushing up input prices despite competition keeping average prices charged lower. This had a negative impact on profitability.

"In all, the key positive from this morning's report is the continued strength in New Export Business," said NCB chief economist Philip O'Sullivan. "Services exports were an important contributor to Irish economic growth last year, with total export growth of 2.9 per cent driven entirely by strength in the services sector. Indeed, in 2012, Ireland's services exports exceeded goods exports for the first time on record."

He noted that the forward looking index measuring expectations and business sentiment reflected "solid optimism", with new export business to remain a key source of growth over the coming year.

The Irish Examiner reports that the probe — of nearly 2,300 companies in the motor trade — undertaken by business intelligence provider, Vision-net, found that 33% were showing signs of business failure, with another 18% at medium risk of collapse. Almost half (49%) however were deemed to be at a low risk of failure.

 However, Alan Nolan, the director general of the Society of the Irish Motor Industry (SIMI) accused Vision-net of engaging in a cynical marketing exercise that could damage car retailers during an important sales period. 

“We are very concerned that this is a cynical marketing ploy to sell their company look-up service. This is a crucial sales period for the car industry, 70% of all car sales are in the first half of the year,” he said. 

Vision-net felt that its findings warranted a warning to motorists planning on buying a new car to check how the dealership is performing before purchasing. 
“This is important, because most dealerships give warranties, so the buyer should check whether the business is likely to still be there should they need to bring the car back for repairs. Equally, someone considering setting up a business in the motor trade should first research demand across the industry and check how others are performing,” according to Christine Cullen, managing director of Vision-net. 

However, Mr Nolan said: “This is just scare mongering to encourage people to use their service. The warranty is given by the manufacturer and if a dealership closes the warranty will be valid in any other dealer within the manufacturers network,” he said. 

Vision-net’s survey was published just a day after data from the SIMI showed a 14% year-on-year fall in new car sales during the first quarter of this year — with the Volkswagen Golf the best-selling model during the period but other popular marques like Renault, Toyota and Ford suffering the biggest losses. 

It also follows some recent high-profile closures across the industry, including the Bill Cullen Motor Group, Merlin Motor City, Appleyard Motors in Dublin and the EP Mooney Car Group.

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