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News : Irish Last Updated: Apr 5, 2013 - 11:45 AM

Friday Newspaper Review - - Irish Business News - - April 05, 2013
By Finfacts Team
Apr 5, 2013 - 9:57 AM

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The Irish Independent reports that under-pressure homeowners are in line for a major boost with a mortgage interest rate cut on the cards as soon as next month.

A new cut in European Central Bank rates would push them to a record low and mean those with tracker mortgages would see big monthly savings.

Over a year the savings would amount to €444 for someone on a €300,000 tracker.

And a new reduction in rates would pile pressure on banks to resist their stated aim of hiking variable rates again.

European Central Bank president Mario Draghi signalled the ECB stands ready to cut interest rates, warning that the economic downturn had now spread into parts of the 17-member eurozone that had not been affected up to now.

And there was no risk of inflation in the euro area, he said. Any threat of inflation would rule out a rate cut.

"In the coming weeks, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability," Mr Draghi said in Frankfurt.

Economist with Goodbody Stockbrokers Dermot O'Leary said: "The 'monitor very closely' phrase has been used in the past as a signal for a future rate cut.

Mr Draghi also mentioned that a rate cut was discussed.

"Another rate cut is now a strong possibility in May," he said.

And KBC Bank's Austin Hughes said the ECB had run out of options so was now set for a rate cut in May or June.

A further 0.25pc fall in the ECB's main lending rate would be a massive boost for the 375,000 homeowners with tracker mortgage rates. A cut would come at a time when property tax bills are popping through letterboxes.

Each 0.25pc reduction eases monthly repayments by €15 on every €100,000 of debt.

The average tracker rate is around 1.25pc above the ECB rate – around 2pc.

And banks would find it impossible to again push up variable rates. These rates can be moved by banks at will.

Some 300,000 homeowners have variable rates, with banks imposing a series of rate rises last year.

Before the ECB met yesterday, AIB boss David Duffy said his bank was looking at increasing variable rates again this year.

And last month Bank of Ireland would not rule out another variable rate rise.

Mortgage expert Karl Deeter said that an ECB rate cut with no change in variable rates would be as good as a rate rise for lenders.

This is because the cost of borrowing for banks would come down if the variable rate remained unchanged.


"But the banks would not be able to increase variable rates as there would be political pressure not to raise variable rates again. Any variable rate rise would be seen as unfair and would likely increase the default rate as some people would give up paying," he said.

The gap between variable and tracker rates is so great already that people with the same mortgages are paying up to €300 more a month because they have a variable rate.

Addressing a news conference after the ECB held rates at a record low 0.75pc, Mr Draghi said discussion at the monthly meeting had been extensive and the consensus was to hold fire on rates this month.

The ECB's main worry is that its low rates are not reaching households and firms in the eurozone periphery, such as Ireland, mainly because banks' funding costs in crisis-stricken countries are higher than those in the core countries, pushing up loan costs.

The Irish Independent also reports that public spending minister Brendan Howlin is making his most explicit warning to date to public sector workers that they face a flat-rate pay cut of 7pc if they reject the Croke Park II deal.

And Mr Howlin clearly says the savings will be made "unilaterally" through legislation if they cannot be achieved through agreement with unions.

Writing in today's Irish Independent, Mr Howlin appeals to public servants to "think about what is best for them and their families".

Targeting low- and middle-income workers, he specifically points out that there would be no core pay cuts for those on under ¿65,000 under the deal.

Mr Howlin says the reform measures on the table, including working extra hours, a reduction in staff numbers, and less use of agency workers, reduce the amount of cash required from public servants' pockets.

And he is quite clear rejection of the deal would cost workers even more.

"In the absence of these measures, a straight pay cut would require a greater ask to reach the same target. Public servants that under this agreement face a gross reduction in pay of, say 4pc, could potentially see that increase to 7pc in the absence of an agreement," he says.

Mr Howlin is making an eleventh-hour intervention in the debate on the plan as union members are currently voting on the proposal.

His comments come after a week of teacher union conferences where there was substantial opposition to the deal.

Mr Howlin admits the Government has been reluctant to get into a discussion about what will happen if the proposals are rejected as the ballots under way "require respect".

"But those casting their ballot cannot be misled on this core point. The €300m savings to the pay bill are in this year's budgetary arithmetic. Those savings will have to be made from the pay bill – the money simply isn't provided for. Similarly, the €1bn savings will have to be achieved by 2015. Those savings cannot be made in the context of the existing Croke Park agreement," he says.

"If they cannot be made within the confines of an agreement with the public service unions, they will have to be made unilaterally. This will require legislation. The precise nature of that legislation will be considered if that eventuality arises," he adds.

Mr Howlin said all unions recommending rejection feel singled out for unfair treatment.

"But by definition, not everybody can be unfairly targeted," he says.

Mr Howlin said the result of the talks was a compromise.

"And, like all compromises, there is something in it for everyone to feel unhappy about. But, now the first reaction is over, public servants need to think about what's best for them and their families," he says.

The Government appears to be appealing to low- and middle-income workers to back the deal to avoid the uncertainty of what happens if the new deal is rejected.

A majority of the membership of public sector unions are still expected to vote for the agreement.

Coalition sources are keen to emphasise the fairness of direct cuts to core pay only applying to those on over €65,000.

"The alternative to this deal could be a flat rate cut across the board. It's about the uncertainty of rejection. If you vote No, you don't know what the consequences are.

The Irish Times reports that more than 50 Irish addresses are believed to be linked to account holders in offshore secrecy jurisdictions, according to an investigation by the International Consortium of Investigative Journalists.

Initial inquiries indicate between 50 and 60 addresses in Ireland feature in documents which include the identities of thousands of wealthy account holders around the world.

All the addresses may not be directly linked to Irish individuals or businesses and could be registered to financial intermediaries, including directors, shareholders, secretaries and nominees holding addresses within the State.

The investigation has uncovered that government officials, their families and associates in Azerbaijan, Russia, Canada, Pakistan, the Philippines, Thailand, Canada, Mongolia and other countries have used a network of covert companies and bank accounts.

Complex offshore structures have been used to own mansions, yachts and other assets while giving account holders the benefits of anonymity and tax advantages.

McKinsey & Company former chief economist James S Henry estimated in a study that wealthy individuals have $21 to $32 trillion (€16 to €25 trillion) hidden in offshore havens, close to the size of the US and Japanese economies combined.

A number of high-profile account holders named as part of the investigation include a former Mongolian finance minister, the husband of a Canadian liberal senator and a number of prominent Thais, including the former wife of ousted prime minister Thaksin Shinawatra.

Quinn links

An early release of some of findings of the investigation by the Guardian last November traced British Virgin Island entities used in Russia by bankrupt property developer Seán Quinn.

Mr Quinn is linked to a number of properties in Russia and Ukraine.

The International Bank Resolution Company is currently seeking to recover as much as $500 million (€385) million in assets from Mr Quinn’s investments in both countries.

Hard drive

The documents analysed in the investigation were passed to ICIJ director Gerard Ryle on a hard drive containing more than 260 gigabytes of data with over two million emails.

The files contained the names of more than 122,000 companies, with almost 12,000 intermediaries, and were analysed using free text retrieval software.

Mr Ryle said, “This investigation lifts the curtain on the offshore system and provides a transparent look into the secret world of tax havens and the individuals and companies that use and benefit from them. We already knew how secret and inaccessible the offshore industry is, but we were surprised by how vast and far reaching it is. It draws its clients not only from the world’s super-wealthy, but also from everyday professionals from all around the world.”

The ICIJ along with dozens of journalists from a network of international media outlets, including the Guardian , BBC and the Washington Post , worked on analysing the files for 15 months.

Some of the findings include evidence that Denise Rich, the former wife of oil trader Marc Rich, had $144 million in a trust named The Dry Trust in the Cook Islands in April 2006.

A congressional investigation found Ms Rich helped raise millions of dollars for Democratic politicians and helped promote her ex-husband’s pardon over racketeering charges by then US president Clinton as he left office in 2001.

The Irish Times also reports that a final decision on the adjustment of the maturities of Ireland and Portugal’s bailout loans may not be taken at next week’s meeting of euro zone finance ministers in Dublin, despite assurances that the deal would be signed off in April.

EU sources have told The Irish Times a final decision on the plan, which the Government hopes will significantly ease Ireland’s debt burden, could be delayed.

Finance ministers agreed in principle last month to back the proposal, which was first mooted in January. The plan would involved the adjustment of the maturity of Ireland and Portugal's bailout loans, which are drawn from the EFSF and EFSM funds.

Ireland is hoping that a reprofiling of the loan maturities will help to lower its borrowing requirements, and ease its exit from the bailout.

The Troika and euro working group have been working on the detail of the plan over the last few weeks, but delays, including the impact of the Cypriot crisis, has meant that the technical detail of the plan is still being agreed, although the final agenda for next week’s meetings has yet to be decided.

The request to adjust the bailout loan maturities is a key strand of Ireland's bid to alleviate its debt burden, following agreement on the promissory note arrangement in March.

While there is no imminent deadline by which a deal must be done, there had been widespread expectation that a final announcement would be made on the deal at the informal meeting of finance ministers which is taking place in Dublin as part of the Irish presidency of the European Council.

Finance ministers of the 17 euro zone countries are scheduled to meet next Friday morning, followed by a meeting of all 27 EU finance ministers, which is expected to continue on Saturday.

Yesterday European Central Bank president Mario Draghi said that the use of the European Stability Mechanism to directly recapitalise Irish banks is a decision “exclusively” for the euro group of finance ministers. However, he said the central bank would "view positively", any measure that cuts the link between sovereigns and banks. Mr Draghi was speaking following the ECB's governing council meeting in Frankfurt.

His guarded comments come a day after the IMF said that the recapitalisation of Ireland's banks by the European Stability Mechanism (ESM) "could play an invaluable role" in the recovery of the Irish economy. The view puts the IMF at odds with its troika partners where resistance to the use of the ESM to directly recapitalise banks, and particularly legacy assets, is growing. Last month euro group head Jeroen Dijsselbloem raised the prospect last month that the ESM may not be used to directly recapitalise banks.
In his first press appearance since the Cyprus bailout crisis, ECB president Mario Draghi said the original decision to bail-in depositors under €100,000 as part of the Cypriot rescue package was "not smart."

"The ECB had presented a proposal where no bail in of insured depositors was foreseen. All the proposals by commission and IMF. had the same feature, " Mr Draghi told a newsconference in Frankfurt. "Then it started a prolonged negotiation, the outcome of which was what you saw. That was not smart, to say the least, and was quickly corrected the day after in a Eurogroup teleconference."

Mr Draghi stressed that the Cypriot bailout, which included an unprecedented move to bail-in uninsured depositors and senior bondholders, was not a template for future bailouts.

"Let me stress that Cyprus is no template , I am absolutely sure that the chairman of the group had been misunderstood," he said, referring to Dutch finance minister Jeroen Dijsselbloem who suggested in an interview that the Cypriot bailout could be used as a model for future rescue packages.

Rather than a "turning-point" in the euro crisis, the Cypriot crisis underlined the need for the introduction of a banking resolution regime, Mr Draghi said said, pointing out that draft plans by the European Commission to introduce a European-wide standard for shutting down banks were already in train, though he suggested that the introduction of such a scheme would be introduced earlier than anticipated. “We would like to see these rules enter into force not in 2019, 2018, but way way earlier, like 2015,” he said.

Progressing plans for a Europe-wide banking resolution and deposit insurance scheme are key priorities for the Irish presidency of the European Council during the second half of its presidency.

The ECB president also dismissed the notion of Cyprus leaving the euro zone as “hypothetical”, arguing that commentators underestimated the amount of political capital that has been invested in the euro area.

“What was wrong with Cyprus’s economy doesn't stop being wrong if they are outside the euro,” he said. “So the fiscal budget stabilisation, consolidation, the restructuring of the banking system would be needed anyway, whether you are in or out. To be out doesn’t preserve the country from the need for action.”

The European Central Bank yesterday left interest rates unchanged at 0.75 per cent, though Mr Draghi's assertion that the ECB stood “ready to act”, prompted expectation among analysts that an interest rate cut could be imminent as early as next month.

The Irish Examiner reports that the EU still has to decide what would happen to uninsured depositors in the event a bank collapsed.

Proposals for an EU banking union, which will have huge implications for each member state, are being put together by the European Commission and the ECB.

Officials from the Department of Finance and the Central Bank were before the Oireachtas Finance Committee yesterday to provide an update on banking union.

The aim is to ensure that any future banking collapse will not put taxpayers on the hook. The collapse of the Irish banking system eventually cost the State €64bn.

But there are a number of hugely contentious issues that still have to be agreed. Proposals for a Single Supervisory Mechanism (SSM) — under the direct control of the ECB — are close to being finalised. But negotiations are ongoing on how the resolution process would pan out.

As it stands, banks will have to hold a number of capital buffers under new guidelines. The SSM will have sweeping powers for a much more intrusive style of supervision with the hope that any bank facing potential difficulties will be caught at an early stage.

However, authorities still have to agree a framework on what to do if there is a gap between a bank’s assets and liabilities. Current proposals for a ‘bail in’ of creditors would see shareholders and subordinated bondholders get burned at the initial stages. But if there is still a hole in the capital base, the next step is causing divisions between different parties. In Ireland, depositors under €100k are covered by the deposit guarantee scheme. But depositors over €100k are on the same legal footing as senior bondholders. If an Irish bank collapsed the Government would decide whether depositors or bondholders would get burned.

Aidan Carrigan from the Department of Finance said proposals for an EU-wide resolution regime are scheduled to be in place by the end of June. It still has to be decided whether the ESM can be used to recapitalise beleaguered banks.

The Government has repeatedly called for the ESM to directly recapitalise the banking system.

There would have to be a centralised resolution agency for eurozone banks because many financial institutions had cross-border activities.

Besides an ESM and a resolution regime, the third prong of a banking union would be a common deposit insurance scheme.

The hope would be there would be a mutualisation of funds across the eurozone to cover this scheme, said Mr Carrigan.

Finance Committee chairman, Labour TD Ciaran Lynch, asked Mr Carrigan whether Bank of Ireland chief executive Richie Boucher’s 2012 salary and bonus unveiled last month has breached either EU or Department of Finance guidelines.

Mr Carrigan said the issue was outside his remit but he would supply an answer over the coming weeks.

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