ECOFIN Update

European Council

The European Council met on 4^th February. The EU Heads of State and Government took the following decisions:

1. ‘Ambitious’ stress tests on all banks are to be completed by the European Banking Authority next month. These will be carried out in cooperation with the Irish supervisory authorities, the European Systemic Risk Board, the European Commission and the ECB.
2. Ireland, along with other Member States, will be required to ensure that State aid compliant plans are in place to deal with any bank that demonstrates vulnerabilities in the stress tests.
3. All Member States are required to submit in April (revised) national structural reform programmes (NRPs) as well as their stability or convergence programmes (budgetary policies).
4. Proposals for (limited) Treaty change to set up the European Stability Mechanism will be adopted at the next meeting of the European Council.

The Council also adopted a statement about the following steps as part of the global package to be finalised at the 24-25 March European Council:

1. Continued successful implementation of the existing programmes with Greece and Ireland.
2. Assessment by the Commission, in liaison with the ECB, of progress made in the euro area Member States in the implementation of measures taken to strengthen fiscal positions and growth prospects.
3. Concrete proposals by the Eurogroup on the strengthening of the EFSF so as to ensure the necessary effectiveness to provide adequate support. (Other than widening its scope, what is at stake is how to increase its effective lending capacity – as stated by the Commission in the Annual Growth Strategy.  For example, the direct purchase of distressed countries’ bonds in the primary market).

In addition, the European Council undertook to take further steps to ‘achieve a new quality of economic policy coordination in the euro area to improve competitiveness’; but did not elaborate on this proposition.

According to Colm McCarthy, from an Irish perspective, what matters most is whether this summit decides to address the bank insolvency problem on a pan-European basis or continues to expect individual Member States to recompense bank bondholders even where this runs the risk of sovereign default. [1]

ECOFIN

At its meeting on 18^th January, ECOFIN discussed an assessment by the Economic Policy Committee on the draft NRPs presented by all Member States and agreed that the difficulties (unspecified) by the EPC would be rectified.

Ministers will hold a policy debate on legislative proposals (draft Regulations) on economic governance at their next meeting (14-15 February) i.e.

-          The preventive and corrective arm of the Stability and Growth Pact;

-          The effective enforcement of budgetary surveillance in the euro area;

-          The prevention and correction of macroeconomic imbalances;

-          Enforcement measures to correct excessive macroeconomic imbalances in the euro area; and

-          Requirements for budgetary frameworks of Member States (draft Directive).

A further meeting of ECOFIN Ministers is scheduled for 15th March; ahead of the 24-15 March meeting of the European Council.

The EFSF and Eurostat

The main question for Eurostat is to decide, in the case that the Facility comes into operation, to who the debt raised should be attributed. The Member States benefitting from the loan will of course have a debt, but to who belongs the initial debt acquired by the Facility in order to make the loan? Eurostat in its decision of 27 January concludes that the EFSF is not an international financial institution and is not under the control of existing European institutions. It is therefore an accounting and treasury tool to enable the same conditions for access to borrowing for members of the euro area, acting exclusively on behalf of them and under their total control. The debt issued by the EFSF must therefore be reallocated to the public accounts of the States providing guarantees, in proportion to their share of the guarantees for each debt issuing operation.

G20

The G20 meeting of Finance Ministers and Governors takes place on 18-19 February. The EU position will be discussed at the 14-15 February meeting of ECOFIN Ministers.

European Banking Authority

The EBA will, as part of its regular cycle of risk assessments, initiate a separate thematic review of liquidity funding risks across the EU banking sector in the first quarter of 2011. The EBA will use this internal review to inform supervisory authorities about areas of vulnerability in relation to liquidity risk.

ECB

The ECB, which has provided some €96 billion in funding to support Ireland’s banks is resisting efforts to penalise bondholders. Its Executive Board member, Lorenzo Bini Smaghi, is reported to have said that any attempt by Ireland to impose losses on senior bondholders would trigger a run on the banks. [2] Comments last week from Jean-Claude Trichet confirmed that the ECB wants Ireland ‘to stick to the plan’. It is believed that the ECB’s fears about bank liquidity and not the scale of the Exchequer deficit triggered the arrival of the EU-IMF. [3] With the ECB giving at least tacit approval to the Irish Central Bank’s Emergency Lending Assistance of €51 billion to Irish Banks, and with one experienced commentator suggesting the Exchequer’s exposure is some €300 billion (and unsustainable), ‘this raises the obvious question of future default by the Irish State…and with a €250 billion gross exposure (to the ECB, EFSF, EFSM and IMF) this could bring the European house down if a future Irish Government reneged on its obligations.’[4]

IMF

Caroline Atkinson, Director of External Relations, said that the IMF would be open to discussing an adjustment to the agreed broad framework i.e. possible changes between the mix of spending cuts and taxation raising measures. [5] Due to the IMF’s rules it cannot change the interest payable on its loans as these are all calculated in the same manner. The IMF will publish its report on Ireland in a few weeks; this will be based on the technical missions to the country.

Bondholders

Former Finance Minister, Brian Lenihan, has warned holders of bank bonds that they will have to share the pain of rescuing the country’s financial sector. Fine Gael and Labour want to renegotiate the EU-IMF deal so that senior bondholders are less protected. There has been much speculation about how the new Government may use the powers available under the Credit Institutions (Stabilisation) Act, 2010, with one analyst (Hank Calenti of Societe Generale SA) suggesting a 90% discount on junior debt and an unspecified write off for senior bondholders. All parties accept – discounting election rhetoric – that Ireland cannot act unilaterally against senior bondholders, nor indeed can the terms of the EU-IMF deal (including the interest rate payable) be changed without the agreement of Eurozone Ministers. However, junior bondholders may be targeted as has happened with Anglo Irish’s subordinated bondholders last month.

Pact for Competitiveness

The Franco-German plan for closer coordination of tax, wage and pension policies at EU level was mentioned at the 4 February European Council but met with significant resistance, not just from Ireland (in relation to corporate taxation). A Commission source said that ‘there will be massive pushback from most countries and the expectation of this succeeding in minimal.’ The Alliance of Liberals and Democrats for Europe and the Party of European Socialists were also unimpressed by the initiative. Angela Merkel also wants debt-limitation rules set in national constitutions but this is quite a separate initiative to what is proposed in the (two-page) ‘Competitiveness Pact’. Given the discordant exchanges at the Summit, Ireland’s trenchant position on its 12.5% corporate tax rate (which is a general measure and not an approved scheme under State aid rules) may affect Ireland’s efforts to negotiate in other areas of the ECOFIN agenda. It is well possible that the Competitiveness Pact will become an intergovernmental agreement along the lines of the Schengen Agreement.

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[1] Interview, ‘Sunday Independent’, 6^th February 2011.

[2] Interview with RTE, 27^th January. It is reported that some €40 billion in deposits were withdrawn in December 2010.

[3] Article by Richard Curran, Sunday Business past, 6^th February 2011.

[4] Article by Damien Kibert, Sunday Times’, 6^th February 2011.

[5] Interview, ‘Irish Times’, 5 February 2011.

Dublin Chamber AGM – President’s Report

Bucking the trend, Dublin Chamber had a good year.

Over 12,500 members and guests attended some 115 events in the past 12 months; this was not only quite an achievement but testimony to the strength of Dublin Chamber. Members see the value of high quality, well-run events where genuine business opportunities exist and where sponsors are able to reach their target audience.

I did my best to get to as many of the Chamber’s events as possible and this provided me with a touchstone of the prevailing mood of the Dublin business community. During the year, the majority of companies – especially SMEs – continued to struggle, although with some notable exceptions. With the arrival of the EU/IMF delegations the mood darkened further. However, companies and owner managers are nothing if not resilient, as we know. This steely determination to stay in business has been a dominant theme throughout the year.

A good example of this determination has been the formation of the Business Owners Network, under the direction of David Wells (Acuity SOS IT Solutions). The Network consists of a group of business leaders, who exchange best practice, ideas and advice using the good offices of Dublin Chamber. It is now 70 strong and a valuable offering to owner/managers. Another success story has been our Green Economy Forum. With 150 active members, the Forum brings together businesses from across a variety of sectors. I wish to thank the Chair, Gerry Killen, for his able leadership of the Forum.

As President, I was part of a delegation this year to visit San Jose, Dublin’s twin city, led by the then Lord Mayor Cllr Emer Costello. Highlights included a visit to IBM’s research facility, Stanford University and meetings with local businesses, including John Hartnett of the Irish Technology Leaders’ Group. I also travelled with John McGrane (Ulster Bank), Chair of the Membership Taskforce, to meet with the Edinburgh Chamber where we shared experiences, in particular in relation to the delivery of membership services.

In October, we had a business study mission to Brussels, which I was particularly proud to lead as I spent the best part of 22 years of my career in the city. Attendees received insightful presentations on a range of topical issues, including: the economy, the reform of financial institutions, the EU’s views on Ireland, trade policy and corporate taxation. As part of the mission, I addressed the European Parliament of Entrepreneurs.

One of Dublin Chamber’s strengths that sets it apart from other chambers in the Dublin City Region is its policy work. In the past year, the Chamber published significant submissions on local government reform; the Dublin City Development Plan; the Regional Planning Guidelines; various T21 projects; Budget 2011; the Government’s Bill for a directly elected mayor; the supply of credit to SMEs and many other issues. We met with the Taoiseach, the Ministers for Finance, Environment, Heritage and Local Government, Communications, Energy and Natural Resources, and Transport during the year. We also met with the Fine Gael front bench, individual TDs across many parties, and senior officials in a number of Government departments and local authorities. While we may not have been successful on every front, the Chamber influenced the shape of the Dublin mayoral legislation, the City Development Plan, and the retention and extension of the Business Expansion Scheme in Budget 2011. Council members Michele Connolly (KPMG), Mike Jones (BAM Construction), Derry Gray (BDO), Ciaran Ennis (IBM), Paul Hallam (PM Group) and Colm McDonnell (Deloitte) deserve special mention for their work and leadership on the Chamber’s policy agenda.

Aligned to our influencing agenda are the Chamber’s communications activities. The Chamber had significant media exposure with continued growth in the quantity and quality of our coverage. I am pleased with the development of the Chamber’s many publications this year, including Business Ireland and Dublin Business, the City Channel project and our online fora such as the Chamber’s LinkedIn group, which has over 1150 members. My blog on my year as President has had over 6,000 visits and I just may continue writing! Dermot Breen (Tesco) is to be congratulated for his work in developing and supporting the delivery of the Chamber’s communications strategy.

The engine of the Chamber is the senior management team able led by Gina Quin. The team and indeed all Chamber staff are to be congratulated for continuing to deliver a wide range of relevant, respected and value for money services. Membership numbers have held up well. Returning a surplus in these uncertain times is no mean achievement. A special word of thanks therefore to Niall Feely (G4S), the Chamber’s Honorary Treasurer.

The Chamber’s Council and Executive met ten times each during the year in a wide variety of venues including the new Terminal 2, the Irish Times, KPMG, and the new offices of Byrne Wallace. The dominant theme at practically every meeting was the economy. We may not have reached consensus on every topic but we all agree that improving the competitive position of the Dublin City Region is an over-arching strategic aim. The feedback from these exchanges informed the Chamber’s position of key policy issues and will be invaluable as work begins on the 2011 General Election and Dublin Mayor manifestos.

Finally, I would like to expressly thank PJ Timmins (Cleary’s), last year’s President; Imelda Reynolds (Beauchamp Solicitors), incoming President; and Patrick Coveney (Greencore), Deputy Vice-President, for all their support and advice for what was for me one of the highlights of my career. Being President of Dublin Chamber was a wonderful privilege and I hope in whatever way I could I contributed to the best of my ability to making Dublin Chamber one of the most valued and respected business organisations in Ireland.

With my personal best wishes to all our members. 

Peter Brennan
President

Dublin Chamber Election Manifesto

All political parties contesting the election have been asked today to respond to a select number of pro-business measures proposed by the Dublin Chamber of Commerce to help existing enterprise survive and grow, to promote entrepreneurship and to create jobs.

The measures are included in the Chamber’s election manifesto which will be unveiled at tonight’s AGM Dinner.

These initiatives, which Dublin Chamber is asking each political party to commit to in the election campaign, include:

1. Reducing the costs faced by business by outlawing upward-only rent review clauses;
2. Reforming  the bankruptcy law to encourage entrepreneurship;
3. Pushing for the broadening of the Business Expansion Scheme with the European Commission; and
4. Requiring NAMA to release property into the market to stimulate economic activity.

 The Dublin Chamber has also called for each party to commit to root and branch reform of the public sector to ensure that Dublin and the national economy is served by effective and efficient government.  These reforms include:

-      Improving productivity in the management and operation of the public sector and the greater use of outsourcing;

-      Taking a pro-active approach to privatisation; and

-      Creating an executive Mayor for Dublin, who is responsible for the cost effective delivery of local services.

To assist the next Government in delivering on these proposals Dublin Chamber is proposing the establishment of an Enterprise Advisory Council, made up of leading business people, to offer Government practical advice on public policies and projects which will lead to the development of an enterprise-focused Programme for Government.  

 The Chamber has also called for a commitment from the next Government to invest in key infrastructure projects to ensure that Dublin is an attractive and competitive location for business.  This includes the swift delivery of the DART underground and Metro North, sustained investment in next generation broadband, a second run way at Dublin airport, an upgraded water distribution network, a waste to energy facility in Poolbeg and the delivery of the Grangegorman Campus.

The Fitzpatrick Tapes

This book is a ‘must read’ as it provides a good (and well-written) overview of the dramatic and at times traumatic events of the past years. It is a major contribution to our understanding of the key events, not least because it is based on the views of one of the many players involved in the demise of the Irish banking sector, but on the additional primary and secondary research material provided.

Reading it made me a bit angry about the whole crisis for the first time. While implied throughout, it jumps off the page that Ministers for Finance and their most senior officials knew what was going on but failed to act decisively for reasons that will soon emerge. Maybe it is unfair, but subsequent decisions not to provide vital information about the Government’s prior knowledge can but lead one to suspect that we were deceived and opponents to the bank guarantee have just reason to raise fundamental questions about competence.

The sooner the DPP takes his decisions on the files before him the better. No doubt much emphasis will be attached to the Government’s ‘green jersey’ policy; but policy direction cannot override the law. Crucially, did certain officials effectively consent to alleged criminal offences and if they did what are the consequences?  Where do professional advisors fit into the equation?

More importantly, the results (however preliminary) of the ‘public’ enquiry into the banking crisis should not be delayed any further. It is imperative that the next Oireachtas call witnesses and get to the bottom of what is clearly a shameful series of events and poor decision-making. This truth commission must root out what happened – warts and all – so that we can begin the process of restoring Ireland’s tattered reputation. The last thing we need after the next election is a series of new debilitating findings which should have been put into the public arena many months ago.

The account of the call from Bank of Ireland’s chairman and correspondence from AIB’s chairman to Sean Fitzpatrick after he did his Marion RTE interview is revealing to the extent that if – following a clear Government instruction – they agreed to provide €10bn in emergency funding to address Anglo’s immediate liquidity problem, why did the Government push the nuclear button and hock the Irish taxpayer for the costs of the banks’ collective bail outs. This cash injection should have given the Minister for Finance time to do what his officials wanted; to nationalise Anglo. A side bar issue is Sean Fitzpatrick’s amazing claim that he knew nothing about this credit line.

Acknowledging that the book reflects one side of the story, I came away with several impressions.

It beggars belief that the Department and Minister(s) for Finance allowed the situation to develop to the point where a blanket State guarantee was provided. There were clear signals and information sitting on the files of the Central Bank and Financial Regulator that were ignored, either by choice or perhaps as a result of incompetence. The book cites numerous instances of informal contacts with all the banks in the months prior to what, on reflection, was a catastrophic decision for the Irish economy.

The role that Sean Quinn played, if the book’s allegations are confirmed, is truly is shocking. Having amassed by stealth an amazing 28% of Anglo’s equity, the bank’s executives faced an impossible task to find buyers for shares that were inflated because of his CFD purchases. It is a moot point if Quinn had not been so greedy Anglo would not have had to deal with the Maple 10 and indeed could have focused more management time and effort on addressing the loss of confidence which undermined its performance. It is arguable that once the hedge funds that were aiding and abetting Sean Quinn discovered the extent of his punt they did what they are best at; making money at someone else’s cost. The Sean Quinn factor has not to date been highlighted; the book will bring his role more into the forefront.

Dithering at political level, incompetence, dubious transactions, apparent lapses of accounting and auditing standards and a systemic failure of regulation all contributed to the crisis. In this respect, Sean Fitzpatrick points his finger at many individuals and professional firms who, unlike himself, have thus far not been subject to the levels of public abuse and humiliation he has encountered.

If the evidence as presented in the book is correct, it is also astonishing that Anglo’s public sector directors – in particular its chairman – carried on with the sham that a ‘good bank’ could ever emerge. On the other hand, the absence of a clear policy about Anglo’s future from the Minister for Finance in the weeks following the decision taken on the blanket State guarantee served to perpetuate a lack of confidence in the entire banking system with the unfortunate result that the Government now owns a majority of the country’s banks.

Greed fuelled the property splurge; and the book provide ample incidents where investments were made on a whim where the normal prudent approach of due diligence was ignored. Sean Fitzpatrick seeks to make the case that he was one of the players that suffered the most; but the litany of his own bad investments is testimony to the then prevailing culture that many investors were untouchables.

The available evidence of a pending shock to the banking system was almost universally glossed over by those who were paid to know better. 

Tom Lyons and Brian Carey have done the State some service. The fact that their book was published before the DPP acted and the ‘public’ banking enquiry was published means that this reference work will be much quoted in the coming months.