The Irish Economy

Today’s media coverage of the Bank of Ireland share issuance contained a number of inaccuracies, which to be fair, probably isn’t too surprising given the complexities of the issues.

On RTE’s Drivetime show, its reporter said that the share issuance occurred because the European Commission was preventing banks from paying dividends on the preference shares. Technically, this isn’t correct. The Commission is preventing banks from paying coupons on subordinated bonds. These bonds, in turn, have dividend stopper clauses and it is these clauses that prevented the payment of the cash dividends.

This is perhaps a technical distinction and it may be difficult to get across the true picture in a short space of time. More misleadingly, however, when I appeared on The Last Word today, I heard Fianna Fail TD Frank Fahey state that the Commission had merely put a hold on cash dividend payments to the government while it is assessing BoI and AIB’s restructuring plans. Fahey thus asserted that in a few months time, AIB’s business plan would have been approved and the government would be receiving the cash dividend from AIB in May.

However, as I noted last week, the coupon stopper is in place “to prevent the reduction of own funds by financial institutions which are still reliant on State aid to fulfil regulatory capital requirements.” It seems likely that AIB will still be reliant on state support in May so by that reasoning the coupon stopper is likely to still be in place.

I’ve been a little surprised that there has been no coverage of the fact that the shares were paid out despite the NTMA CEO John Corrigan and the Minister for Finance both stating in public last week that they could wait to collect the cash dividend. It appears, however, that Bank of Ireland’s own bylaws required it to pay out the shares on the deadline day (see this report by the Independent’s Emmet Oliver). It seems a little strange that Mister Corrigan and the Minister were not aware that the shares were going to be issued.

Governor Honohan’s characterisation of the whole affair as “untidy” seems about right (comments reported on the Six-One TV news). He is, of course, also correct that this payment is small beer compared with the amount of recapitalisation that the banks are going to need after the NAMA transfers. With AIB transferring €24 billion to NAMA, and BoI transferring €15.5 and mooted discounts of about a third, recapitalisation requirements will be a lot more than €250 million. But the fact that €250 million acquires 15.7% of BoI tells us that a far more serious dilution of ownership is on its way.

It is a truth universally acknowledged, that the purpose of blogs is to provide free advertising for a blogger’s own books. Let me buck the trend then, by giving a plug to Cormac’s latest offering, a great example of the power of economics (and history) to illuminate the human condition. I discussed it on last Saturday’s Off the Shelf, which you can download here.

The profile article is here.

You can read the latest speech from Governor Honohan here.

The media have picked up an old paper, which was summarised in a recent report.

The Irish Independent got it right: Long-distance commuters are hit hardest by the carbon tax (no surprise there). The Irish Examiner somehow turns this into “rural Ireland”. The paper clearly shows, though, that the tax incidence is lowest in the city centres, increases in the commuter belt, and falls again in the “deep countryside”.

Today’s IT carries an article by Brian Lucey on recent banking developments. You can read it here.

Wolfgang Munchau of the FT says no (at least for the euro area): you can read his article here.

Despite NTMA chief John Corrigan’s position last week that the state expected to receive its cash dividend of €250 million from Bank of Ireland at some point soon and so would not be getting ordinary shares in lieu, the Bank has today announced that they will be issuing ordinary shares for this amount to the government on Monday February 22. Announcement here. The Department of Finance response to is here. Hat tip to commenter Frank Galton.

A couple of new papers from the IIIS may be of interest:

Philip R. Lane, Trinity College Dublin and CEPR
Gian Maria Milesi-Ferretti, International Monetary Fund, Research Department and CEPR

IIIS Discussion Paper No. 316

Abstract: We document and assess the role of small financial centers in the international financial system using a newly-assembled dataset. We present estimates of the foreign asset and liability positions for a number of the most important small financial centers, and place these into context by calculating the importance of these locations in the global aggregate of crossborder investment positions. We also report data on bilateral cross-border investment patterns, highlighting which countries engage in financial trade with small financial centers.

Patrick Honohan and Gavin Murphy
Institute for International Integration Studies, Trinity College Dublin

IIIS Discussion Paper No. 317

Abstract

Ireland had been considering a break in the long-standing currency link with sterling for some time when the ideal opportunity of a new exchange rate regime – potentially retaining the sterling link while stabilizing other exchange rates – seemed to offer itself in the form of the “zone of monetary stability in Europe” proposed by France and Germany in April 1978. Based on newly released archives, this paper reviews the evolving attitude of Irish officials and the Irish Government over the following months as the decision gradually shifted to one of breaking the sterling link and rejoining what was little more than an expanded “Snake” arrangement; the UK having decided to stay out. While financial issues were to the fore in the discussions, the final decision to join was based on a strategic vision that Ireland’s economic and political future lay with Europe rather than with the former colonial power.

This topic has found its way onto another thread, and given that it has occupied lots of newspaper space and airtime over the last few days it is probably useful to discuss it here in terms of the economic issues. This has been a bit like a tennis match with the ball going back and forth for some time so it is hard to keep track of all the points.

On the one side we have Michael O’Leary who claims he wants to (re)create 300 jobs, but needs Hangar 6. On the other side we have Mary Coughlan and the DAA who say Hangar 6 is not available, as Aer Lingus has a lease on it.

While Michael O’Leary appears happy for other airports to build a facility for him, he does not seem to want the DAA or, given that he appears to prefers not to deal with them, the IDA to build a new hangar for him at Dublin airport. It would appear that the reason for this is cost - he claimed on radio that hangar 6 would be available at a low cost. No doubt Aer Lingus is also getting it at a low cost. In the debate some have argued that Ryanair is pursuing a different agenda - to open Hangar 6 as a terminal. Ryanair say they would be happy to sign a legal agreement preventing them from doing so. So what is this all about??

In a letter to the Irish Times the chairman of Aer Lingus, Colm Barrignton, makes the point that hangar 6 is the only hangar at Dublin airport capable of accommodating wide bodied planes, and that it is extensively used. Could the ability to accommodate wide bodied planes be the key to this scrap? At the moment Ryanair do not have any such aircraft, but might Ryanair have plans to get into the medium- and long-haul business? Aquiring hangar 6 would allow them to build a base in Dublin while at the same time discommoding Aer Lingus, which would be a competitor in that market?