Thursday, September 23, 2010

Ireland Faces Double Dip

Ireland Faces Double Dip, Mulls Restructuring Of Junior Bank Debt

Irish borrowing costs have surged to a post-EMU record after Ireland's recovery buckled over the summer and Dublin said creditors of Anglo Irish Bank may be asked to "share" losses, a warning to bondholders that the dam may at last be breaking on debt restructuring in the eurozone.
By Ambrose Evans-Pritchard | 23 September 2010

Brian Lenihan, the finance minister, sent shivers through debt markets by refusing to rule out a haircut for holders of Anglo's €2.4bn subordinated debt Photo: PA

The Irish economy contracted at a 1.2% rate in the second quarter, making Ireland the first country since the Great Recession to face a double-dip downturn. The setback is blow for hopes that Ireland can slowly grow its way out of debt, and may renew concerns that fiscal austerity without other forms of relief risks tipping the economy into a self-reinforcing spiral. Ireland has been praised for grasping the nettle early in its debt crisis with public sector wage cuts of 13%, leading the way for other eurozone debtors in trouble. But the reward for good behaviour has yet to come.

Otmar Issing, a founder of the European Central Bank, told a Berlin forum that the risk of a populist backlash against austerity is growing. "I think it's a big challenge for responsible parties in the middle of the spectrum to explain to people why these hardships are necessary," he said. Dr Issing said it would be "suicide" for any country to leave the euro, but it could happen anyway if a state finds itself "in such a disastrous situation that extreme parties get a majority". A recent poll by the German Marshall Fund found that 55% of EU citizens now think the euro is a "bad thing".

The Irish upset came as the PMI purchasing managers index for eurozone fell sharply in August. Manufacturing orders fell to the lowest in 14 months. The German PMI fell to an eight-month low of 54.8, a sign that Germany's mini-boom is losing steam. "This data has marked slowdown written all over it," said Martin van Vliet from ING.

Spreads on Ireland's 10-year bonds have risen to 405 basis points. Gavan Nolan from Markit said credit default swaps measuring bond risks on Irish banks are nearing the levels of Icelandic banks shortly before they defaulted two years ago, reaching 955 for Anglo Irish (senior debt), 615 for Allied Irish and 530 for Bank of Ireland. Brian Lenihan, the finance minister, sent shivers through debt markets by refusing to rule out a haircut for holders of Anglo's €2.4bn subordinated debt during a hearing of the Dail's finance committee.

An Irish official told The Daily Telegraph that Dublin will "explore the appropriate burden-sharing arrangements" over coming weeks as it fleshes out its plan to break up the nationalised bank. Anglo Irish may ultimately cost Irish taxpayers as much as €25bn. "This is not just an Irish concern," said Gary Jenkins from Evolution Securities.

"Politicians across Europe want to share some of the pain of the financial crisis with bondholders, and that will force creditors to crystalise losses. The markets are waking up to the restructuring risk. "Investors took extra risk to gain extra yield from subordinated debt, so this fair enough. However, we still have a bank sector on life support, and if they push this too far it will drive up borrowing costs for banks."
Ireland is extending its bank guarantee scheme for another three months, but "sub-debt" will not be covered. Dublin said this was done to bring the country in line with EU guidelines. Bank of Ireland has €5.29bn of such debt, and AIB has €4.4bn.

Ireland has reached a delicate juncture in its recovery strategy. Economic contraction has eaten into tax revenues, causing the budget deficit to remain stubbornly high at 12% of GDP this year— or about 20% if the bank bail-out is included. House prices have fallen 35%. The more they drop, the more they damage banks.

Mr Lenihan is mulling further spending cuts beyond the extra €3bn already in the pipeline. He has vowed to meet a deficit target of 3% by 2014. Slackening would "denude this country of any credibility in world markets", he said.

Julian Callow of Barclays Capital said Ireland needs negative interest rates of -9% under the 'Taylor Rule' on output gaps, while Austria needs +2% and Germany +1.3%— a divergence that exposes the headache facing the ECB as it runs a one-size fits-all policy for states with disparate labour laws and housing markets. He said the gap between EMU states had grown wider over the past two years. The 'self-correcting' mechanism is not functioning.

Mr Callow said Ireland's nominal GDP has contracted by 18% since the peak. This is partly due to deflation, which has helped the country claw back competitiveness lost in the bubble. But deflation is double-edged. Debt contracts are fixed in nominal euros, so the country risks a classic debt-deflation trap as the real burden of interest payments keeps rising.

Mr Callow said Ireland has a "get out of jail free card" in the form of dynamic exports— pharma, IT and services— but needs a "much weaker euro" to play that card. The euro surge against the dollar and sterling could hardly have come at a worse time.


French Strikes Challenge Sarkozy On Pension Reform

By Brian Love | 23 September 2010

PARIS (Reuters)— Flights and train services were halted, schools were disrupted and a leading newspaper failed to appear on the streets in France on Thursday as workers staged their second 24-hour strike against unpopular pension reforms. Hundreds of thousands took to the streets across the country to march against President Nicolas Sarkozy's plan to raise the retirement age to 62 from 60. Unions said that up to 3 million had marched while police said the crowds numbered 997,000.

The union figure was slightly larger than at the last demonstrations on September 7. The police figure was slightly lower. Airlines canceled between 40 and 50 percent of flights and railways reduced intercity services by half. Reuters TV correspondents saw some scuffles between police and protestors near the Paris headquarters of the French employers' federation, Medef.

Unions hoped the turnout would oblige the government to back down over the flagship reform of Sarkozy's five-year term, which would raise the minimum legal retirement age to 62 from 60 and the age at which people can retire on a full pension to 67 from 65. "If the government doesn't alter its intransigent position, it will obviously be our duty and responsibility as unions to envisage further initiatives," said Bernard Thibault, leader of the country's CGT union. A partial strike disrupted programs at the public radio stations France Info and France Inter and the printed version of the afternoon Le Monde newspaper did not appear.

No Surrender

The government says the legislation is essential to erase a growing deficit in the pay-as-you-go pension system, curb rising public debt and preserve France's AAA credit rating, which enables it to borrow at the lowest financial market rates. Labour Minister Eric Woerth, in charge of steering the bill through parliament, promised to press on regardless. "There is a clear deceleration in the protest movement," he said on France 2 television, adding: "The reform will be voted and it will be applied."

The unrest mirrors action elsewhere in Europe as indebted governments cut spending, notably Greece and Spain where more protests loom in the next two weeks in response to some of the harshest austerity measures in the euro zone. In Greece, about 6,000 protesters marched to parliament late on Thursday beating drums and holding banners which read: "No sacrifice for plutocracy" and "Cheap power for everyone". The peaceful demonstration was organized by Communist group PAME against planned increases in power tariffs, heating oil prices and VAT, as the country struggles with its worst economic recession in decades.

French unions and the left-wing opposition say the plans to raise the retirement age to 62 by 2018, raise civil servants' contributions to private sector levels and make people work longer for a full pension are 'unjust'. They will be harshest for those who start work young or do physically grueling jobs, and for women who take career breaks to have children and will have to work till 67 to qualify for full pensions, unions say. The lower house of parliament approved the bill last week but it still has to go through the Senate, which is due to debate the measure next month. The ruling center-right parties have a majority in the upper house, but some conservative senators have said they will seek to amend the bill.

The unions meet on Friday to decide what to do next, with some such as Force Ouvriere and the radical Sud Rail pressing for rolling strikes, which the larger unions have yet to decide whether they will support. It remains to be seen whether workers will sacrifice more days' pay to test a government which appears resolute. Sarkozy has made the pension reform a central part of his legacy. He is widely expected to seek re-election in 2012. To back down would leave his reform in tatters.



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