Every new government deserves a modicum of goodwill, a bit of latitude in its first week. This new government, therefore, is hereby absolved from any election promises to build a new Ireland. Merely fixing up the old one will do for now.
Hitting the ground running, the coalition has thrown a new phrase into the vernacular — debt sustainability. It has been used in relation to the proposed renegotiation of the bailout, but could equally be applied to the biggest domestic political issue, alongside (often literally) unemployment: residential mortgage debt.
There are close parallels between Ireland’s sovereign/bank debt crisis and the one faced by distressed mortgage holders. In each case, the attention is the here and now.
Ireland has sought support from Brussels for lower bailout interest, but this fails to grapple with the central problem: the state is drowning in debt. Measures to help mortgage holders are similarly designed to ease the burden of repayment, and not address the actual quantum of money borrowed, the real problem.
A significant number of mortgage holders will never, ever be able to repay their debt. The banks are not restructuring mortgages, they are restructuring interest terms. As interest rates rise, the number in arrears will rise.
Advertisement
In each case, the debt levels appear unsustainable. Bank bondholders will not be burned. In relation to mortgage holders, debt forgiveness will not be entertained. The new government has committed to extending to two years the period before a house can be repossessed. The day of reckoning postponed further.
Moody’s, a ratings agency, said that it expects arrears in the Irish mortgage market to rise this year and “to stay at elevated levels for several years”.
Lenders will continue to “avoid recognising losses” by offering more loan modifications. This reflects “lenders’ and regulators’ limited appetite to enforce on highly delinquent loans”.
This new government will quickly find that the path of righteousness often leads straight into the mire that is our banking collapse.
New personal insolvency law must allow for a watering down of the current full recourse nature of Irish mortgages. This will have an effect on the Irish banks’ collateral and hence a financial hit on bank balance sheets.
Advertisement
Cutting the terrifying oversupply in the hotel sector, or altering upward-only rent reviews, will have financial ramifications for the National Asset Management Agency (Nama). More cost to the taxpayer.
There are no easy, quick fixes and none should be expected. These problems will be resolved over time. Within five years? There is no guarantee.
A racing certainty
Is Paddy Power the new Ryanair? The bookie is mimicking the low-cost airline not just in home-produced, irreverent advertising, but also in its penchant for picking fights on an international scale. Its Australian online subsidiary, SportsBet has launched a court case in Australia against plans to introduce a turnover tax to fund racing in New South Wales.
Sound familiar? Paddy Power has also been fighting a rearguard action here to prevent racing from getting its hands on taxes from online betting.
Advertisement
Moves to tax online betting here prompted Michael O’Leary-like threats to move abroad. Like Ryanair, Paddy Power is a highly successful dotcom. Last year, online betting accounted for 72% of profits. First out of the stalls with an iPhone app, mobile betting grew by an astonishing 310% to €110m.
Like Ryanair, Paddy Power has also shifted well away from its dependence on the Irish consumer. In 2004, international revenue accounted for 12% of profits; last year it accounted for 64%.
It is hard to find a negative. Its UK shops are in profit: it opened a record 31 last year and its marketing spend was a serious €6m.
This helped online customers in Britain, growing on average 28% a year up to 2010, to jump 56% last year. The company still only has “a low double-digit share” of online sports betting in the UK, leaving lots of headroom for growth.
Its deal to provide the online service to Pari Mutuel Urbain, France’s betting monopoly, added a further string to its bow.
Advertisement
In 10 years as a public firm, it has grown turnover from €363m to €3.8 billion and its average compounded earnings growth rate has been 27%. Forget the jokes. Like Ryanair, this is one serious business.
Paddy Kennedy, the chief executive, already has €9.4m worth of shares awaiting him in his long-term incentive plan (LTIP). He was awarded more than €3m worth of shares last year alone. In total, last year, the group set aside €14m for LTIP share purchases for its top execs.
That ain’t no joke either.
Not so special K Club
How much is the K Club worth? Michael Smurfit and Gerry Gannon, shareholders in the Kildare country club, probably could not bear to find out and so did not include an updated valuation in the company’s 2009 accounts.
Advertisement
For this, auditors KPMG issued an adverse opinion, a pretty severe rap on the knuckles.
The directors said that current market conditions “are not relevant to the value of the fixed assets” as they “do not intend to dispose them in the short term but retain them for a future date when market sentiment is more favourable”.
What a hoot. Bank loans of €55m on the property have been transferred to Nama. Last year the K Club lost €6.5m, and one would imagine that Nama reckons the place is worth anything between what it paid AIB and Irish Nationwide for the loans, which is unknown, and €55m.
Smurfit and Gannon purchased the K Club for €115m in June 2005. Turnover in the bling-bling days of 2006 was €22.3m. In 2009, sales fell to just €11.2m.
If Smurfit agrees to continue to fund losses, and buys out Gannon, a Nama client, the agency will probably roll over the debt for another year. But it will decide on its future.