The International Monetary Fund (IMF) is a rather useless outfit. Last week, it nudged the government and pointed out the great crack running through the foundations of the Irish economy and society: unsustainable mortgage debt.
Why, thank you. We had noticed.
The IMF suggested that we be “mindful of moral hazard” in developing “narrowly targeted” support measures to help vulnerable homeowners.
It then argued that the banks with their bolstered capital absorb the initial costs and the process “be aided” by a “more efficient and balanced personal insolvency regime”.
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This is all sound advice. From a practical point of view, however, it’s not much use.
The IMF should be telling this government to address the problem now and to frame a policy and legislative response before the end of the year.
If homeowners are “vulnerable” now, where will they be when interest rates actually start to rise or when the banks’ standstill period on repossession expires?
The IMF’s prognosis for the Irish economy is modest growth but stubbornly high unemployment. The most vulnerable homeowners are those who are without jobs. So this problem is not going to be solved simply by the passage of time.
A government task force has been set up to examine the problem. The report must highlight the scale of the issue: the number of those in arrears, the duration of default and, crucially, the effect of future interest-rate rises.
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It must also ascertain the scale of negative equity, which is a problem only in extreme cases. There must also be a rigorous analysis of the buy-to-let market.
It is not good enough to base policy on fragmented data or on the half-truths bank executives dish out at results time.
If the government wants to take targeted action, then the only real lever it has is the tax code and, in the more extreme cases of need, the social welfare system.
The cost of extending relief will have to be recouped: not from those taxpayers who avoided getting over-indebted, but from those who promoted the sin ruthlessly: the banks. There might also be an argument for levying those who have benefited from the current crisis: deposit-holders. A rise in deposit interest retention tax should be considered.
Of course, the government must also find a way somehow to square the circle between extending relief to vulnerable homeowners and the need to introduce a property tax, which is another IMF diktat. Reform of the personal insolvency regime is an absolute given, just as it was when we highlighted the views on this subject of John McStay, an insolvency expert, back in November 2008.
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And this, above all else, highlights what is desperately needed: a genuine sense of urgency.
Trouble calls at Eircom
It is getting mighty hard to read the tea leaves at Eircom. Last week, there was a big sell-off of Eircom bonds as a number of its larger investors ditched the phone company debt.
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Eircom bonds shifted down a full 10 points, with the sell-off sparked by a negative research report from Bank of America Merrill Lynch.
The thrust of the report is that debt restructuring is on the way and bondholders will be hurt in the process.
The phone company’s management has played down the prospects of an imminent debt restructuring, but has been flagging up the need to rejig “its capital structure”. Eircom has too much debt and not enough equity. How its new owner, Singapore Technologies Telemedia, plans to rebalance this is much less clear.
What is clear to investors is the extent to which Eircom’s dominance of the Irish telecoms market is being eroded.
Traditionally Eircom’s power base has been its fixed-line voice and internet traffic. It does not seem so long ago that we marvelled at how mobile was about to overtake land lines in relaying voice traffic. Mobile’s share of voice minutes is now heading rapidly towards 60%.
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On broadband, mobile has also made inroads into fixed line’s dominance.
Were this not bad enough, Eircom is also facing red-hot competition on its wired broadband services. Vodafone now has 16% of the market and, thanks to its cable upgrade, UPC — the old NTL — is growing fast and its share is over 15%.
Eircom, which comfortably could count on a three-quarter share of the market in the past, now has less than 50% of the fixed-line broadband market.
Even growth in mobile is starting to tail off. Meteor built its business on cheap calls for young subscribers. With the arrival of smart phones, the shift in mobile is increasingly toward bill pay. Yet some 85% of Meteor’s customer base is pre-pay, compared to 58% for O2.
The ability of Meteor, a single standalone mobile company, to compete with the buying power of three multinationals, has to be questioned.
So here is a very heavily indebted company, operating in a contracting economy against increasing strong multinational competition. All that one can forecast for Eircom is a whole heap of challenge.
A buyer’s market
Allied Irish Banks’ “self-help” programme is progressing nicely. A competitive auction is expected in Poland for Bank Zachodni WBK. Santander’s continued interest in M&T is doing the American bank’s share price no harm at all.
A couple of clouds for the silver lining. First is the politicised nature of the sale in Poland, where the government is keen to see more banks staying in local hands. In America, meanwhile, an abrupt ending of Santander’s interest could disproportionately depress the M&T share price.
But by far the biggest stretch for AIB management, as we have said here many times before, is its planned disposal of its business in Britain, where last week plans were announced for a bank levy.
The fact that a sole bidder emerged in the sale of 600 Royal Bank of Scotland branches is not encouraging. The buyer, Santander, is the most likely bidder for AIB’s British assets. While that means a deal may indeed be done, it is hardly a great omen on price.