Archive for July 22nd, 2011

RTE is this evening reporting that NAMA has appointed Grant Thornton’s Paul McCann as property receiver to several properties owned by NAMA Top 20 developer Sean Dunne. The properties named include Hume House in Ballsbrige “the most expensive plot of land in the State” and RTE News reported properties in Sandyford and Mt Herbert are also affected though this needs to be confirmed. The D4 Hotel is not affected as it was subject to loans from non-NAMA banks.

It was in late March 2011 whenIreland’s Sunday Times (not available online) published an article linking the appointment of receivers by NAMA with Sean’s companies, but that story was rejected by Sean’s spokesperson at the time.

There is an extensive entry on here tracking the progress of the Dunnes as they carve out a new life in north west United States. Sean is also presently “a main player” in a nasty little legal action involving a cleaner inDublin.

Remember there is a spreadsheet of all companies and individuals here against whom NAMA has taken enforcement action.

UPDATE: 23rd July, 2011. There’s considerable reporting today on NAMA’s appointment of a property receiver to some of Sean Dunne’s Irish properties (here and here and here and here and here). Here’s the digest

How much?
€350m reportedly owing by Sean Dunne’s DCD group to Irish Nationwide Building Society and Bank of Ireland, now transferred to NAMA

Personal guarantees?
Apparently extensive, for example €40m reported in latest DCD group accounts (UPDATE: 25th July, 2011. Richard Curran in the Sunday Business Post, without citing sources,  claims that Sean has given personal guarantees totalling €150m)

What’s in
Hume House, Ballsbridge
Riverside complex, Sir John Rogerson’s Quay
67 Merrion Square, (DCD Headquarters)
an office block onHerbert Street
the Hollybrook apartments onBrighton Road, Foxrock, southDublin
development sites in North Wall Quay (adjacent to unfinished Anglo HQ), and at Sandymount (Dublin4) and Rathfarnham (Dublin14)

What’s out (or named as out, the list may not be exhaustive)
D4 Hotels in Ballsbridge
four blocks at the front of AIB Bankcentre, Ballsbridge
overseas assets

Sean’s reaction
Publicly calm, he’ll work with NAMA, the personal guarantees are a worry, he’s surprised at the NAMA move as he claims that relations with NAMA were good in terms of his plans, he’s not legally challenging the move “At the end of the day it’s only money”. Publicly calm.

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Poor old Shane Ross was on the receiving end of a verbal walloping this morning, after Shane had last night characterised yesterday’s EU summit as having “crossed the Rubicon” and opened the door to an Irish default, following the acceptance of the principle of default for Greece. The response this morning (from 18:00) from Minister for European Affairs, Lucinda Creighton was that Shane Ross’s “20-second statement in which he mentioned default 20 times” was “kinda irresponsible” in its suggestion that Ireland will default. You can expect in coming days a re-opening of the debate about whether Ireland’s debt mountain is “sustainable” – the view on here is that it is not, at least in the context of an acceptable society, but the question is not black-and-white and there are respected views to the contrary, including the government’s – but one thing is for sure, debt sustainability has improved with yesterday’s summit in Brussels, and lower interest rates and longer maturities on cheap money are in themselves very welcome indeed.

Mind you, if you were to ask which of the three countries – Portugal, Ireland and Greece – got least out of yesterday’s summit, the answer is “Ireland” in that we have been given the same concessions as Portugal but unlike Portugal, we need “participate constructively in the discussions on the Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ Pact framework”. And of course, unlikeGreece we can’t default on debt. What is troubling on here is that this condition applied toIreland is being waved away by Minister Creighton as if it were nothing and merely a re-iteration ofIreland’s existing position. That seems deeply disingenuous.

Fianna Fail this week again asked the Taoiseach Enda Kenny to release the text of the EU president Herman van Rompuy offer made to Enda Kenny in March 2011. Remember that was the meeting on 11th March 2011 where Enda was reported to have had a “Gallic spat” with French president Nicolas Sarkozy. The noise around this meeting has suggested that at the meeting itself, a 1% reduction in bailout interest rates was offered to Irelandin return for Irelandagreeing to discuss corporation tax arrangements, perhaps just the base. And that offer, goes the rumour, was rejected by Enda and there then followed a vitriolic argument between Enda and President Sarkozy. Fianna Fail is plainly pulling at this thread with its repeated requests for the text of the plan put forward by President van Rompuy. Indeed in this past week its leader Michael Martin told the Dail “it is unacceptable that one has to go to the mechanism of freedom of information to get this very basic information in relation to the publication of the van Rompuy offer in regard to the interest rate on 11 March”. So the question of whether or not Taoiseach Kenny accepted a deal yesterday that was similar to that offered in March might remain for some time. Also it seems that interest already incurred will not be reduced, so we may possibly overpay €40m (1% * €9bn recd from EFSF/EFSM in Jan/Feb * 5 months) by having failed to agree to the deal in March.

It is also confusing to hear Fine Gael claim that its position hasn’t moved on CCCTB, and that it always stood ready to discuss this pan-European initiative on taxes. Lucinda Creighton said this morning (from 20:00 on) “And we’ve committed to that [engaging positively in discussing CCCTB] all along. There’s absolutely nothing new in relation to the [INTERJECTION: it’s just diplomatic language?] the so-called common consolidated corporate tax base. This is a proposal that was launched in March. We said at the beginning as we do with all Commission proposals that it is a proposal, we will participate in the discussions, it would be ridiculous for us to shut ourselves outside of the door and have nothing to do with the discussions. We want to influence them. We have a skepticism over it. We have a serious skepticism over the proposal”. But that is rubbish. The Irish Times reported on 12th March, 2011 “Taoiseach Enda Kenny pledged as he arrived in Brussels that he would resist the creation of a common consolidated corporate tax base (CCCTB) because that would introduce tax harmonisation by the “back door”. In a separate article on 12th March, 2011 the Irish Times reported Enda as saying “in respect of both the CCCTB and the corporation tax rate, that for me this was an issue that I couldn’t contemplate. But I did say that in respect of other elements of the pact [the Euro Plus Pact] I would of course engage constructively with our colleagues around the table” and “Mr Kenny said he offered to engage constructively on the “language about tax” in a new euro zone competitiveness pact, but specifically tied that to the ECB’s scrutiny of the banking situation.” Reuters reported “during talks inBrussels earlier this month, Kenny ruled out engagement on CCCTB, describing it as “the harmonisation of the tax rates by the back door”.” And Lucinda would have us think nothing changed yesterday?

So what is CCCTB and the Euro Plus Pact, in respect to which we have committed to constructively participate in discussions? The Euro Plus Pact was a joint French-German proposal in February 2011 to improve competitiveness and fiscal management in Europe – both concepts in principle to be welcomed by Ireland. In addition, the Pact proposed to develop a common consolidated corporate tax base (CCCTB) which is something opposed by Ireland. The CCCTB was separated out from the Pact and was the subject of a draft Directive from the European Commission on 16th March and, in summary, the “Counsel Directive on a Common Consolidated Corporate Tax Base” (CCCTB) enables multinational groups of companies, operating in different EU member states, to submit a single EU-wide tax computation to a single EU revenue authority, with the resultant tax then apportioned to the member states in which that group operates. So Google for example which has a base inIreland and smaller offices elsewhere in Europe but which generates sales across all of Europe, might submit its tax return to an authority based inBrussels that would then divvy out the tax to different European countries.
The arguments in favour of CCCTB are (a) this will be simpler than agreeing separately the tax liability with each and every member state in which the group operates; (b) it will reduce compliance costs and (c) it will eliminate tax avoidance measures like transfer pricing and profit shifting as potential gains and losses arising from internal trading within the group will be eliminated on consolidation of the accounts at a European level.

Once the profit has been determined an “apportionment mechanism” will share the tax amongst to the member states in which the particular group operates based equally on three factors: (i) payroll and headcount; (ii) sales revenues; and (iii) property (excluding intellectual property).

Effectively therefore, while the EU argues that CCCTB will not have any influence or jurisdiction over national CT rates, the “apportionment mechanism” means that tax apportioned to the member states will not be related to the profit generated in the respective members states, but to “apportionment factors” (i.e. 2/3 of the total consolidated tax would remit to the region with the greatest number of workers and plant, regardless of Gross Value Added or profitability). This will renderIreland’s CT rate largely meaningless with respect to the activities of multinationals, since firms would have an incentive to build up “apportionment factors” in low-tax areas, leaving only sales in high tax environments. Effectively, under CCCTB high-volume/low value employment low tax regions will

It seems agreed that CCCTB will significantly disadvantage Ireland where our 12.5% CT rate is low and where the tax regime is focused on attracting  high Gross Value Added employment activities, including R&D and sales, but where associated manufacturing operations are often undertaken in other, low-cost regions.

It is also feared that the harmonised tax base is the first step towards an EU-wide CT rate – “harmonisation by the back door” as Enda Kenny called it in March 2011 when he ruled out the engagement, on which yesterday he U-turned,  and has now agreed to constructively participate in discussions. Worrying forIreland, and unsettling that there is a denial that our position has changed, which it plainly has.

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“I think based on what we know so far, the package of measures agreed is good news for Ireland and should be welcomed. I think there are some important questions that do need to be clarified : the application of the interest rate cut, how much of the bailout facility will that relate to, the fund that was under examination today only represents about a quarter of the overall money that we are availing of, and secondly we need to know what the government has agreed on corporate tax harmonisation which could represent a real danger to this country’s economic interests”  Michael McGrath, Fianna Fail spokesperson on Public Expenditure & Financial Sector Reform, speaking on RTE News after the EU summit statement yesterday

I think Deputy McGrath summed up the general reaction to the statement yesterday evening inBrussels after the conclusion of the summit of EU leaders including our own taoiseach, Enda Kenny. Without any further press release from the Taoiseach or the NTMA or the Department of Finance, many questions remain:

(1) What is the new interest rate being charged on the bailout? The statement from the summit referred to “lending rates equivalent to those of the Balance of Payments facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost” The EFSF website is not very helpful in explaining the “Balance of Payments” facility, in respect of  which, the website refers you to a broken weblink. Reporting from the summit suggests a rate of “3.5% to 4%” – but why not simply 3.5%?

(2) What part of the bailout does the new interest rate refer to? The IMF said the reduction didn’t affect its €22.5bn contribution to the Irish bailout. With respect to the EU contribution to the bailout, €17.7bn comes from the EFSF, €22.5bn from the EFSM and €5bn in bilateral loans (see here for the splits). The EFSF is the EuroZone fund, and the leaders of contributing countries were in attendance yesterday. The EFSM is the EU bailout fund and several leaders of contributing countries, eg the UK, were not present yesterday. Also there was no representation from the bilateral loan countries, the UK, Sweden and Denmark. So the conclusion on here is that the reduction only applies to the EFSF facility.

(3) Will the new interest rate apply to past as well as future drawdowns? The summit statement referred to “future EFSF loans” in respect of Greece but then said “the EFSF lending rates and maturities we agreed upon for Greece will be applied also for Portugaland Ireland”. The Taoiseach said at a news conference, reported by the Irish Times, “this [interest rate reduction] will apply not only to monies yet to be drawn down but also to future interest payments on existing loans and that’s an important consideration”

(4) What are the new maturities for the bailout loans? 15 years? 30 years? 40 years? And will the new maturities apply to loans already drawn down as well as new draw-downs?

(5) How is the six to eight hundred million saving, claimed and widely reported and not challenged, calculated? This was the quantum of annual saving claimed in Taoiseach Enda Kenny’s brief interview with RTE’s Tony Connelly in which he was asked “any idea in numerical terms what this will mean in terms of billions of euro saved because of this cut?” and answered “well, it’s of the order of 2% and my reckon (sic) without having all of the details which have yet to be worked out will be in the order of six to eight hundred million which is quite substantial”. If the new interest rate applies to the EFSF only then that is a maximum loan of €17.7bn and we are presently paying 5.9% so a 3.5% interest rate would result in a maximum annual saving of €424m. The Taoiseach says the new rate applies to previous draw downs but if that was not the case and only applied to the €14bn yet to be drawn down the maximum saving would be €336m. To get to the Taoiseach’s lower figure of €600m, we would need see a 2.4% saving on €25bn, which happens to be the total yet to be drawn down on both the EFSF and EFSM. To see a figure of €800m, there would need to be a 2.4% saving on €33.3bn which doesn’t represent the sum of any of the discrete elements of the sources.

(6) When will the terms of the EFSF be changed? This may be an administrative point but might assume more significance in the context of the next question.

(7) What does a constructive participation in “discussions on the Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ Pact framework” mean? For how long will Irelandneed “constructively participate”? Who will judge whether or not Irelandhas “constructively participated”? Using what criteria? What is the penalty if Irelandis not judged to have “constructively participated”? Will statements made  by Irelandnow, prejudging the outcome of the “constructive participation” violate the terms of the agreement? The Taoiseach was clear on RTE’s nine o’clock news last night (4:00 on) “we’ve actually achieved a substantial interest rate reduction, greater flexibility in terms of the fund, without conditions attached, and more flexibility in terms of the maturities” So “constructive participation” is not a “condition”. And lastly, why hasPortugal secured the new concessions without offering anything in return?

(8) On what basis will the EFSF buy back bonds? Will the bonds bought back be sovereign or bank or both? Will the EFSF have trigger purchase points eg ifIreland’s 10-year bond exceeds 10%?

But probably the most significant question is : why has Ireland not secured the same default deal as Greece? Okay, Greece’s debt:GDP is projected to reach 172% by the IMF and Greece has not implemented its Memorandum of Understanding and Greece’s economy continues to contract but Ireland is projected to have a debt:GDP of 118% with minimal growth this year (0.75% is the official current projection) and Ireland has implemented the Memorandum of Understanding. On what basis canIreland have been excluded from the default arrangements being put in place forGreece? Because our debt:GDP is “only” 118%? HasEurope thrown moral hazard out the window? Europe has said up to now thatGreece’s debt was sustainable ifGreece followed the programme. What has changed? It should be said that the Greek plan is still unclear as to what is meant by contribution from the private sector, and further details will no doubt emerge in due course.

“A Rubicon has been crossed in terms ofEurope” is how independent Irish politician Shane Ross described the conclusions yesterday. He was referring to the acceptance of default in the case ofGreecebut he predicted the Greek option would be open toIrelandand other indebted countries also. The source for that optimism is not at all clear.

With respect to the corporate tax issue, here’s why the commitment “to constructively” engage in discussion is of concern on here. And to illustrate the concern, consider another routine negotiation in Europe, the monthly setting of interest rates at the ECB. Patrick Honohan, governor of the Central Bank of Irelandis our representative on the 17-member governing council and representsIreland at the monthly meeting. The main ECB interest rate at present is 1.5%, having been subject of two increases of 0.25%-a-time in recent months.Ireland’s economy is presently so weak that it is generally agreed that the appropriate rate forIreland should be practically zero (or theoretically minus 5% according to Credit Suisse) whereas forGermany, the appropriate rate for that economy which is growing at 2-3% per annum with a looming inflationary issue, the appropriate ECB rate is 3-4%. Governor Honohan no doubt makesIreland’s case, but in the final vote, he needs to vote according to the needs of the 330m people in the EuroZone, not the 4.6m here. That’s the nature of Governor Honohan’s role in setting ECB interest rates and apparently the last two decisions to increase rates have been unanimous – there is no hidden conspiracy here : Governor Honohan has publicly said that in this one matter, setting ECB interest rates, he represents Europe not Ireland. And indeed, as ECB president, Jean-Claude Trichet repeatedly tells us, appropriate interest rates forEurope generally should be beneficial to all countries.

But that’s why the commitment given by Taoiseach Kenny yesterday is concerning. If he is presented with a position by his European partners which shows that adopting new corporate tax arrangements is better for Europe overall, perhaps because it stops companies diverting income generated in Europe outside the continent, then can Enda refuse to accept reforms even if they hurt Ireland’s national interests?

And regardless of the outcome of participation in discussions, Ireland’s tax environment has changed this week. From an implacable cornerstone of Irish industrial policy, corporate tax arrangements are now on the table for discussion, and that may have to be the case for some time, years perhaps, to come. Those considering investment in Europe today must place a higher probability of tax changes in Irelandthan a week ago. And that is in itself harmful. Prior to this, it was just unhelpful for France to raise the issue of our corporate tax rate, akin to the loaded question “do you still hit your wife”, it just sowed doubt in the future of our commitment to corporate tax arrangements. But that posturing could be dismissed with solemn commitments byIreland. We can’t give these anymore, or if we do, we are presumably prejudging “constructive participation”.

The position on here is there needs to be some clear communication on what was agreed yesterday. On the face of it, the interest rate reduction, considered in isolation is valuable, particularly if it applies to the EFSM and to past as well as future draw-downs. The extension of maturities is also valuable if it guarantees substantial funding at 3.5% for long periods – judged from a net present value perspective, that is good news for Ireland. The possibility of using EFSF funds to buy back bonds may also be helpful as it might deter stratospheric speculation in our bonds, but unless we get our bonds back down to sub-6% long term rates, then EFSF intervention in the market may only have a cosmetic effect. And not to be underestimated, yesterday’s conclusions have eased the crisis in Europe, at least for the time being which is also good for Ireland. These positives should be weighed against risk (perhaps just reputational risk) to our corporate tax arrangements and unequal treatment compared with Greecein seeing apparent debt write-down. Debt problems in Greece, Spain, Italyand arguably Irelandare not solved by yesterday’s announcements and we may be back here for Spainin weeks. And lest we forget, even if the annual saving from a lower interest rate is €800m, we are spending a multiple of that on bondholders in insolvent Irish banks. Earlier this week, it was revealed that we have spent €1,060m on unguaranteed, unsecured senior bondholders in just one zombie Irish bank, Anglo, so far this year. Yesterday’s interest rate concession is dwarfed by these ongoing payments.

UPDATE (1): 22nd July, 2011. It seems not to be online yet but I have the following statement from the UK Treasury confirming it will reduce the interest rate on its GBP 3.3bn bilateral loan to Ireland. No details as to the reduction but the loan agreement allows for a 2.29% margin which if the EFSF approach above is followed, will be eliminated.

“This morning I spoke to my Irish counterpart, Michael Noonan, and told him that we could cut our interest rate on our loan to them.

I’ve been arguing for some time that the interest rates charged for eurozone loans were too high. I’m pleased therefore they have now reduced those rates. That enables Britain to cut its rate on its loan to Ireland, while ensuring all of the benefit goes to Ireland and not to higher interest rates paid to euro area governments. We will still be more than covering the cost of our borrowing.

We stayed out of the Greek bailout as promised. But, for Britain, Ireland is a special case. Our loan will help them and is in our national interest”

UPDATE (2): 22nd July, 2011. And Minister Noonan has responded to the British move with his own statement, in which he opens “I welcome today’s announcement by the Chancellor that the UK proposes to reduce the interest rates on the loans to Ireland to a level slightly below the new European Financial Stability Fund (EFSF) interest rate. ” Currently 7 year sterling swaps are just below 3.5% so that makes sense.

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