In this week’s bulletin:
- Irish bailout talks continue as both sides try to finalise detail, with the rates of corporation tax very much the area of debate
- Ireland’s main banks see significant outflows from institutional investors
- Are there opportunities within European equity markets amid all the turmoil?
- The dangers of market timing are highlighted with research showing how much can be lost by getting it wrong.
Irish bailout talks continue
Going into the weekend, the Irish government was still hammering out the final details of an emergency financial programme to stabilise their economy, paving the way for the eurozone’s second bailout of 2010. According to The Financial Times, the plan will involve at least €15 billion of spending cuts and tax increases from 2011 to 2014, which is equal to around 10% of the Irish annual economic output. Experts from the International Monetary Fund (IMF) and the European Union (EU) have combed through the balance sheets of the banking sector, as well as the public finances, to determine the size of the bailout but it is thought to be €80–90 billion, slightly less than the €110 billion rescue received by
It is hoped that the announcement of a convincing IMF/EU plan will drive down Irish government bond yields, allowing
Although Brian Lenihan, the Irish finance minister, has indicated that the country’s 12.5% corporation tax rate (the lowest in the eurozone) will not be raised, a number of factions within the European Union are known to have pushed for it to be raised in return for the bailout. This was denied by such luminaries as Nicholas Sarkozy, the French president, but he was quoted as saying, “It’s obvious when faced with a situation like this, there are two levers to use, which are spending and revenues. Why not use them? They have a greater margin for manoeuvre than others, with their taxes being lower than others.” Other governments have long criticised the rate, and argue that it is unsustainable and distorts the market for attracting large corporations. But even as late as Friday,
The Sunday Telegraph reported that Ireland is facing a mass exodus from some of the biggest American companies, as executives at Microsoft, Hewlett-Packard, Bank of America, Merrill Lynch and Intel spoke of the “damaging impact on Ireland’s ability to win and retain investment” should the corporation tax rate be raised. As well as these US behemoths, FTSE groups such as advertising giants WPP, magazine publisher United Business Media, and Shire Pharmaceuticals have all relocated to Ireland recently to take advantage of the lower rates.
The British government is keeping a very close eye on the situation, according to The Independent on Sunday, and the
The effect of all this debate on the future of the Irish economy is being felt by the nation’s banks, as The Times reported, as Allied Irish Bank (AIB) has suffered €13 billion in withdrawals this year, with €12 billion of that coming since June as companies and large investors withdrew funds that weren’t covered by the state’s guarantees of €100,000 on retail deposits. Last week, its larger rival Bank of Ireland signalled a €10 billion outflow of corporate deposits in the third quarter, which amounted to roughly 12% of its deposit base. AIB also revealed that its planned rights issue would raise €6.6 billion, up from the expected €5.4 billion. The government will convert €2.9 billion in preference shares after the rights issue, leaving it with a stake of around 95%.
Problems in the Irish economy and banking system have put the security of savings back in the spotlight. As highlighted in The Mail on Sunday, savers are being warned once again to check that their money is protected by compensation schemes. Post Office accounts, where savings are provided by Bank of Ireland, have recently been moved so that
Does opportunity knock?
Global equity markets rallied late in the week after initially being rocked by both the Irish debt crisis and the Chinese government trying to limit inflation by tightening its banking reserve requirement for the fifth time this year. The FTSE 100 closed the week at 5732.83, down 1.1%, after battling back with gains on Wednesday and Thursday. Amid all the negative sentiment within the eurozone, The Sunday Times put its head above the parapet to suggest to investors that they could use the situation to their advantage by scooping up European stocks that have failed to rally with other markets, and may well “present a real opportunity”. The FTSE Eurofirst 300 Index, which fell 2.3% on Tuesday when it appeared any bailout would be rejected, did actually make up some ground by the end of the week to close just 0.16% down. The difficulties in
Stuart Mitchell of S.W. Mitchell Capital recently reported, “Even if one chooses to see the glass half-empty, and we are in the half-full camp, European shares are good value and trading on some ten times prospective earnings. European markets also continue to trade at significant discounts to the
“It is to our mind encouraging that so many investors remain cautious, if not downright pessimistic. Nevertheless, following on from the sovereign jitters earlier in the year, we draw a clear distinction between business and economic conditions in the southern periphery of the eurozone, labouring under the burden of higher cost structures, and its northern ‘core’ tier. For the south (roughly
The dangers of trying to time equity markets were highlighted in The Financial Times, as they published research showing that
Key week for
Critical growth figures this week will tell the Bank of England whether exporters are finally using the fall in sterling to rebuild their foreign markets, reported The Mail on Sunday. Despite a 25% drop in the