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Enda Slips on Davos Slopes

Posted on: March 8th, 2012

Enda Kenny was probably the toast of Davos last week. His appalling gaffe, blaming Irish people’s “mad borrowing” for the bankers’ orgy, must have given attending foreign financiers and politicians unbridled joy.

And if the Taoiseach repeated in Davos some of the lines he spouted in Dublin before his departure, the assembled European oligarchs will have cheered him to the rafters.

Kenny is in danger of becoming a hero in Europe and a villain at home.

Enda’s trip to the top peoples’ ski-ing resort was meticulously planned. A pity he blew it.

His message was not new — Ireland has turned the corner, and we are a shining example of how a bailout country can recover. Just the message that Angela Merkel, Nicolas Sarkozy and all our European masters wanted to hear.

This time Enda went to meet the uncrowned kings and queens of Europe well-armed. As evidence of the new confidence in Ireland’s progress, a well-schooled Kenny cited Wednesday’s successful Irish bond swap. A day before his departure, the Government had pulled a financial stroke.

In a perfect piece of timing, the sycophants in the National Treasury Management Agency (NTMA) had persuaded holders of a short-dated Irish government bond to switch into a slightly longer- dated stock.

The NTMA presented this manoeuvre as a triumph. They despatched Enda to chilly Davos armed with this weapon of good news.

When he arrived in Davos Enda duly played the “bond swap” card as evidence that Ireland was poised for a return to the bond markets. Which was nonsense.

Back in Leinster House, ministers were swaggering in the corridors as they whispered loudly about a breakthrough. Ireland, they insisted, is different from Portugal, Italy, Greece and Spain. There were buyers of Irish bonds out there. The NTMA’s wheeze provided a timely boost to the propaganda war.

No doubt Kenny was simultaneously telling Sarkozy, Merkel and other premiers what he had repeated in the Dail last week: that Ireland’s growth rate would hit 1.5 per cent this year. Nothing could please his allies out there more. If we grow by 1.5 per cent this year, we should be on course to meet our deficit targets. Let us pray that Angela, Nicolas and the rest do not read the growth forecasts from Davy (0.4 per cent), the Troika (0.5 per cent), the Central Bank (0.5 per cent), Goodbodys (0.7 per cent) or the ESRI (0.9 per cent). If they do, they may conclude that they are being sold a pup by an economic illiterate.

Worse still, they might realise that all the palaver surrounding the overhyped bond swap belonged in the same world of fantasy economics.

The NTMA sent its spinners into overdrive after the swap had been arranged. In advance of the Taoiseach’s arrival in Davos, press reports at home suggested that investors had responded “enthusiastically” to a deal that allowed them to exchange existing two-year Irish bonds for new three-year equivalents carrying a higher interest rate.

The Irish Times led with a headline: “First sale of Irish bonds since 2010.” The Irish Independent matched it with: “NTMA ‘very pleased’ with huge success of debt swap.”

Cabinet ministers were on a high.

They should hold their horses. Instead, they should have asked who these investors were. Were they insurance companies seeking safe havens? Overseas pension funds in search of secure income? Or even hedge funds anticipating a quick buck?

Were the smart boys in the market piling into Irish bonds? Not for a split second. Short- dated bonds of this sort are not held by long-term investors seeking reliable dividends. They are ultra-safe securities for risk-averse investors.

Yes, you guessed it, the vast majority of their holders are banks.

More pertinent still is the specific identity of the banks holding these securities. Let us make an intelligent guess. During the banking crisis, foreign investors fled short-dated Irish bonds. Irish banks’ share of this sector rocketed to more than 50 per cent.

So who were the agreeable investors doing the switch that so pleased the Government and its NTMA puppets?

It was Irish banks who did the bulk of the business.

And who owns Ireland’s banks?

You guessed it — the Irish Government owns AIB, Irish Life, Anglo and 15.1 per cent of Bank of Ireland.

Ho hum.

Stockbroking sources told me last week that the four native banks were the most eager players in the much- vaunted bond swap, the deal trumpeted from the rooftops by the Government and the NTMA.

Another dealer said that he was sure Irish bankers had their arms twisted by their state owners to wear the green jersey before Enda hit the Davos slopes. Dolmen Stockbrokers’ daily bulletin mentioned banks doing their “patriotic duty”.

Barry Nangle, Davy’s head of bonds — the only Irish dealer in government bonds — was quoted as saying that “the significant majority of investors switching were the Irish domestic banks”.

Do you smell a very large rat?

The green jersey is back in the bond markets.

Enda is not likely to have told them this in Davos.

Instead, he will have been able to remind the European elite of yet another piece of good news that will leave them salivating. He could quietly tell them how he stuffed the opposition at home last week and agreed to pay the full €1.25bn due to Anglo bondholders. He could curry further favour by insisting that he was under no obligation to do so, but he himself decided that Ireland’s credibility in global markets merited payment of the Anglo bonds in full.

Enda’s commitment to pay the bondholders will do nothing but harm to our long-term prospects of returning to the markets.

Goodbody Stockbrokers issued another word of warning to the Taoiseach last Thursday. While conceding that the bond swap was a “positive development”, it added “we should not be getting overly carried away… it does not change the debt burden, which continues to balloon upwards. Indeed, Ireland will still have a funding requirement of more than €18bn in 2014 even after yesterday’s bond swap.”

Bingo — but Enda has already snookered Ireland with yet another rash commitment, this time on the debt burden. Last week, he told the Dail that the talks between Finance Minister Michael Noonan, the ECB and Commissioner Olli Rehn were about the terms — or the cost — of the debt burden. There would be no demand for any write-offs of the principal. We would honour the entire debt burden. Music to the ears of European bankers.

Enda’s Davos audience will have been delighted with his visit. Here was a sovereign prime minister who had blamed his own people for their “mad borrowing”; who was going to pay off the entire debt to save the European banks; who was repaying surprised unguaranteed bondholders a shock bonanza; who was promising a delusionary growth rate of 1.5 per cent; whose domestic banks were wearing the green jersey in a co-operative effort to puff up the market in Irish government bonds.

If Enda remains so intent on pleasing his European audience, he will soon be more welcome in Davos than in Dublin.