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In an otherwise cautious fourth Budget, his only other major change was a complete overhaul of the car taxation system. Aside from the Finance Minister's u-turn on property taxes, Budget 2008 will go down as a 'steady as she goes' plan for the economy. But last night it was criticised by the Opposition, who claimed it did not contain much and failed to set out a vision for the next five years. The Minister attempted to cover all the bases in his budget, making the most of scarce resources by giving the bare minimum in each area. And he rejected accusations that it wasn't radical enough. "Sometimes it's very hard to impress people," he said. Mr Cowen is borrowing heavily next year, needing nearly €5bn to balance the books, which he argued was to allow large spending on infrastructure. Having turned a €2.3bn surplus in 2006 into a €3.8bn deficit in 2008, Fine Gael said Mr Cowen was presiding over "the worst decline in exchequer finances in the history of the State". However he is hoping his reform of the stamp duty system, whereby no tax will be paid on the first €125,000, with the balance up to €1m charged at 7pc, will change public sentiment on the market, revive house purchases and stimulate the building industry. Any amount above the €1m threshold will be charged at 9pc. The changes will result in savings of up to €5,000 on the price of an average house of €370,000. "They are the right reforms, introduced for the right reason, at the right time," he said. While Mr Cowen's surprising stamp duty switch was politically clever, there were doubts over whether it will actually bring about the desired effect. Relief The Minister is also increasing mortgage interest relief for first-time buyers in their first seven years after the purchase from €8,000 to €10,000 for single people and €16,000 to €20,000 for couples. Mr Cowen also signalled the start of a major public sector reform process by ordering efficiency reviews across every Government department. However, he would say if this meant widespread redundancies in the public service. The Minister is warning departments who fail to make savings will lose out when spending increases are given out in 2009. The Budget will also bring about an environmentally friendly change in Vehicle Registration Tax from the middle of next year, meaning gas-guzzling cars will be more expensive. The VRT rate applicable to cars registered after July 1st will be determined by carbon emissions, rather than the engine size. Similar increases to motor tax of between 9.5pc for cars below 2.5 litres and 11pc for larger cars will also be brought in from February next. Mr Cowen said the priorities for his Budget were to help the incomes of the vulnerable, help home buyers and boost the economy. Challenging He said he was delivering his Budget against "the most challenging economic backdrop experienced in a considerable number of years". But there was a sting in the tail as accident and emergency charges will go up by 10pc. Furthermore, the drugs payment scheme threshold will go up by €5 from €85 to €90, adding €60 a year to household drug bills. Nearly €1bn extra will be spent on social welfare payments next year as the Minister increased the contributory pension by €14 to €223.30 and the non-contributory pension by €12 to €212 per week. All other personal social welfare rates will go up by €12 per week. Child benefit will go up by €6 for the first two children and €8 for the third and subsequent child. The early childcare supplement for children under six will go up by €100 to €1,100. The only one of the old reliables to be hit was cigarettes, which went up by 30 cent for a packet of 20 from midnight last night. The Minister's minimal changes to income tax, costing him just €500m, will again ensure minimum wage earners do not pay any tax. Meanwhile, average industrial wage workers will stay out of the top tax net. Personal tax credits are set to go up by €70 for a single person, and some €140 for married people. The PAYE tax credit if rising by €70 and the home carer credit is increasing by €130 to €1,830. The Minister said the rate of increase on day-to-day spending next year must be moderate to take account of the revenue available to him. Mr Cowen said he was planning for a general government deficit of 0.9pc in 2008. The slowdown in spending should mean €2bn less being spent. Despite dropping the rate of increase in current expenditure from 13pc to 8pc, it is not quite clear where this reduced spending rate will hit, so some hidden cuts are expected to emerge over the coming days and weeks. Dull Describing Mr Cowen's fourth budget as dull and uninspiring, Fine Gael finance spokesman Richard Bruton said the stamp duty reforms had come six months too late to prevent a crash in the property market. Labour's Joan Burton said that it was a very disappointing budget and there was now a wider gap than ever between what ministers were experiencing and the belt tightening that families would be forced to endure. The Irish Independent also reports that more alcohol was sold in off licences and supermarkets in 2007 than in pubs for the first time, according to new figures. Pubs accounted for just 48pc of alcohol sales this year compared with 70pc six years ago, according to figures released by drinks company Diageo. In addition, the number of pubs offered for sale in the greater Dublin region has also dipped by about 40pc over the last 12 months, according to estate agents Morrisseys. Of those that did change hands, 35pc were for re-development compared with 25pc the previous year. Overall alcohol consumption grew just 1pc to October. According to Michael Patten, corporate affairs director of Diageo, the growth is negligible. "It masks a significant transformation that is taking place underneath the water line," he says. "Week long consumption in the pub has dropped very significantly. People are drinking at home now." "That switching is continuing. This year we estimate trade sales will decline by a further 5pc," he says. Wine accounts for 22pc of alcohol purchased compared to 8pc 10 years ago. Beer's share of the market has dropped to 50pc from 70pc in 1997. Bill Morrissey of Morrissey's Estate Agents says the combination of social changes and fears about the economy has resulted in a near halving of the number of pubs offered for sale in the Dublin area. Pubs with significant catchment areas continue to thrive, he claims, but less populated areas are under significant pressure. "If you ware in a road house with a fairly sparse population you will have to be an extremely good operator to draw people out to you, particularly so now with the drink driving legislation," he says. Despite a doubling in turnover in the off license sector the market has become even more competitive for independent retailers, according to Richard Barry of the National Off license Association. The number of licences has trebled from 600 to 1800. Independents face competition from below-cost selling by big supermarkets, he says. The figures are in line with the trend of recent months, as reported through Homebond, and are now down 46 per cent for the first 11 months of 2007 compared with the same period last year. Homebond registrations are regarded as a useful barometer of future housing output. There is generally a six-month lag between registrations and property coming on stream. The slowdown in construction activity meanwhile pushed activity in the services sector to its lowest level in four years last month, according to the latest purchasing managers' index. Figures from stockbroker NCB indicate that, while the sector is still growing, it slowed markedly last month. The business activity index dipped to 52.8 from 56.5 in October. A figure above 50 indicates growth. The November reading is the lowest for the services sector of the economy since July 2003. Within the overall figure, the most significant drop in activity was recorded by the financial services sector where activity dropped from 55.3 in October to 51.9 in November. As recently as June, the reading for financial services activity was 61.9. Dermot O'Brien, chief economist at NCB, said: "While respondents cited weakness in the construction sector as an influence, the fact that activity slowed appreciably in the wider euro-zone services sector in November suggests external influences also contributed to the Irish experience." It was the ripple effect of the global credit crunch that dragged down performance in the services sector across Europe. Financial services in the Continent's two biggest centres contracted in November. Survey data showed German financial services business shrank for the first time since March 2003 and by the deepest margin in five years, while UK financial services activity contracted for a second consecutive month. The UK services purchasing managers' data, which were much weaker than expected, ratcheted up the pressure on the Bank of England to cut interest rates today from 5.75 per cent. Across the euro zone, services growth slipped to a 27-month low. There were stark contrasts between countries, with growth in France leaping to an eight-month high, despite strikes in past weeks, while Italy and Spain eased to near-stagnation. The RBS/NTC Euro Zone Services Purchasing Managers Index fell to 54.1 in November from 55.8 in October. "The PMI adds to evidence that the financial turmoil is spilling over into the real economy," said Martin Van Vliet at ING. Growth in the US service sector also slipped in November to its lowest since March. The Irish Times also reports that Brendan Investments, the property investment firm of which television personality Eddie Hobbs is a director, has raised about €13 million from investors - well short of its target of €50 million. The company had planned to raise a minimum of €10 million and a maximum of €250 million from investors but set a target of €50 million in the prospectus for its planned pan-European investment company. The firm will combine the €13 million equity raised with borrowings, creating a €50 million company that will invest in property in Germany, Portugal, the UK and Ireland. Vincent Regan, managing director of Brendan Investments, said the investment climate had "significantly shifted" from the autumn of 2006 when it lodged its prospectus with Irish Financial Services Regulatory Authority. "Sentiment has obviously changed but we will have a €50 million company," he said. Almost 700 people have each invested an average of €19,000. Investors were asked to put up a minimum of €5,000. Mr Regan said the directors of the company - Mr Hobbs, accountant Hugh O'Neill, developer and architect Pat Owens and the firm's chairman Dermot Flanagan SC - were investing a combined total of more than €1 million. He said the firm had raised the money, "despite the very testing climate currently prevailing", and had targeted consumers directly, bypassing financial advisers and brokers. He said it was "the first direct offer to the Irish public of a complex financial proposition, with a new brand and without an established distribution channel". He said the company was assessing investments in offices and a nursing home in Germany, and in a 200-bedroom hotel and 160 apartments next to a sports resort in Portugal. He said the firm had reached an agreement with Radisson to run the hotel. He said that some of the negative publicity received by Brendan Investments was "a bit unfair" as he believed some commentators did not compare its product with others available or "with the market norms". He said Brendan Investments was the investment product that has been "most open to scrutiny". Mr Regan said it had succeeded by exceeding the minimum subscription level of €10 million that it had required. The company had extended its initial deadline of October 31st to November 30th because of "high levels of demand" from pension investors. Speaking earlier this week to The Irish Times about investments in general, Mr Hobbs described the market as being "toxic" and "in lockdown".
The Irish Examiner reports that retailers have been warned to be on high alert this Christmas with shoplifters expected to target stock valued at €37 million in Irish shops.
The purchasing managers’ index of services activity, which the Bank of England relies on to improve its estimates of economic growth, fell from 53.1 to 51.9 in November. This is its lowest level since May 2003, when interest rates were only 3.75 per cent. In the housing sector, the Halifax index showed a fall for the third month in a row. By Wednesday evening, money markets were betting on an 80 per cent probability of a cut – up from little more than a 50-50 chance at the start of the day. The pound had fallen 0.9 per cent against the currencies of Britain’s main trading partners and many City economists fretted they had made a mistake in predicting rates would remain on hold at 5.75 per cent. Investors warned of a turbulent reaction if rates were not cut. “The market seems hell bent on a base rate cut tomorrow,” said David Buik of Cantor Index. “If they don’t get one, hold your breath for a roller coaster ride.” Several analysts, including those at Barclays Capital, ING and Global Insight, changed their rate call from hold to cut and others said the decision was simply too close to call. Analysts said the purchasing managers’ survey showed credit market worries were acting as a brake on the wider economy and could give the Bank the evidence it would need to justify cutting rates from their current level of 5.75 per cent. “Demand for services has eased over the past three months with signs that firms serving the consumer are finding life increasingly difficult,” said Ian McCafferty, the CBI’s chief economic advisor. The MPC has already signalled in its November inflation report that rate cuts were needed to stop inflation falling too far in the medium term, but said the outlook was highly uncertain. It faces a current problem in balancing the risks of slowing activity with those of rising inflationary pressures. The British Retail Consortium on Wednesday said higher food prices had fuelled the highest rate of shop price inflation so far this year. Evidence of slowing service sector output was coupled with growing gloom over house prices. The Halifax said house prices fell 1.1 per cent last month, much weaker than expected, bringing the annual rate of house price inflation down from 8.9 per cent in October to 6.3 per cent. While monthly changes in house prices are often volatile, the Halifax index has now fallen 2.4 per cent over the past three months. Michael Saunders, economist at Citigroup, said the fall was “the greatest for any three-month period since the dark days of 1992” and could be a prelude to sharp falls in consumer demand. The FT also reports that about 45,000 holders of secret offshore bank accounts have owned up to unpaid tax bills under the partial amnesty offered by HM Revenue & Customs. A total of £400m was paid into the government’s coffers by the November 26 deadline, as taxpayers sought to take advantage of the 10 per cent penalty cap. The largest payment was £3m. The average was £9,000. However, the tally is far short of the £1.75bn that the Revenue initially estimated it was owed by customers of five high street banks, which were forced by legal rulings to hand over their offshore account details. The tally could be swollen to as much as £500m once outstanding payments are received from 300 people with particularly big and complex offshore holdings who have been given extra time. HM Revenue & Customs denied that it was disappointed by the yield, particularly as the extra revenue has been raked in with relatively little effort. Andrew Hubbard of the Chartered Institute of Taxation said the offshore disclosure facility would be viewed as worthwhile even though the yield was below expectations. “I suspect that the Revenue will be disappointed but it is not an insignificant sum and I think that the Revenue will put a brave face on it,” he said. Grant Thornton, which initially estimated as much as £5bn could be recouped, said the lower-than-expected sum could be blamed on the Revenue’s initial overestimate of the scale of offshore evasion. The Revenue’s offshore disclosure initiative was principally directed at about 100,000 customers of the five high street banks, although it was open to anyone with undeclared onshore or offshore tax. The Revenue is debating whether to offer a similar cap on penalties to customers of another 170 banks and licensed deposit takers after it obtains legal rulings forcing them to disclose offshore account information.
The New York Times reports that as the subprime loan crisis deepens, Wall Street firms are increasingly coming under scrutiny for their role in selling risky mortgage-related securities to investors. Many of the home loans tied to these investments quickly defaulted, resulting in billions of dollars of losses for investors. At the same time, many of the companies that sold these securities, concerned about a looming meltdown in the housing market, protected themselves from losses. One big bank that saw the trouble coming, Goldman Sachs, began reducing its inventory of mortgages and mortgage securities late last year. Even so, Goldman went on to package and sell more than $6 billion of new securities backed by subprime mortgages during the first nine months of this year. Of the loans backing the Goldman deals for which data is available, nearly 15 percent are already delinquent by more than 60 days, are in foreclosure or have resulted in the repossession of a home, according to data compiled by Bloomberg. The average default rate for subprime loans packaged in 2007 is 11 percent. “There is a maxim that comes to mind: ‘If you work in the kitchen, you don’t eat the food,’” said Josh Rosner, a managing director of Graham Fisher, an independent consulting firm in New York. The New York attorney general, Andrew M. Cuomo, has subpoenaed major Wall Street banks, including Deutsche Bank, Merrill Lynch and Morgan Stanley, seeking information about the packaging and selling of subprime mortgages. And the Securities and Exchange Commission is examining how Wall Street companies valued their own holdings of these complex investments. The Wall Street banks that foresaw problems say they hedged their mortgage positions as part of their fiduciary duty to shareholders. Indeed, some other companies, particularly Citigroup, Merrill Lynch and UBS, apparently did not foresee the housing market collapse and lost billions of dollars, leading to forced resignations of their chief executives. In any case, the bankers argue, buyers of such securities — institutional investors like pension funds, banks and hedge funds — are sophisticated and understand the risks. Wall Street officials maintain that the system worked as it was supposed to. Underwriters, they say, did not pressure colleagues on trading desks or in research departments to promote securities blindly. Nevertheless, the loans that many banks packaged are proving to be increasingly toxic. Almost a quarter of the subprime loans that were transformed into securities by Deutsche Bank, Barclays and Morgan Stanley last year are already in default, according to Bloomberg. About a fifth of the loans backing securities underwritten by Merrill Lynch are in trouble. Data from another firm that tracks mortgage securities, Lewtan Technologies, shows similar trends. The banks declined to comment on the default rates. The data raises questions about how closely Wall Street banks scrutinized these loans, many of them made at low teaser rates that will reset next year to higher levels. The Bush administration is close to a plan to freeze mortgage rates temporarily for some homeowners who are threatened with foreclosure. In recent years, Wall Street aggressively pushed into the complex, high-margin business of packaging mortgages. At the same time, banks expanded their roles to selling investments to clients while trying to make money on their own holdings. Now, with the collapse of the credit bubble, Wall Street’s risk management, as well as the multiple and often conflicting roles it plays, has been laid bare. As early as January 2006, Greg Lippmann, Deutsche Bank’s global head of trading for asset-backed securities and collateralized debt obligations, and his team began advising hedge funds and other institutional investors to protect themselves from a coming decline in the housing market. “He was really pounding the pavement,” said one hedge fund trader, who asked not to be identified because it could jeopardize his relationship with Wall Street banks. Mr. Lippmann’s trade ideas — documented in a January 2006 presentation obtained by The New York Times — were not always popular inside Deutsche Bank, where the origination desk was busy selling mortgage securities. In the fall of 2006, Mr. Lippmann pitched bearish trades to the bank’s sales force at the same time the origination desk was bringing them mortgage deals to sell to clients. Last year, Deutsche Bank underwrote $28.6 billion of subprime mortgage securities, according to Inside Mortgage Finance, an industry publication. In the first nine months of this year, the bank underwrote $12 billion. Goldman Sachs also moved early to insulate itself from potential losses. Almost a year ago, on Dec. 14, 2006, David A. Viniar, Goldman’s chief financial officer, called a “mortgage risk” meeting. The investment bank’s mortgage desk was losing money, and Mr. Viniar, with various officials, reviewed every position in the bank’s portfolio. The bank decided to reduce its stockpile of mortgages and mortgage-related securities and to buy expensive insurance as protection against further losses, said a person briefed on the meeting who was not authorized to speak about the situation publicly. Goldman, however, did not stop selling subprime mortgage securities. The bank, like other firms, retains a piece of the securities it sells. A Goldman spokesman said the firm was not betting against the mortgage securities it underwrote in 2007. Like Goldman, Lehman Brothers also started to hedge its huge inventory of home loans in the second quarter of this year, concerned about poor underwriting standards. But Lehman also continued to sell mortgage securities packed with shaky loans, underwriting $16.5 billion of new securities in the first nine months of 2007. About 15 percent of the loans backing these securities have defaulted. At the center of the boom in mortgages for borrowers with weak credit was Wall Street’s once-lucrative partnership with subprime lenders. This relationship was a driving force behind the soaring home prices and the spread of exotic loans that are now defaulting in growing numbers. By buying and packaging mortgages, Wall Street enabled the lenders to extend credit even as the dangers grew in the housing market. “There was fierce competition for these loans,” said Ronald F. Greenspan, a senior managing director at FTI Consulting, which has worked on the bankruptcies of many mortgage lenders. “They were a major source of revenues and perceived profits for both the originators and investment banks.” The battle over these loans intensified in 2005 and 2006, as home prices approached their zenith. (Home sales peaked in mid-2005.) At the same time, buyers of these securities, which carry relatively high interest rates, were fueling demand. Lehman Brothers, the dominant Wall Street player in this field, underwrote $51.8 billion of subprime mortgage securities in 2006, followed by RBS Greenwich Capital, which arranged $47.6 billion of sales. Not all banks continued to expand their subprime business. Credit Suisse, which had been a major player in 2005, pulled back aggressively, with its underwriting down 22 percent in 2006, compared with 2004. But other Wall Street banks, pushing to catch these market leaders, reached out to subprime lenders. Morgan Stanley, which expanded its subprime underwriting business by 25 percent from 2004 to 2006, cultivated a relationship with New Century Financial, one of the largest subprime lenders. The firm agreed to pay above-market prices for loans in return for a steady supply of mortgages, according to a former New Century executive. “Morgan would be aggressive and say, ‘We want to lock you in for $2 billion a month,’” said the executive, who asked not to be identified because he still works with Wall Street banks. Loans made by New Century, which filed for bankruptcy protection in March, have some of the highest default rates in the industry — almost twice those of competitors like Wells Fargo and Ameriquest, according to data from Moody’s Investors Service. Fremont General and ResMae, which also had high default rates, were big suppliers of loans to Deutsche Bank. Merrill Lynch had a close relationship with Ownit Mortgage Solutions, which filed for bankruptcy in December. Merrill also acquired another lender, First Franklin, for $1.7 billion in late 2006. “The easiest way to grab market share was by paying more than your competitors,” said Jeffrey Kirsch, president of American Residential Equities, which buys home loans. What is clear is that home loans were highly lucrative to Wall Street and its bankers. The average total compensation for managing directors in the mortgage divisions of investment banks was $2.52 million in 2006, compared with $1.75 million for managing directors in other areas, according to Johnson Associates, a compensation consulting firm. This year, mortgage officials will probably earn $1.01 million, while other managing directors are expected to earn $1.75 million. The NYT also reports that Bristol-Myers Squibb said yesterday that it would cut approximately 10 percent of its work force of 43,000 employees, continuing a year of pharmaceutical industry layoffs as drug makers adapt to a more competitive environment. Besides layoffs, the company said it would sell or close half its 27 manufacturing plants worldwide, farm out some manufacturing and winnow its portfolio of more than 500 products by about 60 percent. That will be accomplished both by selling mature products and eliminating product lines. Generic competition, a dearth of new drugs and a more safety-conscious posture by the Food and Drug Administration are among factors that have led to the announcements of at least 35,000 industry layoffs during the last year, industry analysts said. The chief executive of Bristol-Myers, James M. Cornelius, delivered the layoff news to investment analysts yesterday at a conference in Manhattan. He said that while it was difficult to cut employees, his company was late in doing so. “I’ve counted: since 2000, there have been 100,000 job eliminations in what we think of as big pharma,” Mr. Cornelius said during a break in the conference. “We’re about the only company that has had the same head count.” Mr. Cornelius took over on an interim basis in September 2006 after the company’s board sought the resignation of his predecessor, Peter R. Dolan. More recently, Mr. Cornelius agreed to remain as chief executive until May 2009. Of more than 43,000 people employed by Bristol-Myers, 1,300 were notified of their layoffs last week and an additional 3,500 will be let go in 2008. The cuts will be part of an overhaul that the company says will reduce annual expenses by $1.5 billion by 2010 and help it adjust to a business model that emphasizes specialty biotechnology products rather than big-market pharmaceuticals. The company declined to say exactly where the layoffs had occurred, other than an unspecified number at a biotechnology plant in East Syracuse, N.Y. Many of the 1,300 jobs already eliminated are in administrative positions like human resources, information technology and finance, the company said. Bristol-Myers had already announced that it would close manufacturing and packaging plants in Colón, Panama; Mayaguez, P.R.; and Barcelona, Spain. The company is facing the same problem as many other drug makers: the looming loss of patent protection for an important drug. In Bristol-Myers’s case, that is the blood-thinning agent Plavix. A generic equivalent will be available beginning in 2011, when the company hits what it is calling the generic cliff. Plavix generates about $3 billion in annual sales for Bristol-Myers Squibb. Industrywide, drugs with combined annual sales estimated at $60 billion will lose patent protection in the next five years. That reality is frequently cited for layoffs at drug companies, including Pfizer, the world’s biggest drug maker, which has announced job cuts of about 10,000 in the past year, or about 10 percent of its work force. Johnson & Johnson said this year that it would cut 4,800 position, or about 4 percent of its employees. Merck announced a global revamping in November 2005 that included an overall work force reduction of about 10 percent. There have already been 6,000 jobs cut, and the company is expected to lay off 1,000 more workers by the end of next year. James Kumpel, an analyst for the investment house Friedman, Billings, Ramsey, said that part of the problem facing drug makers was an increasingly cautious F.D.A. This year through October, the agency approved only 14 new molecular entities — drugs that are entirely new compounds rather than changes in formulations. That is a decline of about 18 percent from the comparable period in 2006, and it is well below recent norms, according to Mr. Kumpel’s analysis. Mr. Kumpel said the trend appeared to reflect the lowest rate of F.D.A. approvals since 1994. “If the F.D.A. is not allowing drugs to get to the market, or is just holding them to much tougher standards than before, drug makers face the prospect of a lot of new drugs going off patent and no new blockbusters to take their place,” Mr. Kumpel said. Despite the higher regulatory hurdle, Bristol-Myers appears poised to move away from its nonpharmaceutical health care businesses to focus even more narrowly on drugs. Mr. Cornelius, in a presentation, said Bristol-Myers would sell its medical imaging division, which is based in North Billerica, Mass. The unit employs about 800 people, 400 of them in North Billerica. The company might also sell its baby formula business, Mead Johnson Nutritionals, based in Evansville, Ind., and its ConvaTec products business, based in Skillman, N.J. ConvaTec specializes in products for wound care and ostomies — surgical openings in the abdomen to eliminate bodily wastes. Analysts have said Mead Johnson and ConvaTec together might bring in about $13 billion if sold. After its overhaul, Bristol-Myers, which has been based in Manhattan since the 1940s, is expected to maintain a mere toehold in the city. A spokesman said the company was expected to vacate all but one floor of its headquarters at 345 Park Avenue, where it occupied 550,000 square feet as recently as 10 years ago. Bristol-Myers has announced plans to streamline operations before. Its past efforts, however, have not been seen as having much effect on expenses. “Bristol has really been unable to cut costs on an absolute basis,” Jon LeCroy, a pharmaceutical analyst for Natixis Bleichroeder, said in a telephone interview. The company also announced that it was increasing its quarterly dividend for the first time since 2002, to 31 cents a share from the current 28 cents. The stock, which has ranged from about $25 to $32 in the last year, closed yesterday at $29.26, up 20 cents. © Copyright 2007 by Finfacts.com |
