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Furious unions accused the Government of declaring a war on their members' wages. But an unrepentant Finance Minister Brian Cowen insisted the benchmarking body had done its job and the issue would now go to the forthcoming national wage negotiations. Opposition parties claimed Mr Cowen and his Cabinet colleagues would be getting deferred pay increases of up to 14pc, under a report comparing top salaries in the two sectors. Union leaders are aware national deals normally give the same rises to both public and private workers. Their pay claims for the next national rise are now likely to increase. The benchmarking report said most public servants are well paid compared with their private-sector counterparts and therefore do not qualify for benchmarking awards. Increases were earmarked for just 15 of the 109 grades examined by the Public Service Benchmarking Body, at a total cost of €50m, or 0.3pc of the total public pay bill. The previous benchmarking body which reported in July 2002, awarded public servants an average increase of 8.9pc each. There was particular anger among nurses' leaders, who called off industrial action to await the benchmarking report's findings. They said yesterday's announcement called into question the validity of the entire benchmarking process. "We were told that benchmarking was the only game in town. But now the report says that the benchmarking process cannot deal with our claim," Irish Nurses' Organisation General Secretary Liam Doran said. Union leaders also complained that the benchmarking body had changed the methods used to calculate the 2002 award. The country's largest union, SIPTU, said the report also reflected downward pressure on wages in the private sector. "It is the inevitable outcome of the Government's refusal to take action on two of the major issues currently undermining workers' living standards. "These are the erosion of pension benefits for private sector employees and the constant undermining of pay and conditions by the widespread use of vulnerable agency workers and migrant labour," said SIPTU vice-president Brendan Hayes. Employers' group IBEC said the report brought reality into pay settlements in the public service at a time when the economy was facing more uncertainty and employment growth was slowing. Employers welcomed the fact that public sector pensions had been explicitly calculated in the decisions. The report put the value of pensions at 12pc of salary, but business group Chambers Ireland said that was too low. "The Department of Finance itself calculated that a pensionable public service salary of €186,000 was equivalent to a non-pensionable salary of €500,000 a year," said its chief executive, John Dunne. "On a general level, the body took the view that the public service must not lead the private sector in terms of pay," it said -- although it took into account "the reasonable aspirations of public servants for equity of treatment relative to the private sector". Labour Party finance spokeswoman Joan Burton said the findings will make it much more difficult to secure agreement on a new national agreement. "The atmosphere has been further soured by the Government's handling of the recent report of the Review Body on Higher Remuneration in the Public Service," she said. Fine Gael finance spokesman Richard Bruton criticised the fact that public sector managers were given high awards while the "ordinary rank and file" got nothing." The Irish Independent also reports that the Irish property market may come under further pressure over the coming months after the European Central Bank yesterday indicated its readiness to raise interest rates further. As expected, the ECB left interest rates unchanged at 4pc yesterday but the bank's head, Jean-Claude Trichet, made a strong appeal to governments to keep inflation down. Mr Trichet said that taking action on inflation remained the bank's "highest priority". The ECB has been under pressure from a number of EU countries to increase interest rates as a means of controlling rising inflation despite signs of a slowing economy. However, a rise in interest rates would further affect banks trying to borrow money during the current credit crunch. Mr Trichet said yesterday the ECB had discussed the "pros and cons" of increasing rates yesterday before deciding to leave them unchanged. Alert However, he said the bank would be on alert for the impact on prices of wage hikes, known as second-round inflation. The ECB has repeatedly warned of these effects, particularly from workers raising wage demands to compensate for high energy and food costs. Next month, talks on a new National Wage Agreement will begin in Government Buildings in Dublin. "The Governing Council remains prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialise and consequently medium-term and long-term inflation expectations remain firmly anchored in line with price stability," Mr Trichet said Mr Carroll did not comment when asked last evening about his investment in the airline, which is his third significant stake in a listed Irish company. Already the owner of a 29.5 per cent interest in food group Greencore and a 29.8 per cent stake in ferry operator Irish Continental, he is believed to have been behind the purchase of 17 million Aer Lingus shares on Wednesday when the stock closed at €2.06 that day. The shares finished yesterday at €2.054. The identity of the vendor from whom the shares were acquired is not yet known. Equally unclear are reasons for Mr Carroll's entry into the scene at Aer Lingus, which suffers from habitually poor industrial relations. The airline does not pay a dividend, has no plans to do so, and has no significant property interests. Land banks held by Greencore and Irish Continental are the presumed target of his stake-building in those groups. Aer Lingus had no comment last night when asked about the identity of its latest investor. If Mr Carroll holds onto his Aer Lingus shares for the long-term, as he has done with previous investments, it could have the effect of reducing liquidity in an already illiquid stock. Among Ireland's wealthiest developers, Mr Carroll has never made any public comment on any of his stock market investments or on any part of his wider business empire. Other Aer Lingus shareholders include Ryanair, whose 29.4 per cent stake dates from its failed takeover attempt at the time of its flotation in 2006, and the Government, which retained a 25.4 per cent shareholding after the initial public offering. Ryanair has submitted its appeal of the EU Commission's decision to block its takeover of Aer Lingus to the European Court of First Instance in Luxembourg, the EU's second-highest court. Aer Lingus has separately indicated that it will appeal to that same court a Commission ruling that it cannot force Ryanair to dispose of its stake in the airline. Other shareholders include the Aer Lingus employee share ownership trust, which owns 14.4 per cent of the airline. Businessman Denis O'Brien owns 2.3 per cent. The latest information for Mr Carroll's main holding company, Zelderbridge, indicates that it had net assets of €779 million at the end of 2005. This is widely believed to be only a partial reflection of his wealth. Zelderbridge now has unlimited liability. The Irish Times also reports that householders and businesses are likely to foot the bill for a €650 million upgrade to the Republic's electricity network that the Government believes is needed to hit green energy targets. Minister for Energy Eamon Ryan yesterday launched the findings of a comprehensive study of Ireland's electricity grid. The report states that the country could produce 42 per cent of its power from green sources, such as wind, by 2020. The study found that this will require an investment in the electricity transmission network of €650 million for the Republic, and just more than €1 billion for the island. An overview of the document published yesterday states that "these additional costs will need to be recovered within the price of electricity charged to end users". Just less than €1 in every €4 charged for electricity in the Republic pays for the national grid, which is used to transmit power from generating plants to the distribution networks that deliver it to customers. Under the all-Ireland electricity market system, introduced last November, there are other fixed charges designed to cover some costs faced by power generators. In other EU countries such as Germany, electricity users have ultimately had to bear the cost of initiatives designed to support the development of renewable energy. In the Republic, State-owned ESB is the only supplier that provides power to households. The Commission for Energy Regulation sets domestic prices every October. The regulator can take into account factors such as network investment when deciding on the charges. Mr Ryan stressed yesterday that investment in the power grid and infrastructure is needed for the country's long-term benefit. "We have to make the decision today to that will shape the country in energy terms for the next 100 years," he said. The Oireachtas committee on communications, energy and natural resources is due to discuss the study and the options for upgrading the grid. No date has been set for any work to begin. The Government has set a target of producing one-third of all the Republic's energy needs from renewable sources by 2020. Mr Ryan said the grid study demonstrated that this could be exceeded. In a separate development, it is understood that the Government is preparing to allow the State's national grid operator, Eirgrid, to borrow up to €500 million. The cash will be used to fund the proposed power connection linking the Irish and Welsh coasts, and to pay for the ongoing development of the systems it uses to manage the all-Ireland electricity market in partnership with its northern counterpart. The ESB owns the grid but Eirgrid, a separate body, manages it.
The Irish Examiner reports that weaker growth in manufacturing output is forecast for the year ahead as global demand slows and the strong euro makes Irish goods more expensive. Mr McQuaid said: “The overall performance of industrial output in 2007 has been impressive and average manufacturing growth for the year as a whole is now forecast at 8.5%, supporting the view that real GDP growth will be close to 5.0%.
The Financial Times reports that the Bank of England left interest rates unchanged at 5.5 per cent on Thursday, as fresh evidence emerged that mortgage borrowers are not yet getting the full benefit of December’s quarter-point cut. The Bank’s survey of quoted mortgage rates at the end of December showed rates on most fixed-rate mortgage products had changed little over the month, despite a lower official rate and a decline in two-year swap rates, which determine lenders’ funding costs. “The fact that mortgage spreads are rising while housing activity plunges makes it clear that this is not just a story of weak housing demand but also reduced credit supply,” said Michael Saunders, economist at Citigroup. Alan Castle at Lehman Brothers noted that lenders had passed on more of the rate cut in floating-rate products, especially for lower-risk borrowers. But George Buckley at Deutsche Bank said: “Retail mortgage interest rates are not falling as quickly as the decline in market rates might suggest ... under normal circumstances.” The monetary policy committee’s decision to leave rates on hold matched analysts’ expectations, although markets had priced in the higher possibility of a cut. George Osborne, the shadow chancellor, said he hoped Alistair Darling, the chancellor, had “learnt his lesson” after making comments that could be construed as an attempt to influence the Bank’s decision. “On Monday he all but publicly called for the Bank of England to cut interest rates, and today they ignored him,” Mr Osborne said. The market reaction was limited, however, as investors focused on the strong prospect that the Bank would now cut rates in February. “‘No change’ today does not mean that easing is finished,” Mr Saunders said, while Daragh Mayer at Calyon Crédit Agricole added: “Today’s inaction really only delays the inevitable.” MPC members will have felt the relative calm prevailing in credit markets removed some of the pressure for rapid action, allowing them to wait until February, when the committee can set out its thinking more fully in its next inflation report. Besides this presentational advantage, the committee may have worried that rapid easing would damage the credibility of its inflation target, given the pressures stemming from the latest spike in oil prices, rises in domestic energy tariffs and the recent slide in sterling, which fell again on Thursday against the euro. Economists say sterling’s decline over the past month could be viewed as an effective easing in monetary conditions of around 100 basis points. The MPC will also be on the lookout for any pick-up in wage inflation, after early data suggesting more generous pay deals. By next month, however, the Bank will have more information on the risks to its inflation outlook and on the extent to which consumers are reining in spending, after ominous trading updates from Marks and Spencer and other retailers. The last month’s data suggest UK activity is subdued but not yet under extreme stress. Shaky sentiment in manufacturing and retail contrasted with a slight recovery in service sector activity, labour market indicators remained benign and surveys gave a mixed picture even of the gloomy housing market. But the worsening outlook for US growth brings fresh risks. Dismal figures on manufacturing and jobs fuelled fears of a US recession last week. The FT also reports that the economic downturn in the US is starting to hit government revenues, the head of the Congressional Budget Office has told the Financial Times. In an interview, Peter Orszag, the CBO director, said the slowdown “is showing up in revenue”. Tax receipts were softer “across revenue as a whole” but “the slowing is most marked in corporate tax receipts”. Mr Orszag said any further deterioration in growth would have a still larger effect on tax revenues. Revenues “disproportionately fall when income weakens and rise when income strengthens”, he said, in part because of the progressive tax code. His comments echo warnings by the International Monetary Fund that the credit crisis and weaker growth outlook will have an effect on public finances in many countries, including the US. Most analysts expect the CBO’s regular update later this month to revise down its estimates for revenues and increase its forecast for the fiscal deficit this year in the light of the economic slowdown. Mr Orszag declined to comment on any possible revisions but said data for the past few months showed that “in general revenue growth has been slowing”. The CBO’s latest monthly update, released this week, shows that tax receipts were up 5.6 per cent year on year in the past three months of 2007 – the first three months of the government’s 2008 fiscal year. But Mr Orszag said the comparison was flattered by there being an extra business day in December 2007 compared with December 2006. “Taking this into account, revenue growth was about 4 per cent in the quarter, much slower than we saw in the previous year,” he said. Even without this adjustment, corporate tax receipts were down 5 per cent year on year over the quarter, although they were flat in the month of December itself. Mr Orszag said revenue growth always “lags behind income as income significantly weakens”. But he said: “Whether growth of, say, 1 per cent would result in falling revenues would depend on the growth mix and factors such as stock market performance.” The CBO director said the slowdown in tax receipts was sharpest “with respect to corporate income tax receipts, because the growth there between 2003 and 2007 was so dramatic”. Corporate tax receipts more than doubled from 1.2 per cent of gross domestic product in 2003 to 2.7 per cent in 2007, surprising experts including the CBO. Mr Orszag said one big reason for this increase was the rise in the share of national income going to corporate profits at the expense of owners of debt and labour. “Since debt is tax preferred relative to corporate profits, that has a significant effect on tax receipts.” The corporate profit share, he said, “would likely decline in response to a weaker economy” – undermining corporate tax receipts. Some economists believe that, in addition to cyclical factors, the repricing of credit under way in financial markets could also lead to a shift in the national income share back from corporate profits to debt. If this happened, corporate tax revenues could surprise on the downside even relative to growth in the coming years, just as they surprised on the upside in the past few years. Mr Orszag declined to comment on whether this might happen.
The New York Times reports that presenting a bleak picture of a deteriorating national economy, Ben S. Bernanke, chairman of the Federal Reserve, strongly suggested on Thursday that the Fed would cut interest rates soon, perhaps by a large amount. “The outlook for real activity in 2008 has worsened,” Mr. Bernanke said after describing all the forces dragging down the economy. “We stand ready to take substantive additional actions as needed to support growth and to provide adequate insurance against downside risks.” With fears rising that the economy is sliding into recession, Mr. Bernanke’s blunt assessment is expected to encourage politicians to call on Congress to take steps that would stimulate growth beyond what the Fed can achieve through lower interest rates. Many analysts now expect the Fed’s policy makers to cut half a percentage point off the Fed’s benchmark interest rate, reducing it to 3.75 when they next meet, on Jan. 29 and 30. They expect the Fed to continue cutting, to 3 percent or even lower by summer, to prevent — or at least mitigate — a recession. The goal would be to get people to borrow and spend more. Consumer spending, however, may already have hit a wall. Shortly before Mr. Bernanke spoke, at a Washington luncheon, the nation’s biggest retailers announced that holiday sales gains were the weakest in the last five years. Only Wal-Mart gained ground, after it slashed prices to draw jittery consumers. “Bernanke should have made this commitment to cut rates aggressively two or three months ago,” said Mark Zandi, chief economist at Moody’s Economy.com. “Will it be enough? It will be close. With aggressive rate cuts, some fiscal stimulus and a bit of luck, maybe we’ll avoid a recession.” The stock market responded with uncertainty at first to Mr. Bernanke’s remarks, but then chalked up solid gains. The Dow Jones industrial average surged as he spoke, then fell back, then rose again, closing up nearly 1 percent, to 12,853.09. Encouraged by other developments as well, including reports that the nation’s largest mortgage lender was about to be acquired by Bank of America, traders apparently concluded that the Fed was at last committed to a more vigorous effort to lift the economy, and to reverse the recent slide in stock prices, which often go up in response to rate cuts. “Maybe the Fed and the market are not quite on the same page yet,” said Richard Berner, co-head of global economics at Morgan Stanley, “but they are getting a lot closer.” Mr. Bernanke’s gloomy assessment of the economy represented a turning point for the Fed. Until now, most of the Fed’s top policy makers, starting with Mr. Bernanke, had spoken publicly of their “uncertainty” about what lay ahead. They have cut their benchmark interest rate, the federal funds rate, by a full percentage point since mid-September in response to the credit crisis and the housing downturn. But they accompanied each cut with a statement that stopped well short of declaring that the economy was clearly in trouble. Evidence of deterioration has accumulated, however, since the policy makers’ last public statement in mid-December. Within the last week, the Labor Department has reported a sharp jump in the unemployment rate; AT&T said that a number of customers were not paying their bills; American Express reported weaker spending by its cardholders; and the nation’s retailers released their disappointing holiday sales figures. Acknowledging the evidence, President Bush, speaking in Chicago on Monday, said the nation faces “economic challenges” and “we cannot take growth for granted.” The mounting evidence has suggested to a growing number of economists and politicians that the Fed by itself cannot stem the economic slide and that Congress must help with fiscal policy in the form of a tax rebate for low-income families, extended unemployment insurance or some other subsidy. Without addressing the growing demands for fiscal stimulus, Mr. Bernanke devoted most of his talk, at a forum sponsored by Women in Housing and Finance and the Exchequer Club, to a review of the economic damage, which he said had increased in recent weeks. Housing starts and new-home sales are off 50 percent from their peaks, he said. Foreclosures are rising, and so is the number of households behind on their mortgages. In the financial markets, the subprime shock “has contributed to a considerable increase in investor uncertainty,” he reported, adding that the Fed is seeing “considerable evidence that the banks have become more restrictive in their lending to firms and households.” Offering an explanation for the Fed’s reluctance to act more aggressively sooner, Mr. Bernanke said that economic growth seemed “to have continued at a moderate pace” until recently, when new information increasingly indicated that “the downside risks to growth have become more pronounced.” The Fed, Mr. Bernanke said, had counted on an expanding job market to “support moderate growth” in consumer spending. But the government reported Friday that hiring had fallen almost to zero in December and the unemployment rate had jumped to 5 percent from 4.7 percent — a rare one-month surge that almost always indicates coming hard times. “It would be a mistake to read too much into any one report,” Mr. Bernanke said of the jobs report. “However, should the labor market deteriorate, the risks to consumer spending would rise.” In a 13-page speech, the Fed chairman devoted only one paragraph to the risk of inflation, although some of his colleagues at the central bank have cited inflationary pressures as a reason to go easy on rate cuts. Mr. Bernanke acknowledged these concerns but clearly put them on the back burner. “Thus far,” he said, “inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilization have diminished.” Mr. Bernanke said the Fed had successfully pumped money to banks and other lenders damaged in the mortgage crisis. Lending to banks directly from the Fed’s discount window, he said, had not worked as well as auctioning fixed multibillion-dollar sums. Among other advantages, he explained, the auctions gave the Fed greater control over how much money was entering the financial system and the effect on interest rates. The auctions, he said, “may thus become a useful permanent addition to the Fed’s toolbox.” In his speech, Mr. Bernanke carefully avoided any discussion of a recession, which would be an extended period of contracting economic activity and falling employment. But some economists argue that such a downturn may be unavoidable — or already have started — despite the Fed’s recent efforts to contain the damage from the housing collapse and credit market turmoil. “However much the Fed cuts rates between now and the spring,” said Brian Bethune, an economist at Global Insights, “the die is cast for a pretty rough six months and a very high risk of recession.” Asked about the possibility of a recession, Mr. Bernanke sidestepped the question. As a Princeton University economist before he came to Washington, he said, he had served on a committee charged with setting the official starting and ending dates of each recession. “You really cannot make a determination,” he said with a sly grin, “until well after the event.” The NYT also reports that Countrywide Financial, the troubled lender that became a symbol of the excesses that led to the subprime mortgage crisis, is close to being acquired by Bank of America for slightly more than $4 billion in stock, people briefed on the transaction said Thursday. Directors for both companies have approved the deal, which is expected to be announced Friday, these people said. Shareholders, however, may be disappointed with the price, which is nearly $500 million less than Countrywide’s value on Thursday. Because it is an all-stock transaction, Countrywide investors will benefit if Bank of America stock rises, which it did yesterday. As the nation’s largest mortgage lender, Countrywide helped fuel the housing boom by offering loans to high-risk borrowers. But as home prices began dropping last year and borrower defaults soared, Countrywide’s lending practices came under the spotlight of legislators, regulators and consumer advocates. With financial pressures mounting, Countrywide’s stock price collapsed in 2007, falling 80 percent, wiping out $20 billion in market value. Earlier this week, Countrywide’s shares plummeted further as speculation about a bankruptcy filing roiled the market, a rumor the company denied. Countrywide shares soared 51 percent, to $7.75 Thursday on news of a possible sale. The shares are down 83 percent from $45.26 last January. Both Bank of America, led by Kenneth D. Lewis, and Countrywide, overseen by Angelo R. Mozilo, declined to comment. But the people briefed on the deal said that negotiations had been going on for about a month. While a sale of Countrywide, based in Calabasas, Calif., is not expected to affect borrowers, it would underscore the complexities and financial challenges that have engulfed the mortgage industry — from lax lending standards to loose regulatory oversight and the intersection of Main Street homeownership with Wall Street financial engineering. “Bank of America has always wanted a larger presence in mortgage banking and Ken Lewis has also said that they would wait to buy until blood is running in the streets,” said Charles Peabody, an analyst at Portales Partners in New York. “Mozilo must have thought there was a chance Countrywide wouldn’t survive.” Almost 150 mortgage lenders failed last year and 43 were acquired by healthier institutions, according to Mortgagedaily.com. Banks and brokerage firms have also suffered steep losses, and several chief executives have been forced out. As defaults have surged, investors who once flocked to risky mortgage loans for their higher yields have shunned them. Troubles in the housing market have also generated larger concerns about the economy as a whole and the possibility that the country may enter a recession. News of the possible sale came a day after Countrywide disclosed that 7.2 percent of the loans in its servicing portfolio were delinquent last month, up from 4.6 percent in December 2006. Foreclosures also more than doubled last month, to 1.44 percent of unpaid principal balances versus 0.70 percent in December 2006. For Bank of America buying Countrywide is a bet that it can salvage its $2 billion investment in a preferred stock issued by the company in August; Bank of America paid $18 a share for a 16 percent stake. But Countrywide’s problems have only worsened, leaving Bank of America with big losses. On Thursday, shares of Bank of America rose 56 cents, to $39.30. Although the terms of the deal are unclear, if the sale goes through Bank of America would be taking on significant legal liabilities stemming from Countrywide’s lending practices. Countrywide Credit Industries opened for business in New York City in 1969, the creation of Mr. Mozilo, a butcher’s son from the Bronx, and David Loeb, a founder of a mortgage banking firm. The company became the nation’s largest lender in the early 1990s. By last year, it had become a $500 billion home loan lender with 900 offices and $200 billion in assets. Mr. Loeb died in 2003. In addition to originating mortgages, Countrywide is the largest servicer of them, overseeing the administration of $1.4 trillion worth of loans. The company also has a bank overseen by the Office of Thrift Supervision; an insurance unit; a subsidiary that provides borrowers with loan closing services like appraisals and flood certifications; and a broker-dealer that trades securities. It employs 51,000 people. Countrywide showed spectacular growth in both earnings and share price over the years. But in recent months it became clear that its growth was fueled by increasingly loose lending practices. Last year, even as defaults rose, the company was slow to recognize that it needed to change its business practices and lend more conservatively. In August, as financial markets froze on fears that the subprime mortgage woes were spreading into other parts of the economy, Countrywide was forced to draw down all of its $11.5 billion credit line. “Countrywide has been a rogue lender with a rogue leader,” said Martin Eakes, chief executive of the Center for Responsible Lending, a consumer advocacy group. “Bank of America would be a responsible home for fixing the problems that Countrywide has created.” Through acquisitions, Bank of America has transformed itself from a small regional bank into a national powerhouse. In 2003, for example, it paid $48 billion for FleetBoston Financial, which gave it the most branches, customers and checking accounts of any United States bank. In 2005, Bank of America became the biggest credit card issuer when it bought MBNA for $35 billion. By purchasing Countrywide, Bank of America would combine its 5,800 branches with the mortgage lender’s coast-to-coast network, helping Mr. Lewis achieve his goal of becoming the biggest player in every major consumer finance category. If the deal goes through, Bank of America would brush up against a federal cap that prevents a bank holding company from controlling more than 10 percent of the nation’s deposits. Because Countrywide Bank is a federally insured savings and loan, the rule does not apply. Seeking to ease any regulatory concerns, representatives for the companies were in Washington on Thursday to brief regulators. Mr. Mozilo is expected to remain as chief executive of Countrywide until the deal closes, probably in the third quarter, people briefed on the transaction said. After that, he would serve on a transition team and would remain with the combined company on an interim basis. He could be entitled to an exit package of roughly $72 million. That would be on top of the $410 million in pay, including $285 million in option gains, that Mr. Mozilo has taken home since he became Countrywide’s chief executive in 1999. Selling Countrywide gets Mr. Mozilo out of a tightening financial vise. But doing so at a stock price below $10 is certainly not what he probably envisioned. Indeed, just last March, as the subprime crisis was starting to unfold, Mr. Mozilo crowed that Countrywide would benefit from the spreading mess. “This will be great for Countrywide,” he told an interviewer, “because at the end of the day, all of the irrational competitors will be gone.” © Copyright 2007 by Finfacts.com |
