Matt Cooper is right.

We’ll pay through the nose to bail out our creditors and save the euro
By Matt Cooper
Friday, November 26, 2010
WHAT’S happening to Ireland at present reminds me of a true, but ugly, story of the near collapse of an Irish corporate icon nearly 20 years ago.

In 1992, GPA was regarded as one of Ireland’s greatest corporate success stories. Entrepreneur Tony Ryan had built a company that was the world’s biggest in its area of expertise, purchasing passenger aircraft which it then leased to airlines throughout the world. Essentially, what GPA did was borrow the money to buy the aircraft and then made its profits by renting them to airlines at what was a higher price over the lifetime of the aircraft.

It was a financial institution, a type of specialist bank for the airline industry. And in 1992 it ran out of cash, just as a global recession depressed passenger aviation. GPA had ordered too many aircraft and did not have the money to pay for them, although this did not become clear until information had to be provided to the stock market as part of a plan to raise new money by issuing shares publicly. It had hoped to raise new money by selling new shares (while at the same time raising money for original investors by selling some of the original shares) which would then allow it borrow a multiple of that again to pay for the planes it had on order.

The company left it too late and looked for too high a price for the new shares. The stock market flotation planned for the summer of 1992 collapsed.

Here’s the ugly bit. In 1993, tottering on the verge of collapse, unable to raise the new money that it needed to retain control of the company, GPA’s founder decided to sell the bulk of the now slimmed down business to new investors.

Ryan was left to cut a deal with the giant US conglomerate GE Capital, which had been one of its supposedly less successful rivals in the sector. The US company’s boss, Jack Welch, drove a hard and possibly unfair bargain, offering almost nothing to existing shareholders, the same people who had expected a massive windfall before the failed 1992 stock market flotation.

Infuriated (and here’s the ugly bit that may offend some readers), Ryan snapped during the lengthy negotiations and shouted at Welch: “This is the rape of my company”. To which Welch reputedly replied acidly: “Well, what do you expect, Tony, when you’re wandering around with no clothes on?” (I met Welch some years later and asked him about the story. He declined to comment on the specifics, choosing instead to offer praise to Ryan, but I don’t doubt the story’s veracity).

Anyway, Ireland has been almost defenceless in the face of violent attack this week, albeit with some remaining clothes, courtesy of enough money in the bank to last us until mid-2011, extra money in the pension fund that could be raided and a balance of payments surplus. However, our ability to repay all of our debts is close to non-existent. It is no surprise the ECB and IMF are offering money, but on very unfavourable terms and conditions.

What that should mean is that we repay only a large portion of the existing debts, getting the balance written off or rescheduled, particularly those applying to the banks. It seems instead we are going to have to repay in full anyway, largely with money that will be forced on us in a refinanced loan from the ECB and IMF (and with some added in by our friends in Britain).

It does not make sense but if the Government continues to acquiesce to the demands of others, then this disastrous course of action will be embarked upon. Our ability to repay the new loans plus interest — a massive amount annually — will be compromised greatly by the dramatic further contraction in the economy that will be caused by higher taxes and further cuts to public spending.

This refinancing is not designed to help Ireland out of its troubles. It is to do two things: it is to bail out those who lent to us (not as is commonly said, to bail out Ireland) and it is an attempt to construct a firewall in the financial markets between us and the rest of the eurozone to protect the currency. It is not clear if either objective will be achieved.

Even if it is, one of the big fears we should have is that extra terms and conditions will be imposed on top of the actual interest rate (and additional facility fees) charged on our new loans. One of those is that we will be told to increase our corporation tax rate of 12.5%.

The campaign to force us to do this is intensifying. It is not likely to be forced upon us immediately — for political reasons because the EU wants to retain some pretence of helping rather than bullying — but the pressure will grow over time. Other EU member states hate the perceived (and real) advantage that it gives us in attracting foreign multinational investment (from the US almost exclusively). They want us to increase the rate, claiming it would allow us to improve our own tax revenues, reducing our dependence on borrowing (Their real agenda of course is to disimprove our chances of attracting foreign investment that might go to continental Europe, or Britain, instead). The campaign is becoming heated. One of the mostvicious and extraordinary attacks on Ireland this week came from a newspaper that, traditionally, might be expected to show some support for this country. An influential columnist in The Guardian, a woman called Polly Toynbee, accused Ireland of “tax piracy” in facilitating foreign multinationals who route their profits through the country and asked why David Cameron wanted to be a “good neighbour” to Ireland “when they have been such terrible neighbours to us?”

She is far from the only person to raise the issue. Many foreign MEPs are at it too, knowing it’ll play well with their constituents, irked by the idea that they will be giving money to sort out a mess in Ireland.

But what of the claim that we would not lose any investment or jobs if the corporate tax rate was increased and that it would allow us to raise extra money?

THE corporate tax rate applies to all, but it is clearly more valuable to large, high-profit companies. Indeed, I imagine that many small and medium sized companies struggling at present to make any profits on which they would pay tax would be happy to substitute lower state imposed input costs, such as energy and commercial rates, for an increase in corporation tax rates.

However, who wants to take the chance on losing the highly profitable bigger fish? As former Intel boss Craig Barrett told us last year only one of the 14 reasons why that country originally invested in Ireland still remains. Take a guess which one that is. There are hundreds of thousands of jobs at risk if our foreign multinationals were to take flight. This is why the Government has made saving our sovereign right to decide our own tax rates a priority.

As for Tony Ryan, now deceased. He lost control of GPA but his creditors did not ruin him. He had a $35 million loan (enormous at that time) with a US bank which decided to agree a settlement with him for partial repayment, even though he still had other assets which they could have insisted he sold.

One of those assets was the controlling shareholding in Ryanair. Not long after it seemed Ryan had lost everything, Michael O’Leary started the startling ascent of what is probably the greatest Irish corporate success story of all time. Ryan made more money out of Ryanair than he ever did out of GPA and the Irish people have had the benefit of the lower priced air travel than had existed before that. Sometimes even in adversity, great things emerge. As long, of course, as they are cut a bit of slack.

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