Economic & Business

Unemployed worst affected by budgets, says ESRI report

unnamed (3)
Michael Noonan, Minister for Finance: the ESRI report said households with the top 10 per cent of incomes will gain from Budget 2015. Photograph: Alan Betson/The Irish Times

Arthur Beesley

First published: Fri, Dec 12, 2014, 00:00

Single unemployed people without children have been hardest hit by budget cuts since the crash, and retired people have lost the least, according to new research. Those on the lowest incomes were found to have lost the greatest amount of household income as a result of Budget 2015.

While budgets since 2008 have reduced the incomes of all income groups, the Economic and Social Research Institute (ESRI) says the percentage losses were greatest for people with the highest and lowest incomes.

In Distributional Impact of Tax, Welfare and Public Service Pay Policies: Budget 2015 and Budgets 2009-2015, an analysis of the impact of sustained fiscal retrenchment, the ESRI found that: lthe richest 10 per cent of households lost about 15½ per cent, mainly from tax increases and public service pay cuts; l budget-related losses incurred by households with incomes in the poorest 10 per cent were “higher than average”, at close to 13 per cent; lmiddle-income households had “lower, though still substantial, losses” due to budgets, from 10 to 11 per cent.

Greatest and lowest losses

A family unit assessment showed that the greatest proportionate budgetary losses were for single unemployed people and the lowest losses were for pensioners.
“This reflects the substantial cuts in welfare payment rates for the young unemployed in particular, and the fact that pension payment rates, unlike working age payment rates, were not reduced,” said the ESRI team.

The research was carried out by Tim Callan, Claire Keane, Michael Savage, John R Walsh and Brian Colgan.

“Families at all income levels and of all types have seen income losses due to budgets over the past seven years,” said Dr Callan.

In an assessment of Budget 2015, the thrust of which was previously carried in The Irish Times, the ESRI team said households with the top 10 per cent of incomes will gain most from the package.

“The results show that Budget 2015 will have its greatest impact – a reduction of 1 per cent in net household income – on the 10 per cent of households with lowest incomes,” the ESRI said. “Smaller losses will be experienced by most middle-income households, with small percentage gains for higher-income households.”

This analysis takes account of the recent revision to the water charge scheme, in which metered charging was suspended in favour of lower flat rates.

Neutral impact

“The overall impact on household incomes of Budget 2015 and water charges is close to neutral, increasing average income by less than 0.1 per cent,” said the ESRI. “ The top [10 per cent of households] gains the most, with an average gain of 0.6 per cent. This pattern of losses in the bottom half of the income distribution, declining as income rises, and gains in the upper reaches, rising with income, can clearly be described as regressive.”
The ESRI said the introduction of a new, higher universal social charge, to counterbalance the cut in the top tax rate for people on very high incomes, gave rise to a “less unequal outcome” than a simple top-rate tax cut.

“A simple top-rate tax cut would have cost in the region of €230 million in a full year. In effect, the higher USC rate claws back close to €100 million of this, by capping the gains of those on the highest incomes at the same level as those on €70,000 per year. Nevertheless, there are gains for all top-rate taxpayers.”

O’Toole demolished by Pat Rabbitte

Why Fintan O’Toole is wrong about this Government

‘He now believes that the economic turnaround was inevitable. It was not.’

First published: Mon, Dec 1, 2014, 07:09

Fintan O’Toole engages in regular cynical depiction of all acts of this Government.

His criticism would be reasonable if he also commented on the Government’s positive achievements.

But Fintan O’Toole’s line is that nothing has improved, nothing can improve, nothing will improve.

He now believes that the economic turnaround was inevitable. It was not.

The truth is that the policies advocated by O’Toole would have sent Ireland Inc to the wall: no pensions paid, no public servants paid and no public services. A crisis of such magnitude that the appalling collapse experienced by Irish society would pale beside it.

However, to sustain his narrative, Fintan O’Toole ignores the positives. So the promissory note deal is ignored, the retained value in what are now our banks is ignored, the reduction in the interest rate paid on loans to both the European Union and the IMF is ignored. The fact that the recovery is not proceeding at the same speed in other euro zone countries is ignored. Surely a turnaround is inevitable there too?

Last week Ireland’s growth figures were confirmed as the highest in the euro zone – so the Government must be doing something right?

Debt will fall

On budget day, Minister for Finance Michael Noonan indicated that our national debt will fall to 91 per cent of GDP next year – and that does not include the value of our bank shareholdings. Within the constraints imposed by the ECB, we have succeeded in alleviating much of the potential debt burden on future generations.
In summary, everything that is bad is bad as a result of politics. Everything that is good or improving has nothing to do with politics. Nigel Farage is riding this sort of wave in the UK at the moment.

Fianna Fáil budgets post- bust, O’Toole argues, were more progressive than those of the current Government. It is a bizarre statement. By this logic, Fianna Fáil budgets that actually cut welfare payments are more “progressive” than those of the Coalition that did not, because those awful Fianna Fáil measures were accompanied by huge hikes in taxation.

If that is “progressive”, I think the Irish people could do without it.

The truth is that this Government has worked hard to protect spending in key areas such as social protection. We have not been able to fund all the resources that might be needed here – that is the product of circumstances we found ourselves in. But the need for balance and factual analysis is ignored by O’Toole.

Not mentioned

So Budget 2015 passes without mention of the first major investment in social housing since the crash. No mention of the fact that, for the first time in six years, Government was in a position to increase spending, current and capital, however modestly. No mention of the Christmas bonus, the partial restoration of child benefit. No mention of the impact on distribution of substantive employment gains over welfare dependency. No mention of the fact that the share of the tax burden on the well-off actually increased.
The problem with the distributional analysis is that to be “progressive” at a time when you are cutting expenditure means you have to continue to increase taxation. That this might impact negatively on economic and employment growth is ignored by O’Toole. Given how central work and employment is to Labour’s philosophy, it is a fact we cannot afford to ignore.

He rails about the recovery not yet being felt in people’s pockets without acknowledging that the first tax alleviation measures are due in January. No mention of the first reduction in mortgage rates for fixed and variable rate customers in years, no mention of property tax variations in urban areas, no mention of reduced energy and fuel costs.

Next year we will hold a referendum on same-sex marriage. We have moved on transgender recognition. We have legislated the X case so this society can now begin to discuss what other circumstances it believes appropriate to allow terminations to women.

This year we have passed legislation on whistleblowers, and Freedom of Information. Ground-breaking lobbying legislation is before the Dáil. The Ombudsman’s powers have been extended. New ethics legislation is on the way. Labour legislation knocked down by the courts restored.

There is no expectation that people should welcome some of the things this Government had to do to rescue this independent State – but there is a legitimate expectation that a man who holds an exalted position in The Irish Times might accord to those with whom he disagrees a basic degree of reason and fairness.

Pat Rabbitte is a Labour Party TD for Dublin South West

Sean Whelan on why FDIs come to Ireland

Why do the multinationals come here?

Wednesday 22 October 2014 14.34 By Sean Whelan
by Sean Whelan, Economics Correspondent

ESRI research shows corporation tax is key

New research by the ESRI for the Department of Finance looks at the impact of tax policy in the decision of Multinational Corporations (MNCs) to locate overseas.

The standout finding is that if Ireland had been operating a corporation tax rate at the EU average of 22.5%, fewer than half the multinational companies that have come here since 2005 would have opened in Ireland.

Even moving to a corporate tax rate of 15% could, the ESRI says, have knocked more than a fifth off the number of foreign firms opening here in the period under review.

It has used a database covering 3,228 newly established multinationals subsidiaries across 26 European countries from 2005 to 2012. 130 of these were located in Ireland. Most years around 400 new multinational subsidiaries opened up in the 26 states covered.

The ESRI controlled for a range of factors, including industry type, tax rate, GDP growth, market potential, common language, colonial past, natural resources. From all of this they deduced the effect of both non-tax and tax variables on the decision to locate.

In terms of non- tax variables, growth counts. It found higher levels of GDP and GDP growth increase the probability of choosing one location over another.

Infrastructure also had a positive and significant effect on the probability of location choice. Market potential (how much access to other, neighbouring markets a particular location gives) is also a positive factor in decisions – suggesting geographically peripheral economies are at a disadvantage.

Labour cost and quality measures were deemed to be not robust enough to draw conclusions from.

The ESRI then used four measures of corporation tax to assess its impact on decision making: the policy rate, the mean effective average tax rate (EATR), the total tax rate (which includes all taxes and contributions paid by businesses such as employers PRSI), and cross border EATR, which includes taxes levied by both host and home countries.

The strongest effect of a 1% change in the corporate tax rate was in the Effective Average Tax Rate, suggesting that this is the key to understanding the impact of tax on business decisions. A 1% increase in the policy rate reduces the likelihood of choosing a destination by 0.68%, but a 1% increase in the EATR had twice the impact, reducing the likelihood of choosing a destination by 1.5%.

And the mean EATR has very different effects on the different sectors the MNCs operate in. Services were the least affected by changes to the EATR, followed by manufacturing, but by a country mile the most sensitive to tax rate changes are firms in the financial sector.

This is important, because firms in the financial sector contribute one quarter of Ireland’s corporation tax take. And the bigger the firm, the bigger the impact of changes to the mean EATR. Again this is important for the state, as the big firms pay the most tax.

Unfortunately the data does not give an indication of the employment generated by the firms, so limiting the real economy impact of the research.

So, using this information, the ESRI ran a counterfactual, looking at the possible impact of various changes to the policy rate (not the EATR, which has a bigger impact).

Obviously leaving the rate at 12.5% had no impact, but going up to 15% reduced the number of new multinationals opening up by 22%: a 17.5% tax rate led to a 37% drop in numbers,: a 20% rate led to a 47% fall in the number of firms opening, while applying the EU average rate of 22.5% resulted in a 54% fall.

So instead of 130 multinationals opening here between 2005 and 2012, it would have been more like 60.

Without employment data we can only guess at the impact such an outcome could have had on overall employment levels in the state (and from that the impact on GDP and the debt ratio). But it couldn’t be good.

Irish Times on 1000 jobs gone in Ballymena

Cigarette plant scheduled to close in 2017 in major restructuring of company’s European operations unnamed
Ian Paisley jnr. Photograp: Paul Faith/PA Wire

Francess McDonnell

The Gallahers cigarette factory in Ballymena is set to close with the loss of nearly 1,000 jobs after its parent company Japan Tobacco International (JTI) announced details of major restructuring plans across Europe.

JTI today released details of a proposal to restructure its manufacturing facilities because of “significant and sustained changes impacting its global business”.

In a statement the company said: “JTI will undertake appropriate consultations on proposals to change its product sourcing, which could lead to the closure of some of its manufacturing sites.

“JTI’s facilities in Lisnafillan (Northern Ireland) and Wervik (Belgium) would cease to operate, with production moving to other facilities, potentially in Poland and Romania. Other tobacco product manufacturing in Trier (Germany) would also be relocated, with the exception of Ploom2-related production.”

A spokesman for JTI stressed that “no firm decisions” had been taken at this time and that it was entering into a consultation period with employees and trade unions.

“We are sensitive to the impact that any decision will have on our phenomenal workforce in Lisnafillan and the local community,” the spokesperson added.

North Antrim MP Ian Paisley said JTI’s decision to put its workers on a 90 day redundancy notice was devastating news. He said it signalled that the “Gallagher era is coming to an end”.

Gallaher, which was acquired by JTI in 2007l, makes Silk Cut and Benson & Hedges cigarettes. The original Gallaher business was founded by Derry man Thomas Gallaher in 1857 .

Mr Paisley said: “Today my heart goes out to these people, many of whom are personal friends, who have been effectively told that the Gallaher era is coming to an end. From May 2016, the first redundancies will commence and the key will be turned for the last time in the factory a year later. This is devastating news.”

The Northern Ireland Independent Retail Trade Association (NIIRTA) said the impact of 1,000 job losses on the local economy would be widespread.

NIIRTA chief executive Glyn Roberts said: “Gallahers generated £60million of wages into the local economy which will be a big loss in spending for local retailers and those businesses who provided goods and services to the company throughout the north Antrim area”

Tue, Oct 7, 2014, 17:26

First published: Tue, Oct 7, 2014, 16:54

Mortgages and conditions

New mortgage loan rules mean most house buyers to need 20% deposit
New Central Bank rules set for January expected to slow house price inflation

The Central Bank’s deputy governor Stefan Gerlach said these measures should help to avoid another property crash in Ireland and dampen the rate of price rise currently being experienced in the market.

Ciarán Hancock

Tue, Oct 7, 2014, 12:56

New mortgage rules published today by the Central Bank mean that most house buyers will have to have a 20 per cent deposit when applying for a home loan. The regulations come into force on January 1st.

The bank is proposing that no more than 15 per cent of all new mortgages for private dwelling homes should have a loan to value (LTV) ratio above 20 per cent. This means that most first-time buyers are now going to be expected to have at least a 20 per cent deposit when buying a home.

In addition, it has also decided that just one-fifth of new mortgages should be issued above a level of three and a half times income

In the case of buy-to-let properties, no more than 10 per cent of the value of all new loans should have an LTV above 80 per cent.

The Central Bank’s deputy governor Stefan Gerlach said these measures should help to avoid another property crash in Ireland and dampen the rate of price rise currently being experienced in the market.

“Our research has shown there is strong evidence that mortgage losses are much higher where borrowers have a high LTV or LTI rate,” he said. “We believe that measures such as these are a standard part of a well regulated financial system and introducing these precautionary measures should contribute to a stable and well-functioning mortgage lending market.”

The regulator said the income caps would be “more binding” than the LTV ratios in a period of boom as pay levels could never keep pace with soaring property prices.

The LTV caps are not “completely counter-cyclical” as loan values will rise in line with property prices.

Figures for 2013, show that of the €2.4 billion in home loans issued, 44 per centre breached the new 80 per cent LTV limit while 23 per cent were above the new income ratio.

In spite of this, the bank’s paper said there is little indication at present that bank credit has been an “important driver of the recent increase in property prices in Dublin, with the volume of new lending still very low”.

Figures for the first half of this year show that €1.3 billion was issued in new mortgages by lenders.

These new rules are proposed in a paper that is being issued to the banking industry as part of a two-month consultation process. The Central Bank hopes to introduce the new rules on January 1st.

Lenders will be required to submit regular data to the Central Bank to verify that they are operating within the new limits.

The regulator said it would use existing sanctions to punish lenders that breach its new rules.

The Central Bank said it does not wish to “regulate or directly control” housing prices in Ireland, which have begun to shoot up again this year, with a 25 per cent year-on-year rise in Dublin recorded in August.

The regulator said it believes the new rules to be “proportionate” and it expects regulated lenders to “take account of the likely introduction” of this new regime when issuing mortgages for the remainder of this year.

Certain exemptions are proposed to the new rules. These cover residual debt from home loans in negative equity, switcher mortgages, and home loans in arrears. Buy-to-let borrowers will also be exempt from the income restrictions.

Lending at high LTVs was a feature of the last crisis. Figures from the Central Bank show that the proportion of new loans issued at more than 90 per cent LTV grew from 14 per cent of loans in 2000 to 29 per cent in 2006, when mortgage lending peaked at €26 billion.

This led to large numbers of borrowers slipping into negative equity once housing prices turned and subsequently into mortgage default.

Tue, Oct 7, 2014, 12:56

First published: Tue, Oct 7, 2014, 12:55

Population statistics in RoI

Emigration of Irish nationals falls 20% in year to April

Just one in five emigrants unemployed before leaving, new CSO figures show

unnamed (4)

A total of 81,900 people of all nationalities left Ireland in the 12 months to April, new figures from the Central Statistics Office show. Photograph: Getty Images

Ciara Kenny

Tue, Aug 26, 2014, 11:42

There are early indications that the wave of mass emigration out of Ireland prompted by the downturn may be slowing, with the number of Irish people leaving the country last year falling 20 per cent compared to the previous 12 months.

Figures published by the Central Statistics office today show outward migration remains high however, with 40,700 Irish people moving abroad in the 12 months to April, compared to 50,900 in 2012/13.

A total of 81,900 people of all nationalities left Ireland in the period, down 8 per cent on the previous year, while 60,600 people immigrated, up from 55,900.

Fewer than one in five emigrants of all nationalities were unemployed before leaving Ireland, with the majority either at work or studying before departure. It is the first time the CSO has analysed the economic status of emigrants.

A breakdown of emigration by level of education, also published for the first time, shows 47 per cent of emigrants had a degree or third level qualification.

Irish people returning to live in Ireland from abroad made up 11,600 of the total number of immigrants, down from 15,700 the previous year. This resulted in a net outward migration figure of 29,200 Irish people, down from 35,200.

The number of births in the period was 67,700 while the number of deaths was 29,800, resulting in a natural increase of the population of 37,900.

The combined effect the natural population increase and migration brought the total Irish population to 4.61 million in April, up 16,500 on the same month in 2013.

Welsh Inferiority Complex Writ Large

Scotland independence referendum: Carwyn Jones threatens to veto Alex Salmond’s hope of a currency union

Wales’ First Minister insisted he would ‘firmly’ say no to any currency proposal in his strongest intervention yet in independence debate


Carwyn Jones has made his most forceful intervention yet into the debate on Scottish independence – insisting he would veto any attempt to set up a currency union after a Yes vote.

The First Minister said Scotland “cannot expect to share in the institutions of the Union” if it chooses to leave the UK in the poll next month and that he would “firmly” say no to any currency proposal.

Mr Jones re-entered the debate after months of rows over whether a UK Government would strike a deal over a currency union in the event of a Yes vote, with the leadership of all three main parties at Westminster saying they wouldn’t enter a union with an independent Scotland.

The Welsh First Minister’s intervention builds on a speech he made in Edinburgh last year in which he issued a passionate plea for Scotland ‘not to forget its Welsh friends’ as independence poll looms

unnamed (1)

Polling has also suggested that the people of Wales are largely hoping that the Scots vote to stay in the union when they go to the polls on Thursday, September 18.

Scottish First Minister Alex Salmond has also come under increasing pressure to explain any back-up “Plan B” he has if the UK Government did not agree to a currency union, which analysts concluded contributed to an unexpected win to Alistair Darling in the first of two televised debates.

Writing for the Scottish Daily Record website, Bridgend AM Carwyn Jones said: “You won’t be surprised to know I don’t want Scotland to leave our community – I don’t want Scotland to leave the UK .

“If that is what Scots want to do I will respect it. Wales and ­Scotland will remain friends. But if Scotland decides it does not want to share in our union, then Scotland cannot expect to share in the institutions of the Union.

“I would strongly oppose the idea of a currency union with an independent Scotland because I believe it would be bad for Wales and the rest of the UK. If you remember the banking crash, what we needed was swift decisions to stop our economy from going under. We had that speed and ­sureness because we pool ­sovereignty.

“There didn’t need to be a meeting of Welsh, Scottish, English and Northern Irish ministers to thrash out a strategy. We had one Chancellor of the Exchequer – who happened to be a Scot – who could act in all our interests.”

unnamed (2)

Scotland independence: As historic vote draws near – so do the questions for Wales

Mr Jones’ suggestion he would have a veto over an arrangement over the currency has been called into question, with Professor James Mitchell of Edinburgh University saying in reality Wales had no constitutional role over the decision and had been largely ignored in the debate – suggesting it was “not serious politics”.

His calls for a redrawn funding formula based on need, which could see Scotland lose out on £4bn of its budget, has also drawn criticism from the SNP.

However Mr Jones forcefully reiterated his belief that a currency union with an independent Scotland would not be in Wales’ best interests in the event of any future financial crises.

He added: “As Welsh First Minister I do not see why in similar circumstances I would have to wait around for the finance ­secretary of what would then be another country to make up his or her mind while the economy of Wales was in peril. I would firmly say no to such an arrangement.

“What we have built together is truly unique – the most successful partnership of nations in the world. I hope Scotland remains with the rest of us on these islands. I hope you vote to stay.”

It came as Welsh Secretary Stephen Crabb was in Edinburgh campaigning for Scotland to remain a part of the Union.

He said: “The United Kingdom has always been a community of distinct people groups, shaped by powerful geographic, economic and cultural forces down through the ages. Indeed, the UK’s Celtic nations own the very idea of Britain as much as the English do. A Britain without Scotland would be a hollowed-out concept.”

“As someone who cherishes both my Welsh and Scottish heritage, my appeal to my own Scottish family and friends is to keep faith in Britain. The United Kingdom allows our passionate sense of nationhood to be expressed inside the most successful political and economic union the world has known. The idea of Britain belongs to us.”

But SNP Treasury spokesman Stewart Hosie said: “Carwyn Jones isn’t in a position to block anything and Westminster can’t stop Scotland using the pound.

“A currency union following a Yes vote – as recommended by the Fiscal Commission – is best for Scotland and for the rest of the UK. Given that Carwyn Jones wants to cut Scotland’s budget by £4bn a year, I don’t think many people in Scotland will be impressed by his views.”

Social catastrophe in Leitrim. IDA must make this number 1 priority

160 jobs to go at MBNA call centre in Co Leitrim

MBNA call centre is expected to close its operations by the end of November

MBNA call centre is expected to close its operations by the end of November

Around 160 jobs are to be lost at MBNA’s call centre in Carrick-on-Shannon in Co Leitrim.

Workers were called to a meeting this afternoon.

It is understood the company will close its call centre by the end of November.

A company spokesman said it was proposing to “close the operation” after a review of potential options, including the sale of the company to a third party.

160 people are employed full-time in the call centre.

MBNA Chief Executive Ian O’Doherty said: “Our business is now UK-focused and serves UK customers, so we are proposing to align our resources to the market in which we operate”.

MBNA announced the sale of its Irish consumer credit card business to Apollo European Principal Finance Fund in March 2012 and around 250 roles were transferred from MBNA as part of the sale.

After the sale of MBNA was announced that same year, the Irish call centre operation in Carrick-on-Shannon was kept to support the company’s UK credit card business.

MBNA is a subsidiary of Bank of America and at one time employed around 900 people in Ireland.

MBNA sold a large share of the company to AvantCard in 2012, which is also based at the same site in Carrick-on-Shannon.

Jobs at AvantCard are not affected by today’s announcement.

Independent TD Denis Naughten said the jobs losses was “devastating news for the employees and their families”.

He said the decision will have “major repercussions throughout the area” and he had spoken to Minister for Jobs Richard Bruton on the issue this afternoon.

Mr Bruton said there have been regular contacts with local management and with Bank of America in the US, but the company made a “commercial decision to close this business”.

He said all the supports of the State will be made available to the workers affected and said today is a sad day and a big blow for those losing their jobs.

The minister said getting foreign investment into regions was increasingly difficult but they were developing new strategies to combat the problem and will announce a Regional Enterprise Framework later this year.

He also said the remaining element of MBNA, which was sold to Advent/Apollo, is working well and employs 250 people.

This has the makings of a major mess. Medical cards anyone?

9,000 one-parent families lose payment from today


The change is dependent on the age of the claimant’s children, along with when the payment began
Over 9,000 families are to lose their One-Parent Family Payment from today, when a previously announced measure comes into effect.

Changes to the eligibility criteria for the payment were announced two years ago, gradually reducing the number of those receiving the benefit.

The change is dependent on the age of the claimant’s children, along with when the payment began.

The Department for Social Protection has said the reforms are designed to get lone parents out of the poverty trap and into work.

Those who have relied on the payment will be offered a range of supports by the department.

Most recipients will transfer to Jobseeker’s Allowance, while some families may be moved to an increased Family Income Supplement payment or Carer’s Allowance payment.

By this time next year, almost 60,000 families will have lost the One-Parent Family Payment.

The Chief Executive of One Family, an organisation that lobbies for equality for one-parent families, has said the Government has not sufficiently invested in the supports that are necessary for one-parent families that will lose their payment today.

Speaking on RTÉ’s Morning Ireland, Karen Kiernan said the removal of this payment from some families, to try to encourage lone parents into the workplace, has not been planned for.

Ms Kiernan said services are required to ensure parents have the appropriate skills to re-enter the workforce as well as childcare facilities to allow them to return to work.

One Family acknowledges that the scheme needs to be reformed to become an active encouragement back to work for lone-parents, but Ms Kiernan said if the appropriate services are not in place, families will find it difficult to make ends meet, and may have to give up part-time work.

She added that the removal of the payment today is counter-intuitive to what the Government is trying to achieve, and insufficient planning will leave families who are already struggling worse off.

“What it actually means for the nearly 60,000 families that are going to be moved off next year is that a lot of them are going to be down money, and they are already extraordinarily poor families, who are finding it difficult to make ends meet”, she said.

Argentina’s best bet is to wait and strike a deal with hedge funds

Analysis: Buenos Aires has few realistic options after US Supreme Court ruling


unnamed (4)

Argentinian president Cristina Fernández de Kirchner raised the prospect of a new sovereign default in a national address yesterday. Photograph: Ron Sachs-Pool/Getty Images


Ed Stocker

Wed, Jun 18, 2014, 01:00

First published: Wed, Jun 18, 2014, 01:00

Cristina Fernández de Kirchner, the Argentinian president, raised the prospect of a new sovereign default in a national address yesterday. She said her government would never succumb to “extortion”, after the US Supreme Court rejected her country’s petition to reverse a legal ruling by a lower US court that forced Buenos Aires to pay holdout creditors.

Does the court’s decision mark the end of the so called “debt case of the century”? Almost. It means that a 2012 ruling by New York District Judge Thomas Griesa remains intact. This verdict said that if Argentina continues payments to creditors who participated in two debt restructurings in 2005 and 2010, then it must also pay the full value of the bonds held by creditors who refused to take part in the deals. These are the so-called holdout creditors, led by NML Capital, a subsidiary of Elliott Capital Management, a hedge fund controlled by US billionaire Paul Singer.

Why doesn’t Argentina pay everyone and move on? Of Argentina’s original $95 billion default, about 93 per cent of creditors participated in the restructurings. Buenos Aires says that leaves roughly $15 billion of bonds, including unpaid interest, in default. At stake in this case is a smaller sum: about $1.5 billion of debt held by NML and its partners. Argentina can meet that payment, but, with only $28 billion of foreign reserves, it cannot afford to pay the $15 billion owed to all holdout creditors at the same time.


unnamed (5)

Argentina seeks to avoid debt crisis after bondholder ruling

What options does Argentina have now? Four, broadly. It could refuse to pay NML, but that would also trigger an automatic default on the exchange bondholders who participated in the restructurings. This would set back Argentinian moves to regain access to international capital markets, such as its recent settlement with Paris Club creditors. That is a high price to pay as Argentina needs fresh loans to develop its shale gas reserves. Indeed, yesterday Ms Fernández swore Argentina would continue to service restructured debt.

Second, it could continue to refuse to pay the holdouts, while maintaining payments to exchange bondholders. However, that would require rerouting payments outside New York, where the exchange bonds are settled. Logistically that is near-impossible, especially as the next payment, some $400 million, is due on June 30th.

Third, it could comply with Judge Griesa’s ruling, and pay NML and its partners $1.3 billion now. However, that would open up Argentina to being sued by the exchange bondholders. That is because, until the end of this year, under a legal clause, they are entitled to claim any better terms voluntarily offered by Argentina to other bondholders.

That leaves a fourth option: reach an agreement with NML to settle its debts, probably by issuing fresh paper, but not until 2015 when the need for Argentina to offer similar terms to exchange bondholders expires. This seems the most likely option.

What are the international implications of the case? So far, none. There has been no market fallout. However, some, including the IMF, worry that the case will make future debt workouts harder as it removes the incentives for creditors to participate.

Against that, most international bonds now have collective action clauses, which make a repeat impossible as it requires bondholders to accept majority decisions.