New law to give Central Bank more powers

The news said that the legislation to put in place a special resolution regime for banks and give the governor of the Central Bank the power to intervene in their affairs. In December 2010, the government promised to publish the law by the end of February and said it would broaden the available resolution tools with the aim of promoting financial stability and protecting depositors. The new law will be used to intervene in the affairs of distressed financial institutions and will replace the Credit Institutions Act.

The legislation was contained in the agreement between the government and the EU-IMF. The EU-IMF deal with the Government said legislation on improved procedures for early intervention in distressed banks and a special bank resolution regime (SRR) would be introduced. “The SRR should include a robust set of powers and tools to ensure the competent authorities can promptly and effectively resolve distressed banks, e.g. when they pose a risk to financial stability. The legislation will be consistent with the EU treaty rules and will be consistent with similar initiatives ongoing at EU level,” the agreement stated.

The UK have been introduced bank resolution legislation in February 2009, however, the absence of such legislation in most jurisdictions seemed it have widely hindered governments’ efforts to deal with distressed banks and the financial crisis.

The Credit Institutions Bill was published and enacted within a week in December. At that time, the minister for finance Brian Lenihan said that a key pillar of the EU-IMF agreement was comprehensive restructuring of the retail banking system. The law, he said, would allow him take actions needed to bring about a domestic retail banking system that is proportionate to and focused on the economy.

http://www.irishtimes.com/newspaper/finance/2011/0228/1224291007031.html

Some reflections of "China's Trade-off"

Razeen Sally, the author of of "China's Trade-off", he wrote some faults of Chinese government policies and interventions of Chinese market, highlight the extremely huge interventions comes from Chinese government in Chinese market even after China joined into WTO. The examples he used are the price control of Chinese food, energy, financial market and the tariff policy of tombarthite. These are all truth, the huge intervention actually exists in Chinese market, but these policies are not as harmful to China as he said, and in opposite, these policies have protected Chinese companies and its weakly market from developed countries' invade and occupy.

And here I just show some of my points about Chinese tariff policy. We have to admit that, more competition can make the companies have more innovation and competitiveness, and also filtrate the disqualification companies. But that is just a totally economic view about market competition, in the real world, more other factors makes governments can not do the theoretically best method to manage its local market. For example, USA's tariff was the the highest of the world in the 19th century, but the highest tariff didn't make USA's industries's decay, it makes the USA's industry got a perfect good environment to develop, and finally make USA became the most powerful country of the world. I'm not mean that high tariff is always good, the overflow of high tariff is really harmful, just like USA's trade war in 1930, the international trade got 70% recession in that time, and Germany's international trade got 76% recession, the industry production of main capitalism countries all got huge influences. Protection tariff policy can provide a good development environment to local companies at the beginning, and it is not suitable for a country which have a mature industry system. The reason why USA always want to make developing countries to execute low tariff policy is because USA has already have a mature industry system, and it want to use its highly developed industry power to destroy the weakly industry systems of developing countries, so that USA can control the industrial power of these countries which means these countries will not be threatening to its position. Chinese history in the 19th century and the beginning of 20th century has fully explained the danger of a country which do not have its own industry system.

And the censure of China's tariff policy is even absurdity. In 11 Sep 2010, Obama government decide to operate the special protectionist tariff for Chinese tire, and after that 24 other special protectionist tariff plans were in considering in USA's commerce department. These evidences show that USA wants to increase the pressure to China for the exchange rate issue and reduce its pressure which comes the huge USA's national debt comes hold by China. USA's actions make thousands of China's company become bankrupt, most of Chinese people want to start a trade war with USA to punish it, and some generals even suggest to sell out all of USA's national debt to give a lesson to USA commerce department. So the duties of China's actions are all belong to USA, the tombarthite tariff and some others are just to give a sign to USA and Japan, tell them don't start a trade war, that's not a good idea for them.

So I think the censure of China's tariff policy makes no sense, the only way is to make USA stop their injustice actions.

Mortgage arrears and repossession rise

Figures released by the Central Bank today shows a 6per cent rise in the number if people in arrears and an acceleration in repossessions. The figures highlight that there is 8.6 billion owed by account holders who are 90 days or more in arrears and 6.2 billion owed by account holders in arrears of 180 days or over. This worsening trend has lead to 106 homes being repossessed in the last quarter and making a new total of 422 homes being repossessed since July 2009.

Official mortgage data that was supplied by the main Irish Banks to the Central Bank has revealed that:

• 44,508 mortgages (5.7% of all mortgages) valued at a total of 8.6 billion euros were more than 90 days behind payment.
• The main banks have allowed 59,229 households to restructure their debt and 35,205 of these mortgages have been classified as performing

According to the Conor Pope this new data has shown the debt owed by private households has decreased by 1.7 billion since the forth in 2009. Although the number of arrears and repossessions have risen the figures released by the Central Bank also show that the main banks are willing to restructure and try to accommodate the payment of the mortgages. The Irish Bankers' Federation have said the rise in the number of arrears is due to current economic circumstances and have stated "while the vast majority of borrwes continue to meet theor mortgage repayments, it is important that those borrowers in or facing difficulties are assisted in every reasonable way possible."

The counter argument to burning the bondholders

The counter argument to senior debt restructuring (which I proposed in my last blog) is made in today's Irish Times by Donal O'Mahony, global strategist at Davy's. The key points of his argument are summarised as follows:

• That senior bondholders are not risk investors are rank alongside ordinary depositors.
• That senior debt provides financing for credit creation far beyond that of ordinary deposit maturities. I found this an interesting argument that I had never heard of, or thought of, before.
• That the risk capital in the banks have already taken a substantial hit: equity shares €55bn in the total Irish banking sector and subordinate bonds €10bn, from liquidity management exercises.
• That the €35bn into Angle and Nationwide are the only bank injections that will end up in black holes and that the money ploughed into the rest of the banks (BoI, AIB, EBS) are "financial transactions" (yes, you heard right, merely a transaction, nothing to worry about!) with "legitimate expectations of longer term return." (What would Keynes say to this?Maybe or grandkids can leave us a note on our gravesides informing us of our return in AIB?)
• That the cost benefit analysis of imposing the senior losses would be adverse, as burning the bond holders may cause contagion throughout Europe and adversely impact on our bank and sovereign funding.

It's an argument at least. But he lost me when he spoke of our returns in the other banks, speaking of their bail-outs as mere "transactions".

JPMorgan fund eyes 10% stake in Twitter

A JP Morgan fund is in talks to acquire a substantial stake in Twitter. Twitter is one of the world's fastest growing social networking sites. The JP Morgan fund asked for 10% of the online messaging service for $450 billion, this values Twitter at $4.5 billion. It is not yet clear if the fund will make a direct investment or buy out existing investors and shareholders.

JP Morgan's Digital Growth Fund was established this month to give rich clients exposure to fast growing private tech companies. This follows a similar effect by Goldman Sachs to invest in the ever popular Facebook.

The fund has raised $1.22 billion to date. but it plans to raise $1.3 billion in total and will have a maximum of 480 investors. JP Morgan expects to earn commission of at least $13 million from the fund.

JP Morgan also hopes to invest another 1/3 of the fund in one other private web company. Games maker Zyna or telephony provider Skype are two possibilties. The final 3rd of the fund will be allocated among 6 other companies.

Kleiner Perkins invested $200 million in Twitter in December at a $3.7 billion valuation. The JP Morgan valuation of $4.5 billion would mark a swift rise in value.

Facebook is now worth up to $70 billion on the secondary market, this is a price considered too rich for the fund.

Why Ireland Should Continue to Invest in Research and Development

During the Celtic Tiger Ireland increased greatly its expenditure on R&D. This was put into two areas; Biotechnology and Information and Communication Technology (ICT). Currently Ireland spends 1.6% of GDP on R&D. However this is below the EU average which is around 1.9%. However Ireland’s current financial crisis and commitment to reduce 15 billion in expenditure from the budget means this investment in R&D is under threat. This would be a huge mistake. Ireland needs only to look at the example of Finland when it needs to answer the question of R&D spending
An example for Ireland is Finland. Finland and Ireland are two countries with many similarities. Both are small, open economies on the periphery of Europe. The population in Ireland is just over four million to Finland's five. The financial crisis Ireland has experience is very similar to the financial crisis that happen in Finland during the 1990s. Over the years 1990-1993 GDP fell by 13% from peak to trough and unemployment climbed to nearly 18%.
Both countries experienced asset price bubbles, particularly in housing. Regulators failed to control the behaviour of the banks and fiscal policy was inappropriate. Yet Finland emerged from its economic depression to rapidly become one of the world’s most ICT-intensive economies with one of the highest growth rates among EU countries. From 1994 to 2000, GDP growth averaged 4.5% per annum.
When the Soviet Union collapse Finland lost a huge share of their export market. In order to compensate for this, Finland decided to cut expenditure in nearly every area except in R&D and education. This was a key decision which Finland is still seeing the benefits. After the crisis Finland emerged as one of the most world’s best ICT sectors. In Suonpera (2009) paper “Lessons for Ireland from the Finnish Crisis” said that by 2000, high tech goods accounted for 23% of the value of total goods exports, up from just 6% in 1991.
It is therefore critical Ireland invests in R&D. In these economic times there are no quick fixes. R&D research could be in crucial to Irelands economic development in moving the economy out of these desperate times

Dublin Chosen as European City of Science 2012

Dublin has won in its bid to be chosen as the European City of Science 2012. Ireland has been increasing its efforts to become an internationally recognised centre for science and research. This effort has been recognised an Ireland is now ranked in the top 20 for both the quantity and quality of research papers produced. As noted by Ahlstrom, Ireland is also ranked among the Top 10 producers of papers in other fields such as Immunology and Materials Science for example. Being chosen as the host city, it is hoped, will bring many benefits to Ireland and increase its reputation internationally. According to O’Carroll of The Irish Times, the event will attract approximately 5000 scientists, business leaders, policy makers, and international scientific media. The aim of the gathering, which is to take place from July 12^th to 15^th, is to discuss European science as well as to address global scientific issues such as energy policy for example.

It is hoped that this event will be highly beneficial to Ireland. But what benefits can this event bring that will outweigh the costs of hosting an event of this calibre? As Clark writes, hosting such events can bring more negative results than positive. It is extremely risky for the host country and holding such an event should be considered thoroughly. The benefits also take a much longer time to materialise than the costs. These events are expensive and unless they are well organised and managed benefits are unlikely to materialise afterwards. Whether or not hosting this event is a wise use of the country's resources is a matter of opinion.

The main benefit envisioned is an increase in Ireland's reputation as a core for scientific research and produce in Europe. Increasing Ireland reputation may attract outside investment and encourage science based multinationals to locate in Ireland over other countries. This is only one of the potential benefits. As Clark puts it in his OECD publication, when international events are hosted well, they become a catalyst for local development and global reach. It is how Ireland handles the organisation of this event that will decide its level of success.