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ISEQ lower-Promissory note problems

Monday, January 28 09:16:33

The ISEQ stands at 3,431, down 22 points this morning as markets are stalled as investors turn cautious at record highs for European markets.

Ireland's promissory note negotiations are similarly in some trouble over the weekend and Davy Stockbrokers comments:

Stock indices closed up on Friday (January 25th), with the Euro Stoxx 50 up 0.8pc and the S and P 500 up 0.5pc.

A rise in the German IFO business sentiment survey buoyed expectations for a euro area recovery in 2013. News that European banks will pay back $137bn of LTRO loans highlighted the improvement in bank funding conditions over the past 12 months. The euro rose to an 11-month high against the dollar, just short of under $1.35 at the close.

Reports over the weekend suggest that the ECB governing council has rejected initial Irish proposals to restructure promissory note payments to IBRC. In short, the promissory notes represent a E31bn central bank loan (ELA funded) set at the ECB's main refinancing rate (currently 0.75pc) and with an average five- year term. So any benefit from a restructuring of the promissory notes would involve locking in the rock-bottom ECB funding costs for a longer time period.

However, it appears that the ECB governing council remains concerned that acquiring government bonds on its balance sheet for an extended period would amount to monetary financing. If so, the most advantageous option, to extend the E31bn loan to a 40-year term at the ECB's main refinancing rate, may have been ruled out. So a sharp reduction in the net present value of the E31bn, through a long-term loan at the ECB main refinancing rate, now looks less likely.

Nonetheless, Ireland could still be relieved of the E3.1bn per annum funding requirement by some shorter-term extension of ECB funding. However, in this respect, the decision by EU leaders to consider extending Ireland's bailout loans may be more fruitful, with almost E34bn of EU/IMF loans due to be repaid, and potentially deferred, by 2020.

UK national accounts data released on Friday showed that GDP fell by 0.3pc in Q4 2012. With UK growth flat-lining, the coalition's fiscal consolidation strategy is now clearly under threat - not least from a downgrade of the triple-A credit rating.

The IMF has called for this year's budget to reduce the pace of fiscal consolidation. Government sources now admit that capital expenditure has been cut too sharply, suggesting shovel ready construction projects may be sought. One mooted proposal is to allow UK local authorities to borrow to build up to 60,000 public sector houses.

So should the pace of spending cuts be relaxed, the UK construction sector may be the first to benefit according to Davy Stockbrokers.