Business News

Mortgage arrears fall again in third quarter – Central Bank

New figures from the Central Bank show that the number of homeowners in arrears for more than three months fell to a nine-year-low of 5.9% in the third quarter from 6% at the end of June. 

The Central Bank also said the decline in the number of home mortgages in arrears for two or more years decreased by 753 accounts in the three months to the end of September. 

Accounts in arrears over 720 days accounted for 45% of all mortgages in arrears at the end of September.

Meanwhile, the number of residential buy-to-let mortgages in arrears over 90 days inched back down in the third quarter after rising unexpectedly to the highest level in more than a year in the previous three month period. 

Buy-to-let loans in arrears fell to 13.9% from 14.9% in the second quarter, the lowest level since the bank began to collect data in 2012. 

Arrears in this category had peaked at 22.1% in 2014 in the aftermath of the property crash.

Today’s Central Bank figures also show that the number of home mortgages classified as restructured at the end of September stood at 88,587. 

A total of 4,993 new restructure arrangements were agreed during the three months from June to September. 

Of these restructured accounts, 86% were deemed to be meeting the terms of their current restructure arrangement.

The Central Bank noted that arrears capitalisation accounted for the largest share of restructured accounts at 33%, while the share of accounts on temporary restructure arrangements remained low at 13%.

In the buy-to-let sector, 14,324 mortgage accounts were categorised as restructured at the end of September, down 1,239 accounts. 

83% of these buy-to-let mortgages were not in arrears, while 88% were meeting the terms of their current
restructure arrangement, the Central Bank said.

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Six euro zone banks fall short of ECB capital demands

Six euro zone banks have fallen short of the European Central Bank’s capital demands and have been told to shore up their balance sheets or face tighter controls. 

The ECB’s annual review of banks comes as many lenders are struggling to make money in an environment of ultra-low interest rates.

They are also facing high legacy costs from their bricks-and-mortar branches and amid a string of scandals related to money laundering. 

The euro zone’s top banking supervisors kept both their mandatory capital requirements and their “guidance”, which is not binding, unchanged from the previous year, at an average 2.1% and 1.5%, respectively. 

Yet six banks fell short of the capital guidance, compared to just one firm last year, and will have to raise their Core Equity Tier 1 ratio (CET1) if they are to avoid new curbs from the supervisor. 

“Six out of the 109 banks that participated in the (evaluation) showed CET1 levels below the Pillar 2 guidance,” the ECB said. 

“For those banks which have not taken satisfactory measures in the last quarter of 2019, remedial actions have been requested within a precise timeline,” it added. 

The ECB’s top supervisor Andrea Enria said he was “broadly satisfied” with the results but emphasised concerns about banks’ business models, internal governance and operational risks.

This was probably a reference to recent money-laundering cases from Latvia to Malta.

The ECB published for the first time a list detailing its capital requirement for each bank, except for a handful that either refused their consent or have yet to be examined in full.

Volkswagen’s leasing arm was a notable absent from that list, along with the euro zone subsidiaries of some investment banks that have only recently left London due to Brexit, among others.

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Oil drops below $60 as China virus stokes demand concern

Crude prices dropped below $60 for the first time in nearly three months today, as the death toll from China’s coronavirus rose and more businesses were forced to shut down, fuelling expectations of slowing oil demand.

Brent crude was down $1.40 a barrel at $59.29 this afternoon to mark its lowest since late October and the biggest intra-day fall since January 8. 

US crude was down $1.05 at $53.14 a barrel. Both contracts had earlier fallen by more than 3%. 

Global stock exchanges also fell as investors grew increasingly anxious about the widening crisis. Demand spiked for safe-haven assets, such as the Japanese yen and gold. 

The death toll from the coronavirus rose to more than 80 and the Chinese government extended the Lunar New Year holiday to February 2, trying to keep as many people as possible at home to prevent the virus from spreading further. 

Saudi Arabia and the United Arab Emirates, allies in the Organization of the Petroleum Exporting Countries (OPEC), tried to play down the impact of the virus today.

Riyadh, the de-facto OPEC leader, said the group could respond to any changes in demand. 

An OPEC source said there were “preliminary discussions”among OPEC+ for an extension of the current oil supply cuts beyond March, and a possible deeper cut was also an option, if there was a need, and if the China virus spread impacted oil demand. 

Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman Al-Saud said today he felt confident the new virus would be contained. 

Markets are being “primarily driven by psychological factors and extremely negative expectations adopted by some market participants despite (the virus’) very limited impact on globaloil demand,” the minister said. 

“Such extreme pessimism occurred back in 2003 during the SARS outbreak, though it did not cause a significant reduction in oil demand,” Prince Abdulaziz said in a statement. 

The OPEC+ group has been withholding supply to support oil prices for nearly three years and on January 1 increased an agreed output reduction by 500,000 barrels per day (bpd) to 1.7 million bpd up to March. 

OPEC+ “have the capability and flexibility needed to respond to any developments, by taking the necessary actions to support oil market stability, if the situation so requires,” Prince Abdulaziz said. 

Brent crude oil prices have dropped by almost a fifth since a spike in tensions between the US and Iran briefly lifted prices above $70 a barrel on January 8. 

The losses since are in spite of a 75% drop in output from Libya to less than 300,000 bpd due to an ongoing blockade of oilfields. 

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Temporary trade dispute appeal system agreed at Davos

The European Union, China and 15 other countries agreed today to develop a temporary system for appealing trade dispute rulings after the recent US-provoked collapse of the WTO appeals body. 

Ministers from the group published a joint statement announcing a “multi-party interim appeal arrangement”. 

The arrangement was reached during a meeting at the World Economic Forum in Davos.

It will allow all the participating parties to “preserve a functioning and two-step dispute settlement system at the WTO in disputes among them,” the EU explained in a statement.  

The move came after the WTO appeals panel, sometimes dubbed the supreme court of world trade, halted its operations last month after years of relentless US opposition. 

Washington, which accuses the court of serious overreach, has blocked the appointment of new judges, leaving it without the quorum of three needed to hear cases due to mandatory retirements.  

Ahead of the December 11 shutdown, Canada and the EU struck a bilateral deal last July to set up an interim panel to hear appeals in disputes that might arise between Brussels and Ottawa. 

In Davos, they were joined by more than a dozen other countries: Australia, Brazil, China, Colombia, Costa Rica, Guatemala, South Korea, Mexico, New Zealand, Norway, Panama, Singapore, Switzerland and Uruguay.

The countries stressed that the arrangement was temporary, and that it was open to any WTO member willing to join it. 

“This remains a contingency measure needed because of the paralysis of the WTO Appellate Body,” European Trade Commissioner Phil Hogan said in a statement.

“We will continue our efforts to seek a lasting solution to the Appellate Body impasse, including through necessary reforms and improvements,” he said. 

The system, which the countries argue is designed to preserve the principle enshrined in international trade law that governments have the right to appeal in any dispute, is based on Article 25, a rarely-used provision of the WTO Dispute Settlement Understanding. 

The article, used only once before in a 2001 dispute between the US and EU over music rights, allows WTO members to resolve disputes via external arbitration and to agree amongst themselves on the rules of procedure and choice of judges. 

The announcement came after US President Donald Trump earlier this week in Davos said “very dramatic” action to reform the WTO was in the works. 

The US has wide-ranging concerns about the WTO appellate branch, which predate Trump’s presidency. 

His predecessor Barack Obama’s administration began a policy of blocking the appointment of appeals judges over concerns that their rulings violated American interests. 

But Trump’s trade team has both extended that policy and escalated the fight, arguing in particular that the US Constitution does not permit a foreign court to supersede an American one. 

US concerns regarding the WTO appeals court include allegations of judicial overreach, delays in rendering decisions and bloated judges’ salaries. 

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Euro zone economy remains weak but green shoots emerging

Euro zone business activity remained lacklustre at the start of the year, a survey showed today but there were some glimmers of hope for policymakers. 

The survey comes a day after the European Central Bank said the manufacturing sector remained a drag on the euro zone economy. 

ECB rate-setters did not make any policy change yesterday, standing by their pledge to keep buying bonds and, if needed, cut interest rates until price growth in the euro zone heads back to their goal. 

But the slowdown in euro zone economic activity has probably bottomed out, according to a Reuters poll last week, which showed while the outlook for growth and inflation remained lukewarm the chances of a recession have faded. 

That outlook was somewhat supported by IHS Markit’s Euro Zone Composite Flash Purchasing Managers’ Index (PMI), seen as a good gauge of economic health, which held at 50.9 in January.

But it missed the median prediction in a Reuters poll for 51.2 – anything above 50 indicates growth. 

After today’s PMI reading, the euro continued to languish near a seven-week low after the ECB’s more dovish tone at Thursday’s meeting than some had expected. 

An earlier PMI from Germany, Europe’s largest economy, showed the private sector gained momentum as growth in services activity picked up and the pullback in manufacturing eased. 

French activity expanded at a weaker pace as nationwide strikes weighed and IHS Markit cautioned growth outside of Germany and France slowed to a six-and-a-half year low. 

The UK’s performance bettered the euro zone’s for the first time since December 2018, a separate PMI showed, the strongest evidence yet of a post-election boost to the economy that could deter the Bank of England from cutting interest rates next week. 

The euro zone’s headline index was bogged down by a still struggling factory industry. 

The manufacturing PMI marked the 12th month below the break-even mark, registering 47.8 – albeit an improvement on December’s 46.3 and well above the Reuters poll’s 46.8. 

An index measuring output, which feeds into the composite PMI, rose to 47.5 from 46.1, its highest since August. 

While most forward-looking indicators in the manufacturing PMI remained in negative territory, they were moving in the right direction, today’s survey showed. 

The new orders, employment, backlogs of work and quantity of purchases indexes were all still sub-50 but did rise. 

However, the PMI for the bloc’s dominant services industry weakened to 52.2 from 52.8, confounding expectations for no change. 

And possibly of concern to policymakers, demand weakened suggesting there will not be a significant turnaround anytime soon. The services new business index fell to 51.5 from 52.1. 

But optimism about the year ahead bounced. The composite future output index climbed to 61.2 from 59.4, its highest reading since September 2018. 

Meanwhile, euro zone consumer confidence remained unchanged in January from December, official flash figures released yesterday showed. 

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Costs and competitiveness a key focus for tourism industry

The tourism industry needs to focus on costs and competitiveness as the sector faces into choppier waters in the years ahead, according to the head of the national tourism development authority, Fáilte Ireland.

Paul Kelly said the industry had to avoid complacency against a backdrop of a softening in demand.

“We absolutely need to keep our focus on competitiveness. There are a lot of cost pressures there. The issue of insurance costs has been well publicised, but there are other inflationary pressures, like wages, that businesses are facing,” Mr Kelly said. 

“We do need to make sure that we’re absolutely not complacent. There is a softening in demand,” he added.

Mr Kelly described last year as ‘mixed’ from a tourism performance perspective.

Brexit uncertainty was a big factor, but there were issues around delays in aircraft being made available and a softening in the German market.

“This is very important from an overall economy point of view. Tourism is a labour intensive industry. A 1% decline in tourism can lead to a drop in 2,500 jobs. Small changes in revenue can make a big difference in absolute job numbers,” Mr Kelly explained.

He said the effect of job losses could be particularly acute in rural and regional areas where it would be hard to find alternative employment.

“Things are more challenging in rural Ireland. Dublin and the big cities have the corporate market with business travel helping to sustain them. Rural Ireland certainly relies more on the holiday maker.”

Paul Kelly said the clarity provided by the Brexit transition phase after the UK leaves the EU as scheduled next week was welcome.

However, he said there were still big questions about what happens after the transition phase ends in December.

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ECB launches review, keeps policy on hold

The European Central Bank launched a broad review of its policy today that is likely to see new President Christine Lagarde redefine the ECB’s main goal and how to achieve it. 

The European Central Bank has fallen short of its inflation target of just under 2% for years, even after Lagarde’s predecessor, Mario Draghi, launched increasingly aggressive stimulus measures. 

Christine Lagarde told a news conference the review was likely to take about a year but hinted it might take longer. “It is over when it is over,” she said. 

She declined to comment on what changes she might favour to the inflation target, but promised: “We will not leave any stone unturned and how we measure inflation is clearly something we need to look at.” 

The review will also look closely at how the bank can incorporate the economic impact of climate change into its policy models. 

The ECB will adhere to its current strategy until a new one is adopted, Lagarde said today. 

ECB rate-setters did not make any policy change today, simply standing by their pledge to keep buying bonds and, if needed, cut interest rates until price growth in the euro zone heads back to their goal. 

The ECB said its rate on bank overnight deposits, which is currently its primary interest rate tool, remains at a record low of -0.50%.  

The main refinancing rate, which determines the cost of credit in the economy, remained unchanged at 0% while the rate on the marginal lending facility – the emergency overnight borrowing rate for banks – stayed at 0.25%. 

The euro dipped slightly after the ECB rate announcement but hardly budged during Lagarde’s press conference. It was last down 0.1% at $1.1084.

While the review takes place, the ECB is expected to leave its monetary policy on hold, as it did today. 

That would leave it adding €20 billion worth of bonds to its €2.6 trillion portfolio every month and charging banks 0.5% on their idle cash for most of the year. 

“The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2%,” the ECB said. 

Ms Lagarde told the news conference that risks to growth in the euro zone remained tilted to the downside, but this bias had become less pronounced as uncertainty around international trade recedes. 

Euro zone data has improved recently, leading economists to believe the export-focused economy has weathered the storms of the global trade war. 

A trade deal between the US and China, and the prospect of an orderly Brexit are also lessening the two main risks the ECB had said were clouding the horizon. 

Changing the ECB’s formulation of price stability – currently defined as an annual inflation rate below, but close to, 2% over the medium term – will be the focal point of the review. 

The ECB could signal its commitment to boosting inflation by raising the goal to 2% and spelling out that it will take any undershooting just as seriously as an overshoot. 

“Our inflation target must be symmetric. If the central target is seen as a ceiling, we have less a chance of meeting it,” ECB policymaker Francois Villeroy de Galhau said recently. 

But policy hawks on the Governing Council, who have long called for the ECB’s money taps to be shut off, will not go down without a fight. 

Some of them favour creating a tolerance band around 2%, which would reduce pressure on the ECB to act, while others would leave the target unchanged or even cut it. 

Rate-setters will also debate the pros and cons of their tools, such as sub-zero rates and massive bond purchases, which have been credited with staving off the threat of deflation but at the cost of an unprecedented rise in house and bond prices. 

The ECB regularly lauds those instruments, recently estimating that without them, the euro zone economy would have been 2.7 percentage points smaller at the end of 2018. 

But minutes of the December meeting show growing discomfort about their side effects. 

That led to calls by some policymakers to give housing costs greater weight in inflation calculations and take into account households’ perceptions of price growth, which is generally higher than official figures.

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France reaches deal with US on digital tax talks

French Finance Minister Bruno Le Maire said France had reached an agreement with the US on the basis for future talks over a global digital tax, at the Organisation for Economic Development (OECD) level.

“We had long talks this morning with the US Treasury Secretary and the OECD Secretary General,” Mr Le Marie said at the World Economic Forum in Davos. 

“I am happy to announce to you that we have found an agreement between France and the United States, providing the basis for work on digital taxation at the OECD,” he added.

“It’s good news, because it reduces the risk of American sanctions and opens up the prospect of an international solution on digital taxation,” he added.

Earlier, Mr Le Maire had expressed optimism that a deal on taxing global tech giants can be reached.

Speaking during a panel discussion on the topic in Davos,  Bruno Le Maire also appeared to implicitly criticise Ireland’s record on taxing tech firms.

“We are moving in the right direction,” Le Maire said, adding that he thought France was close to striking an agreement with the United States.

Without explicitly naming it, Mr Le Maire also appeared to make a jibe at Ireland, claiming it was profiting from applying a low rate of tax to tech companies operating elsewhere in Europe.

“I don’t want to quote that country, but everybody knows which country I’m thinking of,” he said. 

“If we have a level of minimum taxation of 12.5%, it means France could have 10 point of revenue of taxation coming back to the public good in France and to the French consumers.”

“A race to the bottom is not the future I want for Europe.”

But Angel Gurria, the Secretary General of the OECD added that Ireland is very enthusiastically engaging with his organisation on the reform agenda.

Work on a global digital tax agreement is being led by the OECD, a Paris-based club of wealthier economies.

Mr Gurria has been working for years on finding ways to create a level playing field on digital taxation, but those efforts are now being accelerated to see if an agreement can be reached by December.

He said he was hopeful of having a framework that would apply to more than 130 countries drafted by July. 

“We have no Plan B – we just have to get it done,” he said.

Mr Le Maire has thrust France front and centre of the digital taxation debate, despite the fact several countries, including Italy and Britain, are already pursuing or imposing their own national digital-tax regimes.

“It would be far better to have an international framework for everybody,” he said, adding that otherwise the world would end up with a cacophony of national systems that would compound the problem.

“So we have to build something different and that’s exactly what we want to do during 2020, by building on the extremely good work being done (at the OECD).”

France’s existing digital tax is based on turnover. But Mr Le Maire admitted that was not optimal from an economic point of view, saying the OECD’s plan to tax profits was more sound.

There will be intense discussion over what level of profit would be taxed and how it would be collected.

“Everything is on the table,” Mr Le Maire said.

“We just have to decide if we want to avoid a loophole in the international taxation system or have many national solutions that would be detrimental to all of us.

“We just can’t go on any longer with a taxation system in which the richest companies, those that are making the biggest profits, are paying the least tax.”

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Costs and competitiveness a key focus for tourism industry

The tourism industry needs to focus on costs and competitiveness as the sector faces into choppier waters in the years ahead.

That’s according to the head of the national tourism development authority, Fáilte Ireland.

Paul Kelly said the industry had to avoid complacency against a backdrop of a softening in demand.

“We absolutely need to keep our focus on competitiveness. There are a lot of cost pressures there. The issue of insurance costs has been well publicised, but there are other inflationary pressures, like wages, that businesses are facing. 

“We do need to make sure that we’re absolutely not complacent. There is a softening in demand.”

Mr Kelly described last year as ‘mixed’ from a tourism performance perspective.

Brexit uncertainty was a big factor, but there were issues around delays in aircraft being made available and a softening in the German market.

“This is very important from an overall economy point of view. Tourism is a labour intensive industry. A 1% decline in tourism can lead to a drop in 2,500 jobs. Small changes in revenue can make a big difference in absolute job numbers.”

He said the effect of job losses could be particularly acute in rural and regional areas where it would be hard to find alternative employment.

“Things are more challenging in rural Ireland. Dublin and the big cities have the corporate market with business travel helping to sustain them. Rural Ireland certainly relies more on the holiday maker.”

Paul Kelly said the clarity provided by the Brexit transition phase after the UK leaves the EU as scheduled next week was welcome.

However, he said there were still big questions about what happens after the transition phase ends in December.

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Irish tax system best in EU at reducing inequality – ESRI

Research by the Economic and Social Research Institute has found that the Irish tax system does more than any other system in the EU to redistribute income and reduce inequality.

It also found that raising the point at which taxpayers pay the higher rate of tax, or abolishing the Universal Social Charge, would both favour those on higher incomes most.

Ireland has the most unequal share of income in the EU before social welfare benefits or income taxes are applied.

In new research, the ESRI found that the Irish tax system reduces this inequality by more than any other tax system in Europe.

After tax and social welfare payments, Ireland ranks in the mid-range of inequality in the EU.

It also found that Ireland would become significantly more unequal if the standard rate band was increased to €50,000 or the Universal Social Charge was abolished.

The ESRI concluded that it is because the impact of the system is so bound up with income, that it may no longer be able to deliver any further reduction in income inequality.

Instead, it recommends that tax reliefs and payments like the Family Income Supplement should be examined.

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