The Bull

D u b l i n U n i v e r s i t y ’ s F i n a n c i a l N e w s pa p e r

THE MARMARAY TUNNEL P5

On November 4th over a billion euro was wiped off the value of Ryanair, Europe’s largest low cost airline, with shares plummeting by nearly 13 per cent. This came after its second profit warning announcement in the space of two months, which reported that profits for the year up to 31st March 2014 would fall further from between €570m and €600m to around €510m. This marks the company’s first decline in profits in five years. CEO Michael O’Leary has admitted that Ryanair is partially responsible for the downward revision of profit estimates due to the fact that the company are cutting fare prices aggressively in order to adapt to current market conditions; namely, increasing competition and weakening demand.

One can’t help but wonder though if the current situation Ryanair now finds itself in was almost

OBAMACARE SPECIAL REPORT

inevitable. After all, Ryanair is singlehandedly responsible for completely transforming the European airline industry over the past twenty years or so. It prided itself on its low-cost, ‘no frills’ image, forcing other major airlines to cut their own fares in order to compete. However, times have changed since then, and the airline is increasingly facing stiffer competition from a new group of European low-cost carriers such as Norwegian Air Shuttle, Budapest based Wizz Air and International Airline Group’s Vueling. New threats such as these are forcing Ryanair to cut fares further in an ironic twist of fate. Could the strategy that made Ryanair the largest airline in Europe end up costing the company in the long run? It would seem that Ryanair has the potential to be a victim of its’ own success.

Whatever one may think,

P10-11

it’s clear where Mr O’Leary stands on the matter: “There’s a weaker pricing environment out there. Get over it.

Ryanair’s response is to be aggressive about it, putting more low fares out than anyone else. The difference with others is that Ryanair’s costs are lower”. Speaking to analysts, it’s obvious that O’Leary does not view Ryanair as any kind of victim and instead intends to “be more aggressive” in getting the company back on track. He adds: “What we tend to do in these periods when pricing is weak – as we did after 9/11, as we did after the London bombings, as we did after any other events, is lorry out loads of cheap fares.” Judging from this, O’Leary seems confident that he has the situation under control, and you can understand why.

Over the past six months, passenger numbers have increased to 49 million; this is an increase of 2% from

Ray Dalio and his Economic Machine P19

the same period last year. The current aim is to increase its number of passengers from around 79 million in 2012 to 110 million by 2019. One million of these will be travelling into Irish airports as a direct result of the scrapping of the 3 per cent travel tax in the recent budget. This substantial increase in passenger numbers is based upon two ten year deals Ryanair has signed with London Stansted and Moscow airports, as well as an agreement with Boeing to purchase 175 new aircraft.

These are all positive signs for the company; Ryanair realises however, that continuing to cut fares isn’t enough. The current overhaul of its notoriously stringent customer service policy is a crucial move by the airline in order to remain competitive in the expanding market. This change in strategy includes reduced charges for reissu-

ing boarding cards and checking-in luggage, the introduction of “quiet flights” before 8am and after 9pm and a twenty-four hour “grace period” to allow passengers to alter their booking details. This is as well as allocated seating; something which many would say is long overdue but nonetheless is still a welcome development for customers. Despite this attempted transition towards a more customer friendly approach to doing business, one can’t expect Ryanair to completely abandon its straighttalking and ruthless persona.

Speaking in relation to the measures being taken by the airline to stay on top, O’Leary had this to say: “If a couple of competitors get blown up as part of that process – well and good.” It could be said that this is exactly the attitude needed in the difficult few months ahead.

20th November 2013 Issue 2 Vol 3

2

News & current affairs

The Bull 20.11.2013

vital indicators

0.1%

Consumer Price Index

13.2%

Unemployment rate

0.2%

GDP percentage change (projected)

117%

National debt as a percentage of gdp

€3.19bn Trade Surplus

Troubled Canadian Mayor determined to remain in office despite use of crack cocaine

While Toronto Mayor Rob Ford has maintained that there is no reason for him to leave his post, it appeared, towards the end of last week, he may be preparing to take some time off. On Friday, Ford’s lawyer revealed that his client was “considering rehab” but indicated any definitive announcement would come from the Mayor himself.

Ford’s brother, Councilor Doug Ford, conceded his brother “needed a holiday.” He also insisted, however, that if Ford “got his mind together” and lost some weight it would be “very hard to beat” the incumbent Mayor, who intends to run for reelection next year.

Doug was at his brother’s side when the Mayor made an emotional apology to his citizens following an admission to smoking crack cocaine earlier that day.

The brief interview where Ford claims not to be addicted to the substance after trying it “probably in one of (his) drunken stupors” brought

months of media speculation on the matter to an end. In May the Toronto Star reported that two of their staff had seen video evidence of Ford smoking Crack; a digital video file depicting similar evidence was recovered from a hard drive seized by Toronto police on June 13th.

The Toronto Star has released a video in which Ford makes use of harsh language in threatening to violently assault an unknown party.

Ford issued another apology moments later, stating he was “obviously extremely inebriated” before adding that he “hoped none of you have ever or will ever be in that state.”

Ford made the key address at the Old City Hall this Monday as part of the Remembrance Day proceedings.

A poll conducted following the Police’s video announcement showed public support for Ford, whom the City Council cannot remove from office unless he is convicted of a crime, had risen.

by Conor O’Donovan

›› The Wall Street Bull

CRACKDOWN

on Wall Street

The US government has continued its’ crackdown on Wall Street firms.

They have targeted firms for selling ‘toxic’ mortgages, a key cause of the financial ‘meltdown’ in 2007/08

The US Department of Justice is currently investigating 9 financial institutions for allegedly selling unsafe mortgage-backed securities.

These include Bank of America, JP Morgan and Wells Fargo.

Mortgage-backed securities are collections of often hundreds of mortgages that financial institutions sell to investors to raise capital for further loans. The inclusion of subprime mortgages as part of these packages led to the financial

crisis beginning in 2007 and ensured the global nature of the crash.

This does not mean that Mortgagebacked securities are all dangerous; indeed, the market for high quality mortgage-backed securities has recently rebounded in the US. It is reported that the US is seeking $864 million from Bank of America as compensation for the sale of mortgage-backed securities which caused state owned Freddie Mac and Fannie Mae huge losses. The sale was carried out by Countrywide which was purchased by Bank of America in 2008. A federal court found that Bank of America was liable for Countrywide’s actions in defrauding the state-owned lending companies.

Also targeted has been JP Morgan who are said to face a record $13 billion fine regarding its sale of supposedly risk free mortgage backed securities. The US government alleged that JP Morgan profited from such sales, knowing that the home loans were in fact subprime and therefore potentially risky.

Wells Fargo has also agreed to pay Freddie Mac $869 million in compensation for the toxic loans sold to the state-owned lender in the lead up to the 2007-08 financial crisis.

The US has been very active in recovering the losses of Freddie Mac and Fannie Mae, who lost more than $30 billion through investing in mortgage-backed securities containing subprime home loans.

These loans became practically worthless as poor homeowners began to default on their mortgages, causing millions of dollars to be wiped off the true value of assets.

by Cheryl Carter

CONTRIBUTORS Editor Edward Teggin Deputy Editor Sean Tong Layout & DESIGN EDITOR Mena Eskander Sch. MANAGEMENT Reuben Whelan

›› Rob Ford, Mayor of Toronto, Canada

SUB-EDITORS Niall Casey Peter Martin Duncan Moss Timothy Munier Eoin O’Drisceoil Callum Trimble-Jenkins Patrick Vaughan

This publication is partly funded by a grant from DU Publications Committee.

This publication claims no special rights or privileges.

For advertising, please contact thebull.tcd@gmail.com.

Serious complaints should be addressed to: The Editor, The Bull, Box 31, Regent House, Trinity College, Dublin 2.

3

NEWS & CURRENT AFFAIRS

The Bull 20.11.2013

The African Criminal Court?

SARAH HEALY INVESTIGATES WHETHER OR NOT THE INTERNATIONAL CRIMINAL COURT IS FOCUSED SOLELY ON AFRICAN CASES OF WAR CRIME

T

he Hague based ICC, an independent international organisation, is a permanent tribunal established to prosecute individuals for war crimes, the crime of genocide, crimes against humanity, and most recently, the crime of aggression.

It has recently come under fire however, for its exclusively African case dock. The ICC has been blamed for targeting only Africa, while turning a blind eye on perpetrators in other regions of the world where it also has jurisdiction, since its inception in 2002. This focus on Africa has prompted many from within and beyond the continent to question why it is only Africans facing international justice when similar crimes are widespread in other parts of the world. Some have gone so far as to accuse the Court of peddling a Western agenda that seeks to control African politics through ICC investigations and prosecutions. The African Union have been leading the charge,

alleging that the ICC’s prosecutorial policies towards Africa are destabilising to alternatives providing African solutions to African problems put in place by the Union.

The ostensible focus on Africa by the ICC must be examined in the context of legal impediments imposed by the Rome Statute, the treaty establishing the Court, as well as practical considerations surrounding the operation and jurisdiction of the Court.

The Court can only investigate situations in the non-party states when the Security Council refers the situations. The blame for the ICC’s failure to investigate serious situations in non-party states therefore lies not with the ICC, but with the Security Council. The evidentiary basis for claims that the ICC has discriminated against Africa in deciding which situations to investigate and prosecute is weak. The ICC has invoked its own jurisdiction in only one situation; the other situations have all come to the Court through referrals from the states concerned and the Security Council.

To date, 122 countries have signed and ratified the ICC’s Rome Statute. The United States, China, Japan, India, Pakistan, Israel and Turkey have not ratified it and thus are not under the jurisdiction of the Court.

Of these 122 countries, close to one

The ICC has declined to investigate only two situations outside of Africa: one involving allegations of crimes against humanity in Venezuela and another concerning alleged British war crimes in Iraq. This sample size is far too small to support the

Is the ICC targeting Africa inappropriately, or are there sound reasons and justifications for why all the situations currently under investigation or prosecution happen to be in Africa?

IRAN programme is crippling its economy

F

claim that the ICC’s decision making is based on invidious distinctions.

The ICC’s assertion that the African situations were selected based on their gravity and that the situations in Venezuela and Iraq were rejected on the same basis is credible given the larger numbers of victims involved in the African situations under investigation.

The ICC’s exclusive focus on Af-

rica is damaging perceptions of the Court’s fairness. The ICC should continue and perhaps increase its efforts to combat such perceptions. The appointment of an African prosecutor, Fatou Bensouda, is a step in the right direction. However, the relationship between African states and the ICC will be primarily affected by changes in policy, rather than the selection of an African prosecutor.

A Changing nuclear situation

DIPLOMATIC CORRESPONDENT JAMES PRENDERGAST discusses just how Iran’s political stance towards it nuclear rom the American to the French revolution, there has been a strong link between taxation and democracy. In Iran this is broken. About half of its GDP is exempt from taxation and millions of people pay no tax and work in the informal sector. Half the government’s revenue and 80% of its export earnings come from oil.

What sets the Iranian regime apart is its origin in a native revolution. Opposition to the West has been a key theme of the regime.

The Shah was accused of ‘Occidentosis’, or ‘Westerness’. The Ayatollah, known for his austere lifestyle, called the Shah’s 1971 celebration of 2,500 years of monarchy a ‘feast of bestial gluttony.’ The new mood of austerity and self reliance initially led to the suspension of the Shah’s nuclear programme.

Aside from Japan, Iran has had a parliament longer than any Asian country and imposing an Islamic Republic on the country was not easy.

The United States and the Soviet Union were both convinced until very

third include African states. As such, The ICC does not have universal jurisdiction.

late that the revolution would be communist. After the Shah fled, his Prime Minister, Shapour Bakhtiar, implemented democratic reforms and abolished Savak, the hated secret police.

Upon his return, the Ayatollah demanded Bakhtiar’s resignation. He succeeded but his new regime made some concessions to democracy.

He used his support of the hostage takers and later the war with Iraq to defeat the liberals and moderate nationalists.

Initial attempts to impose Islamic dress on women were met by protests. Not until 1981with the distraction of the war was the policy implemented. Today, the story of the war is used to full propaganda effect by the regime. Tehran is dotted with war memorials, while images of the conflict appear regularly on television.

The Iranian government may have taken note of the contrasting fates of the North Korean dictatorship, which has nuclear weapons, and that of the Gaddafi regime in Libya which suspended its nuclear programme in

2003. Pakistan, a nuclear armed nation, that is believed to be a massive sponsor of terrorism is treated as an American ally. Meanwhile Iraq, which had yet to develop a bomb in 2003, was invaded.

Nuclear power in Iran was originally supported by the United States and Iran received assistance from Western companies. The Shah emphasised the programme’s peaceful nature and signed the nuclear Non Proliferation Treaty at the earliest possible date.

From the late 1980s Iran restarted its nuclear programme, being revealed by an Iranian opposition group in 2002. Under pressure from the United States and Europe, Iran agreed to stop enriching uranium until concerns that the programme involved developing weapons were resolved. This agreement collapsed in 2005 when Mahmoud Ahmadinejad was elected president.

Iran says enriching uranium to 3.5% is necessary to fuel its nuclear power plant near the Persian Gulf.

It has however, also been enriching uranium to 20%. It needs 90% enriched uranium to build a bomb but a stockpile of 20% enriched uranium would make this process faster.

Iran has the technology to do this

and some experts say that it could produce enough fuel for a bomb within a couple of months. However it would take longer to develop the technology to fire a nuclear warhead.

A heavy water plant at Arak would, if completed, provide an alternative route to producing a nuclear weapon using plutonium. That Iran ceases the development of the plant is a key objective of the West.

Once it is fuelled, it will be very difficult to carry out military strike on the plant without dispersing nuclear material.

Three days of talks in Geneva have ended without any deal after France took a hard line. More talks are scheduled to begin on the 20th of November but they will be at senior diplomat rather than foreign secretary level. The proposed deal in Geneva would have frozen Iran’s nuclear programme for six months, in return for a partial lifting of sanctions. Israel’s Prime Minister Benjamin Netanyahu condemned the proposal, calling it a “deal of the century” for Iran.

France’s foreign minister, Laurent Fabius, said that Iran’s construction of the heavy water reactor at Arak was one of the main areas of dispute.

Iran would also have been allowed to

continue enrichment at a low level.

Diplomats were said to be furious after Fabius pre-empted a press conference by Iranian Foreign Minister Mohammad Javad Zarif and EU Foreign Affairs Chief, Catherine Ashton.

Relations between the US and Iran appear to be at their best since 1979. Secretary of State John Kerry spent almost ten hours in one on one talks with Zarif. This comes after the historic telephone conversation between Obama and Iran’s new President, Hassan Rouhani.

Any agreement will have to be approved by Iran’s Supreme Leader, Ayatollah Ali Khamanei. Khamanei, through his own powers and appointments, exercises veto power over almost all political decisions.In 2005, Khamanei overruled a previous agreement brokered by Rouhani in 2003 to suspend uranium enrichment.

What may make Khamanei more likely to compromise today is the state of the economy. Sanctions are crippling the economy. Oil imports are down by 40%, inflation is running at 40%, and youth unemployment is 28%. Politics can only defy economics for so long.

4

NEWS & CURRENT AFFAIRS

The Bull 20.11.2013

ECB cuts interest rates

The European Central Bank has cut its benchmark interest rate to a new record low of 0.25%. The fall from previous low of 0.5% has surprised many economists, who believed that further rate cuts wouldn’t be necessary.

The fall interest rate comes after the October estimates for the Consumer Prices Index (CPI) fell to 0.7%.

Inflation in the Eurozone is now at its lowest since January 2010. The ECB will hope that by cutting the interest rate they will alleviate fears of deflation in Greece and Spain.

The move has not been welcomed on the currency markets, with the euro down against the dollar. Many see the low inflation rate as evidence of low growth among the eurozone members.

ECB President Mario Draghi admitted that the eurozone was seeing “weaker than expected economic activity” and argued that the Bank had

acted accordingly. Mr Draghi will be hoping to avoid the expectation of further price cuts.

The hope of the ECB is that by making it cheaper for banks to borrow from them, this will then be passed on with cheaper bank loans to businesses and consumers. Ideally this would lead to a boost in the economy by increasing disposable income.

However, this may not be enough to offset the structural problems facing countries on the periphery of the common-currency zone. Mainly Southern European countries such as Greece and Spain are suffering from massive debt. Further deflation may be difficult to avoid as these countries try to regain the ability to stay competitive. This could be helped by the weakening of the euro, making eurozone exports more competitive on global markets.

by Chris Davies

No agreement in negotiations on Iran’s nuclear policies

Construction sector returns to growth With fears that a two-tier property market is rising from the rubble of the Celtic Tiger, Aidan O’Regan discusses the recent return to growth of the Irish construction industry from the rubble left behind in the wake of the Celtic Tiger after over six years of decline.

The Irish Construction Industry has returned to growth for the first time since May 2007. The Ulster Bank Construction Purchasing Managers’ Index shows that construction activity in the Irish economy is at its highest level since the advent of the downturn.

In their September report Ulster Bank commented that there was a “sharp and accelerated” growth in new orders. They also report that sentiment among construction firms regarding the 12-month outlook of their firms was at its strongest in many years.

Chief Economist for the Republic of Ireland at Ulster Bank, Simon Barry, commented that output in the housing sector had risen at the fastest pace, while there have also been rises in commercial output.

The latest Ulster Bank PMI report released on Monday November 11th confirms this trend, noting that construction activity in October rose at its fastest pace since January 2006.

The rate of expansion in housing has reached levels not seen in nine years commented Simon Barry.

“While it may appear that the con-

struction industry has turned a corner we must remain mindful that the rate of job creation failed to increase proportionally during October.”

The report also concluded that the price of materials has risen for the fourteenth time in fifteen months, quickening to the fastest pace it has been at in nearly a year.

Barry pointed out that the recent growth must be seen against the massive fall in output sustained during the last six years. Optimism in the sector remains strong however, with many commenting that the growth in construction may be reflective of the overall outlook for the economy in Q4 of 2013.

As reported by Ulster Bank, the housing sector of the construction industry is the area where the most growth has taken place. This is in part due to strong demand in key areas for new housing. We have in recent months witnessed the emergence of a two-tier property market.

The CSO Residential property price index for September reports that prices in Dublin have risen by 12.3% annually while prices outside Dublin have fallen by 2.6% since September

2012.

The publication of the myhome. ie Property Barometer report confirms this trend. Prices in Dublin are now on average 26% higher than the rest of the country and the myhome. ie report has suggested that despite stock increases, property supply remains weak in popular Dublin areas.

While stock in the Dublin region has increased, so too has the number of transactions. The latest Property Price Register has indicated that transaction levels rose by 30% in Q2 of 2013.

The Central Bank announced in June 2013 that over 97,000 private mortgages are in arrears. Pressure is mounting on the banks to address this issue and in some instances repossession will be the only viable option. Should the banks act quickly in disposing of these properties; the effect on the property market will be unknown as restricted stock levels are currently keeping prices high.

While there are gentle signs of recovery, Q4 will remain a challenging time for the Irish Property Market.

off on it; we signed off on it,” he said.

“There was unity, but Iran couldn’t take it.” Mohammad Javad Zarif, Iran’s Minister for Foreign Affairs, rebutted Kerry’s claim on Twitter, stating “Mr Secretary, was it Iran that gutted over half of US draft Thursday night? And publicly commented against it Friday morning?” Unity was achieved by the P5+1 group only on the last night of discussions leaving little time for

the Iranians to formulate a response; much of the preceding 60 hours had been spent trying to find a common position.

The negotiations will continue next week on a smaller scale as Iran, under the guidance of its Supreme Leader Ali Khamenei, continues to desire a cease to the international sanctions which have slowed its oil exports and crippled its economy.

Despite positive signs of brokering the dialogue between Iran, the International Atomic Energy Agency and foreign representatives, the talks failed to address the critical issue which has resulted in years of gridlock between Iran and the IAEA: the agency’s investigation into work done by Iran on creating nuclear weapons in the past.

by Duncan Moss Negotiations between US Secretary of State, John Kerry, and his French counterpart, Laurent Fabius, in a hotel room in Geneva have resulted in a stalemate after the first bout of negotiations between the P5+1 group and the Iranian delegation. For the draft of an interim agreement with Iran, Fabius had insisted that there be no solid guarantees in the preamble about Iran’s

right to enrich uranium, and that all work should cease on Iran’s heavywater nuclear reactor about 130 miles south-west of Tehran. The Arak reactor is capable of producing plutonium which could be used for a nuclear arsenal.

Speaking in Abu Dhabi, John Kerry blamed Iran for failing to come to an agreement. “The French signed

5

FEATURES

The Bull 20.11.2013

I

n 1860 Ottoman sultan Abdülmejid I had a dream. Desiring to unite the continents of Europe and Asia by means of a submerged tunnel under the Bosphorus Strait, he commissioned a French architect to draw up a blueprint, but unfortunately a dearth of money and inadequate technology stood in his way.

Now, some 150 years later, his dream is finally coming true.

The world’s first sea tunnel connecting two continents was inaugurated on October 29th, commemorating the 90th anniversary of the founding of the Turkish Republic.

During the opening ceremony on Tuesday morning representatives from Japan, Somalia and Romania, as well as Turkish officials, talked of the tunnel as a new dawn for Istanbul and Turkey. Erdoğan himself said at the tunnel’s unveiling “The Leaders of the Century, the Project of the Century: The Marmaray Opens.” Attendees to the festival were given white caps festooned with the Marmaray logo to commemorate the event. One elderly man, to show his excitement, even stacked two hats on his head. It was a day of celebration for all of those involved.

Coined the “iron silk road” by the Turkish government, the tunnel itself is a part of the $3 billion Marmaray project, which Prime Minister Recep

Tayyip Erdoğan claims will eventually link “London to Beijing” by rail, reviving the ancient trade routes of Europe to Asia. Even critics of Erdoğan’s Justice and Development (AK) party concede that the Marmaray project, named Marmaray due to a conflation of the name for the proximate Sea of Marmara with “ray” the Turkish word for rail, is an engineering marvel.

“Whether they like us or not, whether they vote for us or not, they will be proud of this project,” Erdoğan said to a cheering crowd at Üsküdar, Istanbul, where celebrations were being held for the tunnel’s opening.

“We have given the Republic a much stronger structure by decorating it with brotherhood, unity, solidarity, justice, equality, and democracy.”

Initially started back in 2004, the project was delayed due to the largest ever discovery of a Byzantine fleet, at the main metro terminus in Yenikapi, causing Erdoğan to voice his contempt at the project being held up by “clay pots” and “other stuff”. About 40,000 artefacts were discovered, helping push back the date of the earliest known settlement at the site of Istanbul to 8,500 years ago: some 2,500 more years than previously thought. By 2025, the tunnel is expected to have over a million commuters per day, and at full capacity the rail service will be capable of carrying 75,000 peo-

ple per hour in either direction. The underground crossing itself takes a mere 4 minutes: much faster than the ferries which dart across the Bosphorus Strait, one of the busiest shipping arteries in the world.

Yet, the Marmaray Tunnel, despite being opened four years after the initially proposed completion date, is still not running at full capacity.

Many fear there will be dangerous consequences of rushing to finish it for the 90th anniversary of the Turkish Republic. The tunnel, almost a mile (1.4km) of which is submerged under 56m of water, runs parallel to the North Anatolian Fault; the same fault line caused the devastating 7.4 magnitude earthquake that struck Turkey in 1999, killing tens of thousands of people. Many perceive it as a death hazard, with risks of liquefaction during an earthquake (where the soil becomes like a liquid causing the tunnel to rise to the surface) or worse still possible collapse. Indeed, the day after the official opening, an electricity failure caused the tunnel to be evacuated and passengers had to evacuate the tunnel on foot, hardly something to instil confidence.

Minister. This is how he measures his success. “We have added seventeen thousand kilometres of road in eleven years,” Erdoğan said on Tuesday. “When we came into power, there were twenty-six airports, and now there are more than fifty.”

However, there are no signs that his vision has now been completed.

He plans to build the world’s largest airport on the European side of Istanbul, as well as an ambitious canal to link the Sea of Marmara with the Black sea, a third bridge over the Bosphorus, and another tunnel, for cars, underneath it, all of which add to the growing sense of discontent amongst the populace regarding what they feel are his authoritarian tendencies and quest for personal glory. Umud Dalgıç, a sociologist and project coördinator at the Istanbul branch of the Heinrich Boll Foundation, suggests that the need to commemorate the anniversary with the opening of the tunnel has to do with the upcoming presidential and local elections, both of which will take place in 2014. “Zillions of these projects will be announced before the elections,” he said, “and they will say that all of them will change your life.”

Indeed, Erdoğan’s desire for mega infrastructural projects like the Marmaray has characterised his political career, both in his time as Mayor of Istanbul and as the Turkish Prime

For the city of Istanbul, with a population of nearly 15 million people and its’ perennial problems with traffic congestion, any change or chance of relief to ease the gridlock

of vehicles would surely be welcomed by all parties. Yet Erdoğan missed an opportunity to advertise the tunnel’s benefits at the opening ceremony. Heralding the project as a grandioso architectural feat, which no one can deny it is, instead of focusing on the tunnel’s pragmatic positives in relieving traffic congestion and helping the working population in commuting to work, meant that for many the tunnel represented just another grand monument in his honour rather than something useful to the economy. The Turkish Prime Minister lumped the tunnel into the same bracket as some of his other more controversial infrastructure projects, such as the conversion of Gezi Park into a shopping centre which sparked the nationwide riots back in May. In doing so, he has merely alienated further his opposition and reminded his critics why they are opposed to what they perceive as his authoritarian dispositions. While the Marmaray Tunnel has, no doubt, put Istanbul back on the world stage, it remains to be seen whether or not the people of Istanbul and their growing discontent for the Turkish government will allow it to remain there for the right reasons.

by Duncan Moss

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7

Features

The Bull 20.11.2013

Europe to decide fate of nuclear power?

EU correspondent Heather Lang discusses the fate of Nuclear Power in Britain and the rest of the European Union Last month, the British announced that they will be building their first nuclear power station in twenty years, or rather that the French and Chinese will be building it. However, the plans could be scuppered by the European Commission if it decides that nuclear power is not eligible for state aid. Even if the plans are approved, major questions need to be addressed relating not only to the potential safety threats posed by such projects, but also about the actual value nuclear power has for the public in terms of bringing down energy bills.

EDF is an energy provider, 85% owned by the French government, which bought British Energy and its eight nuclear sites, including land for potential new reactors, in 2008.

It, along with the 100% state-owned China General Nuclear Power Group, struck a deal with the British government where they will build and operate the two reactors at Hinkley Point C and in return will get a set price of £92.50/ megawatt hour for 35 years.

This is essentially a subsidy which is twice the current market price for

electricity, and could be ruled by the EC as anti-competitive.

There are no present guidelines, directives or legislation which unequivocally excludes nuclear power from receiving state aid but this case is the first of its kind. Ed Davey, the British Energy Secretary, argues that the advantages being offered to new nuclear sources is already offered to other low-carbon sources of energy production. However, critics argue that nuclear is an old technology which does not need subsidies in order to be competitive in the market.

Davey has described this nuclear power deal as ‘competitive’ with other renewable energy projects.

If the set price of energy provided

by Hinkley Point C is approved by the EC and remains stable, it will be cheaper than the current price of onshore wind at £100/MW hr, biomass

at £105/ MW hr, solar power at £125/ MW hr and wave power at £305/MW hr. However, the price negotiated between the British government and EDF-CGNPG will not come online until the reactors themselves do in 2023, while these other renewable technologies have been getting more sophisticated and cost effective year after year.

Nuclear power is attractive due to its low carbon emissions and ability to produce a large quantity of energy from a small geographic space.

It is projected that Hinkley Point C will have a capacity of 3,200 MW per year, undoubtedly a more impressive figure than the 1,000 MW capacity of London Array, the world’s largest wind farm. Most commentators are seeing Chinese involvement in the British nuclear market as an opportunity for them to prove themselves in what is considered to be the most

THE EU COMMON FISHERIES POLICY A fishy business

by Eoin O’Driscoll & Beatrice Reichal

Despite the minor role that the fishing industry plays in European economies, the €1bn of subsidies to European fishing that is the European Union Common Fisheries policy has been the source of much controversy being a central factor in Iceland and Norway continuing to opt out of European Union membership. Now with overfishing seriously threatening European fish stocks, the European Union is being forced to act; on May 30th the European Parliament and European Council finally agreed on the main points of a proposed reform to the Common Fisheries Policy.

In 2006, Science magazine published a groundbreaking report claiming that global fish stocks are expected to collapse by 2048. Up until now the Common Fisheries Policy has long been a major driver of overfishing, but the May reforms seeks to change this and reinvent the Common Fisheries Policy as an engine

of conservation. It set a target to replenish European Union fish stocks by fifteen million tons by 2020.

concentrated in the Mediterranean region. We are undoubtedly at a crisis point.

The root problem is simple enough: the capacity of modern fishing fleets far exceeds the regenerative ability of fish stocks. While the European Union has subsidised its fisheries and provided it with bigger vessels and more advanced technology, catches are decreasing.

European Fishing has far exceeded maximum capacity.

In theory, the Common Fisheries Policy already includes measures to prevent overfishing. It sets a limit on how many fish can be taken from the sea, known as the Total Allowable Catches (TACs). TACs are decided upon in consultation with scientists who advise the EU on the regenerative capabilities of fish stocks. States are then given national quotas by the Commission who ultimately decide how much countries can take from the sea. It monitors and takes measures against illegal, unreported and unregulated fishing. The European Union also negotiates with developing nations in order to gain access to their territorial waters.

In 2012 the global catch dropped to 90 million tons from 94 million in 1996 despite the ever growing capacity of fishing fleets. The World Wildlife Fund suggests that the global fishing industry is two or three times larger than what our fish stocks can sustainably support, while the European Commission has found European waters to be three times more overfished than the global average, with overfishing

The reality has been much different from theory, however. Illegal fishing continues in spite of EU blacklists and sanctions. TACs and

tightly regulated market in the world and critics are weary of the lack of transparency that is characteristic of all Chinese companies, as reported by the anti-corruption organization, Transparency International.

However, even though there has been no disaster involving a British reactor anywhere close to the scale of Chernobyl or Fukushima, there have been safety concerns. In 2009, Magnox Electric Ltd was found guilty of allowing radioactive material to leak out of their facility at Bradwell-on-Sea from 1990-2004; the government’s chief nuclear inspector reported that there were more than 1,750 leaks and breakdowns at various facilities in the seven years previous. In the end, most nuclear accidents have been the result of human error and regardless of the checks in place, complete safety for workers and the public cannot be quotas are set much higher than scientists recommend, and many fish species once common to European waters are now listed as vulnerable or endangered. Meanwhile, European fleets outcompete fishermen in developing nations, preventing growth in their national economies.

The proposed May reforms aim to see European fish stocks rebuilt over the course of the next seven years. The main innovation will see the end of annual haggling over national fishing quotas by setting longer term, multiannual quotas, based on the findings of scientists and experts in the field. The practice of “discarding”, where a fishing vessel would throw unwanted stock, for reasons of species or size, currently accounts for up to a quarter of European fishing. Most discarded stock understandably dies as a result. Such practices will be banned if the May agreement is implemented.

EU subsidies will now be withheld from states that maintain oversized fishing fleets, and EU fishing vessels are to be forbidden from overfishing, even in territories outside EU jurisdiction.

guaranteed. In the case of Hinkley there is a further safety concern as a waste disposal site has not yet been identified.

The result of the EC’s deliberation regarding this case will set a precedent for other EU states who have shown an interest in expanding their nuclear power programs, for example, Poland and the Czech Republic. Despite current trends, an acceptance of the British subsidy could result in nuclear power becoming more attractive for more states in terms of providing a steady energy supply in conjunction with other renewable and non-renewable sources. The question remains if a rejection of the deal will equate to a European rejection of a new generation of nuclear power by making it unattainable for cash-strapped governments.

The brokering of this Common Fisheries Policy deal was one of the achievements of the Irish Presidency of the European Council. However, the May agreement maintains the controversial Hague Convention which allows vessels from one member state to fish in the territorial waters of another. The Spanish and French governments, spurred on by their economies’ sizeable stake in the fishing industry, had pushed for EU funding to upgrade existing fleets, but were left dissatisfied. They cite that in a time of mass unemployment in Europe, the European Union should not be encouraging the further curtailing of any industry. And while conservationists have been largely supportive of the May deal, some have criticized the limited subsidies still available for a small variety of fleet upgrades such as engine capacity.

Whether or not the May reforms help towards sustaining European fish stocks remains to be seen. What is beyond doubt is that the Common Fisheries Policy of the European Union will remain a controversial policy area for the foreseeable future.

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FEATURES

The Bull 20.11.2013

LEBANON

by Donal Kennedy

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constitutionally ethnoconfessional and communitarian state, eighteen communities are officially recognised and are geographically delimited in the Cedar State of Lebanon. The confessional public repartition of faith groups renders complex the system of governance since the procedure of quotas reserved to specific religious groups is supposed to ensure, in principle, the democratic representativeness necessary to provide stability within demarcated territories. Although the ethno-confessional aspect of division of responsibilities has historically penetrated the upper echelons of the State hierarchy, this strict and generalised implementation of consociationalism at an institutional level dramatically contributed to the outbreak of the Lebanese Civil War and especially the chronic nature of that war.

The system of power repartition could be described as a poisoned chalice, as although it has held the peoples of Lebanon together in the framework of equitable representativeness on the basis of a democratic charter, it has in almost equal measure led to more than mere ephemeral political crises with his-

toric allegiances being tested and blood repetitively being shed. The endemic divisions came to a climax in the 1980’s when intra-religious groups fought each other, in acts of political consolidation. Illustratively, Maronites were massacred by coreligionists in Safra, north of Beirut in July 1980.

In the same vain, a few years earlier, political rivalry cost the lives of the prominent Frangieh family within the Christian Forces. The Syrian question was essential to that episode and remains generally so, to the strife that has plagued Lebanon, in light of the fact that allegiance to Syria or nationalistic hostility to its interference in post-independence Lebanese affairs is the Gordian knot over which the political class has formed its major division. Recently, the Lebanese have arguably been the first people, apart from those fleeing Syria itself, to suffer from the Syrian crisis, from the early days of its socio-political origins to the militaristic intensification of late.

The triad of Lebanese based supports utilised by both the Syrian government and especially its emissaries, as it struggles to grapple with rigidly imposed, United Nations

enforced economic sanctions, and opposition forces alike, are crucial to understand some of the principal developments of late in the on-going Syrian Civil War. The first is the Rafic Hariri International airport of Beirut, from which figures from both sides of the divide leave the region, and negotiators can penetrate Syrian territory.

The second is Lebanon’s renowned advanced banking fabric which in light of the banking sector of the Syrian Arab Republic being paralysed by tough sanctions overseen by the Arab League and the Quartet, allows strategic funds to channel extra territorially and is usurped by unscrupulous groups at play.

Indeed the United Nations Relief Work Agency’s (UNRWA) recently published its second instalment of “A War on Development” report indicating in summary, that the Syrian Arab Republic is in an advanced stage of de-industrialisation, “agriculture now accounting for 54 per cent of GDP, and since March 2011, the economy has lost US$ 103.1 billion”. Thirdly and finally, the Lebanese sea port of Tripoli remains another lifeline to forces loyal to the

Baathist president and the motley groups organised within the broad Syrian National Coalition, politically and financially supported by the more radical elements of the Qatari and Saudi diplomatic channels.

As regards Syrian refugees, it could be said that it is still etched clearly in the collective memory of the Lebanese people the dramatic influx of Palestinians in the wake of 1948 with refugee camps being hastily assembled to accommodate the displaced population. 65 years later, the emblematic Ein el-Helweh camp “houses” in excess of 70,000 of an approximate total of 450,000. The heritage of this “collective memory” thus plays a non-negligible role in concerns from the communitarian factions in confessional democratic Lebanon.

Added to that comes, in recent months, hundreds upon thousands of Syrians, (including however Syrian Palestinians who are know once again refugees in Lebanon). The UNRWA puts the figure at 800,000 in total but one specialist of the region, amongst others, Ghassan Salamé, Dean of the Paris School of International Affairs and former minister in one of Rafic Hariri’s governments,

puts the figure as having exceeded 1 million some months ago.

Initially, it was largely speaking the Syrian land owing bourgeoisie who had moved to Beirut to inhabit holiday apartments or sea villas in the hope of staying there on a temporary basis before the conflict dissipated. Since, what has unfolded resembles more of an exodus than a brief absence. As an illustration, albeit reductory, the UN Refugee Agency communicated recently that the influx of Syrian refugees into Lebanon, was relatively akin, all other things being equal, to 11 million refugees installing themselves in the United States or 10 million in Germany.

Lebanon is being overwhelmed by what its twin sister, Syria has endured and experiences in parallel all what its people suffers. One could say that when Syria sneezes, neighbouring Lebanon catches a fever, not a cold. While much talk focuses on Turkey’s eventual geopolitical manoeuvring, Washington’s demands, the plight of the Lebanese who have already seen their country ravaged by internal strife, bear witness to their special country being mutated once again.

Rwanda - Building a strong economy

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sk anyone what they know about Rwanda and talk of genocide is likely to feature prominently; specifically, that of the Tutsis by the Hutus that took place in 1994. Over the course of approximately 100 days over 500,000 people were killed, according to a Human Rights Watch estimate. What people don’t realise is that Rwanda is one of the best performing economies in the world.

Rwanda is an excellent example of how a country tarnished by civil unrest and war can turn its fortunes around by rebuilding its economy and opening itself up to foreign direct investment. According to a World Bank report, Rwanda’s economy grew by 8 per cent in 2012, thus continuing a decade-long period of

strong economic growth and claiming for the third year in a row the title of the fastest growing economy in the EAC. Why is Rwanda’s economy growing more quickly than other African states? One of the main reasons is because of huge foreign direct investment that Rwanda is opening itself up to. “The government continues to promote a private sector led free market economy…by undertaking reforms with the objective of making the country a favourable place for investment,” Yusuf Murangwa, Director General, National Institute of Statistics of Rwanda-NISR said during the launch of the foreign private investment report for 2011.

The strong growth in recent years is attributed to a resilient private sector performance especially in the

services sector with trade, telecommunication and transport generating about 40 per cent of 2012 real GDP growth.

Lowering corruption levels in Rwanda has also had positive implications for its economy. Rwanda has a strong political will to fight corruption. The country has achieved significant progress over the last years in terms of government effectiveness and transparency of the regulatory framework. Rwanda’s stable government and strong stance towards corruption make it an attractive state for investment, which in turn leads to improving its financial position.

Paul Kagame, President of Rwanda, has clear and ambitious goals for Rwanda. For example, he wants to find paying jobs for half of Rwanda’s

subsistence farmers, nearly quadruple per capita income to $900 and turn his country into an African centre for technology, all by 2020.

Kagame’s hopes are most certainly audacious – and many believe impossible. Kagame believes that no country can rely on aid forever; this is perhaps why his plans are so bold.

What is obvious however is that Rwanda is living up to its expectations in improving its economy and has the third best score in Africa on the World Bank’s ‘ease of doing business’ rankings. It also has a higher development ranking that some European countries such as Poland and Hungary.

However, it is clear that the most important reason Rwanda is able to build its economy is because it was fundamentally successful in build-

ing its state through the use of taxation, something which the majority of African states have not done.

Rwanda has aggressively extended its tax-net. The number of registered taxpayers has increased by 337% from 2008-2011. This has helped the Rwandan economy grow and has increased levels of public sector spending which, for example, has incorporated a free health care system that covers about 90% of the population.

The encouragement of international business, rule of law and lack of corruption is crucial to the future success of Rwanda, and if this growth continues then Rwanda is in a promising financial position in the near future.

by Andrew Nevin

9

FEATURES

The Bull 20.11.2013

AFRICA The new battleground in the war on terror As sickening reports of the carnage at Westgate Mall, Nairobi, are still seeping into the international media, the steady rise of jihadist groups in the region has been brought into sharp focus. Though the US ‘War on Terror” has largely been conducted in the Middle East, the influence of jihadist groups in Africa, particularly in areas surrounding the Islamic Maghreb, is spreading rapidly.

Even two years ago, it would have been preposterous to suggest that Islamic Africa was being radicalized.

When peaceful protests broke out across Northern Africa, with students and workers calling for reform, governments fell and free elections were held. For a period, it seemed to the idealists among us, that true democracy could be achieved in countries that had never really thrown off the shackles of occupation.

The so-called “Arab Spring” presented an alternative solution to the age-old choice between brutal dictatorships propped up by the West, or a tyranny of extreme Islam. It proved Al-Qaeda wrong; real reform for moderate Muslims could be obtained peacefully.

It was not long until the movements turned sour. As the uprisings became more violent, more radical factions stepped in and began to gain influence. The failures of movements for reform in Egypt, Morocco, Libya and elsewhere left a gaping hole in the fabric of African governance, ripe for exploitation by existing jihadist groups. As weapons flooded out of Libya, extremist groups went

from strength to strength, promising stability and security in countries that had been shaken to the core.

The struggle in Syria has compounded the problem. The conflict is mired in contradictions. First, there was the refusal on the part of the US and its western allies to intervene on the side of the comparatively moderate Syrian Free Army. Meanwhile, rich Arab countries in the Gulf poured money into jihadist groups in Syria, furnishing them with weaponry the original rebels could only dream of. These ‘benevolent’ fundraisers, America’s partners in peace, allowed extreme Islam to hijack the anti-Assad movement, leaving the West with a Sophie’s Choice. The only certainty being the further radicalization of yet another Arab country.

Arguably, it is much the same disinterest that has allowed the rise of jihadist groups in across the Sahel. Just as the Mujahedeen grasped power in remote towns and villages in mountainous Afghanistan, radical islamist groups in Niger, Mali and northern Nigeria have risen to positions of influence in rural areas.

As far back as September 2011, the senior American military commander for Africa warned that AlQaeda, Somalia’s Al-Shabaab and Nigeria’s Boko Haram were trying to forge an alliance to coordinate attacks on the United States and Western interests. In February 2012, Al-Shabaab officially pledged obedience to Al-Qaeda leadership, and Boko Haram has long maintained links to the Algerian Al-Qaeda.

›› Gen. David Rodriguez, United States Africa Command

Though differing in ideology, recent attacks in Kenya and Nigeria appear to show the emergence of an “alliance of convenience” between three of the most powerful terrorist organisations on the continent.

Undoubtedly, this alliance has vastly increased the capabilities of each group. United under the banner of al Qaeda, regional groups now have access not only to huge sums of money, vast stores of weaponry and increased human capital, but also to the large network of Westerners sympathetic to the cause.

The possibility of a vast and efficient network of Islamic radicals across Africa is indeed a terrifying prospect. Not only would it have huge geo-political consequences for the continent, it poses a very real threat of mass terror attacks in the West.

The ball is now squarely in our court. The tendency to ignore troublesome African regimes has not served the West. Today, the emphasis has to be on providing support to any government who wishes to oppose radical Islam. Lessons must be learned from the intervention in the Middle East; increased US military presence in Africa is in nobody’s interest. Funding, logistical support and training for local security forces in Mali, Niger and Somalia would go a long way towards preventing further attacks.

In addition, the US must confront their so-called allies who continue to fund terrorist networks. Radicalism has always flourished in areas of oppression and extreme poverty, but without the support from rich countries in the Arab Gulf, there is no way these groups could exert their current influence.

The key point in this narrative is that Africa is home to more than 420 million Muslims, most of whom are moderate. The international community must now tread carefully to ensure that African leadership provides real resistance to radicalism, and a viable plan for stability.

by Anna Brennan , African Correspondent

Irish Aid Whose world?

What future?

Niall Murphy In spite of our good will, best intentions and circa €650 million spent on foreign aid every year there is need for reform.

The effects of our efforts and not merely our efforts need to take centre stage.

I

n May of this year, Irish Aid launched “One world, One future: Ireland’s policy for International Development”. The paper builds on the previous 2006 White paper but also sets a new focus and direction on overseas aid in a time of high government debt, and in the light of recent scandals over misappropriation of foreign funds in Uganda. Now is a good time to ask ourselves, are we really getting value for money?

The plan aspires to a number of highly laudable objectives. High on the list is ‘accountability’. However, the plan also aims to commendably demonstrate, “our commitment to staying the course with countries emerging from conflict “and thereby pledges to “deepen our engagement in Sierra Leone and Liberia.”

Unfortunately, there is a trade-off here which the plan has failed to recognise.

If our primary aim is accountability, then the most fragile of states, and arguably those most needing of assistance, would simply have to lose out. By the very fact that they need assistance the most, the weakest states will be unlikely to be able to provide the kind of checks and balances which the department now prioritises. Rather than fooling ourselves into thinking we can have the best of both worlds, we need to decide what our true priorities are.

The plan hints at disillusionment, with multilateral donors saying that the agency will “review our support for multilateral organisations.” They are not alone in their disillusionment.

In a recent International Development select committee hearing in Westminster, the Rt. Hon. Sir Malcolm Bruce asserted that “if you are trying to work through the plethora of EU and UN-type agencies, you waste one heck of a lot of money on the way in bureaucracy and less gets to the front line”. This kind of thinking is misguided. The economies of scale which can be seen in said agencies cut costs through reduced duplication, not to mention that buying in bulk can bring down the cost of essential goods. Large multilateral agencies also have far greater expertise in all areas of development. Therefore projects coordinated by multilateral agencies can be more cost effective.

Bilateral donors also tend to be prone to “capture”, whereby local NGOs, politicians or commercial

interests successfully lobby money towards their junket. Multilateral organisations invariably have a far greater number of stakeholders which by the law of large numbers simply leaves them less vulnerable to such influences. While the plan also advocates “engaging in a smaller number of sectors in our Key Partner Countries”, fragmentation remains a key problem facing a small agency such as Irish Aid. Successful bureaucracies and businesses often preach the need to “specialise”.

By contrast, aid operations are split among too many donors, too many countries and too many sectors.

Even when trying to address this problem, a tiny agency like Irish Aid still manages to split its operations between nine different countries.

Within all of these nine countries, Irish aid focuses on a wide range of very different sectors. In 2011, the annual report of Irish Aid listed twelve different sectors (including the ambiguously named “other sectors”). Two per cent of total funding was spent on water sanitation. Another two per cent was allocated on rural development. With a budget of only €650 million, spent in nine different countries across over twelve different sectors, opportunities to reduce fragmentation are few, meaning less value for money.

Meanwhile, only one-fifth of Irish aid is allocated to multilateral organisations which, for all their faults, offer a more effective means of investment.

Unfortunately, we are not alone.

Both the USA and Japan have two separate agencies dedicated to overseas development aid. In fact, Lael Brainard, US Under-Secretary of the Treasury for International Affairs ,estimates that the United States has more than fifty different bureaucratic agencies involved in foreign assistance. Bill Easterly, Professor of Economics at New York University, has shown that Luxembourg, one of the world’s largest donors by percentage of GDP – yet tiny in absolute terms – divided its 2004 budget of $141 million among thirty sectors of which fifteen had a percentage share of total funding of no more than 1%.

The “One World, One Future” policy paper marks an improvement, and internationally Ireland is comparably effective in its overseas development aid programmes. However, for development aid to be truly effective, much reform is required.

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features - special report

The Bull 20.11.2013

The Patient Protection & Affordable Care act COLM MANNING

Obamacare: A step in the right direction?

There was always going to be controversy with the Patient Protection and Affordable Care Act, betterknown as “Obamacare”. The surprise is that this debate, oft ill-informed, is still taking place almost 4 years after the bill was signed into law.

The aim of Obamacare is to increase the quality and affordability of health insurance, lower the uninsured rate and reduce the cost of healthcare for individuals and the government. Why wouldn’t we want this?

Obamacare works by mandating individuals to buy private insurance.

Subsidies are given to those who cannot afford the most basic insurance. Private insurance companies must offer the same rates regardless of pre-existing conditions. The law requires insurance companies to cover all new applicants with minimum standards. Other changes are also part of the act, such as allowing young adults to stay on their parents’ insurance policies until age 26. This has already had huge effects on the numbers of uninsured youths.

“Obamacare works by mandating individuals to buy private insurance” “Obamacare works by mandating individuals to buy private insurance”

Future reforms aim to improve healthcare outcomes and reduce costs within the system. This will be achieved through increased competition, regulation and incentives to streamline the delivery of healthcare. Given the predicament in Washington, these reforms are confined to the future.

Why the need for change? Why not just leave things the way they are? The simple answer is that things just weren’t working. The United States health expenditure is circa 6% higher in GDP terms than that of France, Germany and the Netherlands (figures from the World Bank).

Although America is at the forefront of medical advances, possessing the medical technology to keep people alive who should have died a long time ago, the inequality within the system is huge. If you can afford it you’ll get it. If you can’t then good luck and have a nice life (or what remains of it). Obamacare exists to try to address some of the flaws built into America’s health insurance and thus health care industry. It is a step in the road to universal health insurance, as exists amongst our paymasters, Germany.

“Obamacare is a step in the road to universal health insurance” This leads neatly into my next area of discussion, the two theories to achieve minimum standards of healthcare, and I stress the word ‘healthcare’. Economic theory suggests that there are two ways to

achieve universal healthcare: (a) the government led route or (b) the insurance led route. With option (a), the government provides various levels of healthcare and pays for this through increased taxes. This system is partly implemented in Ireland and more so in the UK where everyone is entitled to varying levels of public healthcare. Discrepancies arise in the levels of healthcare provided due to the politics of fine-tuning the system. (b) Individuals take out private health insurance to provide various levels of health care. For various reasons, this must be regulated. Simple economic theory states that for the private health insurance market to function in the long run everyone must have insurance. This ‘basic rule’ is needed due to the uniqueness of the health insurance market. Not all young and healthy individuals will want to buy insurance. This results in a higher portion of unhealthy, expensive people taking out insurance. Health insurers increase the average price to compensate for this leading to a spiral of ever increasing premiums, further discouraging healthy individuals from taking out insurance, fuelling this spiral. There are a few other aspects to take into account but, put simply, mandating citizens to have private insurance prevents this death spiral. “…for the private health insurance market to function in the long run everyone must have insurance”

Understanding the two basic theories to achieve a minimum level of health coverage, we see that Obamacare is following the private insurance route with government regulation. For this system to function, everyone must have insurance.

I know there will be people who say that it is ‘unfair’ to force people to take out potentially life-saving insurance. But if we want minimum standards of health cover, and we choose the insurance led route, this is what must be done. It must be pointed out that Germany, the largest economy in Europe by far, already has this system in place. Everyone is required by law to have insurance. The government subsidises you if you cannot pay while also paying the premiums of children, etc. Obamacare is a step in this direction, with citizens mandated to buy cover and fined $95 if they choose not to.

Where does this leave us? We need to ask ourselves: do we, in a rich society, want to have basic levels of health cover for our fellow citizens? Economic theory suggests there are two ways of achieving this.

Both have been mentioned and both have their merits, with neither being better than the other. Obamacare is a leap in the direction of universal insurance. I would challenge anyone, especially the con side, to read more into the Patient Protection and Affordable Health Care Act and say it is not an improvement on what has gone before. Some might say that

healthcare costs will still be too high even with this momentous change in the health insurance market. I would say prove it. The Congressional Budget Office stated in their research paper ‘CBO’s Analysis of the Major Health Care Legislation Enacted in March 2010’ which was

“Obamacare is the biggest overhaul of the U.S health system in the last half century” undertaken on 30th March 2011 that ‘Obamacare’ would save the Federal government $210 billion over the years 2012-2021.

“Obamacare is the biggest overhaul of the U.S health system in the last half century” There are several technical, petit flaws with Obamacare which I’m sure the con-side will bring up. I assure you that either I have addressed them in my piece or in the papers I have cited or else they are in fact small, technical problems that can be tweaked with further legislation.

Obamacare is the biggest overhaul of the U.S health system in the last half century. It will work, it will benefit society and it is a giant step in the right direction.

PROS PROS PROS PROS PROS PROS PROS PROS PROS PROS PROS PROS PROS PROS PROS PROS

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Features - special report

The Bull 20.11.2013

OBAMACARE A token gesture in a flawed system?

Raaj Zutshi outlines what he perceives to be the flaws in America’s recently revamped healthcare system Just over a year ago, on the 23rd October 2013, a group of young students decided to have a quick game of 5-a-side football. Midway through the game, the attacking team was coming down the flanks and as the defender turned to track his runner; he heard a small pop in his knee and fell to the ground in excruciating pain. As the players slowly came to the realization as to the gravity of his injury, a teammate promptly suggested calling an ambulance.

In between the groans of pain, the injured party was quick to affirmatively decline the offer. Why? Because I was that student and I was in America. One year on, one insurance policy, one surgery, multiple physical therapy sessions, thousands of dollars, hours on the phone with insurance companies and still a couple of pending insurance claims; those nightmares of the American healthcare system have become my reality.

Spending my Junior Sophister year abroad on exchange in the U.S, I was fortunate enough to experience the U.S Presidency election process.

The Patient Protection and Affordable Care Act and ensuing health reform policies advocated by President Obama were selling points that

many of my Democrat peers echoed.

As of 1st October 2013, “Obamacare” was realized as the federal and state insurance exchanges went live. Whilst the launch had been obstructed by the shutdown of the U.S Government, many people are optimistic about the numbers who will register by the New Year. However, one ought to note from the story above, insurance and healthcare are not synonymous, and this is where one must express some caution.

Insurance policies in general vary depending on the scope of the coverage and the deductible threshold.

With regard to U.S. Health Insurance, one first looks at your maximum benefit, ones deductible, and finally the preferred and out-of-network care providers listed. This refers to a select few pharmacies, physicians and hospitals whereby one will receive further discounts on top of your policy coverage. Insurance providers come with their own links in various locations across the country; therefore choosing a policy with your local hospital or doctor is essential. Thankfully, I was on the university’s student policy provided

by United Healthcare and so it was subsidized, while having an exten-

sive range of physicians across the East Coast.

With a fairly comprehensive plan, 80% coverage and a $100 deductible (for in-network), and 60% and a $400 deductible (for out-of-network); how expensive could an ACL (anterior cruciate ligament) reconstruction cost? In Ireland the average cost of this surgery is €6,000 (which is covered by the government). After some research and the expectation that the US would be slightly more expensive; I calculated the costs of the surgery after insurance at about $2,000, seemingly worthwhile due to the predicament I was in. After an MRI scan, several meetings with the doctor and a surgery date scheduled over the Christmas break, confirming that the doctor was “in-network”; everything seemed to be in order.

The calls and letters started on the 27th December, just under a week after surgery. Learning how to walk and bend my knee again, I was surprised to get a call from the insurance provider asking me to run through the nature of my injury once again; because they don’t cover university sports injuries. After an hour on the phone, I managed to

convince the employee that I was just playing with my friends and it had nothing to do with the university; crisis averted! The bills started arriving shortly after and that’s when the intricacies of the American Healthcare system emerged. Each individual person who looked after me sent me a bill, whether it was the doctor, the anesthetist, the nurses, the hospital etc. Their combined charge amounted to over $25,000 pre-insurance.

At this point, the fine print of the policy began to surface. I expected some contentious claims, as insurance companies are profit-orientated institutions and therefore seek to pay out as little as possible. However I clearly underestimated the magnitude of these minor “exceptions” they place in one’s policy; the strangest one of the pick was the fact that they didn’t cover any post-operation visits to the doctor. As my leg still had staples in it and open wounds, several trips to the doctor to dress the wound and remove the staples were a necessity.

ACL Reconstructions are common among many young athletes in the US, with almost 200,000 surger-

ies per year, such that some doctors make a living off them. It’s a routine surgery that takes just over 2 hours to complete, with little risk of complications. My story is only one of many tales of despair people share after their experiences with the American Healthcare system. While I was fortunate that the surgery was not a matter of life and death, and I luckily had the financial backing of my parents to cover these exuberant costs on top of the insurance policy, many Americans don’t share such luxuries!

The underpinning concept behind Obamacare is that of universal healthcare. Whether or not this can exist in a privatized healthcare system is the primary concern. There is no doubt that as of 1st October 2013 there are people who can avail of cheaper insurance policies from the same insurance companies; but at what cost? Limited scope of protection, higher deductibles and more out-of-pocket expenses! I have no doubt that Obamacare will succeed in insuring a vast majority of the nation, but I fear for those who suffer from anything more then the seasonal flu.

WHAT DO YOU THINK? THE FACTS

The official name for “Obamacare” is the Patient Protection and Affordable Care Act (PPACA).

The Affordable Care Act was first signed into law by President Barack Obama on March 23rd, 2010.

PPACA was upheld by the Supreme Court on June 28th, 2012.

c.10% of those deemed eligible to enrol have done so. This figure is 21% in state-based marketplaces and 4% in marketplaces run by the federal government. c.75% of the sign-ups have come from the 14 state-based marketplaces.

There are currently more than 48 million Americans who have to enrol in one of the insurance marketplaces. The population of the USA is estimated at 317 million.

35,000 people have signed up in California alone, accounting for one third of the current total.

106,185 have bought a plan (this figure includes those who have placed a plan in their shopping cart but haven’t paid for it yet).

42 – The number of people who have signed up in North Dakota, the state with the fewest enrolees.

CONS CONS CONS CONS CONS CONS CONS CONS CONS CONS CONS CONS CONS CONS

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ECONOMY

The Bull 20.11.2013

THE FORMULA BEHIND THE CRASH In the autumn of 1987, the man who would become the world’s most influential actuary landed in Canada on a flight from China. David Li had (it seemed) found the final piece of a risk management jigsaw that banks had been waiting for. But what started as a financial solution soon became a recipe for disaster.

Investors like risk – what they hate is not knowing how big the risk is.

Central to this process is the concept of correlation. Before quantitative models came along, the investors were only comfortable putting their money in mortgage pools when there was no risk whatsoever. Yet during the 1990s, there were trillions of dollars waiting to be loaned to borrowers of all kinds, if only investors could put a number on the correlations between them. The problem is agonisingly hard, especially when you’re talking about hundreds of variables.

Enter Li, a star mathematician who grew up in rural China in the 1960s. In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled “On default correlation: a copula function approach”. Using some rela-

tively simple maths, Li came up with an original way to model correlation.

Instead of using historical data, he used market data about the prices of credit default swaps. This was David Li’s Gaussian Copula.

Now banks no longer had to hold on to risks. Instead, they could value them using mathematical modelling, then package them into collateralised debt obligations (CDOs) and trade them like any other security.

Mortgages were the perfect example. Rather than issue a mortgage and collect interest over its lifespan, banks began to bundle the loans together and sell them into specially created off-balance-sheet shell companies. These companies in turn issued bonds to raise cash and, by using this Gaussian Copula, banks were able to mould the structure of mortgage portfolios to ensure that bonds of varying risks could be issued to investors.

The CDO market boomed. By the end of 2001, there was $920 billion in CDOs outstanding. By the end of 2007, that number had shot to more than $62 trillion.

In finance, you can never reduce

JC Penney Market reflexivity is a theory expounded by the legendary investor George Soros. He based the theory on the social reflexivity teachings of the philosopher Karl Popper. Soros’ theory stresses that markets are in a constant process of dynamic disequilibrium. In ‘The Alchemy of Finance’, Soros maintains that efficient market theory cannot explain the results of irrational participation in the markets where market participants have biased beliefs and perceptions of value.

The result is a symbiotic relationship between the fundamental underpinning of the marketplace, the market’s pricing, and the participants in the markets who make trades based upon biased perceptions.

This of course runs entirely contrary to the foundation of traditional economic theory, which largely only acknowledges the rational thinking participant. His theory has gained wider acceptance since the financial crisis due to the systemic failure of risk models based on market fundamentalist theory, relied on by institutional rating agencies and investment banks to give investment grade ratings to mortgage derivative investments. The blind acceptance of the credibility of these models was one of the root causes of the financial crisis.

risk as such; you can only try to set up a market in which people who don’t want risk sell it to those who do. But in the CDO market, people used the Gaussian copula model to convince themselves they didn’t have any risk at all, when in fact they just didn’t have any risk 99% of the time. The other 1% of the time they blew up.

The cracks started appearing thanks to the US subprime crisis.

Defaults started to increase in late 2006. This didn’t worry the banks at first, as their models assumed that the minuscule default points all over the US were not correlated. Unfortunately, some things (such as falling house prices) affect a large number of people at once. If home values in your neighbourhood decline and you lose some of your equity, there’s a good chance your neighbours will lose theirs as well. If, as a result, you default on your mortgage, there’s a higher probability they will default too.

In 2007 the problem escalated, and by that summer homeowners all over the US were defaulting on their mortgages. The cheap debt made available by the finance revolution was so cheap in fact that the loans

A potential case study in market reflexivity?

Soros however, is much more widely recognised as an investor.

In July the financial press reported that Soros Fund Management had amassed an almost 10% stake in troubled US retailer JC Penney. The stock has lost more than 70% of its value this year and the chain has failed to turn a quarterly profit since mid-2011.

This year alone it has burned through $1.6 billion in cash reserves and has suffered a 22% drop in operating revenue. The retailer began to falter after the appointment of Ron Johnson, the former Apple Stores director, as CEO. Johnson then advocated the adoption of a new strategy to make the store appealing to younger and wealthier shoppers. Private brand labels were introduced and long running promotions were dropped. This proved to be a disastrous move and resulted in a 25% drop in sales in the first year of the transformation alone. Loyal long term customers were alienated and deserted in droves to the store’s main rivals. The board fired Johnson in April and rehired Myron Ullman who formerly served as chairman from 20042011. Johnson’s legacy continues to cast a shadow over the company with revenue and sales continuing to decline into the first and second quarters of this year. In a bid to turn the retailer

should never have been issued in the first place.

The losses the banks began to incur on their holdings of CDOs were staggering, and as the institutions grew fearful about one another’s solvency, they stopped lending to each other. Global liquidity dried up.

The cracks spread through the whole banking and financial world.

world of mortgages and economics, it crumbled. The range of possible outcomes here was more complicated and more random than those facing an insurance company’s clients.

There is a common saying in statistics: ‘All models are wrong, but some are useful’. David Li’s model was, for a period, undoubtedly useful.

Li isn’t just to blame. Bankers should have noticed that very small changes in the underlying assumptions could result in huge changes in correlations. Unfortunately, the managers didn’t need to understand any maths behind the assumptions. All they needed to see was that single correlation number. The people selling these CDOs saw correlation as a constant, when they should have been seeing it as a variable. Even Li himself, two years before the crash, said “Very few people understand the essence of the model”.

The problem with Li’s formula was that it assumed events tended to group heavily around an average. In actuarial science, Li’s formula could adequately capture binary outcomes such as life or death, but in the messy

around the new board reverted to its’ old strategy of discounts and promotions. To shore up liquidly Ullman negotiated a $2.25 billion loan from Goldman Sachs at the start of the year and sold $900m in additional equity in early October.

In order for JC Penney to survive it has to rebound sales to a level that will expense leverage. Its September earnings report showed that mall traffic rose, and comparable store sales which is a key retail metric, fell 4% from the same period last year, which equated to a 580 basis point rise from august 2013. It also had the second largest online sales of any US retailer. From a strategic point of view JC Penney has no market advantage.

The US retail sector is cut throat and no competitor, save Wal-Mart, has the benefit of significant market share.

Turnarounds in the retail sector traditionally take longer than any other market sector due to the difficulty in re-attracting lost customers and convincing them to spend money on largely discretionary goods.

The current climate is not particularly conducive to its efforts also.

While US gross consumer spending has recovered somewhat to the pre2008 levels due to record low inflation and massive government expenditure it still is off the credit fuelled gorging

by Ailbhe Smith

›› David Li

that took place in the early 2000’S. Soros’ reasoning as to why JC Penney is a reflexive investment must stem from the fact that the store had a long history of successful trading before it tried to rebrand itself and that a return to its old business concept will bring the company back to profitability. His Investment runs contrary to the market as a whole as roughly 70% of the stock float is held in short contracts.

For a return to be realised on this investment it is clear that patience will

have to be the order of the day.

by Simon Daly

13

business

The Bull 20.11.2013

Stale Irish banking system needs rejuvenation

by Brian Devitt

The Irish banking sector waved goodbye to Dankse Bank and Rabobank in the past month, as both decided to cut their losses on Irish operations. The industry is becoming lonelier, and the consequences of that are far-reaching.

Every market needs competition to provide efficient and quality goods and services to consumers, but the Irish currently have a limited choice of financial institutions; the result is a very languid industry, dominated by inactive players. It’s no secret that the country needs lending growth before it experiences any significant economic growth, but the impaired balance sheets of banks are preventing this from happening. Since the proportions of loss-making assets are so high, banks are trying to hold more reserves in provision of these loan losses instead of making new loans, which is why Central Bank statistics show lending to Irish residential households hasn’t seen positive growth since October 2009.

Bank of Ireland for example has almost 6% of its total assets in cash compared to 0.2% in 2008. All Irish banks are trying to rapidly store up liquid assets to meet their customer deposits and other liabilities as they fear the returns on their less liquid assets, their loan book, won’t be sufficient to do so. Another reason for this is that it improves their ‘Capital Adequacy Ratios’ (CAR), which is calculated as a percentage of ‘RiskWeighted Assets’ where less risky

assets such as cash are given a lower weight. This is particularly important ahead of the ECB’s ‘Balance Sheet Assessment’ next year, where it will likely instruct under-capitalized institutions to issue new equity; something which won’t please the shareholders of such institutions.

Of course in more ‘normal’ times or a more competitive environment, said banks could not afford to keep such unprofitable assets as their income statements remain in the red.

The country really needs banks to start aggressively chasing earnings again but without competition, that won’t happen.

There’s a second factor crippling lending and it relates to the customers of these banks whose financial position is just as impaired. Recent figures indicate that Irish private debt is about 320% of 2012 GDP, second in the Eurozone only to Luxembourg (whose figure is less meaningful due to the large presence of Multinational corporations). Household debt alone is over 100% of GDP and as people struggle to cope with current debt, there remains no appetite for new borrowings. This is why Dankse Bank and Rabobank are leaving: restaurants can only serve to hungry diners, banks are no different.

This largely explains why policymakers at both national and EU level have struggled to create economic growth. The ECB has kept interest rates low and last week cut its main

rate to a record 0.25%. Yet it’s unlikely this will be sufficient incentive for banks to amplify lending.

The Irish Government could be apportioned blame for lack of growth but it has balance sheet problems of its own as government debt is 117% of GDP. The Government might be content with the deep fiscal budget adjustments it makes every winter, but no amount of cuts will aid the private sector whose issues remain unaddressed.

There is however, one group of borrowers with high demand; Irish Small-Medium Enterprises (SMEs), the majority of whom are in good financial health. New start-ups and those that haven’t been liquidated since 2008 have low amounts of debt but are correspondingly undercapitalized and desperate for new investment.

ISME chief executive Eamonn Kielty lamented last week that “A normal competitive banking market no longer exists in Ireland, and currently the banks are primarily concerned with self-preservation and deleveraging.” The problem is that these businesses are high-risk for lenders and exactly the type or borrowers the conservative Irish banks want to currently avoid. The government, along with Enterprise Ireland, AIB and other institutions recently launched a fund to invest in SMEs and void this gap. However at a measly size of €125m, a lot is left to be desired.

Time to allow competition in the Dublin Bus market The summer gone-by has provided a rude awakening to the travelling public. The Bus services on which we rely can disappear at any moment.

Strikes at Bus Éireann and Dublin Bus left the travelling public stranded for a number of days on each occasion, and they should prompt us to question whether a fully public bus market is a wise choice. Thankfully, a small number of Bus Éireann passengers could find private alternatives for their journeys, but this wasn’t the case for Dublin Bus passengers. We have only one company to get us around Ireland’s capital city.

The introduction of competition into the capital’s bus market is a controversial proposal, and a risky one.

However if we strike the right balance between public need and private competition, we can achieve a future with less disruption and reduced fares.

I want to make it clear from the outset that a completely deregulated model is not the answer. In such a sce-

nario private companies would only serve profitable routes and only run busses at peak times. Many countries provide examples of this failure, but Ireland can learn from their mistakes and instead perfect a private model that suits both providers and passengers.

The main feature of this hybrid model would involve the tendering of profitable and unprofitable routes. It’s an unfortunate reality that our society must provide some bus services at a loss, but we cannot leave behind those who live in isolated communities or ones without the population to sustain a viable service. The question for us is whether the taxpayer provides this subsidy, or whether we get the market to do it for us.

A mixed tender of profitable and unprofitable routes essentially forces the private operator to cover some of this state subsidy and it limits their overall profitability. In tandem with a tender of mixed routes there should

also be a minimum frequency of busses on those routes; there’s no point in tendering to a company who will only run one bus per day on certain routes.

Building a minimum frequency into the contract of private operators also gives them an incentive to better serve that route. They can experiment with running busses at different times of the day to achieve the best passenger numbers.

We must also consider the logistics of it all. If we have three bus operators in the city, does that mean each street will have three bus stops and three real-time displays? The answer to this is no. The network of bus stops can be used by all operators and the realtime displays are already owned by the National Transport Authority (NTA). In future, they would display Dublin Bus arrival times, along with those of private operators; a system of multiple operators would still mean the same bus stops and the same routes.

This is the biggest advantage of a

competitive tendering system, a real reduction in costs and thus of fares.

Dublin Bus drivers are currently the third highest paid in Europe, even when adjusted for costs of living. The current dispute that has led to strike action only centres on premium payments, not on core pay. No one wants to see drivers paid pittance for what can be a stressful job, but the act of unions holding Dublin Bus to ransom is unacceptable and would not be demanded were Dublin Bus open to losing some of its routes to private operators.

Next year the NTA has the option of renewing its monopoly contract with Dublin Bus, or it could move to a system of competitive tendering to allow new operators enter the market. One year might be too short notice for new companies to emerge, but if we never try, we’ll never know.

by David Higgins

14

OPINION

BREXIT?

B

rexit” is the EU jargon term for Britain leaving the European Union. Hold on, what? There is literally a queue of countries waiting to join, and they want to leave? Well it would be consistent with the history of Euro-scepticism that the UK has. Presently, the UK’s Prime Minister, David Cameron, is in the process of renegotiating the terms of the UK’s EU membership, hoping to improve labour rights, environmental concerns and economic liberalisation. The referendum, which will ask the question to citizens as to whether the UK should leave or stay in the EU, is scheduled for 2017.

So why would they ever consider leaving? The UK contributes up to an

S

Time for the UK to give it up?

average of£15 bn annually to the EU fund to help the economies of other member states. By leaving the EU, the UK would be saving roughly 0.7% of its annual GDP, helping to progress towards a quicker recovery. However, by leaving the EU they would be cutting themselves off from one of the largest global trading blocs. The Single European Act, 1987, outlined the free movement of goods, services, capital and labour. Huge global conglomerates have settled in the UK, as they have done in Ireland, to gain access to this unique, open market. Earlier this year, the UK lowered their corporation tax which led to an influx of companies creating job opportunities there. These companies, such as Intel and Aon, would be shut

out of this exclusive market should “Brexit” materialise. The UK would have to put its’ barriers back up after the reform of regulations and ease of capital flows for the last 40 years.

But there are barriers existing in the UK already, such as currency and exchange rates. The UK was confident enough in its own currency to abstain from the banking union and European Monetary Union in 1993.

As far as the British Pound goes nowadays, in comparison to the Euro, it is still strong despite the recent economic climate. Many companies that settle in the UK have overcome the currency barrier, with help from the European Commission’s “Market Access Strategy”, to trade in the Single Market hassle-free. Would they still

LET US RISE

eptember 2013 marked the hundredth anniversary of the beginning of Dublin’s Labour War. It is a time to reflect on the glorious, momentous and tragic events that occurred in this city a century ago.

The tram workers ceased operations at midday 26th August 1913 after being refused permission by the notorious William Martin Murphy to unionise. The baton charge on O’Connell Street the following weekend by the Dublin Metropolitan Police resulted in the deaths of two workers, James Nolan and John Byrne, and the injuring of 600.

A five month-long struggle against the employers of Dublin ensued, until eventually, the workers and their families were starved back into near slavery by Murphy and his fellow employers.

These events heralded the awakening of Irish working class consciousness, exemplified by the foundation of James Connolly’s Irish Citizen Army, an army of the working class dedicated to creating a free

The Bull 20.11.2013

Ireland and resisting the regressive, violent actions of the capitalist state.

The Lockout’s legacy has, however, been lost to the turn-coats and hypocrites that are today’s Labour party and the so-called “left-wingers” who are just as implicated with the capitalist system as the “right wing” parties of Fine Gael and Fianna Fáil.

Just as the then owner of the Irish Independent and prominent tram developer, William Martin Murphy, reaped great benefit through the exploitation of workers in 1913, his figurative descendants today continue to profit off the backs of Ireland’s poor.

While the Irish nation is left ravaged by social cuts, regressive taxation and water meters; the businessmen continue to profiteer and propagate the cause of capitalism and worker exploitation.

Murphy may be dead and gone, but his ideological descendants are still here to screw every cent from Ireland’s poor and stamp out any rise in living standards.

The tenements of Dublin’s poor in 1913 were grossly unsuitable homes, with Dublin’s child mortality rates

be willing to do this if they were suddenly subject to un-harmonised tariffs and quotas?

An odd example of this is the UK’s current rule on the sale of “guest beers” on draft, i.e. craft beers fermented in other EU Member states.

At the moment, their rule is inconsistent with the EC Treaty rules, but the Commission have allowed a concession for the UK; it is allowed if they reserve the “guest beers” to be served from small breweries only. There are two ways of looking at this; If the UK leaves the EU, they one would not get this concession. Yet, if they were not in the EU, they wouldn’t have to worry about the European Council’s rules in the first place.

By “Brexit-ing”, if I dare use it as a

higher than in any other part of the UK. Yet they perfectly fulfilled their main purpose of creating cheap revenue for landlords. When the state allowed the expansion of slum empires in this city it was not protecting its poor and vulnerable. Rather, it was enhancing the wealth of the rich, just as it does today.

Priory Hall in north Dublin and the many pyrite infested estates in Dublin’s commuter belt bear testament to the continual exploitation of the Irish Nation by property developers.

This state is structured to accumulate unrestricted levels of wealth and power for the business classes at the expense of the Irish nation and our communities. The lessons of 1913 have not been learned.

Larkin’s war for justice may have begun in late August 1913 but it has far from run its course. It is up to this generation to continue the just fight.

We must resurrect the spirit of Jack White, Countess Markievicz and the Irish Citizen Army. by

by Liam Cowley

“ The great only appear great because we are on our knees Let us rise. “ Jim Larkin

verb, the UK would have a lot more economic freedom in terms of creating its’ own rules, barriers and regulations on a global scale, but can they make it worth sacrificing one of the most coveted treasures of the 21st century – EU membership?

A poll undertaken by the Economist was launched earlier this month with the motion: “This house believes that Britain should leave the EU.” It was a very close call, but the opposition won over with 57%; there may be some hope left yet to prevent a Brexit.

by Niamh Teeling

THE CRASH

by Eoin Healy Throughout the infamous crash of 2008 and the ensuing protracted recessions, defaults, bail outs and insidious contagion; media commentators labelled this period the worst economic decline in history.

These commentators had obviously not studied the history of the business cycle or the origins of modern economic theory. They should not have been surprised by its occurrence.

Karl Marx is often mistakenly credited with being the father of Communism. This great thinker wrote at length about flaws he believed were inherent within the capitalist system and passionately argued that the very functioning of capitalism, its perpetual march towards accumulation and growth, would lead inexorably to its catastrophic demise. However, beyond this point of systemic and total failure Marx did not cast his mind. This unenviable task was left to Lenin, the real father of the form Communism we saw in the old USSR and a slightly older China. Lenin constructed Communism as a political and economic system, not Marx.

As centrally controlled economies are anathema to most modern economic thinkers, policy makers and those with a passing interest in the subject, Marx’s works are disregarded with a certain level of disdain. This is unfortunate as the German made many accurate predictions and valuable insights. He constructed an abstract economic model in which a quintessentially perfect capitalist system would still unravel itself; the source of profit, according to Marx, is surplus value.

Value is a somewhat elusive term but was defined generally at that time as the amount of labour re-

quired to produce a product. It was thought at the time that the ‘proletariat’ could only earn a subsistence wage - enough to ‘keep body and mind intact.’ Therefore, the profits of the industrialist and the entrepreneur stem from workers earning paltry wages but working a 70 plus hour working week. As profits rise, so too will the demand of the ‘bourgeoisie,’ putting pressure on the supply of goods which will drive up wages, thus eating away at profits.

This fall in profits will necessitate investment in labour saving machinery, thus increasing the number of unemployed and driving down wages once more. However, in this perfect capitalist system machinery will sell for exactly its value, therefore rendering the portion of output attributed to machinery unprofitable. This cycle repeats until labour cannot be replaced by machinery anymore and profits are thereby eliminated for most firms, bringing a calamitous crash in the market. During this period, the larger and more efficient firms acquire smaller firms and machinery at lower than cost price from those firms who went bust. Then begins a new cycle; this is the business cycle.

Albeit a simple model that obviously has huge assumptions behind it, the fact remains that Marx’s predictions were incredibly accurate.

Our hubris in the 21st century led us to believe that our modern monetary policy and innovative financial engineering would allow us to avoid this inevitable boom and bust cycle, but our terrible anagnorisis came in 2006. We realised all too late that this time was not different. Marx did make one other prediction: each boom and bust cycle would be more severe than the last.

15

BUSINESS

The Bull 20.11.2013

Aircraft Leasing An Irish Industry

Niall Fitzgerald looks at the aircraft leasing industry It is no secret that Ireland is a country that relies heavily on foreign direct investment as a source of employment and to help sustain the Irish economy. Over the last twenty years Ireland has become a hub for the insurance, pharmaceutical and technological sectors. The fact that major global companies such as Apple, Facebook and Twitter each have their European headquarters in Ireland is an outstanding success story. However, one sector that has received little or no publicity is the aircraft leasing sector.

Aircraft leasing as the name suggests involves the lessor, usually a leasing company or a bank, leasing aircraft to airlines. This can be advantageous for airlines as it allows them to operate aircraft for a specified time period without the burden of having to purchase them. Aircraft leasing also allows airlines to adapt to changes in demand for their services. Ireland is today a major aircraft leasing hub. Over 50% of all aircraft leased globally are leased through Ireland, with nine of the ten largest aircraft leasing firms in the world based in Ireland. Indeed, many might be surprised to learn that the concept of aircraft leasing was first developed in Ireland over 35 years ago.

Guinness Peat Aviation (GPA) was set up in 1975 by the Guinness Peat Group, Aer Lingus and Tony Ryan.

Over the course of 15 years it would go on to be the largest aircraft leasing company in the world, before eventually collapsing after a disastrous flotation in the early 1990s.

In spite of GPA’s failure, this did not hamper the development of the aircraft leasing industry in Ireland.

Many other aircraft leasing firms were attracted to Ireland by the fact that some of the most skilled and talented people in the aircraft leasing industry were now looking for fresh opportunities. Many of GPA’s former employees would go on to use their experience at other major aircraft leasing firms who were eager to obtain the benefits of their experience at GPA. However there were many other reasons why major aircraft leasing firms such as Gecas and International Lease Finance Corporation (ILFC) were attracted to set up in Ireland.

Ireland’s corporate tax rate of 12.5% was a major incentive for these firms to invest in Ireland. In addition to this, Ireland has an extensive double tax treaty network with 69 other countries. The Irish government has facilitated the growth of this industry by ensuring that Ireland’s legal system is in line with international legal norms on aviation law. Ireland was the first member of the European Union to ratify the Cape Town Convention which established an International Registry which sets out the registered interests in an aircraft.

As a result of the development of the aircraft leasing industry in Ireland, a number of service industries have developed to support the aircraft leasing industry in Ireland.

Major aircraft leasing firms have been able to benefit from the very best advice when it comes to legal

The recent involvement of outspoken hedge fund manager Bill Ackman with American retailer JC Penney has sparked a renewed debate on the role of activist shareholders.

In 2010 Ackman bought more than 39 million shares in the company.

Since then he has sought to radically change its business model, helping to replace its CEO, change its customer base and product range, and introduce a new pricing strategy which eliminated sales and discounts. These strategies drove away customers, enraged employees and caused sales to plummet. In early August JC Penney reported its ninth consecutive drop in quarterly revenue and a loss of $568 million for the quarter.

reserve of large hedge funds, however. Pension funds have been involved in activist strategies for decades. In November 2012 the California State Teacher’s Retirement System called for diversified manufacturer Timken to split its steel and bearings businesses. Individual shareholders and institutional investors also frequently file proposals to be voted on at shareholder meetings.

Other prominent hedge fund managers have pursued similar strategies recently. Third Point CEO Daniel Loeb called for Sony to sell off its entertainment business and concentrate on electronics, a proposal which was rejected by the Japanese giant. Shareholder activism is not the

But can activists help to build long-term value at a company? Activism is far from perfect. Complicated rules, unequal representation, lobbying and attempts to fix voting, all threaten its credibility and usefulness. Activists are often criticised for seeking to impose their vision on a company, sometimes in an industry where they have little direct experience. Others are accused of focusing excessively on short-term returns, a charge levelled against hedge-fund manager David Einhorn following his calls for Apple to return large amounts of cash to shareholders earlier this year.

and financial issues. Several of Ireland’s largest law firms and accounting firms offer top quality legal and financial advice on aircraft finance and leasing. As well as this, aircraft leasing firms now account for a large part of aircraft maintenance firms such as Dublin Aerospace and Shannon Aerospace client bases. The Irish Aviation Research Institute estimates that the aircraft leasing industry provides for 1400 indirect jobs in Ireland.

Each of these factors has contributed to transforming Ireland into an aircraft leasing hub. However, Ireland’s preeminent position is under threat from increasing global competition, particularly from Singapore.

Demand for aircraft in asia is growing rapidly; in 2012 demand for new aircraft in Asia outpaced demand in North America and in Europe. Added to this is the fact that Singapore has adopted many of the measures that Ireland first adopted to attract investment from the aircraft leasing industry such as a low rate of corporation tax. The rise of Singapore as a major aircraft leasing hub thus poses new challenges for the aircraft leasing industry in Ireland.

However, in spite of the growing competition, Ireland is in a strong position to retain its preeminent position for the reasonable future thanks to the factors which have been outlined above.

Bringing value to Shareholder activism

by Paul Reidy

Despite these difficulties however, shareholder activism can and should play a vital role in corporate governance. It is a key responsibility of shareholders to ensure that their companies are being appropriately managed and to hold management accountable for their decisions.

Shareholder activism can, at the very least, draw attention to real problems within corporations. After years of poor corporate governance and risky debt-fuelled expansion, CEO and founder of Chesapeake Energy, Aubrey McClendon, was reportedly forced out by large shareholders in April this year. The activists argued, with some justification, that McClendon’s leadership was depressing the company’s share price and damaging its future prospects. Even those shareholder proposals that are rejected can bring about change in a company by drawing management’s attention to an issue. Fast-food giant McDonald’s, for example, have re-examined some of their marketing and nutritional policies in light of share-

holder proposals that were defeated.

But activism can be much more effective if management as well as shareholders rethink how they approach the subject. Companies must acknowledge that corporate governance is changing and that shareholders often have valuable and constructive ideas. Management should prepare for activist campaigns and encourage suggestions and proposals instead of regarding them with distrust and as an attack on their performance. Shareholders, in turn, must strive to offer thoughtful proposals that will enhance long-term value creation. Activists should also accept when their proposals are defeated; protracted shareholder campaigns, which usually receive extensive media coverage, can have hugely adverse effects, depressing share prices and discouraging others from investing in a company.

In essence, management and shareholders must learn to trust one another. But this trust can only be

established if the destructive shortterm thinking which frequently characterises activism is avoided.

Focusing on maximising short-term profits for shareholders can do real damage to companies by distracting management from the company’s long-term goals. Veteran investor Carl Icahn was sharply criticised for his role at Blockbuster where he cut spending on its online business and reinstated late fees at a time when it was losing ground to rival Netflix.

While Blockbuster’s shares rose briefly following these actions, the company filed for bankruptcy in 2011.

With over 800 shareholder proposals filed in the US alone this year, it seems that shareholder activism is set to become even more important. Management must find the right balance between listening to shareholder ideas and leading the company in what they believe are its long-term interests. This will be a difficult task but one that can unlock real value for companies and shareholders alike.

16

ECONOMY

The Bull 20.11.2013

Abenomics and Japan’s economic revival

Since a property crash in the 1980s, Japan’s economic story has been one of slow decline. A slumping stock market, falling prices and a shrinking population, which has led to years of low growth, have characterized the once-powerful country. Nominal GDP is at the same level as it was in 1991, while Japan’s stock market, the Nikkei, (even after a recent surge) is barely at one-third of its peak.

However, since taking office last November, Shinzo Abe has overseen a remarkable turnaround in Japan’s economic fortunes. Economic growth has been projected at 4% on an annualised basis, while the stock market has risen by 55% since Mr Abe took office. The policies behind this Japanese revival have been named ‘Abenomics’ in honour of the new Prime Minister. Abenomics is a three-pronged strategy to inflate the economy, involving monetary loosening, fiscal stimulus and structural reforms.

In terms of monetary policy, one of Japan’s biggest problems has

been the reluctance of its Central Bank (BoJ) to take bold measures to curb deflation. Mr Abe has wasted no time in clearing out the bank’s stale leadership and appointing Haruhiko Kuroda, a former finance ministry official, as the new governor. Mr Kuroda, under orders to set an inflation target of 2%, has announced that this goal will be achieved in two years by doubling the monetary base through an unprecedented programme of quantitative easing.

The hope is that private investors and banks now shunning risk by owning government bonds will be forced to seek higher yields elsewhere; either abroad (weakening the currency and boosting exports) or by investing in the real economy (boosting demand). So far, this policy has worked very well. The yen has fallen by around 8% against the dollar since the end of 2012 and the prices of shares and government bonds have soared.

Along with the regime change in the BoJ, Mr Abe has ordered an

enormous stimulus package worth 20.2 trillion yen ($210 billion), of which 10.3 trillion ($116 billion) comes in the form of government spending. This spending will be targeted on infrastructure projects, which the government has said will increase GDP by 2% and create about 600,000 jobs.

While monetary and fiscal policy will be crucial in the short-term, long overdue structural reforms are also a key feature of Mr Abe’s plan.

With a shrinking workforce having to support a growing number of the elderly, sweeping reforms are needed to invigorate the supplyside of the economy. Mr Abe has announced initiatives that will encourage greater female participation in the workforce, and begun to overhaul regulations in crucial sectors like energy and healthcare.

One of the most significant aspects of Abe’s structural reform plans is his decision to join the Trans-Pacific Partnership (TPP), a proposed regional free trade agreement being negotiated among the

United States, Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Japan’s cabinet office says the TPP could boost GDP by 0.7% over a decade. The partnership is a contentious issue for Mr Abe however, with powerful industries such as agriculture vehemently opposed to the possibility of foreign competition due to the removal of high tariffs.

Clearly, the policies implemented under Abenomics have had a profoundly positive effect so far.

But in a country with a history of political paralysis, it is important to ask whether continued optimism is justified. The fact that Mr Abe’s Liberal Democratic Party enjoys a majority in both Houses of Parliament is crucial, as it means that Mr Abe is firmly in control and does not have to worry about obstruction from opposition parties.

Analysts have pointed out that, technically, there is nothing new about the policies that fall under Abenomics. Rather, it is the sheer

scale and comprehensiveness of its mandates that is making Abenomics so successful. According to Mr Abe’s advisers, improving the economic situation is less about policy details than perception. People have to be shaken out of a negative mind-set: if you look at the noise coming from the BoJ, for example, that is exactly what is happening.

Unfortunately it is still early days in Japan, and there are still huge risks. One such risk is that investors, worried about the BoJ successfully inducing inflation, may dump Japanese bonds, thus driving up longterm interest rates. This would be catastrophic, with the national debt standing at 240% of GDP. It seems that Mr Kuroda’s boldness will have to be met with even greater boldness on the government’s part.

This requires delivering upon the structural reforms that have been promised. Otherwise, Japan’s economic recovery may very quickly be forgotten, and Mr Abe remembered as the leader of another failed government.

by Alex Slevin

THE TROIKA Last week marked the final visit of the joint EU, ECB and IMF taskforce to Ireland. More commonly referred to as the Troika, they have been monitoring the Eurozone-IMF bailout programme which is due to come to an end on 15th December. Ireland will be the first country to leave the Troika programme. However, with unemployment remaining high and the IMF head of mission Craig Beaumont warning further sectoral reforms are necessary, what is next for the Irish economy?

Firstly, it is important to note that Mr Beaumont has called Ireland a good example of how to exit a bailout programme as well as commenting on the positive signs of growth in the Irish economy. The key debate now is on how Ireland will exit the bailout. Will it leave unaided or will further international help be required?

It is not uncommon for countries leaving IMF bailouts to be supported by a precautionary credit line. This would ease Ireland’s return to the international bond markets replacing funding that for the past 4 years has come from the IMF. The argument for leaving the bailout unaided is that if Ireland requires a 1 year credit line, it is simply pushing issues of market confidence 1 year down the line. It is thought that Brussels officials favour Ireland’s full return to market financing sooner rather than later since market conditions are currently favourable to such a move; especially now that Irish bonds yields have decoupled from yields of other peripheral eurozone countries such as Greece and Spain.

Mr Beaumont considers Ireland to be in a strong position, with bond yields of around 3.5% and cash buff-

ers of around €25 million, but said that the IMF would be open to any backstop measure decided by the Irish Government.

Economic considerations are not however the only factors in determining how Ireland will exit the Troika bailout. As with every government decision there are important political considerations. To secure a precautionary credit line Ireland would have to request it from the European Stability Mechanism (ESM).

This would require the consent of a number of national parliaments including the German Bundestag.

German public opinion is sceptical about supporting weaker eurozone counterparts and may be a reason to avoid such a vote.

There are also implications on the domestic political front. Minister of Finance Michael Noonan first publicly floated the idea that Ireland

could leave the bailout unaided at the Fine Gael conference. Undoubtedly Fine Gael and Labour would use an unaided exit as vindication of their economic policies. Of course, any negative economic effects leaving without a credit line could be potentially fatal for the 2 parties. The political factor will surely determine the course of action leading to Ireland leaving the Troika programme unaided. However, this will only happen if the markets continue to react positively to the option.

The International bond market will be at least as tough a taskmaster as the Troika. To maintain financing on the market Ireland will need to balance continued fiscal contraction while trying to encourage growth.

Speculators will demand this as evidence that Ireland can meet bond repayments over the long term.

It is likely that the Government

will continue to broaden the tax base to avoid any rises in income taxes which markets see as damaging for growth. Therefore, this is certainly not the end of austerity in Ireland and indeed it is not the end of the Troika in Ireland; they will continue to monitor the repayment of the IMF which will not be completed for another 10 years, doing so on the basis of biannual visits.

Whatever happens next this is an important landmark not just for Ireland but for the entire Eurozone.

However this does not mean the crisis in the eurozone is over; just that Ireland has been differentiated, at least in the market’s eyes, from the other periphery countries such as Greece, Spain and Portugal.

by Callum Trimble-Jenkins

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Ronald Coase 1920 - 2013 Life and Legacy

Ronald Coase, one of the greatest economists of the post-war era, died in September. Unlike many of his contemporaries, he eschewed obtuse economic theory in favour real world, tangible research. His work, spanning eight decades, left an indelible mark on institutional economics.

For a man who would go on to revolutionise economics, he had a humble background. Deemed unfit for traditional schooling as a boy, he was bundled off to a school for “physical defectives”, where he spent his days weaving baskets. It was only

through his parents’ persistence that he eventually won a scholarship to the local grammar school. The year basket making did have a lasting impact however. His missed year precluded him from studying Latin and studying in his chosen field of history. It was only by accident that he decided to study Commerce at LSE. On a visit to the US, he became fascinated with large American companies. Why and how were they formed? Coase stumbled on a crucial insight: transaction costs. In a theoretical perfectly functioning market, every individual would be self-em-

ployed in some specialised field, entering into contracts continually and salaries would fluctuate with market demand and productivity. In the real world, there are prohibitive costs of continually searching the market to do business and finding the goods and services they need. Coase described these as “transaction costs”, the costs of entering and operating in the market such as legal costs, bargaining and management. Coase posited that firms exist so as to coordinate and minimise these transaction costs. Coase documented this idea in his 1937 essay “The Nature of the Firm”.

Coase turned his attentions to the problem of externalities in the market, the negative impacts of a business transaction on a third party such as pollution. The conventional wisdom in dealing with these market failures centred around Arthur Pigou’s idea that the State should intervene and prohibit the polluter from operating, or should at least levy taxation against him to pay or the costs. Externalities were seen as an open and shut case of market failure which necessitated a government response. Coase broke radically from this established ideal by seeing externalities as an economic trade-off.

Consider the example of a noisy ice-cream factory operating next to a doctor’s office. Rather than penalising the ice-cream factory, both parties should attempt to come to an agreement that would minimise the externalities while maximising efficiency. The ice cream factory could perhaps agree to operate only within certain hours and pay an agreed fee

I spent 7 weeks in Brazil as a volunteer teacher this Summer. My time in the country coincided with the largest public protests there in 20 years. Sparked by rises in transport costs, demonstrations against the government soon spread nationwide. On June 20th, over 2 million people took to the streets to protest the malaise that has taken over the country. The protest against the endemic corruption of those in public office, the stark levels of inequality, the high crime rate, and the eyewatering sums being spent on next year’s World Cup. Cronyism has long plagued Brazil.

On a tour of the new local government building, we met councillors who were in charge of making legislation for the area which had a population of just 100,000. Each councillor had three full time secretaries. It was implied that in order to get a job as a councillor’s secretary you had

to be involved in his election campaign. In addition, near the end of the program, all the volunteers were invited to the mayor’s house (private residence it should be noted), to thank us for the work we were doing in the community.

Crime is still a major problem in Brazil and is one of the major barriers to achieving its potential as a tourist destination. In the interior of the country, the threat of crime was relatively small. Serious crime in Brazil is concentrated in the large urban centres, where inequality is at its most extreme. In fact, of the 50 cities in the world with the highest homicide rates, 12 are found in Brazil. Rio de Janeiro has always had a notoriously high crime rate, a reputation that was reinforced internationally by the film “City of God”. Rio, however, has made strides in recent times as a result of the government’s “pacification” project. The results have

been impressive - Rio’s homicide rate has been steadily decreasing and reached a 21 year low in the first five months of 2012.

I saw the positive effects of this project when I visited Rio for a few days when my stint as a teacher ended. I went to see a pacified favela called Vidigal, previously the domain of drug lords and pimps; its inhabitants now see promoting tourism as the best way to achieve a better standard of living. For example, a group of young men on small motorbikes wait at the bottom of the mountain and for a fee of 5 reals (about €2), bring tourists to near the top where a forest hiking trail begins.

This is undoubtedly one of Rio’s success stories, but there is a long way to go before it can deliver real prosperity and opportunity to its citizens.

When Brazil was awarded the right to host the 2014 World Cup

by FIFA in 2007, its GDP growth

by Emma Sutton

for the disruption to the doctor’s office. Alternatively, if society valued the product doctor’s surgery more, the doctor could pay to have the ice-cream factory to operate only at non-peak times.

Free enterprise between willing actors would allow the most efficient use of resources. The idea has had a practical impact. In 2010, a US energy company offered households near its turbines in Eastern Oregon $5,000 each to not complain about the noise that the turbines generated thereby leaving all parties satisfied. Coase was characteristically modest: “All it says is that the people will use resources in the way that produces the most value, that’s all.

You wouldn’t think there was a need for a Coase Theorem, really.”

For his research he was awarded the Nobel Prize for economics in 1991. He continued doing research for the rest of his life, analysing China’s path to free enterprise among his other works. Coase himself was an exceptional example of an economist who challenged the prevailing consensus and won. His ideas continue to have a deep impact on the world we live in today.

“All it says is that the people will use resources in the way that produces the most value, that’s all. You wouldn’t think there was a need for a Coase Theorem, really.”

was 6.1%. 2005 and 2006 were also years of impressive growth for Latin America’s largest economy. Taking this rate of growth into account, organisers decided to plan a nationwide tournament in 12 cities, rather than the cheaper and more efficient option of concentrating the event in the more developed south. As a result of their ambition, the projected cost of next summer’s sporting extravaganza now stands at $14 billion; this is more than treble the cost of the 2010 World Cup in South Africa. This includes the cost of building new light rail networks for cities, renovating stadiums and upgrading all the main airports to cope with the increased traffic.

The public, who initially supported the bid to bring football back to its spiritual home, have expressed anger at the astronomical cost. The Socialist Party congressman Romario, a former World Cup winner

to boot, expressed his concern in a recent article where he wrote that “I never thought the World Cup would solve all of our problems, but now my fear is that this mega event will only deepen the problems we already have”.

Brazil remains a country of immense potential and hope but faces a myriad of structural problems.

The Brazilian government continues to dominate many areas of the country’s economy, undercutting development of a more vibrant private sector. Taxation takes near 37% of GDP, one the highest rates in the developing world. Businesses struggle with excessive red tape and inefficient bureaucracy, and the political system remains laden with waste and corruption. How Brazil confronts those problems in the coming years, will decide whether Brazil can live up to its potential.

by Féidhlim McGowan

Trouble in Paradise Brazil’s growing pains

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Student managed fund

The Bull 20.11.2013

Macro REPORT Head of Macro Research Jasper Plan gives his outlook for Q4 2013 With US stock markets reaching all-time highs almost every day of the week and other markets following this upward trend, something big would be needed to wipe the smile off the SMF‘s face. You‘d think a one-day 11% decline in Ryanair‘s share price would be enough? Think again.

Despite slowing revenue growth and Ryanair‘s recent profit warning, we continue to like the company. The firm remains the strongest low cost carrier in the industry and we continue to believe that it will outperform its peers. Further, we see strong support coming from the European rebound, with positive data having been released from the English, Spanish and German economies.

France, on the other hand, is facing unique problems of its own. Their president, Francois Hollande, even managed to beat his predecessor Nicolas Sarkozy in the polls, becoming the most unpopular president the French Republic has ever seen.

Only 26% of the French population has a positive view on the socialist leader, whereas his right wing counterpart managed to achieve 30% popularity in the BVA polls. Even the Standard & Poor‘s rating agency seem to think little of Hollande,

having very recently downgraded French debt from AA+ to AA due to the combination of poor economic growth, high unemployment and government spending constraints.

The English economy, on the other hand, is growing at its fastest rate in more than 3 years. Output last quarter grew 1.5% year-on-year, or 3.2% on an annualized basis. With the British housing market on the recovery and consumer confidence rising, we believe that the retail sector will be a key beneficiary and therefore decided not to sell Marks & Spencer plc. In fact, retail sales were up 2.2% compared to September 2012 figures.

The SMF‘s exposure to Russia also seems to be rosy for the time being. With oil production on the rise and plans to double share in LNG exports, things are looking positive in the Russian energy sector, which could benefit our position in Rosneft.

The company reached its record production level at 4.9m barrels of oil equivalent.

On the contrary, we believe that the outlook for the mining industry remains weak, dictated by depressed commodity prices. This, combined with Caterpillar‘s high Value-at-Risk figure, made us very cautious with

our position in the firm. When CAT‘s Q3 earnings disappointed the markets, we saw this as the third strike and decided to free ourselves from the company.

Likewise, BHP was also very exposed to the weak commodities market. Trading at 14x earnings estimates, however, we believe there is still value in our holding of the firm, especially if it can take advantage of its 70% exposure to the Asian markets and Chinese economic growth.

The world‘s second largest economy most recently exceeded market expectations, with Q3 GDP figures up 7.8% versus 2012 and a seven-month high manufacturing PMI reaching 50.9 (up by 0.7 from last month) as well as a strong non-manufacturing PMI of 56.3.

The Trinity Student Managed Fund will continue to evaluate growth prospects in both developed and emerging markets in order to optimize its investment strategy. As the FED continues to inject steroids into the markets, there has been little rush to spin off our investments and cash in our gains. On the contrary, we are looking to add sustainable equities to our portfolio.

The Rocky Road to recovery How well placed is the Irish economy to complete a successful and durable exit from its bail-out programme? The indicators are encouraging. Since 2010 the government has met all the targets set by the troika of international lenders. Yields on ten-year Irish sovereign bonds have fallen to 3.5% from a peak of nearly 15% in 2011. But challenges remain if the recovery is truly to take hold.

The Irish economy officially moved out of recession in the second quarter of 2013, with a further 2% GDP growth forecast for 2014.

Unemployment, which peaked at over 15% in 2012, fell to 13.3% in September, helped by increased job creation and continued high levels of emigration. It’s expected to fall again to 12.5% next year. The property market too shows signs of a recovery, buoyed by strong growth in Dublin.

Despite budget 2014 being the 8th so called austerity budget, Irish Government outlays still far exceed revenue. When one takes a sober look at the figures, it’s hard to see how spending cuts can be curtailed in the near term. The Irish public deficit will reach 7.5% of GDP this year totalling €13.5bn, with sovereign debt reaching 118% of GDP, a figure that puts Ireland among the most indebted nations in the industrialised world.

Debt of this magnitude remains unsustainable. An ECB working paper on government debt published this year shows that governments sustaining higher debt ratios have depressed growth. Moreover the report shows that a policy targeting a higher debt level to support growth in the form of stimulus spending, as many analysts and policy makers advise, would have “an unmistakably adverse growth impact”. The report concludes that prioritising growth through higher spending “is simply not a policy option”.

Despite these warnings, this year’s budget adjustment totalled just €2.5 billion; lower than the €3.1 billion figure originally projected in the 2010 bailout programme. Reducing the pace of fiscal adjustment is a double edged sword for the Government.

Although broadly politically popular, the reduction could threaten fiscal stability and threaten further troika intervention. Credit rating agency

Standard and Poor’s intervened in the debate, saying any “significant departure” from the €3.1 billion figure could seriously damage Ireland’s fiscal position. Ireland’s economic performance has long been favourably compared to other peripheral nations and is seen by many analysts as a model for fiscal reform to other more wayward Eurozone members.

Although ostensibly released from the troika programme of fiscal adjustment, Ireland faces a long winding path back to sustainable growth. Ireland’s long term fiscal outlook remains uncertain. High levels of personal, corporate and government debt mean that Ireland must still engage in deleveraging in the medium term. Projected growth of 2% next year should be a welcome relief after five years of recession and stagnation. However, Ireland faces many pitfalls in the coming months and years; chief among them continued weakness and instability in the wider Eurozone.

Many structural issues remain to be addressed. The difficult issues of comprehensive financial overhaul and bank recapitalisation remain.

Developing sustainable solutions for mortgage holders deep in arrears must remain a priority. The lack of reform has meant bank balance sheets remain highly leveraged and new business loan approvals have been sluggish. Despite the best efforts of the Irish government, the ECB has all but ruled out using the European stability mechanism (ESM) to retroactively recapitalize the Irish banking system. It seems the costs of saving the industry will be the Irish tax payers’ alone to bear.

Ireland is to become the first Eurozone nation to successfully exit its bailout programme, no small achievement. After being buffeted by rough waters and high winds, Ireland’s economy seems to be sailing into more placid waters. The last five years were some of the most difficult in the state’s history. Though the course ahead remains fraught with dangers, there may finally be cause for some cautious optimism.

by Niall Casey

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RAY DALIO & his economic machine and contractions of knowledge, but rather by expansions and contractions in the amount of credit in the economy.

The amount of credit in the economy dwarfs the amount of money; in the US there is about 15 times as much credit as money. This is largely because anyone can create it. Most people buy things on credit, but many do not fully appreciate the liability they have created for themselves. Without credit, the economy could only grow through increased production. With credit, on the other hand, people can substitute consumption between periods. Thus, demand can increase without an associated increase in productivity.

This means that credit and spending can grow faster than money and income. Rising credit-driven spending generates rising incomes and net worth in the economy, which increases the borrowing capacity of individuals and allows for further increased spending. Borrowings give the illusion of prosperity, and can fool borrowers and their creditors into believing that they are more creditworthy than they actually are. This self-reinforcing process is constrained only by the willingness of lenders and debtors to create credit.

R

ay Dalio is the founder of Bridgewater Associates, a global macro hedge fund that ranks as one of the world’s largest. He recently produced a 30-minute video, entitled How the Economic Machine Works, that explains the economic template he has used to guide his investment decisions. It is refreshingly simple and intuitive, and somewhat more manageable than the 200-page paper (Economic Principles) that it accompanies.

Dalio’s fundamental observation is the crucial (and under-appreciated) role that credit plays in the economy.

Rather than being viewed as aberrations, he considers global deleveragings of the nature that we are currently experiencing as natural consequences of innate human tendencies and the structures within which they operate.

Dalio’s view of the economy is

relatively deterministic – he describes it as a ‘machine’, dominated by cause and effect. Transactions are the fundamental unit of this machine. Buyers purchase goods, services and financial assets using money or credit. The central bank controls the amount of money in existence, but credit can be created by any two consenting parties. This characteristic of credit will be shown to be very important.

There are three main forces that drive economic activity in Dalio’s template: productivity growth, the short-term debt cycle, and the longterm debt cycle. Combined, they can be used to track and forecast economic movements.

Productivity growth is largely driven by improvements in knowledge and technology. As measured by the growth trajectory of real per capita GDP, it is relatively linear in the long run. Deviations from this long-run trend are not caused by expansions

The central bank can influence this process only indirectly by adjusting interest rates. Its decisions are responsible for driving the second of Dalio’s three forces: the short-term debt cycle. Also known as the business cycle, this repeats every 5 to 8 years. In short, freely available credit results in growing indebtedness and strong demand. This drives economic growth, but also produces inflationary concerns. The central bank addresses these by increasing the shortterm interest rate, which makes credit more expensive, and by slowing the growth rate of money.

As the printing presses slow and credit dries up, the economy begins to decline. This decline is called a recession, and continues until slack returns to the economy and inflation subsides. Part of this process involves a reduction in the level of debt, whether by defaults or repayments.

When the central bank is satisfied that the economy has returned to its natural state, it eases monetary policy and reverses the decline. This loosening of policy sets the economy up for another credit-fuelled expansion and inevitable decline.

Crucially, the level of debt that exists in the economy is higher at the end of the cycle than it was at the beginning – in other words, though the level of debt falls during a recession, it does not fall so far that all of the debt accrued during the boom is repaid.

Thus, successive short-term debt cycles are characterised by higher highs and higher lows in terms of the debt burden.

This general upward-trend of debt is the reason we have a long-term debt cycle. This is the most interesting force in the model: it takes about 70 years for this debt supercycle to manifest itself, and it is qualitatively different from shorter debt cycles. It is exactly a cycle of this nature that we are experiencing at the moment.

cut back at once.

Because standard monetary policy is ineffective at this point, the central bank will print large amounts of money until the deflationary effect of debt reduction and austerity are counteracted. This debt monetisation is the key to ending the deleveraging process, as it is the inflationary aspect of the treatment. The central bank can use newly-printed money to buy government debt, acting as an effective loan to the sovereign so that expansionary fiscal policy can take the place of falling private sector consumption and investment.

Though successive business cycles bring higher and higher levels of debt, it is clear that debt cannot grow faster than productivity forever. Eventually, the cost of servicing the debt becomes too burdensome for current income levels to sustain, and some private sector borrowers begin to default. When this point is reached, the economy must begin to deleverage in a big way.

Whereas recessions are the result of inflationary fears, deleveragings and associated depressions have their roots in more structural features of the economy. The deleveraging is the free market’s way of repairing itself. It serves to redress fundamental credit imbalances and restore health to the capital markets and the economy at large. Debt levels fall, financial assets become cheaper, and the supply of money to purchase assets and services increases. When the deleveraging is complete, capital formation becomes viable once more.

A deleveraging is simply the downward portion of the long-term debt cycle, and involves reducing the burden of debt through a combination of debt reduction, fiscal austerity, wealth redistribution, and debt monetisation. Each of these four approaches has a part to play in stabilising the economy. If the balance between the four is correct, the economy goes through what Dalio calls a ‘beautiful deleveraging’.

Though the depression phase of the deleveraging may take just two or three years to complete, a full recovery and restoration of capital formation may take as long as a decade.

Note that the long-term debt cycle is the natural by-product of human exuberance and the supply and demand mechanics of the credit market. At every stage of the process, people behave as you would expect in pursuing their own self-interest.

Mismanaged deleveraging results in a depression. A depression is much less common and much less understood than a recession. Its defining characteristic is that the private sector contraction cannot be reversed by conventional central bank policy because the short-term nominal interest rate is usually at the zero percent lower bound. The road to recovery is much more painful than the corresponding solution to a recession.

In this sense, the economic machine as described by Dalio is perfectly logical and consistent. By superimposing the short-term debt cycle over the long-term, and combining this with the productivity growth trend line, we can better understand the nature of cyclical fluctuations. In the long-run, increasing productivity is the source of growth and higher standards of living. Along the way, however, we experience natural debt cycles that disturb us from the growth path. Though they can be controlled to an extent, they must be accepted as inevitable if the economic machine continues to operate as it does.

by Sean Tong, Deputy Editor

Of the four ways that Dalio suggests economies escape from deleveraging, wealth redistribution is the least significant. Debt reduction (including defaults and restructurings) and austerity are deflationary, and typically occur first. These actually cause the relative debt burden to rise, because aggregate income falls faster than debt when many people

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