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Trinity Economic Forum

Dublin University’s financial newspaper

Budget 2013 Unveiled

»» Property Tax Comes Into effect »» Tax Hikes for High-Income Earners »» Registration Fee Increases By Cathal o’Domhallain Editor High-income earners and pensioners were the primary targets of Budget 2013 with an estimated €500 million extracted from this group. The controversial property tax is also set to come into effect in July at a rate of 0.18% on properties valued under €1 million. Unoccupied properties and first-time buyers are temporarily exempt from the tax. Excise duties have increased by €1 on wine and by €.10 on other forms of alcohol and cigarettes. Excise duty on petrol and diesel remains unchanged. One of the measures that was formally announced by Minister Noonan was a three-point increase in the Universal Social Charge, for those over the age of 70 with incomes in excess of €60,000 per annum. A new cap of €60,000 on the amount of tax relief available for pension contributors was also established, which the government expects to engender €200 million in savings. In total, the budget will involve

approximately €2.25 billion in spending cuts and €1.25 billion in tax increases. Eamon Gilmore, leader of the Labour Party, called the budget “tough but fair.” Gilmore and other Labour TDs were willing to countenance cuts to certain programs in exchange for an estimated €500 million in increased taxation on high-income earners. Additional sources from the Labour Party expressed their discontent at the €10 cut to child benefit allowances, but indicated their relief at education spending being maintained at their 2011 levels, hopefully protecting front line services to the greatest extent possible. One of the most controversial aspects of the budget, however, was the increase in student contribution charges. Brendan Howlin announced that this fee was to increase €2,250 to €250 in 2013. This cost is set to increase to €3,000 in 2015. There is some concern for those receiving the student grant, as there is to be a reduction in the income threshold entitlement. However there will be no cut to the maintenance grant rates.

›› Michael Noonan announces budget plans for 2013

Tesco to leave US Market Tesco’s Chief Executive Philip Clark announced on Wednesday that Tesco were ending its foray into the US market, stating that they would now most likely be selling Fresh & Easy, their US subsidiary, in an attempt to recoup some of the losses from the US business. Fresh & Easy is a chain of grocery stores which Tesco operates across much of the western United States. Clarke stated that a review “might lead to a sale of Fresh & Easy, or partnering the business. But it is

likely that our presence in America will come to an end”. But Clarke is optimistic, stating that they had been approached by a number of potential buyers in the last year. Tesco began its venture into the US market 5 years ago, and has invested in the region of £1 Billion into Fresh & Easy since then. It is expected that by early 2013 total losses incurred by Tesco’s US subsidiary will be around £850 Million. The decision to withdraw from the US market has been treated as

Likkanen Under Strain A new swathe of divisions over how to implement the recommendations of the Likkanen report are threatening to derail one of the most ambitious reforms of the Eurozone in recent years. While Eurozone finance ministers seem to agree with the idea in principle, they cannot agree on how far the powers of the banking supervisor should go, how the regulations should be implemented and how to prevent discrimination between Eurozone and non-Eurozone countries. Fissures have erupted over whether the regulations should extend only as far as the larger European banks, as Germany prefers, or if should be applicable to all banks operating within the EU. Spain’s Economy Minister Luis De Guindos said that the future of the Euro depended on the implementation of a deal. “Banking union is crucial to remove all doubts about the future of monetary union,” he said yesterday evening. Concerns persist, however, over the fate of Swedish and British banks. Britain currently seeks the ring-fencing of its banks from any regulations which could do harm to the City of London, while Sweden, also a non-Eurozone state seeks representation on the ECB’s executive if it’s to have oversight of the assets that Sweden owns. Sweden’s finance minister Anders Borg affirmed his stance on Tuesday, telling reporters “there can be no unfair treatment of nonEurozone countries. There must be safeguards and we must be able to have our own.” Diplomats must also address the concerns non-Eurozone states that intend to join the currency in the near future to ensure that these countries are not disadvantaged by the regulations. If a deal is agreed to, however, it will allow them to finalize the framework through which the deal is implemented by the EU summit on December 13-13.

a positive one by many of Tesco’s investors, who are happy to see the loss-making venture come to an end. Shares in Tesco rose in early trading in London on Wednesday morning, up 3%. The news was announced at the same time that Tesco reported that its sales across the UK have shrunk by 0.6% compared with the same period a year earlier. This is as a result of like-for-like sales across the UK declining in the last quarter of the year. 06 December 2012 Issue 3 Vol 2

2 1.2%

Consumer Price Index

News & current affairs

The Bull 06.12.2012


Unemployment rate

vital indicators


GDP percentage change


National debt as a percentage of gdp

Republicans and Democrats make Budget Offers By dave kelleher News Editor With the fiscal cliff in the United States looming ever closer Republicans in the House of Representatives have delivered a counter-offer to President Obama. The offer gives a renewed hope of movement in the negotiations, though it is clear that both sides are still far from achieving a deal. The fiscal cliff refers to the effect of a number of laws which, if left unchanged, could result in tax increases, spending cuts, and a corresponding reduction in the budget deficit beginning in 2013. The Congressional Budget Office (CBO) estimates the sudden reduction will likely lead to a recession in 2013. The Republican’s offer calls for a $2.2 Trillion deficit reduction over 10 years, which is significantly lower than the $1.6 Trillion target proposed by Mr. Obama last week. Republicans hope to achieve this saving through a broad tax reform, rather than an increase in taxes on the wealthy, which is what Mr. Obama and the White House has been

B of p current account deficit

Greek BondBuyBack By Bishoy abdou Layout and Design Editor

›› Is there any hope for a deal betweeen the two parties? actively pursuing. In a letter to the President, US Speaker of the House John Boehner stated that “If you are agreeable to this framework, we are ready and eager to begin discussions about how to structure these reforms so that the American people can be confident that these targets will be reached.”

Chelsea Owner Abramovich Intervenes In Dispute The Russian billionaire Roman Abramovich, best known as the sometimes erratic and always controversial owner of Chelsea Football Club, has this Tuesday agreed to purchase a 7.3% stake in Norilsk Nickel, which will help to end a long-running battle for control between the companies two largest investors. Norilsk Nickel is based in Moscow and is the world’s leading producer of nickel and palladium, as well as being in the top ten for production of copper. Issues have existed since 2008 when Hong-Kong listed Rusal purchased 25.1% of Norilsk in a failed takeover attempt, leaving rival company Interros with 28%. Mr. Abramovich’s investment company Millhouse Capital will acquire the stake for an undisclosed amount. The move is believed to have been facilitated by the Kremlin, who were forced to step in after a four-year dispute had held back the company’s development. Representatives from both companies met with Russian Prime Minister Dimitry Medvedev earlier this year, and met with Russian President Vladimir Putin just last

€1.05 bn

week. The aim of the plan is that Mr Abramovich will be able to act as a neutral third party, and the agreement is expected to provide measures that will ensure greater stability into the future. A statement from Rusal released Tuesday states “The reasons for and benefits of entering into the agreement are to improve the existing corporate governance and transparency of the Norilsk Nickel group, to maximise profitability and shareholders’ value and to settle the disagreements of the company and Interros.” By Dave Kelleher News Editor

However White House Communications Director Dan Pfeiffer was quick to reject both Mr. Boehner’s letter and the Republicans’ plan. “Their plan includes nothing new and provides no details on which deductions they would eliminate, which loopholes they will close or which Medicare savings they would achieve.”

Treasury Secretary Tim Geithner presented the White House’s offer last week, but it too was rejected out of hand by the Republicans. While both offers were met with immediate dismissal, their release has suggested to some that a common ground may yet be achievable. However at present both sides remain in a stalemate.

Chinese Companies Facing Difficulty in US Markets The US Securities and Exchange Commission this week accused the Chinese affiliates of Deloitte, Ernst & Young, KPMG, PwC and BDO, of breaking securities laws after their refusal to provide the Commission with paperwork relevant to investigations of fraud at a number of Chinese companies. Such firms are put in a difficult position by the fact that US law requires them to provide the SEC with all documentation of their audits in overseas companies, while at the same time they are barred by Chinese law from sharing that same paperwork with foreign investigators.

Some lawyers and accountants have stated that the SEC has potentially begun a process that could result in all Chinese companies being removed from the US stock market. The result could either see Chinese companies going down the private route, or could see them shift their listings to the Hong Kong stock exchange. The problem arises from a failure to put in place a China-US auditing framework before the companies were originally listed. The result has seen a less strenuous auditing process of Chinese companies that seem to have been taken advantage of.

The Greek government has commenced a program to purchase back some of its debt, a condition of it receiving the next tranche of bailout funds. The government is set to offer to buy back €10 billion of their bonds from private investors at an estimated 40% of their face value. These bonds will be paid over a six-month period with money from the European Financial Stability Facility rescue fund. Private investors have until Friday to accept the deal. The current Greek hope is that the first to apply for this program will get the best deal. This comes after private creditors agreed in March to write off approximately €107 billion of Greek government debt in one of the most aggressive restructuring programs in recent years. If this operation succeeds, it will pave the way for Greece to receive the next tranche of its bailout funds, worth approximately €44 billion on 13 December. Greece has been waiting since June for these loans to keep the country running. The payment of these loans agreed to last week at a meeting of Eurozone finance ministers and the International Monetary Fund. Doubts persist, however, over whether Greece can continue paying at its current rate or if a program of debt-forgiveness is required.

CONTRIBUTORS Editor Cathal O’Domnallain

Opinions Editor Gabriel Corcoran

This publication claims no special rights or privileges.

Deputy Editor Sean Tong


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Layout and Design Bishoy Abdou

Special thanks to Tony O Connor for all his help during production.

NEWS EDITOR Dave Kelleher

This publication is partly funded by a grant from DU Publications Committee and by Trinity Investors Society.

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

FEATURES EDITOR Reuben Murray Whelan


News & current affairs The Bull 06.12.2012

TEF OFFICIALLY RELAUNCHES Last Monday the 2013 Trinity Economic Forum was officially launched. TEF 2013 follows on from the highly successful inaugural forum that took place last February, in which students from around the country converged on Trinity for a series of workshops and guest lectures from notable figures in the field of economics. Speaking at the launch of TEF 2013, program coordinators Seán Gill and Gary Finnerty said they hoped to “encourage student participation in the policy making process, open discourse on a national level and share with students the knowledge, insight and expertise of professionals.” The 2013 forum will follow a similar format to last year’s event, with student focused workshops on the issues currently dominat-

ing economic discourse in an Irish context. The workshops, facilitated by PricewaterhouseCoopers, will focus on issues such as the viability of property taxes, the provision of health insurance and the allocation of spending within the education sector. Speaking to this reporter, Gill said that while the coordinators were still working on confirming the full set of speakers for the forum, he was “very confident that we can build on the fantastic speakers we secured last year and really appeal to all those with an interest in rethinking economics.” He went on to say that President Michael D. Higgins’ keynote address to the forum last year, in which he urged students to question the failed assumptions and have the courage to consider bold

new strategies, would be the defining characteristic of TEF 2013. “We’ve been working really hard over the past few weeks to secure the guests who can help us take TEF 2013 to the next level. We have some interesting speakers from across the economic field and hopefully we can provide speakers and workshops that cater for every preference”. The coordinators were quick to stress the networking opportunities for students present by TEF, with Finnerty commenting that many of last year’s student delegates had gone on to secure places on internship programs with the chief sponsor of the event PricewaterhouseCoopers. Ticket prices for TEF 2013 start from €10 and are available from

Trinity Economic Forum

Greece ranked bottom of EU Countries on Corruption Index Anti-corruption watchdog Transparency International (TI) published their corruption index on Wednesday, which showed that Greece was perceived as being the most corrupt country in the EU, and was ranked 94th overall out of the 176 countries surveyed worldwide. Corruption has long been an issue of concern in Greece, but everincreasing austerity measures taken in recent years have brought the issue to greater attention, with tax evasion by the wealthy being one of the problems that most concerned Greeks. Ireland was ranked 25th out of those surveyed. Jane Mittermaier, who is TI’s EU analyst, said that “The results of the

survey should be a warning signal for the EU to require more information and accountability from its member states”. Perceptions of corruption are created primarily by weak and ineffective judicial systems and perceived over-familiar ties between government, big businesses and the wealthy, according to Mittermaier. Other standout countries include China ranked 80th, the US who were 19th, the UK in 17th, a position they shared with France, and Germany who were 13th. New Zealand, Denmark and Finland shared the top spot while Afghanistan, North Korea and Somalia were perceived as being the most corrupt.

The Eurozone’s finance ministers have last Monday approved €39.5 Billion in aid to Spanish banks. The decision has formally ended months of uncertainty that could potentially have pushed the country into a full-blown bailout. The announcement has seen Spain’s 10-year bond yields drop to 5.25%, - the lowest since April. The decision was approved just hours after the Spanish government officially requested funds, which has been a positive sign for many. Yet

despite this there concerns persist among private-sector analysts, who believe the €39.5 Billion will not be enough as Spain’s banks continue to suffer in the midst of a deepening recession. However European officials are confident that the injection of capital, as well as an easing of many EUmandated budget targets, will take much of the pressure off Spain and its banks, meaning it will not need any further aid in the future.

Aid approved for Spanish Banks

4 Normality Close for Irish Banking System? Last Tuesday, the 20th of November, Bank of Ireland raised €1billion ($1.27billion U.S.) in its most significant bond issuance in three years. Although the bank had recently issued £300million worth of private bonds to a small group of investors, this is the first public issuance by Bank of Ireland since October 2010 and also the first public covered bond / ACS issue since September 2009. Originally planned for September of this year, the plan had to be put on hold due to the return of market turmoil. Reports by the bank itself say it had an oversubscribed order book approaching €2.5 billion for the issue, with a “well diversified” group of nearly 200 investors: 37% were German and Austrian investors, 35% Irish/UK and the rest from continental Europe. Banking reports are claiming the majority of these were so-called “real money” (institutional fund managers) rather than hedge funds and other speculative players. Financial reports are referring to it as a potential signal of renewed market willingness to look at investments within Ireland, a very positive sign for the struggling financial sector as a whole. It has been a struggle for the Irish financial institutions to regain share in public markets heavy with concern over the government’s inability to

support a bruised banking sector, which is still recovering from heavy losses in the property lending market. “Today’s trade is a significant vote of confidence by international bond investors in Bank of Ireland and reflects the material progress made by Group” the Bank said in a statement. The Bank has confirmed it will use the €1 billion raised to reduce its reliance on monetary authority/ Central Bank funds, which are estimated to stand at €21 billion. Finance Minister Michael Noonan also released a statement saying that the “issuance is further evidence of the strengthening and normalization of our banking sys-

“Clearly, Bank of ireland is leading the rest of the irish banking system” tem.” “Today is an important milestone on the path to full independence for our banks”. Vinod Vasan, head of European financial institutions’ debt capital

Banking Turmoil

Tiarnan O’Caithin explores the political pitfalls of the European banking regulation As the hand-wringing and headshaking reaches its peak in Europe, swift resolutions and future preventative measures for the banking crisis are still a long way from fruition. What are we waiting for? The effects of our crippled bank-

ing sector are clear: lack of liquidity has strangled the credit supply to labour-intensive small and medium enterprises, driving up unemployment figures. One mooted solution to this problem is the establishment of a


The Bull 06.12.2012

›› Bank of Ireland is leading the rest of the Irish banking system back to normality markets at Deutsche Bank and one of the bookrunners on the deal, has also backed the move: “This deal demonstrates Bank of Ireland can access the market and that’s been one of the critical concerns about the sector”. Bank of Ireland’s bonds will pay an interest coupon of 5.875 per cent. An indication of wide interest came as a total of 68 accounts bought the bonds and investors orders for the transaction totaled €1 billion. Speculation is now mounting that Ireland and the National Treasury Management Agency are poised to follow in the Bank’s footsteps and make a return to the long-term bond market for the first time since September 2010. Although rumours

claim this move may potentially be made before Christmas, financial analysts believe the country may wait until January. There is, however, a certain pressure in place: if bad news emerges from any of the other at-risk Eurozone countries, it could hinder Ireland’s chances of a successful return EBS has also successfully tapped international bond investors recently. AIB CEO David Duffy told the Irish Independent earlier this week that the bank has updated its “covered bond” program, which has fueled talk that state-owned AIB is now potentially in position to soon follow in order to reduce the bank’s reliance on the ECB for ongoing liquidity. This later move comes just

as the Government’s bank guarantee in due to be withdrawn at the end of December, which costs the banks hundreds of millions each year. Earlier this year, Bank of Ireland said it was ready to exit the scheme as the pace of growth in mortgage arrears is falling. Clearly Bank of Ireland is leading the rest of the Irish banking system towards a more normal operation. It remains to be seen if the ECG can be withdrawn from the banking system later in the year or in early 2013. This would be a significant sign of further progress and would serve to improve the reputation of Ireland’s banks in the worldwide financial market. by Eibhlin Crowley

banking union. A September proposal by the European Commission mandated the establishment of a single supervisor for the Eurozone. Questions remain over the extent of its remit, however. National Banks are to retain their everyday functions, but will cede authority to the European Central Bank to set capital buffers, order inspections of financial institutions, and carry out stress tests of the 6,000+ banks in Europe. There are also calls for a ceiling on bankers’ pay and bonuses, either through a bonus ratio limit or simply prohibiting any bonuses that exceed salary. Many objections come from countries outside the single currency club, who are understandably reluctant to cede sovereignty to the single supervisor for little return and say in its regulations, as non-euro countries will not be granted full voting rights. The Commission has made some concessions in terms of voting procedure but they have so far been deemed an unworthy offering. The UK is striving to protect the city of London from overwhelming regulation while maintaining access to the single market. Still fearful of a voting block of EU countries in the new authority leaving the UK ignored, David Cameron is understandably cautious given the grow-

ing protestations of Euro-sceptic MP’s. However, a very public dispute between France and Germany over the remit of the supervisor stems from their respective domestic banking systems. Germany’s politically powerful network of small public bank, popularly known as ‘Sparkassen’, consider themselves

where sound [banks] are tapped so that the unsound don’t have to substantially change their business model,” said Georg Fahrenschon, president of the Sparkassen Federation (DSGV). Regulation of the union’s top 25 ‘systemic’ banks is preferred by the German government, who cite the quality of supervision to be prioritised over the quantity. This however, has caused an uproar in France, where it is believed that will result in the creation of a two-tier system, meaning French banks will be under the supervision of the European Regulator while German ones will remain under domestic supervision. All this is disappointing as the original aim was merely to maintain adequate levels of liquidity and stability standards for the future. Indeed, any plans for the implementation of any of the above firstly rely on the agreement of the €1 trillion European budget, which is creeping its way through the usual summits and meetings of European finance ministers. It is hoped that the beginning of any legislation draft will be available in the first six months of 2013.

“Regulation of the union’s top 25 banks is preferred by the german government” sacrosanct and it remains in their interests to stay within domestic regulation only, mainly because any deposit-pooling guarantee scheme would likely see foreign banks benefiting from German deposit strength. The ‘Sparkassen’ have launched a campaign against the plans, claiming that they did not cause the euro crises, and will not be forced into such a scheme. “The lovely word ‘banking union’ masks a redistribution mechanism,



The Bull 06.12.2012

Volatility in the Fixed Income Market Sean Tong examines the problems faced by the fixed income market

The fixed income market is comprised of a broad range of securities that promise a fixed stream of income, or a stream of income determined in accordance with a specified formula. Activities in this market have historically accounted for a significant proportion of revenue in the investment banking industry, with the ten largest banks sharing $22 billion in FICC (fixed income, currencies and commodities) revenue in the second quarter of this year. Changing regulatory requirements and muted markets have, however, forced a number of

the consensensus among seems to be that more cutbacks are inevitable banks to question the viability of continued participation. More so than in most markets, fixed income trading is heavily scale-dependent. This is due in part to the high fixed costs of operation, but also to the requirement that firms regularly turn over their in-

ventory in order to earn spread income on client transactions. Banks operating on a smaller scale are struggling to manage the strain brought about by cautious investors and stricter regulators, who now require that banks hold significantly more capital in order to back their fixed income transactions. Particularly decisive action has been taken by UBS, which announced at the end of October that it will be largely withdrawing from the market in order to focus on more secure revenue streams. About 10,000 jobs are set to go across the group as the firm acknowledges that it is unable to compete as a subscale participant in the sector. The regulatory requirements imposed in Switzerland are particularly stringent, squeezing margins to the extent that the activity is no longer economical for the bank. The response of investors was one of approval: the company’s share price rose 6% on the day of the announcement, as the market welcomed a move that many saw as being belated. Given that the investment banking division had just announced a pre-tax loss of 2.87 billion Swiss francs, investors were reassured by the bank’s decision to place greater emphasis on its wealth management and advisory services. Credit Suisse, another Swiss

›› One of the firms involved affected by this trend bank, took a very different approach to its own fixed income travails. Whereas UBS took quite radical action, Credit Suisse reaffirmed its commitment to the market while rearranging its operations so that more risky divisions will be kept separate from those that are perceived as being safer. The bank will thus be split into an Investment Banking Division and a Private Banking and Wealth Management Division. The hope is that this separation would make it easier to cut off loss-making divisions in times of difficulty, while preserving the activities in other sectors. In contrast to the experience of UBS, Credit Suisse’s decision seemed to be rejected by the mar-

kets. Shares ended the day down 2%, as the firm was seen to be clinging to a pre-crisis model of universal banking that UBS had recognised as no longer being economical. It must be said that the fixed income division in Credit Suisse is significantly larger than that of UBS: representing more than 25% of group earnings, a full withdrawal may not have been feasible. The feeling remains, however, that the ability of smallscale banks to compete in this market has been significantly impaired, and banks should be more realistic about their participation. The consensus amongst analysts certainly seems to be that more cutbacks are inevitable as smaller firms are squeezed. There is pressure

on other sub-scale players, such as Morgan Stanley, to take similar action. Quite apart from the difficulties posed by regulation and high costs, there is a real danger that renewed market volatility in the coming months will see a flight of client capital from these smaller banks to larger, more secure ones. None of those operating on the periphery seem prepared to admit to planned restructurings or withdrawals, though time will tell. It should be said, of course, that there are risks to withdrawing entirely from the market. The cost of re-entering the business after exiting is very high, and effectively precludes the firm from participation in the foreseeable future. Bernstein Research also points out that the interrelated nature of banking means that a weakened fixed income department may affect revenue in precisely those sectors that the banks are withdrawing to, such as mergers and acquisitions. While smaller firms may be apprehensive about their future prospects, the larger banks within the industry will undoubtedly benefit from further withdrawals. Deutsche Bank in particular reported a surge in business on the back of the UBS decision, as market transactions were split amongst fewer firms. Other market leaders, such as J.P. Morgan and Barclays Capital, also stand to gain from the unrest.

Increase in capital gains is in our interest The infamous Bush era tax cuts are set to expire at the end of this year. Among the taxes due to increase is the tax rate on capital gains, which is forecasted to rise from 15% to 20%. For high-income taxpayers the new rate will be 23.8%. Most importantly for the private equity industry, the Obama administration plans to end the treatment of ‘carried interest’ as a capital gain in its 2013 Budget. ‘Carried interest’ refers to the share of a private equity firm’s profits that is paid to the investment managers. The compensation of managers at private equity is often called the ‘2 and 20’ rule. Managers are usually entitled to around 20% of total profits, even though ‘general managers’ typically contribute only 1%-5% of the firm’s capital. They get also get a fee of around 2% of total capital, which is taxed at the normal rate of income tax. ‘Carried interest’ does result from a capital gain but most of the risk is borne by the firm’s investors or ‘limited partners’, who contribute the vast majority of the firm’s capital. Those in favour of closing the loophole say that ‘carried interest’ is more akin to a fee, and should be taxed as an income, like a performance bonus is.

It is doubtful whether the private equity industry will be adversely affected by the proposed changes. The

“carried interest goes against two of the canons of a good tax system; equity and fairness” loophole doesn’t apply to money managers at mutual funds or to corporate executives who get stock options as a bonus. They are taxed at the same rate as ordinary income. Closing the loophole will not affect the investors who provide the lion’s share of the capital; just as much investment will be forthcoming as before. Undoubtedly, some private equity managers will try and claw back some of their losses through higher fees, while other ‘general partners’ want to introduce clauses that would allow them to take a bigger share of the profit if the tax rate is changed.

›› Mitt Romney: A beneficiary of the ‘carried interest’ loophole Moreover the preferential treatment of ‘carried interest’ goes against two of the canons of a good tax system: efficiency and equity. An efficient tax is one that does not encourage people to do more or less of an activity than they otherwise would. An equitable tax makes the rich pay more than the poor. Alas, the ‘carried interest’ loophole fails both these tests. Someone who would be more suited to working in

an investment bank may decide to work in private-equity solely for tax avoidance. The tax is also extremely inequitable. Most private equity managers are very wealthy individuals. The loophole is the main reason why Mitt Romney only paid 14.1% of his income in tax in 2010. Half of all capital gains go to the top 0.1% of income earners in the US. This issue raises the fundamental issue of whether capital gains

should be treated differently at all. An enormous amount of rent seeking activity is involved manipulating income so that it is classified as a capital gain. This would be avoided if the rates were equal, like they were when Reagan was president. Whatever the merits of the preferential taxation of capital gains, the carried interest loophole is a subsidy to the super rich that should be ended.



Texas Turns to Trains S

The Bull 06.12.2012

Ed Teggin expounds the benefits of turning to high-speed trains everal economic and scientific studies over the past number of years have recommended the modernization of the U.S. rail network as a means of bolstering economic growth, limiting urban sprawl, creating thousands of jobs and providing much-needed relief to the beleaguered construction industry. The main recommendation coming out of these studies has been to upgrade the American rail system to incorporate high-speed trains like those used in Europe and Japan. The main criticism of the current rail operators is that their fastest vehicles can only average 110 km/h; this is in stark contrast to the TGV of France which runs at an average of 200 km/h. Clearly there is a significant divide in both the operational speed and the quality of service. It has been suggested that an improved rail network in the U.S. would provide the rail companies with a vastly augmented operational capacity, allowing them to provide a better and more competitive service to their clients. It is hoped that such an improvement will benefit small to medium sized

businesses by allowing them to switch from the more conventional road haulage, thus enabling them to open up their operations to increased commuter travel. Transport planners in Texas have recognized the benefits and opportunities which could be afforded by an upgrade of their rail network and have put in motion a project to create a high-speed link between Houston, Dallas and San Antonio. The desired impact of the

plan is to establish the possibility of traveling between the three cities in 90 minutes. The main demographic reason for the upgrade of rail infrastructure is that Texas’ three main cities - Dallas, San Antonio and Houston - form a triangle, with two thirds of the population densely packed into the sprawling suburbs surrounding them. With population figures expected to jump significantly in the next ten years, a solution must be found. Such an

ambitious project won’t be cheap. Planners estimate the cost to be approximately $18 billion. This is obviously a substantial sum of money, explicating the main barrier to embarking upon this project. Though there have been no concrete moves as yet, there has been an indication that Governor Rick Perry is sympathetic to the idea: “Currently it isn’t possible without very large government subsidies. However as the population of these cities becomes

denser and more concentrated around the DFW-Houston-San Antonio triangle it will become a more viable option.” This came from a spokeswoman for Rick Perry, and while it certainly leaves Perry’s position firmly sat on the fence, it does provide a glimmer of hope to those who hope to see high-speed trains running in Texas by 2020.

›› TGV - A model for the future?

Consumers run amok on Black Friday


n the 23rd of November a wave of consumer hysteria hit the streets as the annual buying-bonanza of Black Friday, began. Retailers across the country dangled deep discounts to lure customers this year as an estimated 147 million people went shopping between Friday and Sunday. Consequently, Black Friday upheld its title as the busiest shopping day of the year. The coining of the phrase is widely disputed, but the popular theory is that the name is a reference to profits in retailers accounts, as it was an accounting tradition to use red ink to show negative figures and black

“with the us economy in such a fragile state many stores opened their doors on thursday” ink to show positive. Since retailers historically “moved into the black,” or became profitable on the Friday, the name followed suit. Black Friday has gained both national and international notoriety for its an-

nual reports of assaults, shootings, and throngs of people trampling on other shoppers as they rush to get the best deal on a product before supplies run out. This year alone various incidents were reported, including a man reportedly pulling a gun out on a shopper while waiting in line in at a Sears store and a couple that were hit by an SVU driving into Wal-mart. For stores, the Friday after Thanksgiving can be the most profitable day of the year and serves as a useful barometer for what they can expect for the rest of the season. With a strong Black Friday, they can generally keep their prices up and assume that their holiday inventory will sell; a weak Black Friday means they have to start marking down holiday merchandise to get enough of it out the door by Christmas. With the US economy in such a fragile state, many shops this year began their sales on Thursday night - the earliest yet. Retailers noted that their midnight openings drew a younger crowd who wanted to party — and shop — late rather than get up early. Discount retailer Target opened its doors at 9pm local time, three hours earlier than last year and Sears opened at 8pm. Although these Thursday night opening hours were followed by Union calls for people to boycott the shops and for the employees to go on strike, they were largely ignored. At Macy’s Herald Square store in Manhattan,

for example, about 11,000 people were in line as it opened at midnight, compared with 7,000 for an early Friday opening in 2010. Black Friday relies on a few simple retail strategies. One method is to sell everything as cheaply as possible and magnify a tiny profit through volume. Other stores mark down only a few high-profile items — even selling them at a loss — in the hope that customers will also add

›› Crazy for bargains

some full-priced items into their carts. Yet the data still suggests a general decline in the number of in-store buyers, as the 147 million people forecast for this year is down from 152 million on the Thanksgiving weekend last year. Where the market is seeing an increase though is online shopping. A survey by Forrester Research suggested online shopping is set to jump 15% to $68.4bn. According to

IBM, online sales for Thanksgiving were up 18% from the previous year. When analyzing the continuing increase of consumer spending, two possible explanations must come to mind; either the economy is starting to grow again and as a result people have more money to spend or people having to purchase during the discount period due to financial duress as it is the only time such items can be afforded.


Features - Special report The Bull 06.12.2012

Budget Special Dublin University’s financial newspaper

Opposition Party Budget Proposals

Every year opposition parties release their budget alternatives. But are they constructive, or merely irrelevant sideshows? Gabriel Corcoran investigates these proposals; their relevance; or lack thereof


he build-up to Budget Day in recent years, like a festival of sorts, bring with it numerous weird and wonderful sideshows, from the colourful street carnivals of austerity marches, to the feature long radio shows dedicated to speculating and anticipating what will happen come the big day. Amongst the most fascinating of these annual rituals are the Budget Proposals released by the opposition parties of the day. But is there anything of substance behind their inexorably emotive, yet inherently ambiguous taglines such as “A Fairer way to Recovery”? Or do they simply detract from the reality of impending austerity, offering false and unrealistic alternatives from parties who will ultimately have no say, nor bear the brunt of responsibility, for the measures that will inevitably be put in place? Below is an unconventional look at some of the more bizarre, and arguably more self-serving

proposals, the rhetoric, the implications and their consistency with previous policies while in power. Fianna Fail, our most recently ousted incumbents, offer “A Fairer

“Amongst the most fascinating rituals are the budget proposals released by the opposition parties” Way to Recovery” as the mantra of their proposal. Upon initially considering this statement, you may assume their use of the term “fairer”

is used in comparison to Fine Gael, but on examination of the outlined proposals, it becomes clear that they may in fact be stressing a superior alternative to their own previous track record. Some of their more populist proposals such as their view that “now would not be the right time to introduce a property tax” and their “solidarity measure” to reduce retired public servant pensions, are a complete U-turn on the stances they held when they actually had the power to change these things, with the former having in fact, been promised in writing to the Troika by FF. Much of the rest of their proposal to raise funds include the usual rather lofty, yet limp suggestions to increase efficiencies, cut evasion rates, increase enforcement, as well as a plan to raise the cost of our pints and tayto with alcohol and junk food taxes. Sinn Fein, the second string opposition party, take a more direct approach in using their budget proposal to attack the incumbents

using terms like “cruel” and “gruelling” in reference to recent budgets. At the press conference, Mary Lou McDonald boldly declared that the purpose of their proposal was “To Protect Children”, virtually implying, in a way only Mary Lou can, that FG may in fact be setting out to harm children, just stopping short of a Helen Lovejoy-esque outburst of the emotive “Won’t somebody please think of the children?!”. As for the actual substance of the proposal, Sinn Fein come out guns blazing (metaphorically of course) and tax happy. They propose a 48% rate of tax on income over €100,000 which they estimate would yield €365m, and a 1% wealth tax on net wealth over €1m which would raise €800m. Other expected proposals included stabs at private schools and “super pensions” as well as a gambling tax of 5%, perhaps to compete with FF aforementioned funcurbing taxes. Like FF, the Shinners haven’t shied away from comical hypocrisy either, also including

measures to cut down on “black market activities”. While opposition budget proposals will always have their im-

Helen lovejoyesque “won’t somebody please think of the children?” portance in a democratic society, in offering the incumbent government constructive suggestions and alternatives on behalf of the underrepresented, it is when they lose sight of this responsibility, using budget season as an opportunity to gain petty opinion poll points with empty irresponsible political rhetoric, that the exercise becomes an irrelevant side show, detracting more than it contributes.


Special reort- Features

The Bull 06.12.2012

Ted Nyhan analyses Ireland’s current fiscal situation; whether Ireland is going in the right direction or is it consigned to more years of austerity?


reland has been praised, most properly, for its Herculean efforts in adapting to the fallout from an economic collapse and for sustaining the monumental burden of bank debts. Public expenditure has been restrained and revenue has been generated through tax rises and the divestiture of assets (The weight of adjustment is distributed between spending and taxes at a ratio of 2:1). The country and its finances appear to be well on the way to recovery. Conversely, our fellow PIGS have refused to confront the structural problems that plague their economies, and have been less successful in restoring fiscal rectitude. Their populace has been intransigent in their opposition to necessary, and belated, reforms and has been equally hostile to an unavoidable contraction in government spending. In Ireland there have been fringe protests, but in general there is recognition of what must be endured. Unfortunately, Irish people seemed resigned to these measures as a punishment, rather than as a chance to improve the ability of our nation to produce wealth and prosperity. This period of austerity should be bright with hope for the future. There is an opportunity to resolve the last vestiges of our fiscal and economic crisis, whilst laying the groundwork for a vibrant economy going forward. Focusing on budgetary decisions as some sort of zero-sum game in a static world is a mistake. Everyone

as exacerbating the fiscal situation by depriving the exchequer of taxes and demanding more in the way of job-seeker allowance. Lower marginal tax rates can be achieved by shortening the duration of benefits, allowing them to become l e s s gene r -

“The concept of ‘free-fees’ should be consigned to the dustbin of failed experiments” can benefit if the appropriate approach is adopted. Of all the issues in recent budgets, unemployment, education, health, and water and property taxes have dominated the discourse and they are addressed briefly below. Firstly, the path forward should involve reducing the marginal tax rate on lower income earners. The loss of benefits and income that accompanies securing employment can often mean that, for the lowskilled unemployed, the marginal tax rate can exceed 100%, which, the inherent fulfillment from work notwithstanding, presents a powerful disincentive to accept undesirable jobs. This perverse arrangement deters the unemployed from pursuing employment, which leads to social ills as well

ous as time passes, which progressively adds greater pressure to take a job. This has the virtue of easing the social welfare burden, ameliorating the fiscal situation. Unfortunately, in this budget, it is likely the government will continue child benefit cash payments to lower income families, which they presumably lose if they climb in to a higher income category. This is anathema to promoting social mobility and also worsens the country’s finances. Insofar as the state funds health services and the education system these areas should be spared the full brunt of cuts. Clearly, the concept of “free-fees” should be consigned



Features - Special report The Bull 06.12.2012

€T 2013

to the dustbin of failed experiments. There is mounting evidence it has done little more than act as a subsidy to the comfortable middle class. The government should instead construct a state-backed studentloan system, creating a model that exists in many of the world’s most admired economies, from the US to Australia to Norway. This loan system can include “sweeteners”, such as writing off a portion of principal if the borrower successfully obtains a degree. Establishing this may cost money, but the overall objective is to allay market (and Troika) concerns as regards our capacity to repay our debt. Settling the issue of third-level funding would certainly not hinder our attempts to convince our financiers of our creditworthiness. In the realm of public health, the government has indicated it may decrease “the price and volume of goods and services procured by the health services”, which is ominous. They also intend to lower staff levels. This may be suitable (administrators may be the subjects of cuts), but it is discomfiting that a government bureaucracy is determining the amount spent on something as vital as healthcare, and, indeed, how these services are dispensed. An incre-

“In ireland there have been fringe protests, but in general there is a recognition of what must be endured”

mental privatisation of the system could relieve the government of some obligations, as well as potentially raising money from the sale of assets. Even in the context of a universal, mandatory insurance scheme, there is no need for the government to actually be involved in supplying medical services. The water charge and property tax are ideal taxes for generating revenue, given their lump-sum nature. They have a comparatively mild distortionary effect on economic behaviour and are difficult to avoid or evade, which maximises receipts. Most developed countries have a property tax, which is a very efficient method of funding state expenditure. Given that yawning deficits must be closed somehow, these taxes represent one of the optimal ways of doing so. The recent protests in Dublin ignore the fact that this charge is required to preserve the services that they themselves would undoubtedly demand. The property tax is negligible. Fears persist, however, that it will grow in the future. This is most likely correct, but hopefully rises will be matched

“the period of bankruptcy should be reduced to one year, in line with the uk and us” with falls in tax collected by other means, especially the income tax. As for the water charge, it can be viewed as user fee. Ireland is currently alone amongst OECD countries in not charging for water use. The only drawback to the water charge is that it is much too small and not related to the level of consumption. The once-mooted plan of installing water meters would do much to rationalise the provision of this resource, if implemented. This would ensure the full cost of water is borne by the user, and not society. The government spends €1.2 billion on water services annually, so shifting costs to the users would be fiscally meaningful. Finally, the limitations of the budget in and of itself to effect the positive changes should be acknowledged. For instance, the delayed insolvency bill should be expedited through the Dail, and the period of bankruptcy reduced to one year, in line with the UK and US. Relatedly, the thicket of regulations that smothers business and calcifies markets should be thinned. These actions would spur private sector growth, enlivening the labour and housing markets. However, much can be achieved by holding down marginal tax rates and the amount of consumption channeled through government bureaucracy. And, of course, running a manageable deficit helps too.


features-special report The Bull 06.12.2012

The Property Tax: Right Idea, Wrong Model The property tax has generated much controversy since it was initially mooted by the Fianna Fail government in 2008. But is it sustainable? Sean Tong investigates


reland has been almost unique amongst developed countries in its refusal to implement some form of property tax, instead relying on exceptionally high rates of direct (income) and indirect (consumption) taxation. Given the limited scope for further increases in these, it was inevitable that the Government would be forced to shift its focus to a tax on wealth – and as property represents the vast majority of wealth in Ireland, it was an obvious candidate. There are, broadly speaking, four types of property tax. The first of these is a flat-rate charge, and is considered singularly undesirable due to its regressive and indiscriminate nature. The Household Charge introduced at the beginning of 2012 is an example of this, and served as a temporary measure before the introduction of a full property tax in this year’s Budget. The second type of tax is based on the market value of the whole property, and is in common use across the world. The third form of property tax is essentially a reduced form of the second one, relying on value ‘bands’ to determine the tax applicable to any given property. This is the form the Government has chosen to adopt, mimicking the council taxes used in the UK. Households will be asked to self-assess the value of their whole property, and pay taxes in accordance with the band within which this value falls. While this is certainly an improvement over the somewhat dis-

“given the limited scope for further increases in taxation, it was inevitable that the government would be forced to shift its focus to a tax on wealth” astrous Household Charge, there is a strong feeling of opportunity lost in this decision. Having found itself in the enviable position of being able to create a bold new tax that drew from the experiences of other countries, Ireland has instead decided to copy-and-paste a relatively ineffective model into our own tax system. The fourth type of property

tax, known as a site valuation tax (SVT), would have been preferable along a number of dimensions. An SVT is calculated in relation to the value of the land upon which a property sits, rather than the total value of the real estate. This model was actually proposed by the Government in November 2012, but has since been abandoned in favour of the total property value approach. A tax of this nature can be found in countries such as Singapore, Hong Kong and Russia, as well as certain states within the US (such as Pennsylvania). There are three significant benefits to this approach: it is efficient, creates desirable incentives, and falls on the ultimate beneficiaries of the revenue. The efficiency of the SVT has been noted by economists as far back as Adam Smith, who was an advocate of the measure. The supply of land is, for all intents and purposes, perfectly elastic in so far as there is a fixed quantity of it. This means that, unlike the property tax the Government would like to implement, an SVT would not be distortionary. It would not influence the market

mechanism or create deadweight loss in the manner that other taxes do, as the supply curve for land is vertical. There is, in fact, both a predicted and an observed correlation

“Ireland has decided to copy-and-paste a relatively inefficient model” between the use of an SVT and improved market efficiency. In terms of incentives, the SVT encourages the efficient use of scarce resources. This is in stark contrast to the full property tax, which actively discourages this. Faced with a tax calculated solely in relation to the value of the site, landowners are incentivised to develop vacant and underused plots in order to maximise their value. Speculative holding of land is discour-

aged, and better use of inner city space helps to reduce urban sprawl. In Harrisburg, Pennsylvania, the use of an SVT has been credited with bringing about an eight-fold reduction in vacant structures over the past thirty years. Contrast this with the property tax that the Government is implementing, which encourages owners to distort the value of their homes and discourages them from carrying out improvements that would increase the property’s value. This seems like a bizarre set of incentives to induce: businesses are discouraged from expanding their operations, households are punished for improving things like energy efficiency, and dilapidated buildings would be left to continue their decline. Finally, an SVT would be easier to implement and fairer in terms of its incidence than the tax that the Government is proposing. Whereas the value of the whole property depends on innumerable factors, there are just two key variables that influence land value: the size of the site and the extent of the ameni-

ties (social and natural) in the local area. Given constant plot sizes, it is improvements in local amenities that drive differences in land value and, consequently, the tax payable under an SVT. As the revenue from this tax is intended to be used to fund local services and improvements, the SVT is also fairer than the full property tax in the sense that those who pay the tax are also the ultimate beneficiaries, and benefit in proportion to their payment. Under the Government’s model, households pay different rates for the same local amenities. This is certainly not an exhaustive list of the failings of the ‘band’ system of property tax – there is, for example, ample evidence in the UK that the regular updating of these bands can be problematic – but it should be sufficient to appreciate that there were certainly better options open to the Government. While the (belated) introduction of a property tax is to be applauded, it is difficult to shake the feeling of lost opportunity in this case.



The Bull 06.12.2012

Hamas: The Islamic Resistance Movement Timmy Munier examines the prospect of peace between Israel and Hamas The recent outbreak of violence between Israel and Hamas has dominated global political discourses in recent weeks. No other world conflict has ever embodied such a mixture of religious fervor, national identity, cultural aspirations and economic drawbacks than this tumultuous relationship. In 2006 Hamas won a majority of seats in the Palestinian Parliament; defeating the governing political party of the time, Fatah,

“the founding charter commits the group the raising the banner of Allah” in Gaza. The following years were dominated by violent clashes with Israel which were characterized by the frequent exchange of missiles between the two belligerents. However, little is made known of Hamas; what it is, whom it represents and what it stands for. Can peace in the Middle East even be considered

while what so many have branded a terrorist group is in a position of political leadership? The organization was founded in 1988 by Sheik Ahmed Yassin following an uprising by Palestinians against the Israeli control of the Palestinian territories since 1967. Hamas was created with the sole purpose of ending the existence of the Israeli state and to restore the land to Palestine. The founding Charter commits the group to raising “the banner of Allah over every inch of Palestine”and the to the destruction of Israel. Hamas is also committed to overriding the Palestinian National Authority as the main governing body of Gaza. The 1988 Hamas covenant is a deeply religious document that emphasizes a total dedication to Allah, the spread of Islam across the land and the struggle against the Jews. The prospect of a cooperation between Hamas and Israel seems unlikely upon reading the the charter’s extremist statements. Hamas sees Jihad, which is Arabic for struggle, either physical or internal, as the only path to Allah. Any man or woman who does not accept Islam as their faith has chosen “annihilation as their only companion.” Hamas reportedly has a seven hundred million dollar budget funded mostly by private individu-

›› Missiles have featured heavily in recent Israeli-Hamas conflicts als, groups and neighboring states such as Saudi Arabia. Last year the group cut all financial affiliations with Shia dominated Iran because of its support for Bashir Al-Assad and the treatment of Sunni Muslims. Despite terrorist accusations by foreign nations Hamas denies that it is a terrorist group and has built a wide local support by providing education, hospitals and sports leagues to communities. Hamas views itself as a political party willing to use violence to see its ideals

Adam Smith’s


Underlying Marxism?

dam Smith is often portrayed as a free market advocate. His seminal work The Wealth of Nations is frequently cited by many free marketers as a theoretical underpinning for benefits of an unadulterated market system. This depiction is limited and simplistic. If one probes a little deeper into Smith’s work, they will

find some notions more akin Marx than Friedman. Smith’s underlying Marxism is most clearly seen in the Theory of Moral Sentiments – especially the parts dealing with consumerism. To Smith, consumerism is only beneficial if it’s supported by the exercise of three virtues: justice, beneficence and prudence. Throughout his works, these three virtues are

consistently regarded as the basis of our morality. Justice is the prevention or remedy of acts that cause “real and positive hurt to some particular persons, from motives which are naturally disapproved of.” Beneficence is the “free gift of items or services of value to another human being.” Prudence is the “care of the health, of the fortune, of the rank and reputation of the individual, the

come true, which, in its eyes, renders it a militant group rather than a terrorist organization. Recent attempts at reconciliation with secular Fatah, the party that still governs the West Bank, fell short of success. However, a coalition between the two would offer more promising path to Arab- Israeli peace. With followers united through an absolute and irrevocable hatred for Israel it’s difficult to envisage a mutual agreement between the two states. A peace deal

between the two would have to include a compromise and accept a state that does not include all of the historic territory of Palestine. Hamas’ current leader has been challenged by its more radical members for favoring a political solution over military resistance. To reach a solution Israel and Hamas must engage in direct negotiations and find a compromise in which two states, something which truly looks easier said than done.

objects upon which his comfort and happiness in this life are supposed principally to depend.” These three virtues formulate the rationalistic part of men for Smith. Free marketers frequently argue that consumption can satiate human desires and thus lead to an overall happier life for the consumer. A free market system based on a production-consumption mutually beneficial relationship can help people live the good life. Believers of such a notion often depict human beings as self-interested, egoistic, utility maximisers. This depiction only accurately captures half of a person’s make-up for Smith – they are also rationalistic. A free market consumerist society like the one we experience today will not lead to the good life according to Smith. To him, unchecked consumption leads to alienation. If people are completely enveloped in consuming, they don’t exercise the moral virtues that Smith identifies. Modern day advertising helps create a scenario where people become obsessed with consumption. This leads to a state of affairs where people become deficient in their rational moral decision making capacity and overly egoistic and self interested, alienating them from their rationalistic side. The best society for Smith is one which keeps a healthy balance between mans rationalistic and egoistic parts. The current economic system we live

under promotes consumption viciously and pushes us into our egoistic side far too much. For Smith, the current economic system al-

“to smith, unchecked consumption leads to alienation” ienates man from what they truly should be. This is precisely the same conclusion Karl Marx came to in his Economic and Philosophic Manuscripts of 1844. Smith captures the futility of men trying to live their live by feeding their egoistic parts with consumption when he says the following: “The poor man’s son, whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich. He finds the cottage of his father too small for his accommodation, and fancies he should be lodged more at his ease in a palace. It (isn’t till) in the last dregs of life... that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility, no more adapted for procuring ease of body or tranquility of mind than the tweezer-cases of the lover of toys.” By James Nugent



The Bull 06.12.2012

SMF - Global economic outlook The SMF’s Head of Macro-Research, Edward Flahavan, delivers his outlook on the Global economy The global economic outlook for the coming months is dominated by politics to a greater extent than ever. This is true across the developed world and into emerging markets. In the United States, Republicans and Democrats look like they will squabble all the way to the ‘Fiscal Cliff’ and perhaps go over it. Elections next month in Japan will see power change hands once again but this time the Bank of Japan has been at the centre of the debate as it comes under pressure to revive the economy. Meanwhile, back in Europe the EU has just postponed the difficult decisions in the EU budget which exposed the fault lines between richer and poorer, and Eurocentrics and Euro-sceptics. It would be an understatement to say that greater challenges lie ahead. European politicians have put up with their fair share of abuse; now attention has rightly turned on the US elite. The ‘Fiscal Cliff’, which is the automatic tax raises and spending cuts which will be introduced if no compromise can be reached over the debt level, could be a serious self-inflicted wound. If fully introduced it would take 2.9% out of real GDP in the US next year - this would almost certainly mean another recession and much higher unemployment, making it one of the most costly own goals in recent history. The reality will most likely be a compromise between the current path of persistent deficits and the ‘cliff’ itself. With the Bush tax cuts

for lower and middle earners making up more than half of the ‘cliff’ expect to see the American consumer affected: consumer sentiment, which recently hit new highs, will probably see a drop. Japanese politics rarely makes it into the headlines, but the upcoming election in mid-December has caught the attention of financial markets and commentators. Shinzo Abe, the leader of the opposition Liberal Democratic Party and the likely future PM, has said that he will bring pressure on the Bank of Japan to boost the economy if elected. The Bank of Japan, like most central banks, fiercely defends its independence from politicians;

“italy was able to sell debt in teh bond market at yields that hit a two-year low” however this has not stopped the yen from falling 4% against the dollar in the past fortnight. Abe has suggested raising the inflation target and buying foreign government

›› Are thinkg looking up for the global economy? bonds in a bid to weaken the yen and boost growth in a country that has battled inflation for the best part of 25 years. This political intervention is seen by some as the potential catalyst for a Japanese bust. Kyle Bass, an American hedge fund manager who profited from the European crisis, now has his sights set on Japan. However, many hedge funds who forecasted a fall in the yen and a debt crisis have been slowly bleeding money waiting for the ‘Japan Short’ to come off over the past few years. If they’re proven right this time, Mr Abe will have a lot to explain to the Emperor. Will 2013 be the make or break year for the euro? This time last year it was going to be 2012. A reso-

lution looks as likely as a break-up. European politicians are struggling to find common ground while the economic realities are hitting hard. Unemployment rose again in the eurozone in October to 11.7%; even Germany has not been unscathed, seeing an eighth straight month of increased unemployment, which is now at 6.9%. Greece has had another bandage put over its public finances and a Spanish bailout looks like being a matter of when, not if. However there is some cause for optimism: Italy was able to sell debt in the bond markets at yields that hit a two-year low last week as Mario Draghi’s proposed bond buying scheme (Outright Monetary Transactions) appears to be having an effect without being used.

Heading towards the fiscal cliff

Celia Ho looks at the prospect of a ‘grand bargain’ as the US veers towards the fiscal cliff Tension has been mounting as a failure to compromise on a budget deficit reduction plan between the Democrats and Republicans has

“it all comes down to whether america is united after all” pushed the United States on the brink of the fiscal cliff. If both sides hold their respective positions, On

January 1 2013 the US government will be facing $600 billion of higher taxes and reduced public spending in 2013. The formation of this fiscal cliff is due to many past temporary government policies (especially tax related) which are due to expire. These include the Alternative Minimum Tax, Bush tax cuts, and elapsing of payroll tax cuts. Attempts to maximize growth and to maximize welfare in the past have come to a large bill that the current generation of Americans are forced to pay off. When the problem arose in 2011, US President Obama passed the Budget Act of Control of 2011. The US government made the decision

›› Partisan divisions are hampering the prospect of a resolution to increase the debt ceiling which will be compensated by a reduction in government spending at some point in the future. Clearly, failure to address the high public debt has exacerbated the problem. Now Democrats and Republicans appear

to be making the same mistake by failing to agree on a program to reduce public expenditure and raising the tax revenue. Republicans believe that tax rate increases for the upper class are not necessary, if not harmful to the economy. Presi-

If the better credit conditions for peripheral sovereigns can be transmitted to businesses then the eurozone may be able to function as a proper monetary union. Until then, the domestic economies of Ireland, Spain et al. are struggling with a persistent contraction in lending, under which a recovery is unlikely. Financial markets and political elites are eyeing each other intently from across the room, decisions on both sides being influenced by the other: politicians courting the markets and markets testing the loyalty of politicians to their promises. This relationship has evolved over the past two years and if the coming months pan out as expected, this fling is about to get serious.

dent Obama insists on introducing higher tax rates on the upper income class while keeping the tax cuts for the middle class, arguing that suggestions such as ‘closing tax loopholes’ and ‘limiting reductions’ suggested by Republican Senator Mitch McConnell are inefficient. An additional delay in making a progress towards a deficit reduction package will bequeath the current generation of US citizens with a dimmer outlook, reducing market confidence and potentially raising its borrowing costs. If no agreement is sought for a debt reduction plan, the US economy will contract. Not only will the rate of unemployment increase to 9%, unemployment benefits will be cut dramatically. All government departments would share the hit of the fiscal contraction. As for the public, an average household will be liable for an increase in tax of $2000. The already weakened global market would take another shock after the European financial crisis and China’s slowing growth. An agreement on a fiscal plan can minimize the hit; but it all comes down to whether America is united after all.



The Bull 06.12.2012

In a state of flux

Reuben Murray-Whelan remains sceptical of the viability of the Eurozone’s nascent recovery


n the past 3 months Europe has seen a shift in the focus of the debt crisis. Recent trends have illuminated how markets have been re-evaluating EU economies. Greece, as ever, remains on the point of default, living on day-to-day financing via fourweek T-bills. A Greek default, or at the very least a significant “haircut” to its creditors, is surely not far off. Greece’s debt, simply put, is too significant to be paid back at present value and this has been reflected in the Troika’s recent agreement to extend the debt deadline by two years to 2022. Yet the trend of falling bond yields has shown a possible differing market sentiment. Greece has seen its own 10-year bond yields reduce massively from 24% to averaging just above 16%. Spanish 10-year bonds in the last 3 months have fallen over 100 basis points (one basis point is a hundredth of a per cent) from within touching distance of the “unsustainable” 7% to almost 5.5%. Italy has mirrored this

pattern, dropping from a brief stint above 6.5% to significantly below 5% hitting record 2 year lows. Back home, Ireland has been showing up some of its bigger neighbours with a much improved attitude. Credit institutions are being lambasted by any perceived “tightness” in terms of lending and special credit facili-

“the pressure on the eu has not left, however, but merely shifted to its newest target” ties are opening to provide for the SME sector. Continually cited as a “special case” in light of commendable recovery, Ireland last week saw its credit rating outlook upgraded

from “negative” to “stable” by Fitch rating agency. While The PIIGS remain delicately poised economically, trends from key indicators seem to be less pessimistic of late. The pressure on the EU has not subsided, however, but merely shifted to its newest target. France, with stalling growth, a lacklustre SME sector and an indecisive government, has emerged within the Eurozone as the latest concern. This could possibly be the beginning of the “contagion” economists and advisors have long speculated about. Whether Europe’s trailing periphery economies’ problems or France’s gradual loss of competiveness have led to the problems right at the heart of the EU is not yet clear. What is clear, though, is the manner in which the socialist French government is failing to deal with it effectively. While Hollande has promised reforms, those enforced so far seem to reflect an ideological background rather than an economic purpose. France’s tax

›› Nonchalance in the face of financial turmoil reforms have targeted the wealthy with a tax of 75% on earnings above €1,000,000 and, before a strong revolt, attempted to increase capital gains tax up to 60% in certain cases. The latter of these would have imposed serious penalties on entrepreneurs in a time when incentives are desperately needed. Monsieur Hollande has displayed a remarkable lack of comprehension of the SME sector and its role as the driving force of economies, perhaps to his and France’s detriment. The feeling of a flailing France is one reflected in the markets. France’s bond yields have crept up over 70

basis points on the Eurozone’s one stable economy, Germany. Furthermore, a symbolic loss of the top credit rating AAA by Standard & Poor has had drastic implications for the French economy. The surge in bond yields is only the beginning of France’s troubles. Many forget that France’s debt level is by no means under control, sitting at 91% of GDP - an increasing cost of debt just adds to Hollande’s list of worries. If the French premier fails to stimulate SMEs and attract investors to France to boost growth and subsequentially GDP, it won’t be long before speculation ensues.

The Chicago-engineered Chilean economic revolution

›› Santiago - The fruits of capitalism In 1960s a group of prominent Chilean economists held a series of meetings behind closed doors. All classically trained in economics, they debated how a Western style free-market economy could be built out of a ramshackle banana republic. They set about planing the most radical economic experiment since the Meiji Restoration. At this time Chile’s economy seemed to be in freefall. In 1970, Chile elected the first Communist leader in the Western world, Salvador Allende. He immediately sets about nationalizing industries, setting price and wage controls and

restructuring the economy along socialist lines. The economy collapsed. The country was in shambles as hyperinflation of over 340%, a lack of foreign reserves, a rocketing trade deficit, massive increases in circulating currency, and falling GDP took hold. Chile, it seemed, was spinning out of control. In 1973, the people had enough. The country erupted in protests and citizens poured into the streets demanding change. A crisis took place when the parliament passed a resolution accusing the government of violating the Constitution. The Allende government was overthrown

in a coup. A military government, led by general Augusto Pinochet, took power. It was change, but not of the sort the people wanted. Pinochet was an opportunist rather than a liberator and he set about brutally suppressing the people. At first the Junta continued the centralized economic policy of the predecessors. It was only after the economic malaise deepened that Pinochet and his generals turned in desperation to the ideas of the “Chicago Boys”. The economists were at first reluctant to work with the regime with such a violent record of oppression, but in the end they saw it as their duty to use their expertise for the good of Chile. They set about a radical economic transformation of Chile’s economy. Economic liberalization replaced collectivism as the government began one of the most dramatic reversal of economic policy in history. Under the guidance of the Chicago economists, the government set about overturning the country’s centralist economy and building a modern market economy. They immediately began rolling back Allende’s socialist reforms; privatising state industries, eliminated price controls and cutting the money supply. The used the ideas they learned in America to reshape Chile’s future. The results of the experiment were at first were devastating. Unemployment spiked, the economy contracted and capital flowed out of the country. Despite this, the Chicago Boys

kept their nerve and eventually the fever broke. Inflation fell and continues to fall for the next decade. They continued the programme of economic reforms. Chile cut out many of the loopholes that favored certain interest groups and encouraged inefficient economic choices. Tax evasion dropped significantly and revenues rose. Exports more than doubled as tariffs were dramatically reduced. Chile maintained the most stable monetary policy in the region. As a result, the

“exports more than doubled as tariffs were drastically reduced” economy that once seemed hopelessly outdated was transformed. Economists around the world began to refer to the “Miracle of Chile” as a new model for development. In 1989 elections were called and the military regime was peacefully removed from power. A center-left coalition took power. The new government set about building an open democratic government . Noting the successes of the policies, they refrained from dismantling the economic reforms. They continued the

tight monetary policy and privatisation policies throughout the 1990s and 2000s. Although debate continues on specific economic policies, a consensus reigns on the success of the market reforms. Chile’s economic reforms were the first shots in an economic revolution that would spread the world over. However quietly, however clouded in euphemism, nation after nation emulated Chile’s reforms. From Thatcherism in the UK to Rogernomics in New Zealand, from the former soviet republics of Eastern Europe, to the emerging Asian nations of Singapore and Malaysia, successive governments spanning continents adopted local variants of the reforms. Today Chile in the most prosperous economy in Latin America. Poverty has fallen from a peak of 46% to 14% today. It’s economy remains the strongest performing in the region, with growth at a robust 6.5% in 2011, the fastest growing developed country. In 2010, Chile was the first South American country to join the OECD. Many economists contend today that the most important consequence of the Chicago Boys reforms were not the economic prosperity they generated but rather that they set a course for democracy. By freeing the markets they believe, they set the conditions for a free society, a view vindicated by the peaceful transition to democratic government in 1990. By Niall Casey


Student managed fund The Bull 06.12.2012

Performance Graphics

SMF Monthly Report


›› Things are looking up for the energy market

ince our last report markets have had a mixed performance across the board. The US equities market in particular has shown signs of consolidation that has been limited on the downside by improving business sentiment. Considering that this is on the back of a four month market rally it is comforting to see this support, one would envisage that the S&P 500 will reach new highs in the event that a fiscal agreement is reached in Washington before the January 1st deadline. However, we will endeavour to avoid another discussion on the fiscal cliff as it is a topic that has received more than its fair share of media coverage in recent weeks. While US data for consumers and

“we retin the view that this is an opportune time to add” housing show increasing signs of recovery, concerns about weak global growth have been reflected in a below average earnings season. Company guidance in each of the sectors has been predominantly weak with Caterpillar Inc. typifying this

by lowering its revenue forecasts for the next three years despite improving margins. We retain the view that this is an opportune time to add to the portfolio; with P/E ratios in every sector with the exception of healthcare well below their historical averages and encouraging developments in Europe, we have taken the necessary steps to make this happen. Large cap companies have significant amounts of cash on their balance sheets leaving them well placed to exploit market opportunities in the event that global economic outlook is improved. For the most part, companies with a global focus have been sheltered by the debt crisis in Europe by repositioning to target growth regions. As a result we are inclined to be attracted to companies that are not particularly at risk from national domestic developments. We have been fortunate enough to be provided with some particularly good investment presentations that clearly show evidence of considerable research and compliance with our investment process. We have consequently added Apache Corporation to our portfolio and feel that this independent energy company is a good fit with our Schlumberger holding and shows ample signs of upside potential. Likewise the integrated global nutritionals and dairy business Glanbia plc as well as technology giant Qualcomm have been

chosen for the portfolio. Glanbia (GLB:LON) will be added when the shareholder vote is finalised in the coming days while an order for Qualcomm (QCOM:NASDAQ) has already been placed. Edward Life sciences (EW:NYSE), Empresa Nacional de Electricidad (EOC:NYSE)

“the portfolio as a whole has performed in line with our benchmark” and Barrick Gold (ABX:TSE) have been placed on our watch list, appearing to be promising investment prospects. These additions match the criteria set out in our investment policy and will undoubtedly bring greater balance to a portfolio that was overweight in industrials and healthcare. The portfolio as a whole has performed in line with our benchmark over the last two months and it is hoped that our new additions will enable us to outperform the MSCI World into next term. We remain bullish about Q1 2013 and intent on making further acquisitions in the run up to potential Christmas volatility.

›› Italian police try to calm protestors


careers and editorial The Bull 06.12.2012

Intern Insights: Morgan Stanley Internship RESTORING SANITY TO the US editorial:

Ever wondered what it feels like to work at a world-leading bank? A former Mortan-Stanley Intern reveals all

By Cathal o’domnallain Editor

University: Trinity College Dublin Course: BESS (Business & Economics from 3rd year) Current role: Analyst What was the application process for the internship like? The first decision I had to make was choosing the division I wanted to work in. I did some online research and spoke to people in the year ahead that had done similar internships in the past. After much careful consideration, I decided to apply for the Investment Banking and Global Capital Markets Summer Analyst Program (IBD & GCM). I chose to do so because I enjoy longer-term project-based work than the fast based sales and trading environment. The online application was very straightforward. I uploaded my CV and cover letter onto the Morgan Stanley careers website. After you do this you are sent the link to complete a numerical reasoning test. There were three rounds to the application process for IBD. The first round consisted of two phone interviews with junior bankers. These were heavily focused on ‘competency’ based questions (i.e. questions about CV / leadership / teamwork etc). In addition they tested my motivation for an internship in finance and for working at Morgan Stanley. Finally, there were some technical questions (e.g. methodologies for valuing companies and basic accounting-style questions to ensure that I understood the relationships between the three main accounting statements). The following round involved being flown out to London for three face-to-face interviews at the Morgan Stanley offices in Canary Wharf. This was the first round of interviews, at which only senior bankers were present. There were also a few ice-breaker questions that required me to think quickly on my feet. I remember not knowing the answers to all the technical questions they asked. Either way, I always gave it a shot and was able to justify my answers / rationale along the way. The final round took place at an assessment centre (AC), again in Canary Wharf. The AC lasted an entire day and included two more face-toface interviews with very senior bankers. I also participated in a group exercise, gave an individual presentation and took a numerical test at the end of the day. Throughout this process there was a very supportive junior banker in contact with me at regular intervals to provide me with performance feedback and to guide me through the following round. What did you do on a daily basis? I joined the media and telecommunications team in IBD, which covered all media and telecommunications clients in Europe, Middle East and Africa (EMEA). As an intern, I was essentially doing the same work as a first year full-time analyst. The team provides financial advice to companies that specialize in mergers and acquisitions. This meant that that I was undertaking financial company valuations and modeling in addition to carrying out industry benchmarking analyses. What was the best aspect of your internship? Unquestionably the opportunity to Work with extremely motivated and talented individuals from an eclectic mix of backgrounds. One of the main perks, however, was participating in a very high-profile M&A deal which was regularly on the front page of the Financial Times. What did you learn during your internship? I acquired the very useful skill of time management and I learned how to assume responsibility for my own work. By the end of the internship I was able to prioritize my work more effectively. I also gained an invaluable insight into the more practical aspects of corporate finance than my financial theory classes could not provide me with. How has your internship affected your career prospects? At the end of my internship I was offered a full-time position at Morgan Stanley. It was a great source of relief for my final year and it meant that I didn’t have to worry about applications and interviews when I was focusing on important exams and course work. The internship is a great way to get a feel for the industry and the company to ensure that you make the right decision coming out of college. Any top tips for a student interested in an internship at Morgan Stanley? Apply early as a rolling application process is in place. Read up about the different divisions before making a choice. Finally, make sure that your CV and cover letter is polished. Thousands of applications are received fora limited umber of places and it is very easy to rule out potentially great candidates if there are typos/wrong company names in the text.


he growing consensus around Washington is that the United States needs to restore fiscal sanity to federal balance sheet. As the adrenaline-fueled and aggressive combatants in this debacle belatedly begin to relax their seemingly intransigent stances on this issue, special interests and ideologues on both sides of the political divide continue to trample on the shoots of growth, all but hampering the prospect of a swift resolution to this crisis. Early signs from the Republican Party appear encouraging, as a growing number of politicians and party stalwarts have distanced themselves from Grover Norquist’s organization, Americans for Tax Reform. Senators Saxby Chambliss and Linsdsay Graham disavowed the infamous pledge not to raise taxes during their tenures in office, refusing to put partisanship over the nation’s interests in doing so. People like these imbue hope that the three branches of the US government will address the issue of sequestration before the US ignominiously veers off the fiscal cliff on December 31. This is a highly unfortunate situation. Unlike the Eurozone, which faces another two years of anemic growth and recessions in the periphery, the US economy is back on its own two feet and growing at a moderate pace. This is understandable, as most economists, including Ben Bernanke, believe that America’s sustainable long-term growth rate has fallen drastically since the Great Recession. If this situation was allowed to transpire, however, the economy would still probably grow, but at a negligible rate of around 2% in 2013. While the economy would slow down, the full-on great depression hyperbole espoused by the general

media appears to be nothing more than a mirage. Nevertheless, as this long-lasting game of political brinkmanship enters its second month it remains as apparent as ever that the battle is far from over. Neither party seems willing eschew their ideological purity to reach a solution to this crisis. While a select group of Republicans are beginning to distance themselves from Norquists’s organization, they remain a small minority. Democrats seem equally unwilling to see cuts to the sacrosanct programs of Medicaid, Medicare and Social Security. Both these positions are completely unrealistic. The social programs that many Democrats wish to ring-fence are bordering insolvency. The total costs of these unfunded liabilities currently stands at $7.1 trillion, and estimated to be growing at a rate of approximately $100 billion per week. Many economists also hold the Bush tax cuts of 2001 and 2003 responsible for having caused such shortfalls in government revenue. Often overlooked in the narrative of these events is the Democrats’ pandering to various interest groups. The AARP and the Committee to Preserve Social Security and Medicare have launched aggressive campaigns to block any cuts to these programs. Similarly, the ‘Social Security Protector’s Pledge’ has received the signatures of 110 House Democrats and 11 Senators. Over 200 Representatives and a large proportion of Republican Senators have also signed the notax pledge. While the disavowing of the pledge has proven not to have dealt the fatal blow to the guilty Republicans that it would have done two years ago, the fact that so many remain loyal to it illustrates the organization’s stranglehold on the Republican party and proves that it remains a very potent force in dictating policymaking.

Alas, there are not guarantees that members of either party will stand up to these special interests, who continue to apply huge amounts of pressure to parties and continue to bare a disproportionate influence on each parties’ fundraising activities as well as their conventions and primaries. The United States can nevertheless count itself highly fortunate that a group of Senators have put bipartisanship before ideological fervor. The so-called ‘Gang of Eight’, the informal bipartisan group seeking the enactment of a Grand Bargain, have proven that cross-party cooperation is possible when facing the dark reality of economic tumult that will inevitably come into being if the sequester occurs. Much of this hinges on Mitt Romney’s running mate Paul Ryan, the economic wunderkind of the anti-tax wing of the Republican Party. If he continues to oppose tax increases, then the chances of House Republicans agreeing to them will remain minuscule. If he countenances them, however, it would diminish his 2016 Presidential prospects. There is another reason for optimism, however. The result of Nov. 6 has proven that voters want politicians in Washington to work together, to put their political fervor and partisan zeal aside in the interest of the wider public. A recent Gallup poll found that 80% of Americans favor a debt reduction package predicated on compromise rather than having one skewed towards either party’s bases. From this evidence, it’s clear that the American people are ready for tough choices. They stare into the dark face of the future with a brooding sense of realism as politicians continue to dither over the enactment of a Grand Bargain. It’s time for their elected representatives to listen.



The Bull 18.09.2012

THE BULL Issue 3 Volume 2  

Issue 3, 2012 of The Bull, Trinity College Dublin's Financial Newspaper