The Bull Issue 4 Volume 2

Dublin University’s financial newspaper

PERSONALITY PROFILE DRAgHI P 17

SYRIAN REvOLUTION P 15

HACKS WITHOUT A PLAN P 10

Davos Report 2013 P 5

OSBOURNE PROPOSES BANKINg REFORM » »

Payments System to be Upgraded Easier Access for Newer Financial Institutions

caThal Ó doMhNallÁiN Editor UK CHANCElloR of the Exchequer, George osbourne, this week announced that the government will intervene in the UK payments system to encourage competition in the financial sector by making it easier for new banks to compete against the larger, more entrenched ones.

Having compared the payments system to the telecoms and the electricity grid during the eighties, osbourne told an audience at Bournemouth that the current structure of Britain’s financial sector means that four big banks handle an estimated 75 percent of all bank accounts.

This makes it difficult for new

banks to enter into the fray, as larger banks are able to use their financial leverage to crowd out smaller ones, leaving newer institutions with little option but to amalgamate with their larger rivals in order to gain access to the system. osbourne asked, “Why is it that big banks can move their money around instantly, but when a small business wants to make a payment it takes days?”

He continued, “The system isn’t working for customers, so we will have to change it.” The current payments system has been subjected to increasing scrutiny since the biggest banks attempted to phase out the use of paper cheques, only to step when faced with a customer revolt. It is likely that the government will

explore the use of direct regulation of the payments system to protect the banks’ customers.

Reformers have long-advocated the transition to a highly automated payments system that all banks, regardless of size, would have to avail of. A system of this kind would enable customers to make quick payments and facilitate the changing of accounts. Such a centralized system could also help banks, such as the Royal Bank of Scotland, who suffered enormous losses after a major IT failure last summer.

While the length of time taken to switch current accounts is soon to be reduced from 30 days to 7, critics still point out that the length of time it takes is too long.

Dell to orchestrate $24bn buyout deal this week

By Bishoy aBdou Design Editor DEll FoUNDER Michael Dell has masterminded a $24.4 leveraged buyout of the computer assembly firm he founded almost 30 years ago, joining with Microsoft and Silver lake Partners in what is the largest take-private deal since the advent of the financial crisis in 2008.

If consented to by Shareholders, the investment group led by Michael Dell would pay $13.65 per share for all outstanding stock in Round Rock, Texas-based Dell, the world’s third-largest PC maker based on quantities shipped.

Silver lake Partners will contribute funds to the deal, Microsoft

will offer a loan of approximately $2bn and Mr will roll over his 15.7 percent share of the company, believed to be worth $3.8bn. MSD capital, another company Mr. Dell controls, will contribute additional cash to the enterprise.

The deal will be funded in large part by debt financing from Barclays, Credit Suisse, Bank of America and Royal Bank of Canada.

Dell shares rose just under 1 percent to $13.36 per share when trading reconvened earlier today. one of Dell’s main competitors, Hewlett-Packard, warned that Dell “faces a touch road ahead.”

HP said in a statement, “The company faces an extended period of uncertainty and transition that will be good for its customers.”

While Dell will continue to listen to competing offers for the company during the 45-day period in question, no other private equity firm is expected to step forward, largely because it would be difficult for them to raise funds for an all-out buyout with Mr. Dell’s stake.

This represents the most daring and, potentially costly, gamble of Mr. Dell’s career. While he has diversified his assets into real estate, timer and debt through MSD capital, his shareholdings in Dell represent a quarter of his $16bn worth.

Changing the company’s fortunes is not going to be an easy task.

He has already spent $13bn on various acquisitions since to diversify his holdings. A sanguine Mr. Dell said, “This transaction will open

up an exciting new chapter for Dell, our customers and team members.

We can deliver immediate value to stockhoders, while we continue the

execution of our long-term strategy and focus on delivering best-inclass solutions.' our customers as a private enterprise.”

7Th FeBruary 2013 issue 4 vOl i1

2 0.8%

Consumer Price Index

News & current affairs

The Bull 07.02.2013

14.6%

Unemployment rate

vital indicators

-0.7%

GDP percentage change

106.4%

National debt as a percentage of gdp

€3.2bn

B of p current account Surplus

Details UK Ministry of Defense announces of Match its latest round of cutbacks Fixing Released Europol, the EU’s law enforcement agency, announced on Monday that as many as 380 professional football matches across Europe have seen attempts to have their results fixed in the last 5 years, in many cases successfully. The investigation looked into 13 countries, and has concluded that a Singaporebased network was responsible for the match fixing attempts.

The investigation was nicknamed ‘Operation Veto’ and ran from July 2011 to January 2013.

Attempts to manipulate the results came from the bribing of match officials as well as players.

According to the Director of Europol, this bribing ‘formed part of a sophisticated organised crime operation’ which is believed to have earned the perpetrators around €8 million in gambling profits, and cost in the area of €2 million in payments to those involved. He went on to say that Europol believes up to 425 players, officials and criminals were involved. Experts in the area have claimed however that both the amount of money involved as well as the number of people “is just the tip of the iceberg.”

Of particular concern to those involved in football at the highest level is the prominence of the matches that are either known or thought to have been affected.

Matches Europol claim to have been fixed include “World Cup and European Championship qualification matches, two UEFA Champions’ League matches and several top-flight matches in European national leagues.”

Such findings have not come out of the blue, however. There have been cases in Bochum, Germany in 2009 where 14 people were sentenced to jail time, as well as the case of a Hungarian referee currently on trial for allegedly fixing a game between the Bolivian and Argentine junior teams. Both of these events are thought to have been orchestrated by the same Singaporean ‘cartel’.

Investigators will not name any conspirators as of yet, however in a related move Interpol have begun moves to arrest Dan Tan Seet Eng, who is a Singaporean financier thought by many to be the head of the cartel. Singapore has yet to agree to the extradition of Mr. Dan. The investigation continues.

The UK Ministry of Defence has announced a third round of army redundancies. This latest cut in staff levels is due to see between 5,000 and 5,500 layoffs. The announcement comes as part of an initiative to reduce the number of active servicemen by 20,000 to 82,000 by 2017 as the MoD is forced to contend with budgetary constraints enforced by the 2010 Strategic Defence and Security Review.

Speaking of the new round of cuts, UK defence secretary Philip Ham-

mond said, “The army is actively managing recruitment to reach the target numbers, but unfortunately redundancies are unavoidable due to the size of the defence deficit that this government inherited and the consequent scale of downsizing required in the army…We will have smaller armed forces but they will in future be properly equipped and well-funded, unlike before.”

Mr Hammond has however confirmed that the incoming cuts are not expected to impact ongoing op-

erations in Afghanistan, a concern which has been at the heart of the families of servicemen and women.

To compensate for the loss of regular soldiers, the UK Government had previously announced its intent to double reservist numbers to 30,000 by 2018, a programme that has caused divisions. This increase in the operational strength of the Territorial Army could prove to be a coy move on the part of the MoD, as reservists are increasingly being called on to join the line due to op-

erational demands. The UK shadow defence secretary Jim Murphy expressed concern surrounding the cuts, but admitted there was a logic behind them, saying, “there are real worries about the military impact of a loss of skills and capability at a time of increased threats and new global challenges.”

By Ed Teggin Contributing Writer

2012 Yields Worst Property Slump Since Records Began

›› The MoD is likely to see cutback of up to 5,500 personnel

CONTRIBUTORS Editor Cathal Ó Domhnalláin

online editor Ed Teggin

This publication claims no special rights or privileges.

Deputy Editor Sean Tong

Layout & DESIGN Bishoy Abdou

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

Features editor Reuben Whelan

Special thanks to Dave Kelleher 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.

Opinions Editor Gabriel Corcoran

2012 was the toughest year yet for the Irish Construction sector, with the fewest number of houses being built since records began. In 1970, the first year such things were recorded, 14,000 houses were built in this country, as compared to the mere 8,500 that were built last year, a 19% drop from 2011. 1970 had previously been the lowest ever year on record. This is according to figures released this week by the Construction Industry Federation.

These figures are particularly worrying as the majority of these were the completion of previously started estates, rather than the beginning of new projects. The Construction Industry Federation predicts 2013 will be even lower again.

The ESRI predicts that in order to meet future demand, Ireland needs to construct in the area of 15,00020,000 homes each year. However, with more and more people turning to renting instead of buying, the number of people currently renting having doubled in the last five years, it is unlikely we will see construction return to this level for some time.

2012 marked the sixth successive year of decline in terms of houses being built, following the end of the construction bubble in this country which saw all previous records smashed. The CIF claims that the main impediment to increased growth is the failure of the banks to provide enough credit, and if banks were to increase this it would likely have a strong stimulating effect on demand.

3

News & current affairs The Bull 07.02.2013

Smakraft AS announces EU Leaders’ plans for new hydro plants Budget

By Michelle Buckley Contributing Writer

Smakraft AS, majority-owned

by Norway’s biggest utility Statkraft AS, plans to build six hydropower plants this year at a cost of about 270 million kroner; this is roughly equivalent to $49 million. In 2010 Norway generated about 95 per cent of its required electricity from hydropower according to International Energy Agency statistics.

These plants will generate electricity by forcing water through a series of turbines and will have a combined capacity of 25 megawatts, Rein Husebo, managing director of Bergen-based Smakraft, said by email. They’ll produce 65 gigawatthours of power a year and be financed through Smakraft’s owners, he said.

The plan is to build six of the smaller variety of hydropower facilities, as the common rule of thumb is that the smaller hydropower installations are generally considered more environmentally friendly as

building costs and procedures for big dams and water reservoirs for storage isn’t required.

Some weeks ago it was stated that small hydro potential in Norway of an estimated 25 terawatthours has “considerable” interest from investors, Husebo said, whose company operates 34 smaller hydropower plants. Realistically, 4 to 5 terawatt-hours could be built before 2020, he said.

While this project of the enhancement of the renewable energy sector in Norway has been met with some interest by potential investors, it has also won the plaudits of many of the environmentally conscious elements of both Norwegian and European society and government circles.

This notion of a greener future for Norway’s energy industry finds something in common with that of its Scandinavian neighbour, Sweden. In 2012 Norway and Sweden started a common green certificate market to increase the amount of renewable sources used in the pro-

Struggle

By Dave Kelleher Contributing Writer

duction of energy. Electricity suppliers must get a certain portion of power from low-carbon sources or by purchasing green certificates that have a tradable value.

Allowing renewable certificates

to trade freely between the countries helps them to meet clean power targets at a lower cost, thus increasing the likelihood that the certificate program is to be viable.

Libel claims to push BP’s leakage cost to $90bn BP is facing demands for an additional $34bn from US states and local governments as a result of the Deepwater Horizon disaster, a figure that could lead to enormous upward revisions of the potential cost.

The group stated on Tuesday that Alabama, Mississippi and Louisiana all made claims against the company, including economic and property damage as a result of the calamity.

The recently released claims imply that the total bill for the disaster could rise to more than $90bn for the British companies if the maximum damages and penalties are bequeathed on them. Thus far, BP has made $42bn available for claims and damages resulting from the spill.

BP has, however, taken issue with the methods used to calculate the total cost to the firm, calling them “seriously flawed,” and the amounts demanded “substantially overstated.”

Since the disaster, BP has divested nearly $38bn of assets - mainly to cover spill-related costs, and partially to realign its focus on expanding its oil exploration portfolio.

EU leaders have until a summit meeting on Thursday in Brussels to finalise a plan for a long-term budget up to 2020. The budget will cover around €1 trillion in spending over seven years, 2014-2020, and has been tabled by the current President of the European Council, Herman Van Rompuy. This comes after attempts to agree a budget deal ended in failure last November.

Agreement in this area is difficult due to the need for all 27 member states to agree. One of the key areas of concern is demands from the UK for a further €30 billion in reductions, which have previously been blocked by both France and Italy.

Both France and Italy are calling for additional funding for agricultural projects before they agree to the UK’s position. The current proposal put forward by Van Rompuy covers a total of €973 billion.

Officials must remain optimistic about the likelihood for an agreement; another failure would be a serious blow to confidence within the European economy, as well as serving as a delay for many of the EU’s programmes for 2014 which cannot be authorised without a firm budget in place.

Many politicians however will see such discussions as an unhelpful distraction, with both Germany and Italy holding elections in the coming weeks. Angela Merkel’s staff have stepped up their effort, with one member claiming this week that, “if we don’t get a deal this time then it will be many, many months before we can come back to it, and that will have real implications.”

Additional problems may arise ver Britain’s demands for additional cuts to the EU budget.

French Premier, Francois Hollande admonished Mr. Cameron for his stance, stating, “I have been told a solution cannot happen with Britain. But why should one country decide for 26 others? Indeed we could have agreed at the last European summit.” He continued, “In order to let people say that this failure was a victory, we let it happen.”

He went on to target Britain’s stance later on in his press conference, mocking Cameron for seeking both greater cuts and larger rebates to individual states.

The budget could also struggle in the European Parliament, where it must be passed by MEPs. Martin Schulz, the president of the Parliament, has stated that the more the budget is reduced, the more likely MEPs are to vote against it.

4

Opinion

The Bull 07.02.2013

FRAUDULENT AND UNLAWFUL PROMISES

Marc Morgan inveighs against the dishonest and illegal promises of the Irish government

I

n March the Irish state is under contract to pay promissory notes (simply a ‘promise to pay’) to the value of €3.1 billion to foreign financial institutions. This is a huge sum of money. To put it into perspective, last December the Irish parliament passed a severe ‘austerity’ budget in order to save €3.5 billion this year. For months the government has tried to renegotiate the terms of the repayments, but without any success. The government’s argument is that the terms of the notes, as they stand, are unsustainable for a country that is receiving external financial aid. The government is currently relying on the proposal of lengthening the repayment period, which would avail of a lower interest rate. While true, this proposal is inadequate because it masks the fundamental truth of the matter.

The argument that should be used

by Irish citizens and by our current representatives (if that is who they are) is not that these financial ‘promises’ are unsustainable but that they are in fact fraudulent and unlawful.

Ironically, we are told that the notes themselves form a legal obli-

gation. On paper this is true. When you agree to pay for something in writing you are legally bound by that agreement. It was a Fianna Fáil government in 2010 who signed a 10 year, €31 billion contract on behalf of every citizen to guarantee the self incurred debts of Anglo Irish Bank and Irish Nationwide - now merged as the Irish Bank Resolution Corporation (IRBC) – who had become insolvent after the last financial crisis. This contract means that every month of March for 10 years, Irish taxpayers must pay a principle of €3.1 billion along with interest of €1.6 billion to the private credi-

“THe proposal is inadequate because it masks the fundamental truth” tors of two failed institutions. The implications of these payments for the country’s budgetary arithme-

tic are mystifying. The state must borrow the funds if only to meet the interest payments on the notes.

Yet at the same time it must follow through a severe cost cutting program requested by the troika and the recently ratified European Fiscal Treaty.

These ludicrous public to private transfers, we are constantly told, are intended to honour an efficient market allocation of financial contracts – a “complex network,” according to the governor of the Irish Central Bank. But allocative efficiency becomes void of all meaning if the allocation to those willing to pay is backed by fictitious money.

Indeed, the Central Bank played its part in this financial coup d’état, as it lent the IRBC the funds it required to pay back foreign bondholders.

Under article 123 of the Treaty of the European Union, a Central Bank is absolutely forbidden to lend to an insolvent institution, like the two that comprise the IRBC. So Anglo and Irish Nationwide had to be made look solvent, which is where the government-backed promissory notes came into play – they made both institutions look solvent as they represented assets on the bal-

ance sheet. This point was brought into the public realm by barrister Vincent Martin in an article in the Irish Times on December 13, 2012.

In reality both Anglo and Irish Nationwide were far from solvent. So the scheme was a fraud. [It would be interesting to find out who provided

“The irish government never voted to approve the promissory notes” the advisory role to the government during this time. It is known that Goldman Sachs was hired to advise NAMA, the agency managing Anglo Irish Bank’s debts on behalf of the government. Incidentally, Goldman Sachs is also a holder of Anglo bonds…]

The contract signed by the previous government was not only a fraud, it clearly bypassed standard legal procedures. This latter point

was also highlighted by barrister Martin in his article. A paying party to a contract must have agreed to its terms, otherwise the contract is not binding to the party. Irish taxpayers (who figure as the paying party in this scheme) were never consulted on the terms of this contract prior to its signature. Critically, the Irish parliament (which decides on public spending and lawmaking on behalf of the people) never voted to approve the issue of the promissory notes or any payments honoured by them. It was a contract signed in ‘secret’ by the minister for finance and his interested advisors, thus in full breach of the Constitution.

This unlawful state of affairs has recently been brought to the High Court by businessman David Hall and a group of lawyers, of which Vincent Martin is one, representing New Beginning, an advocacy group for fair solutions to Ireland’s overindebtedness. Three TDs have also been to the High Court to support the group’s challenge - independent TDs Shane Ross and Stephen Donnelly and People Before Profit TD Joan Collins. Their aim is to prevent the state making the annual payments of the notes. The Court’s decision is still pending. But it can only be hoped that at least one public institution will honour this country’s democratic and legal systems, as the deadline for these fraudulent payments comes nearer.

If not it will be up to the paying party to the contract to engage in financial disobedience.

5

Features

The Bull 07.02.2013

Women’s role in the financial world and other key themes at Davos 2013 Eibhlin Crowley reports on the key issues that were discussed at the 2013 World Economic Forum

T

he Davos summit has wrapped up for 2013 and, as the 5,000 international finance leaders leave Switzerland with mixed emotions and premonitions for the future, we recap a number of this year’s key themes with particular focus on women’s role in economic decision making and those sure to have an impact on the financial horizon in the coming months.

Women in Economic Decision Making in the Public and Private Sector “Dare the difference and deliver,” stated Christine Lagarde, the Managing Director of the IMF and the keynote speaker at this year’s WEF plenary session on women.

The topic has been to the forefront of both academic research and discussion in recent years, as greater efforts have been made to increase the role of women in the labour force. The highly publicized findings of the WEF Global Gender Gap Report conspicuously highlighted both a strong correlation between improving economic competitiveness and the closing of the gender gap.

Despite recognizing a series of improvements in the levels of women serving on boards and serving in top economic positions, the panel was quick to point out that progress on this front remains sluggish.

This led to a discussion of possible organizational changes that could accelerate this advancement in gender diversity: Viviane Reding, a Luxembourg politician currently serving as vice-president and European Commissioner for Justice,

Fundamental Rights and Citizenship, spoke of new legislation that will set a target of 40% for women as non-executive directors on the boards of European corporations by 2020. This would expand on current companies’ promises to increase female representation on their boards. This trend has been typified

by Vodafone, who have set a target of having a 25 per cent level female representation on their Board by 2015. Ms. Redding acknowledged her preference not to introduce compulsory quotas, but that the commission has been left with little or no choice to do so. “We first asked companies to induct women directors themselves, but there was no improvement.”

Anecdotally, a number of the panelists shared their own personal experiences of stereotyping and the gender-bias they faced on their path to leadership and corporate success – an issue, they noted, that is underrecognized, under-discussed and often under-addressed. The high profile women each encouraged those present to address these barriers to ensure that diversity will remain a bulwark of their corporations’ success.

Thus it was a recurrent theme that increased gender diversity could help corporations to improve their competitiveness and spur innovation; it is a critical agenda factor for all stakeholders in the near future and in their interests to do so.

Currency Wars Although Angela Merkel remained unconcerned by the Bank of Japan’s recent doubling of its infla-

tion target to 2% and the expansion of its money supply via quantitative easing, some investors have expressed their fears that the currency markets are set for turmoil. The move is sure to drive down the yen and increase Japan’s competitiveness, but may lead to some serious financial issues for the Eurozone.

Billionaire investor and market guru George Soros outlined that while currencies have been incredibly stable for the past few years, the prospect of volatility remains quite high.

The move has been compared to one taken in recent years by the US central bank, the Federal Reserve, to stimulate America’s ailing economy.

The International Monetary Fund’s Christine Lagarde spoke on Saturday about the topic saying, “We are very interested by those policies. We certainly would like them to be complemented -- just as in the United States -- with a midterm plan that includes how the debt will be reduced going forward.”

Currency volatility in 2013 is a key area to watch and how it impacts national economies will determine the global economic outlook for 2013.

The British Perspective In tandem with the widespread criticism of the UK’s referendum to leave the EU, the pugnacious British Prime Minister David Cameron caused a stir at the Davos conference in an impassioned speech denouncing the European Union, saying the bloc was being “outcompeted, out-invested and out-innovated” by its global competitors.

Angela Merkel surprised delegates by echoing the British prime minister’s sentiments stating, “EU member states can only grow when they produce goods that can be sold on the international market place.”

Ethics was a theme that remained prevalent throughout the conference and Mr. Cameron highlighted it in his repertoire. The Prime Minister promised that a key feature of Britain’s G8 presidency would be improving transparency and furthering controls on corporate tax evaders. However, fears have arisen over Mr. Cameron’s stringent tax threats to multinationals, potentially contaminating Britain’s attractiveness to international firms.

Britain needs to remain an attractive location for industry such as financial services or lose out to global competition and succumb to capital flight.

Reemergence of Manufacturing Economists had been contrasting the de-industrialisation as a badge of economic progress at this year’s conference with a notable emphasis on the renewal of manufacturing. The resumption of the car manufacturing industry in particular has proven profitable in countries such as the UK, causing speakers to debate its current value and future role in driving economic growth.

This view was reflected by the incumbent mayor of London, Boris Johnson, who questioned why a partial re-industrialization of the British economy should not take place.

Unemployment Workers’ rights campaigners expressed dismay at the lack of action governments have taken to combat growing levels of unemployment and why this issue has not been tackled adequately.

Guy Ryder, the secretary-general of the International Labor Organization, stressed that these high levels of unemployment, among the youth in particular, would remain a persistent threat to social stability and quash their future prospects of upward social mobility.

Russia As expected, Russian President Vladimir Putin’s regime was discussed at great length throughout the Forum, with 78% of one poll voting that the most important issue facing the country was the tackling of corruption and the improvement of its quality of governance, despite claims from its delegates that this problem is already being tackled.

The concerns of the global business community were also expressed in a special World Economic Forum production called Scenarios for the Russian Federation, which warned that falling oil prices could lead to “a crisis in Russia’s economic foundations that threatens the country’s social stability.”

In conclusion, many people question the value of a global summit like Davos, but clearly it gives opportunity for discussion of key economic issues and sets an agenda for all businesses to consider in their outlook processes.

6

MARKETS AND FINANCE

The Bull 07.02.2013

Italian bank shakes Eurozone

The winter sun shines over the cold Piazza dei Salimbeni, in the historical center of Siena, in the heart of Tuscany. At the back of the square, few tourists suspect that behind the thick walls of the Palazzo Salimbeni, home to the oldest surviving bank in the world, the Monte dei Paschi is gasping for air. The bank applied last week for a €3.9bn bailout from the Italian government, following a week of disturbing revelations concerning its trading activities.

In what resembles a Dan Brown intrigue, a 2009 document was unveiled to regulators revealing derivative deals that have accumu-

lated unwieldy losses for the bank over the past two years. These deals, codenamed Alexandria, involved proprietary trading schemes which proved highly unprofitable; the accumulated losses to date sum to a looming €720m or nearly three quarters of its 2010 net profits.

According to Reuters, insiders have cited a team, known as the “five percent gang” and headed by the ex-finance department chief, as the instigators of the deceitful transactions. The “five percent” insignia refers to the 5% fee that the team would charge for any transaction that went through their offices.

The previous years’ accounts

had been completed without the information contained in the document hidden in a safe in the bank’s 5 century-old head office. The safe had not been revealed to police and regulators in 2007, when an investigation was being carried out about the bank’s acquisition of Antonveneta, another Italian bank. Despite repeated warning signals from internal auditors, the Alexandria deals, which involved other important banks such as Deutsche Bank, the Japanese Nomura bank and JP Morgan, had been handedly tucked away from reporting authorities.

The credit institution is definitely no relic of history: Monte dei Pas-

›› Could Monte Dei Paschi soon become a relic of the past?

chi is Italy’s third biggest bank, with 4.5 million customers, 33,000 employees and over 2,000 branches.

More strikingly, it manages €241bn in assets – an amount equivalent to the Irish annual output – approximately half of which is in the form of loans to customers. Its investment bank subsidiary, MPS Finance, has operations across the main financial hubs, including New York and London. It is undoubtedly too big to fail.

The survival of the bank is crucial for the health of the world’s financial ecosystem. Luckily, it seems that Mario Draghi, the Italian central bank and the government in Rome have understood the lethal implications of a bankruptcy for the entire financial system. The two other Italian banks, Unicredit and Intesa San Paolo, would both tumble in the aftermath. A fire sale of the bank’s safest, and thus most valuable, assets – mostly Italian government bonds – would raise interest rates on the sovereign bond market, and risk pushing Italy’s borrowing costs above unsustainable levels.

This would annihilate the ECB’s latest efforts to stabilize the Eurozone. The entire money market would rapidly dry up. Banks would be wary of lending to each other, especially since several large financial institutions depend directly or indirectly on the Monte dei Paschi: JPMorgan and AXA both retain minority stakes in the bank and would have to write off their investments altogether. French bank BNP Paribas itself owns Italy’s fourth largest

bank, which too would suffer dramatically from the bankruptcy of Monte dei Paschi.

The bank’s market capitalization has already fallen by 91% since 2007. But beyond the economic repercussions of the Paschigate, in-

“The survival of the banks is crucial to the financial ecosystem” vestigations may reveal embarrassing truths about the ruling political class. Italy’s bank lobby director as well as the bank’s chief have already resigned. At the time of the dealings, Mario Draghi, then governor of the Italian central bank, had investigative power to potentially uncover the financial constructions.

Archives show that Draghi had been informed of transparency issues from within the Siena bank, but refused to intensify scrutiny.

The acquisition of Palazzo Salimbeni, originally a fort, by the Monte dei Paschi, was intended to signal to its clients the security the institution offered. There is a bitter sentiment of paradox that the demise of the world’s oldest bank may one day be caused by what lay in its own hidden safes.

By David Schenck

13-Unlucky for some?

James Talbot makes bold and daring predictions for 2013 The forecast for 2013 looks dark, dull and dreary, but will light shine in some places where you least expect?

The newly re-elected president of the United States, Barack Obama, has enough to deal with vis-à-vis domestic issues. Solving domestic issues may be Obama’s chief objective, but a bigger challenge is that it’s soon likely to play second-fiddle to China, an economy that recorded an 8.6 percent growth rate last year.

Xi Jinping and a swathe of cash-rich Chinese firms will be looking to get a foot in the door of America by securing big-money contracts and bidding for large American companies.

America must also be ready for China’s rise as a superpower.

It won’t happen this year, but unveiling before our eyes is a clear indication that China’s rise is coming more to the fore, and the right choices will have to be made in order to influence this ship to sail in the right direction.

Francois Hollande will have to live the nightmare of grappling with

3 million unemployed people in France and try to steer the country away from its current situation of

“America must also be ready for china’s rise as a superpower” feeble growth and a crippling government bureaucracy. If you think 3 million French people unemployed was bad, try 12 million in Spain. You can rest assured that street protests in Spain will be splashed on our newspapers and televisions in 2013.

Spain and Portugal’s economies will shrink for the 4th consecutive year in 2013.

Britain’s Conservative-Liberal Democrat coalition government will come to blows with each other over issues such as welfare and the reform of the National Health Ser-

vice, not to mention implications for London and the financial services in the European market. Further debate about Britain’s secession from the EU will be blown out of proportion. This idea will not come to play until 2017, on the basis that Cameron is still prime minister.

With at least one election on the horizon in the next few years, Britain can return to this matter at a later date and focus more on the issues currently at hand.

We will see Croatia join our club on 1st July 2013. It has taken over 12 years for this to come to fruition.

Croatia will modernise itself within the boundaries of the EU, evident by its Yugoslav war-crimes tribunal currently underway. The EU will also benefit Croatia with leverage when dealing with its neighbours Serbia and Bosnia. Don’t be surprised if Croatia becomes the most popular holiday destination for Irish people in the foreseeable future. Much is to be seen in this beautiful country.

Also out of the doldrums, Brazil, India and even Mongolia will be

›› A relationship that will define the coming years emerging. India, Brazil and Russia are constantly on a small incline and this will continue to be the case this year. Mongolia, conversely, will experience economic growth of up to 18% in 2013 fuelled by the giant Oyu Tolgoi copper and gold mine. It has the potential to become a major player in global commodity markets with its remarkable mining industry and we will see evidence of this in 2013.

2013 may appear to be much more negative than previous years, but realistically, it’s just another step on the ladder. As always, the problems evidently exist and we need to determine and support those who we deem best to lead us through a successful 2013. The adage “easier said than done” comes to mind. Hopefully something a little more creative breaches the mind of our leaders.

7

MARKETS AND FINANCE The Bull 07.02.2013

LTROs provide boost to European banks Clíona Nic Dhomhnaill delineates the positive effects of the ECB’s LTROs on the Eurozone’s financial sector The Euro area received another boost last week when the European Central Bank announced that Eurozone banks have elected to repay over one third of the longer-term refinancing operations (LTROs) issued to them by the ECB in December 2011 ahead of schedule.

Although analysts had anticipated a portion of the funds would

“the ltros provided banks with the opportunity to deleverage” be repaid early, the €137bn figure exceeded expectations and spurred on markets, helping the euro to 14-month highs against the dollar.

The ECB issued its first tranche of LTROs with a maturity of three years at the ECB’s main policy rate, which currently stands at 0.75%, in December 2011, with a €489bn uptake. Though they are not due to be paid until January 2015, banks were given the option of making an early repayment in January 2013. A second issuance took place in February 2012, whereby a further €530bn of funding was provided, maturing in February 2015. The ECB followed up its initial announcement with a second one indicating that €3.4bn of the second tranche would be repaid early. Thankfully, this lower figure failed to temper the market’s optimism.

The primary function of the ECB’s open market operations is

to provide liquidity to banks in the euro area. The bank decided to offer longer-term maturity funds, as opposed to the standard one-week maturity on its main refinancing operations, in an attempt to restore liquidity to the euro area banking system and reassure markets of the long-term viability of European banks. The measure was undertaken when Europe was deep in the midst of its sovereign debt crisis, when lending to firms and households was at a minimum and banks were struggling to source funding.

The LTROs provided banks with an opportunity to gradually deleverage under severe pressure from market forces to reduce their risk exposure and avoid bankruptcy.

The repayment announcement was preceded by the publication of an ECB paper that attempted to quantify the impact of LTROs on the euro area economy. The LTROs are viewed as a ‘non-standard monetary policy shock’ that comple-

“THe Ltros have also caused a decline in the EURIBOR-ois spread” ment standard monetary policy as determined by the ECB’s interest rate. The paper finds that they have had a significant impact; firstly by generating a rise in gross domestic product, predicted to be as high as

0.7-0.8 percentage points, followed by a smaller increase in inflation.

The LTROs have also caused a decline in the EURIBOR-OIS spread, which indicates the risk level of the interbank lending market, although the impact is moderate in comparison to that on GDP and lending.

The ECB paper confirms that the LTROs have succeeded in their primary aims of increasing lending within the euro area, stimulating output, and reducing the funding risk for banks. They have alleviated the pressure on banks to begin deleveraging and increased capital buffers to avoid balance sheet crises as their assets continued to decline in value.

Of course, a number of other factors have played a key role in the improvement of the euro area’s outlook, not least the outright monetary transactions announced by

ECB President Mario Draghi last September - the ECB’s unlimited bond-buying programme to reduce the risk of sovereign default. The LTROs have made a less dramatic, yet significant contribution to the Eurozone’s recovery. The early repayment has provided further evidence of the improved health of the Eurozone’s banks, with fears of a euro breakup largely abated at this point.

The ECB’s problems are far from over. There are also downsides to the early repayment of the LTROs, as banks that are unable to repay the funds early now face the risk of being stigmatised. Commentators have raised fears of the emergence of a two-tier banking system in Europe, whereby weaker banks, especially those in the periphery, could now face funding difficulties.

Although the ECB has declined to

identify which banks have made early repayments, individual banks such as Commerzbank have made their own announcements in an attempt to assure markets of their stability and creditworthiness.

There is also the issue of the monetary contraction that will now take place. Such a large withdrawal of funds from the Eurozone’s economy may cause a tightening of lending at a time when the economy is still fragile, and peripheral nations could be particularly sensitive to a potential rise in lending rates.

If the ECB recognises these risks now and takes steps to attenuate them, it can ensure that its longerterm refinancing operations leave a successful legacy. The “positive contagion” in the euro area predicted by Mario Draghi could become a reality.

Getting out while the going’s good Little over a month ago the FT began reporting on the possibility of a substantial bubble in the bond market. Most reporters pointed to common reasons of the US experiencing extreme levels of its third round of Fed quantitative easing and central banks in the EU holding interest rates at record lows. Prices of bonds have seemingly inflated well beyond reasonable values limits (bond prices having a negative relationship with interest rates).

Yet most of the writers dismissed concerns for the short to medium term forecasting interest rates remaining unchanged/low for the next 1-2 years at the very least. But with 2013 renewed investor confidence has stabilized markets. January has seen new records across the board with the S&P 500 tipping 1,500 on an all-time high with fur-

ther growth still expected, the Wall Street Journal speculating 1,600 within reach before the year is out and a slowly improving EU econo-

›› George Soros

my with the negotiation of the fiscal cliff/debt ceiling seemed to point to signs of the possibility of new economic growth for 2013.

The issue now is that, because bond yields have dropped so low, investors looking for good returns have turned to riskier assets with the yield on corporate junk rated bonds falling as low as 6% in early January. To give perspective, corporate investors in junk bonds at a high risk of default are receiving lower returns for their money than a Spanish 10 year bond investor would have for much of 2012. In other words, the market is assessing the likeliehood of US junk rated corporate default as similar, if not less likely, to that of Spain. Investors are seemingly forgetting that Spain has had the full support of the ECB and the option of the newly established

OMT (Outright Monetary Transactions) program should they so need.

“it won’t be long before interest rates begin to rise” This “dash for trash” has further deepened the consequences of a bubble, should it arise. A bear market in all long term debt issued in the past 3 years is almost a given (long term being the most susceptible to interest rate fluctuations).

As economic outlooks stabilize, it won’t be long before interest rates begin to rise and the possibility of

soaring yields will be a real threat to investment portfolios. Billionaire financier George Soros recently declared his expectancy that “Once the [US] economy gets going, then interest rates are going to take a big leap.” Bonds have been a traditional stronghold for pension funds, providing less volatility than equities and garnering significant positions in corporate and government debt.

But as the CBOE Vix (A general index of volatility levels) reaches its lowest level since 2007, equities propose a more acceptable investment and it may be time for funds to begin to bias their portfolios away from the potential bears in the bond markets. 2013, it seems, will be a year of substantial capital outflow from bond markets.

By Reuben Whelan

8

economy

The Bull 07.02.2013

The promissory notes jig goes on Brian Devitt laments the Irish government’s response to the issuance of the much maligned ‘Promissory Notes Hindsight is a cruel critic, but there’s little doubt remaining that the 2010 decision of the Irish Government to guarantee depositors, bondholders and other creditors of failed banks will be remembered as one of the worst economic decisions made by any government in the history of the state. While the causes of the problem have been debated to death, it’s hard not to think that the Government’s response to the crisis has been, well, typically Irish: delay the problem for as long as possible so as to avoid making any difficult decisions whatsoever.

The infamous ‘promissory notes’ (Government IOUs) which IBRC, an asset recovery bank, use as collateral to borrow from the Irish Central Bank, have left the state a liability of €31 billion, about 14% of Irish Gross Domestic Product. To establish perspective, it’s useful to take a step back and reflect on how this messy

process works in practice.

The Irish Government pays IBRC €3.1 billion in notes every year on March 31st. IBRC then uses this as collateral to borrow funds from the Central Bank’s ‘Emergency Liquidity Assistance’ facility, which IBRC uses to pay its deposi-

“the point is that this promise is unaffordable and always was” tors, bondholders etc. However, in order to get past the complex legal framework, these promissory notes had to be defined as a security by the

ECB, so they had to carry a coupon.

This was originally 5% but since the government took interest holidays in 2011 and 2012 (more kicking the can down the road) this is now over 8%. Now IBRC borrows from the ELA at 3%, so yes, it makes a margin of 5% on money it doesn’t even have.

Summing the interest and capital payments, the state has a financial liability of about €47.4 billion, almost 4 times what the Government spent on healthcare last year, and about 6 times what it spent on education. So it comes as no surprise that a large amount of fuss has been kicked up by the Irish people over these notes.

The point is that this promise is simply unaffordable and always was. It was merely a postponement of the problem, rather than a realistic solution to it.

To make matters worse, last week saw the beginning of a very interesting case in Dublin’s High Court between businessman David Hall and the Irish State. Mr. Hall noticed that the promissory notes were never voted on in the Daíl: hence, Brian

›› Former PD leader Michael McDowell was part of the defence team Lenihan never had the authority to make such expenditure. Good point you might say. Well, the expensive defence team (paid for by Irish taxpayers) including former Tánaiste Michael McDowell, have swatted him away by pointing out that, since he is not a member of the Oireachtas, he cannot challenge the decision as an ordinary citizen.

You can’t help but think that it

was all a tall tale, a nice way of pushing back the problems a sudden default would bring. The truth is that any renegotiation of the interest rate, term or principal of the notes is a default; don’t be fooled. There can be no doubt whatsoever that any successful renegotiation this year will be followed by many more “renegotiations” over the next 20 years.

Obama’s Platinum Coin Option With the near swan dive off the fiscal cliff averted, the foundations of the American economy can be seen as shaky at best. As a result of this, it was warmly welcomed when Congress quickly implemented a short-term increase of the national debt-ceiling to avoid the vicious spending cuts and punitive tax increases that otherwise would have ocurred on January 1.

What was truly alarming though, was the increase in the volume of calls by the liberal blogosphere to exploit an obscure law that would have allowed the Obama administration to mint a trillion dollar coin.

Ordinarily, the Treasury Department is not allowed to just print money if it feels like it. It must defer to the Federal Reserve’s control of the money supply. The Fed then purchases coins from the Treasury to meet demands from commercial banks, and pays for them by printing money that it then deposits in the Treasury’s accounts at the Fed. But there’s a loophole - unlike banknotes, which are liabilities of the Fed and thus part of the monetary base, coins are the liabilities of the Treasury. What is even more bizarre is that under an Act of Congress the Treasury Secretary has full discretion in the creation of coins and its specifications, including its denomination.

The “Banana Republic” plan was an ill-conceived plan; rather than going to the negotiation table over the debt-ceiling, Obama would simply bypass Congress by minting a

trillion dollar coin, providing all the spending room the government needed for the coming year.

Fortunately, both t h e

White House and spokesman for the Treasury, Anthony Coley, shot down the idea:

“Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the

production of platinum coins for the purpose of avoiding an increase in the debt limit.”

It is important to stress why this decision was fortunate. Normally, the Fed purchases bonds by choice to carry out monetary policy. Being forced to buy the one trillion dollar coin would have been a textbook case of monetizing the debt and a gross violation of the Fed’s independence, which would have fueled accusations that it had subordinated monetary policy to fiscal policy.

Furthermore, there’s a good reason that the treasury is forbidden to pay America’s debt: inflation. Many economies have been ruined when profligate governments turned to printing money to meet the myopic demands of their national economies. What really would have suffered the most would have been the image of the Obama Administration. In a nation that considers itself the frontier of Democracy, the notion of a President bypassing Congress quite obviously does not bode well among the wider public.

Fortunately for the economy, the Republicans’ appetite for a showdown had diminished following the ordeal of the fiscal cliff. Coupled with the fact that they still have at least two other points of leverage to pursue their agendas, the ‘sequester’ and the continuing resolutions of funds that are set to expire in April, Congress didn’t stutter on passing the debt-ceiling. Of course if either of these events were to come into being, the consequences would be dire.

By Graham Reynolds

9

Economy

The Bull 07.02.2013

Signs of recovery for Ireland’s waning property market

Recent property market data has raised hopes that Ireland’s sixyear old housing slump is nearing its end. According to the Central Statistics Office (CSO), the annual decline in housing prices slowed to 4.5 per cent at the end of 2012, compared to 16.7 per cent for the year. Moreover, prices registered a monthly rise of 1.1 per cent in November, which was only partially offset in December, when prices slipped by 0.5 per cent. Irish house

“it is not unusual for property prices to ‘overshoot’ during a bust” prices have now fallen by almost half from their 2007 peak.

Furthermore, the latest property market report from The Economist suggests that house prices in Ireland are slightly below fair value.

The report uses two measures to judge whether a country’s hous-

ing market is under or overvalued.

These are the ratio of house prices to rent and the ratio of house prices to income. On both these metrics Ireland’s housing market is marginally undervalued. By contrast, Spain’s housing market still has a long way to fall before it reaches fair value.

Nevertheless, it is not unusual for property prices to ‘overshoot’ during a bust. In Japan, for example, prices continue to fall more than twenty years after the bursting of its ‘bubble economy’. This, however, may have as much to do with a shrinking population as with a weak economy. Despite emigration, Ireland’s population continues to grow, and this should buoy the Irish housing market.

Activity returned to Ireland’s lacklusture property market in 2012. In December, the level of transactions was at its highest in three years. For the year as a whole, the level of transactions surged by 34 per cent. Undoubtedly, activity would be much greater were it not for the moribund nature of our banking system.

Unless the banks begin to lend to consumers, this recovery in activity may prove to be unsustainable. Estate agents estimate that 40

›› Opportunity or peril? per cent of all transactions in 2012 were done entirely through cash.

Mortgage approvals in 2012 were at their lowest since 1972. There was a significant upturn, however, in the final quarter of the year. Mortgage approvals in November soared by almost half compared with a year earlier. If this trend is maintained into 2013 a recovery may be imminent.

Even if a recovery does materialise, it will be unevenly spread across the country. The balance between supply and demand is starting to even out in our cities, especially Dublin, while in rural areas the market continues to be massively oversupplied, a fact noted by the ratings agency Fitch in its recent analysis.

This two-speed revival is borne

out in the data. According to daft.ie the number of rental properties in Dublin has plunged by 70 per cent since 2009. As a result, the number of people renting there is rising strongly. With the exception of Galway city, rents in the rest of the country continue to ebb. The same pattern can be seen in changes in house prices. While in December 2012 house prices in Dublin were down 2.5 per cent from a year earlier, prices excluding Dublin tumbled 6.1 per cent.

In the above mentioned report, Fitch cited rising arrears as one of the main challenges facing the market in 2013. In contrast to the US, where there has been an epidemic of repossessions since the onset of the crisis, they have remained at an extremely low level in Ireland.

This may have artificially propped up prices here. Arrears are continuing to rise, perhaps in response to incoming personal insolvency legislation. This is making the banks reluctant to lend.

Nothing dramatic is likely to happen to the Irish property market in 2013. Those expecting a return to the boom are likely to be disappointed. Indeed, taking a long term view, property markets look decidedly boring. In 2007, for instance, the price of houses in real terms along Amsterdam’s Herengracht canal approached their alltime high, reached in the year 1736.

Their recovery took 271 years; why shouldn’t ours take as long?

By James Prendergast

The robust costs of obesity

As obesity rate increases, Dave Kelleher warns of the consequences of leaving the problem unaddressed

It’s that time of year again, with New Year’s resolutions still (reasonably) fresh on people’s minds. For decades, resolutions about getting healthier and losing weight have dominated the beginning of every

“In terms of healthcare, the economic costs are staggering” calendar year, but recently things have changed. According to a survey of New Year’s resolutions made at the beginning of 2013, 31% of people listed ‘Saving more money’ as their resolution, while the second highest was ‘Get out of debt’, with 22%. ‘Get fit/lose weight’ was knocked into third, with just 18% of respondents stating this was their most important resolution for the year ahead.

It’s becoming increasingly clear

that for many, these should not be mutually exclusive ideas. With our waistlines expanding and our diets deteriorating, there is an ever increasing economic cost to be paid, for the state as well as for the individual.

We’ve all heard the warnings about what effects gaining weight can have on our lives and our health, but far less often do we hear about the effects it will have on our wallets. But as obesity concerns increase with each generation, it is a reality we are all going to have to start paying much closer attention to.

In Ireland, obesity is believed to cost the state more than €1.1 billion each year, with €400 million of that on health care costs, making up nearly 3% of the state’s total healthcare expenditure. The rest, €730 million, comes from loss of productivity and absenteeism. This is a figure which affects obese people rather than just the overweight, as obese people are significantly more likely to miss work, or to perform worse in work, than their lighter

counterparts.

But it is to the United States we must turn to get an idea of just how costly those excess pounds can be.

In the US, studies into this area are far more detailed and everything is done on a bigger scale. A whopping 34% of Americans are now classed

›› The obesity problem

as obese, with a further 6% falling into the ‘morbidly’ obese category, a category we rarely see used on this side of the Atlantic. Only 26% of Americans are believed to be of normal, or less than normal, weight.

It has been calculated that if all Americans were normal weight,

they would require 938 Million gallons of gasoline less each year to get them around. That’s a $4 billion saving right there.

In terms of healthcare, the numbers are even more staggering. The most recent study states that as a whole the US incurs $190 billion a year in additional medical costs due to obesity, which makes up more than 20% of total US healthcare expenditure. This fails to take into account costs associated with loss of productivity, which are not as clear in America but are believed to be in the area of $66 billion.

The concern for Ireland and many other European countries is that while our figures are not yet similar to Americas, they are similar to those of America ten or twenty years ago. All figures currently point to Ireland getting bigger over the next few decades, which will undoubtedly put pressure on an already strained health service. It is now up to policymakers to see the potential effects of the obesity epidemic on their economies, before the damage becomes irreparable.

10

features - special report

The Bull 07.02.2013

USI HACKS WITHOUT A PLAN

Failed Plan, Failed vision, Failed Organisation

USI

Gary Finnerty

outlines the primary shortcomings of the USI; how their current position is unsustainable and how a more constructive organisation can be achieved

34

Number of third-level institutions affiliated with the USI

T

he core issue with the approach taken

by USI on the issue of third level funding is a lack of focus on a primary objective.

The generally accepted principal goal in the current environment is to ensure students can continue to go to college regardless of their family’s financial circumstances. While there can be justified criticism from the USI of the circumstances resulting in the state the economy and the state of the government finances, the union has a responsibility to fulfil its duty to students in ensuring access to third-level is an option to all and as such, pragmatism is essential in achieving the ideal of college being an opportunity for all students.

Firstly, the limitations of the economic argument of ‘Free Education for Everyone’ need to be understood. It is true that the quality of a human capital is paramount as the economy continues to transform from manufacturing to services and high technology industries.

These growing industries increasingly require college graduates to successfully compete in a global economy. Even in today’s manufacturing firms, higher level skills are required, which mandates that

workers obtain an education beyond the secondary school level.

However, this requirement could likely be met without FEE and there is an argument to be made that FEE facilitates the misallocation of skills

“The USi would better serve students by providing clarity on which is more valued: Minimizing the student contribution or maximizing the grant” – students are quite simply not pursuing the courses which would benefit the economy most and justify the economic argument behind FEE.

Additionally, when advocating FEE, one cannot ignore the individual benefits as opposed to any societal benefits from third-level.

While this arguable should not matter, given the economic climate and the emphasis on solidarity in public discourse during the crisis, the perception of college students among the masses of squeezed tax-paying workers cannot be disregarded. If the perception (rightly or wrongly) of college students is that of alcoholics studying courses with no tangible benefit to the economy, who are only enriching themselves at the expense of tax-payers, it is difficult for public representatives to justify to the majority of the electorate why there should be FEE. In tackling this image, past actions of the USI have been particularly poor. Repeated publicity stunts, be it occupying buildings and getting arrested, disrupting the Dáil and getting arrested, or vilifying politicians, only serves to reinforce negative views of students in higher education. This undermines students by making it easier for politicians to defend their decisions. When a Labour politician stands up and makes a reasonable case that his preference is to see more special-needs assistants in his constituency at the expense of

maintaining student contributions constant, it ought not to be greeted with derision.

Beyond the issue of perception, the USI would better serve the interests of their students by providing clarity on which is more valued: minimising the student contribution or maximising the provision of the maintenance grant. While there are other options, which The Bull advocates in this feature, it would seem the USI is fixed on those two policies. In such a case, there is a strong argument to be made that in order to ensure equality of opportunity, opposition to the rises in the student charge should be dropped conditional on widening and improving the grant system. By lobbying for both, those least able to afford college will be hit worst by any tightening of budgets. Policymakers with finite resources (which is a reality we cannot avoid) will make decisions and without any alternative proposals beyond ‘no to any grant cuts or fee increases’, the decisions are likely to continue in their present form, which will no doubt force students from college.

The USI owes these vulnerable students better representation than is currently on offer and the union has the capacity to do so by adapting more pragmatic positions.

11

Features - special report The Bull 07.02.2013

FUNDING

By Kevin O’Reilly

S

ince 1995, Ireland has been using a system akin to the student contribution model for funding third level education—involving an annual registration fee. This system has been under increasing scrutiny and review over the past few years as belt-tightening has become the norm. Other funding models have been examined in the past, but the ability of government to communicate the benefits and costs associated with them has been questioned. As such, we will provide a fact-based overview of alternative funding models in third level education.

One Hundred Percent Upfront Fees Prior to the 1995 Free Fees Initiative, students in Ireland bore the entire economic cost of their university degrees at the point of delivery.

Adopting an upfront fee model transfers the responsibility of third level funding to the individual family/household. This frees up government revenue, which can be invested in additional infrastructure and services in education or other economic sectors. This system also creates a market for third level edu-

PROPOSALS

By Sean Tong

T

he abolition of university fees in 1996 was hailed as “a major step forward in the promotion of equality” by the government document outlining the specifics of the policy. It served to remove “important financial and psychological barriers to participation”, and is a model that the Union of Students in Ireland continues to support. It must, unfortunately, be concluded that the free fees policy has failed to achieve this goal, amongst others, and that a better model could and should be implemented.

From a social perspective alone, the fundamental fact that the government of the time failed to observe is that credit constraints play a relatively minor role in the individual’s decision to progress to tertiary education. Those from lower socio-economic backgrounds were already exempt from paying tuition fees, so the true beneficiaries of this scheme were the middle- and upper-class families that had previously been paying fees.

This is a finding that holds internationally. Carneiro and Heckman (2002) found that just 8% of US

cation. Universities will be able to adjust their tuition fees to profit maximize, resulting in greater funding for research and teaching facilities.

Because universities will have autonomy over their tuition pricing, the availability of scholarships, bursaries, and/or grants may be limited. Naturally, this hinders equality of access and perpetuates income inequalities, as fees may only be affordable to students from wealthy backgrounds. This may cause a potential brain drain effect, as students will have an incentive to seek lower-cost education abroad.

Graduate Tax

A graduate tax system means that a student will not have to pay upfront fees. Instead, upon reaching a certain income level postgraduation, the student will be subject to an additional income tax to cover their degree cost. The ability to pay is based on future personal income, rather than on family income.

A graduate tax system allows education to be free at the point of entry as there is no upfront cost to the student/household. Compared to a student loan system, graduates do not take on personal debt that may otherwise adversely affect their credit worthiness. Additionally, government revenue is freed up and allows for additional spending in education or other economic sectors.

The primary concern is the implementation and enforcement of the graduate tax. Students may leave the country upon graduation, making it harder for tax enforcement and incentivizing a brain drain effect. The windfall in government revenue may be mitigated by administration and enforcement costs. In terms of university funding, it may take time for universities to reap the benefits of the graduate tax due to the lag in fee payment.

This may further put a strain on the state in order to smooth university funding over time. Finally, the graduates will face the same tax rates regardless of gross income, which results in some graduates paying more than others for the same degree.

Student Loan The student loan scheme is what is currently implemented in the United Kingdom. In availing of a student loan, the student faces no fee obligations until they reach a certain income level following graduation.

Similar to other models, the student loan scheme allows education to be available at the point of access.

Again, additional revenue is available for government expenditure, as the state will no longer have to cover student contributions.

As with all loans, however, there is a default risk and students may have to pay interest on the cost of their education. Students from low-income backgrounds tend to be debt-adverse and may avoid higher education altogether in order to avoid acquiring debt. With falling graduate employment prospects, the accumulation of debt may adversely affect their credit worthiness and ability to borrow in the future. Finally, as with the graduate tax system, there are high administrative costs involved.

As shown, there are many alternatives to Ireland’s current funding model. There are many considerations to be made before making policy changes, including the high levels of government debt, historic emigration problems, and potential social backlash. It remains in the hands of policymakes to evaluate the feasibility of these alternatives and how they fit within Ireland’s socio-economic context.

high school graduates were credit constrained with regards to thirdlevel attendance, and similar findings were reported in the UK by Dearden et al. (2004). This is not to say that family finances are irrelevant, of course: financial aid for the less well-off has been shown to significantly increase participation rates (Dynarski, 2009).

The effect of the free fees policy has been investigated in considerable depth by Denny (2010), who estimated a number of probit models using data from the ESRI School Leavers Survey between 1994 and 1998. It was found that the introduction of free fees did not have a significant effect on the participation rate of students from lower socio-economic backgrounds. While the number of poorer individuals attending university has increased, this is driven largely by increases in supply – the percentage of places in higher education occupied by these individuals has stayed constant.

Though this may seem unlikely, it is consistent with the robust finding that the probability of attending university is overwhelmingly determined by performance at secondary level and family background. In an Irish context, it is unsurprising to find that the number of Leaving Certificate points attained is positively correlated with progression to third level. The number of points attained is itself correlated with the socio-economic status of the individual’s father.

The importance of family background is quite striking. The average child of a professional father achieves 92 points more than the child of a manual labourer, and is over 30% more likely to progress to university. Given this inherent advantage, the free fees reform served only to benefit those from relatively well-off backgrounds who were actually in a position to pay fees themselves.

When considering alternative approaches to this model, it is important to remember that ‘free fees’ cannot exist in practice. The cost of third-level education must be funded by someone: the current model places the burden on taxpayers in general (inequitably, it has been argued), whereas other models typically target the direct beneficiaries of the education. This seems to be a far superior approach.

Though there are a number of preferable alternatives to the status quo, the specific approach that will be advocated in this article is the income-contingent loan scheme.

Variations of this model have been notably implemented in Australia and the UK, amongst other countries. Essentially, students are liable to pay tuition fees but are provided with loans so as to defer payment until their income has reached a certain threshold. The key benefits of this model are the removal of barriers to entry, the non-distortionary nature of repayments, and the progressive nature of its imple-

mentation.

Unlike the current system of Student Contributions, introducing a loan scheme would make third-level education free at point of entry for those who want to avoid upfront payments. Research in Australia has shown that this combination of tuition fees and government loans has not damaged participation rates (Greenaway and Haynes, 2003). In particular, there has been no negative impact on low-income families (Chapman and Ryan, 2002).

Secondly, the model has the benefit of simply ascribing a flat price to a third-level degree. It does not distort labour markets in the way that a graduate tax may, and it can be implemented so that emigration cannot be used to avoid repayment.

Finally, the income-contingent loan model levies the cost of education on the direct beneficiaries of this education: the graduates.

Given that research in the UK has estimated the lifetime income gap between graduates and non-graduates to be about £400,000 (Skidelsky, 2000), it seems only fair that tertiary funding should be sourced in a manner that reflects this.

It seems bizarre to suggest that this approach is somehow unfair, or a violation of a basic human right, while at the same time maintaining that the redistribution of income from current low-income taxpayers to future high-income individuals is not. The private gains from a

One Hundred Percent State Funded On the opposite end of the spectrum, is an entirely state-funded system. This is similar to Ireland’s current model, but requires no student contribution.

The abolition of fees creates equal opportunity for third level education. Such a system would increase the number of graduates and attract foreign talent—increasing economic activity and human capital.This, however, puts a greater burden on the government to fund education, which could be put to more efficient use in other economic sectors. This proves to be difficult for countries in economic recession that face public debt obligations and has historically led to an under-investment in the tertiary education sector.

1.5%

Annual rate of interest on student loans in the United Kingdom

250,000

Number of third-level students affiliated with the USI

€133,976

Total contribution made by Trinity students to the USI

university education far exceed the public ones, so funding should reflect this.

Levying fees in this manner also serves to sever the link between the individual’s obligations and the financial status of his or her parents.

This is a notable peculiarity of the free fees model: the payment that an individual must make for his or her education is linked to the income of his or her parents. It seems more sensible, and certainly more just, to charge the same price for the same education, but to defer this payment so that current financial security is not of concern.

The income-contingent loan scheme is thus preferable to the current model (and other hypothetical ones, for that matter) along a number of dimensions. It would remove upfront costs for prospective students, widening access; reassign the burden of funding to the ultimate beneficiaries of education; and finance the provision of tertiary education in a non-distortionary way.

The free fees model has failed to increase participation amongst the underprivileged, and has served only to reduce the financial burden placed upon reasonably well-off families at the expense of the general taxpayer. The main argument in its favour, therefore, turns out to be misguided at best. For this reason, and the economic ones outlined above, it must be replaced with a more appropriate model.

12

business

The Bull 07.02.2013

Ryanair’s Latest Merger Attempt: Pigs will Fly Gabriel Corcoran analyses Ryanair’s recent efforts to increase their 30% holding in Aer Lingus Ryanair-related stories seem to dominate the airwave these days, from the recent precedentsetting court ruling against the airline, entitling passengers to compensation from flights cancelled due to ash clouds, to their enviable €18 million 3rd quarter profit figures for 2012. Airwaves aside, dominance of actual airspace in and out of Ireland has been highest on Ryanair’s agenda as they battle bitterly to attain authorization from the European Commission to merge with the former flag bearing carrier Aer Lingus, in which they already own a 30% stake.

Ryanair’s original merger application was submitted to the European Commission in 2007, and was ultimately rejected following an appeal to the European General Court. The appeal was rejected on the grounds that the merged entity would have near monopoly power on at least 35 routes. The primary concern of the Commission, in other words, was the potential reduction in consumers’ choice and an increase in prices. A second application followed in 2009 but was subsequently withdrawn, with the 3rd and most recent application submitted on July 3rd 2012. This application, which is currently in the lengthy secondary review phase, is claimed, by CEO Michael O’Leary,

to boast a “radical and unprecedented” set of remedies to previous anticompetitive concerns raised by the Commission. Although as of yet unpublished, these remedies are said to include the selling of substantial portions of Aer Lingus’s short-haul route network to competitors such as FlyBe, and as much as 85% of their Heathrow slots to British Airways. Although Ryanair are putting up the usual front of confidence, how likely is it that this attempt will be successful, and why should we care either way?

Taking a look at how the European Commission operate in relation

to merger applications can shed

“it would appear ryanair have the odds stacked against them this time” some light on Ryanair’s chances.

The commission has a progressive

approach to granting mergers, with Joaquín Almunia, Vice-President of the EC and commissioner responsible for competition, stating that “mergers can allow companies to develop in ways that would not be feasible on a stand-alone basis’” In light of this, it does not bode well for Ryanair that their merger application is one of only 2 that have ever been turned down in the Airline Industry since the commission was granted the power to make such rulings in 1989. The commission has in fact only prohibited 20 out of a total of 4500+ general merger applications across the board, and has

never in their history overturned a previous decision on a merger.

With both Brussels and Dublin explicitly expressing their renewed opposition to this merger, Ryanair are charged with the unenviable task of trying to convince competition policy experts that a merger will not result in a position of dominance that is open to abuse. It would appear Ryanair have the odds stacked against them this time.

Would Irish skies run by Ryanair be such a bad thing? Apart from anecdotal grumbles and groans about uncomfortable seats and sour-faced staff, Ryanair are consistently leaders across almost every category of customer service under the sun.

According to the airline, 93% of all flights arrived on time last year, 1 bag in 3000 was misplaced (compared to almost 60 by British Airways) and only 4 in 1000 flights were cancelled.

Regardless of the feasibility of a merger with Aer Lingus, directly or indirectly Ryanair has changed the face of air travel in Ireland to the benefit of consumers in the form of lower prices across the board. Unfortunately for Mr. O’Leary, it may be more in his interest to prepare for the first pig to fly with his airline, than for a merger with Aer Lingus to be granted.

The Fall of a Main Street Icon The decision of the high-street entertainment retailer HMV to enter administration on the fifteenth of January was greeted by many with shock; the retailer had, after all, been an ever-present feature of the entertainment retail sector since its founding in 1921, the once familiar logo of Nipper and the gramophone now replaced with the image of the ‘Blue Cross’ fire sales.

Though the fall of this once great company has been seen as almost unbelievable by the general public,

another symbol of the current economic plight, it perhaps should not come as too much of a shock given the fact that HMV bosses acknowledged their liquidity problems in June 2011, and sought restructuring loans to the tune of £220m from the Royal Bank of Scotland and Lloyds.

These loans were due to mature in September of this year, but with profits from retail plummeting by the end of 2011, (by up to 90% in Irish stores) it was clear that the writing was on the wall and that

HMV would struggle to repay the loans by the end of the two year deadline.

At present the main concern for employees of the chain is naturally that they will lose their jobs, as well as the backpay owed to them. The approximate number of potential lay-offs within the UK and Ireland is somewhere between 4,350 and 4,500, a sizable chunk to add to the live register. The chief executive of HMV, Trevor Moore, offered his thanks to suppliers who had

been more than patient during the past few months, but also provided

“hmv bossess acknowledged their liquidity problems in june 2011” something of a rallying cry for the company’s future, “HMV was recently voted one of the top 10 names people most wanted on their high street … A high street without HMV is not as attractive as it is with one.

We know our customers feel the same way.”

The most obvious question on everybody’s lips is the standard ‘what went wrong?’ The bog-standard reply is that HMV is merely the latest casualty of the boon of the online retail sector, and while this is somewhat plausible with the advent of internet selling, one cannot help but feel that there is something more to the story than a mere change in buying trends. The growing use of the internet and the continued trend in downloading digital media through iTunes or streaming websites has certainly led to a

decline in sales, with the managing director of Conlumino, Neil Saunders, stating that “By our own figures, we forecast that by the end of 2015 some 90.4% of music and film sales will be online. The bottom line is that there is no real future for physical retail in the music sector.”

While Saunders concurs with the notion that e-sales have harmed HMV’s performance, the case is also made for a strategic failure on the part of HMV bosses to adapt to the changing business environment, and a failure to ensure the continued loyalty of its customers: “This outcome was always inevitable. While many failures of recent times have been, at least in part, driven by the economy, HMV’s reported demise is a structural failure. In the digital era where 73.4% of music and film are downloaded or bought online, HMV’s business model has simply become increasingly irrelevant and unsustainable…HMV did not react early enough to the digital trend; it did not give shoppers a reason to keep buying from it. Admittedly, the company has tried to innovate through selling more electricals and gadgets but, unfortunately, these initiatives were never going to be enough to counteract the terminal decline in its core business.”

By Edward Teggin

13

business

The Bull 07.02.2013

a genuine business?

In light of a commercial court ruling, Ted Nyhan examines the integrity of Herbalife’s business model

A

heated, and frequently comic, exchange between hedge fund titan Bill Ackman and legendary corporate raider Carl Icahn intensified concerns over multi-level marketing company Herbalife, leading to rumours of a Federal indictment and concomitant share price gyrations.

Mr Ackman was an invited guest on CNBC’s Half-Hour programme, in order to level allegations that Herbalife was a “fraudulent” firm, whose business model was essentially a “sophisticated pyramid scheme.” In the course of outlining his case Mr Ackman cast aspersions at rival Carl Icahn, with whom he had an enduring discord stemming from a legal dispute many years before. The furious, often puerile debate, between Mr. Icahn and Mr. Ackman that unfolded frequently elicited cheers from the trading floors, especially when an irate Icahn resorted to expletives in his frustration at Ackman’s calm, assured manner of presenting his short thesis (Mr Icahn is a defender of Herbalife and has refused to comment on whether he is long the stock). However, the main consequence of the encounter was to increase market, and perhaps regulatory, scrutiny of the murky operations of Herbalife.

The current furore really began when Ackman’s hedge fund, Pershing Square Capital Management, took a $1 billion dollar short position on Herbalife and founded a website, factsaboutherbalife.com, which catalogued the characteristics of Herbalife’s operations that qualify it as a pyramid scheme instead of the bona fide “direct selling” firm it purports to be. The publicity surrounding the adoption of this position is highly unconventional and, to some, borders on “market manipulation”. Mr Ack-

man has defended his actions, insisting his short interest is purely “patriotic” and that any personal profits he gains from this trade will be donated to charity.

Herbalife was established in 1980 in the wake of a landmark Supreme Court case involving Amway, the “original” multi-level marketer (MLM). The court ruled Amway was a legitimate enterprise insofar as the majority of its sales were from distribution of products to real cus-

“It has been asserted that 99% of distributors lose money in net terms” tomers as opposed to recruitment.

Under this ruling, if a firm failed to pass this test it was a de facto pyramid scheme and would necessarily entail the apex of the pyramid reaping rewards at the expense of the base. An important corollary of this decision was that an organisation could be adjudged to be a pyramid scheme even if it didn’t inevitably lead to collapse upon saturation of available markets. This meant that an illicit scheme could survive in perpetuity, continually victimising new participants. Although the court’s definition of a legal MLM appears quite clear, the intricate accounting and complex business model of Herbalife, along with insufficient data on how precisely it derives its sales and on how well its sub-distributors fare in terms of gross and net compensation, mean that it’s difficult to determine, in a

prima facie manner, the validity of Herbalife’s business.

Herbalife is an international vendor of nutritional and dietary products. It has constructed an extensive global network of subdistributors to facilitate reaching its end-consumer. The top-level sub-distributors are encouraged to engage smaller sub-distributors and then this second level can do likewise in turn to form a third-level, and so forth. Theoretically, the lower levels should only come into existence if they are able to earn a reasonable profit. When a given geographic market is exhausted then no additional levels of sub-distributors should be created and revenue growth must be generated through organic sales expansion rather than fees gleaned from recruiting further sub-distributors.

Unfortunately, in reality there is heavy “churn” as sub-distributors join and drop out. As fresh participants pay a joining-fee and purchase initial inventory there is a possibility to mask a situation whereby recruitment is the primary driver of revenues.

It has been asserted that more than 99% of distributors lose money in net terms, with a small percentage at the top profiting considerably. Mr. Ackman himself has calculated only 0.14% of 2.7 million distributors earn $20,000-plus in commissions. This gives weight to the idea that Herbalife uses recruitment to sustain revenues.

Herbalife attempted to repudiate this by claiming that 69% of subdistributor compensation was from sales to real customers (presumably with most of the rest being composed of recruitment-related revenues). Both of these assertions are not verifiable or falsifiable without more complete information, which Herbalife is understandably

loath to release for proprietary reasons. However, casual investigation seems to lend credence to Mr. Ackman’s claims. The products that Herbalife sell are largely commoditised, grossly expensive and are not advertised or marketed. Yet sales are extremely robust, being multiples of equivalent products from competitors. Formula one, its principal offering, is more costly than rivals, whilst remaining unbranded and undifferentiated. Despite this

“Let people know what they are letting themselves in for” it has retail sales equal to Oreo, an instantly recognisable household name. This is quite inexplicable.

Mr. Ackman contends that these incredible sales figures are underpinned by the routine defrauding of unsuspecting sub-distribution recruits who acquire the product and attempt to sell it, usually in vain.

As Mr. Ackman succinctly puts it, “Herbalife bundles its products with a ‘business opportunity.”

Herbalife argues that many involve themselves in the scheme but quickly are overwhelmed by the normal difficulties of building a business. These failures are the cause of the company’s high churn rate amongst sub-distributors (which exceeds 50%). Essentially, they hold that although being a sub-distributor is arduous, it is not an unfair game. Herbalife exhorts visitors to its “business opportunity” webpage to “earn what you’re

worth.” The implication is that the truly assiduous can prosper through Herbalife, a declaration that is bolstered by accompanying testimonials from successful distributors.

It is nigh on impossible to truly ascertain the legal status of the Herbalife’s baffling business model.

Furthermore, it appears the company adds little value and shamelessly understates the risks associated with its “opportunities.” This opacity and disingenuousness displayed by the firm is unethical, and one could go as far to say that they are morally guilty of inadequate disclosure. The case for regulatory intervention is limited, however. Mr. Ackman has brazenly called for US federal agencies to move on Herbalife, which is substantial in size: it has $3.5 billion in net sales and over 5,000 employees (the Belgian Commercial Court has already deemed it an illegal pyramid scheme). Whether Herbalife’s business is valid, or even lawful, is uncertain. In these instances, prior restraint is not a path consistent with innovation, risk-taking and experimentation.

The activities of Herbalife may have more logic than someone who lacks experience with the industry can comprehend, and the distributional efficiencies of its model may be hard to identify a priori. As Nietzsche keenly remarked, “not all that is unintelligible to humans is necessarily unintelligent”. Herbalife may have hidden merit, and its disadvantages may be exaggerated. The only appropriate regulatory action would be a binding instruction to provide more full and nuanced disclosure – not just for Herbalife but also across the MLM industry (affecting other questionable businesses such as Nu Skin and Avon). Let people know what they are letting themselves in for. After that, they have only themselves to blame.

14

POlitics

The Bull 07.02.2013

North Korea rocket launch raises fears in the international community Timmy Munier investigates the clandestine proliferation of missiles in the world’s most secretive state WHEN THE most secretive state in the world is experimenting with nuclear technology, the international community will naturally do everything in its power to stop it. North Korea is once again posing a threat to world peace. Both the 2006 and 2009 missile launches were followed by nuclear tests. It therefore seems highly probable that a third

“sTaTes should impose serious Trade sancTions on The counTry” is soon to follow despite restrictions imposed by the U.N. Security Council. A nuclear-armed North Korea would strike a severe imbalance in the relative military power of the world’s nations.

Pre-existing United Nation reso-

lutions banned North Korea from missile and nuclear activity. China, North Korea’s biggest trade partner, is hesitant in imposing economic sanctions, fearing that it would only cause further provocation. However, with North Korea set to conduct another nuclear test, now seems to be the best – and maybe only – time to impose more serious and damaging restrictions.

Why are the North Korean military leaders so determined to provoke and defy international regulations? Are they envisaging to one day topple the great nations from power or are they merely continuing out a family legacy? By successfully undertaking nuclear experiments the young Kim Jong-un is continuing the state’s ‘military first’ programs which were first implemented by his father, the late Kim Jong-il. The country hailed the most recent rocket launch in December as a celebration of the excellence of the three members of the Kim family that have ruled since the founding of the state in 1948.

The primary target of the North

USA’s contribution to the rise of Militant Islamic Terrorist Sects in North Africa

›

some of the recent missiles developed by North korea

is the United States, which it considers the “sworn enemy of the Korean people.” According to North Korean officials the recent activity is in response to the hostility of American policy. However, South Korean analysts have said the North is now capable of developing rockets within the US range, but has not yet shown the ability to miniaturize nuclear warheads and mount them on rockets.

A recent statement explicitly

ruled out the possibility of talks proposed by President obama with the intention of denuclearization. The North responded by claiming that nuclear advancement is part of both a civil program and a fundamental right of the North Korean government. Propaganda in the country implies that such activity is a part of Korean nationalism. Taking into account the tiny size of the economy and the majority of its people living in poverty, these recent erup-

tions might simply be a cry out for more international attention and increased aid.

If the North continues its nuclear program in defiance of nuclear restrictions, the international community should impose serious trade sanctions on the country or take military action. Now may be the ideal time to take down a regime that has been starving its people and forcing them to live in complete isolation for over half a century.

USA’S PolITICAl response to 9/11 has generated support throughout the Arab world for radical Islam.

The terrorist activities carried out during 9/11 were by small parts of certain sects of Islamic people. The words terrorism and Islam should not be used coextensively but since 9/11 they largely have been in the U.S. This erroneous way of talking about Islam is likely to annoy many peaceful Islamic people and generate greater hostility towards the US’s hegemonic international position. one area where such anger is on the rise is North Africa.

In their attempts to make the U.S more secure, the American political bureaucracy has actually jeopardized their national security.

Shortly after the terrorist attacks that rocked the U.S, then president George W. Bush, made the following remark: “Every nation in every region now has a choice to make: either you are with us or you are with the terrorists”. Since this proclamation, many American political writers have equated terrorism with Islam. Norman Podhoretz claims that the US is engaged in a global war against Islamofascism in his book, “World War IV: The long Struggle Against Islamofascism”. Paul Berman in “Terrorism and liberalism” argues that Islamic radicalism is a new form of fascism. Equating terrorism with Islam is the equivalent of saying Catholicism, fascism, and communism, are all part of the same movement. Islam has nu-

merous denominations, including Sunni, Shia, and Sufism, and over seventy sects, such as Ikhwan ulMuslimoon, Hizb ut-Tahreer, and the Naqshabandis. These political writers are not alone in erroneously equating Islam with terrorism but their error, in-conjunction with the American political bureaucracies’

alongside many Mande, Peul, and Songhai native people are currently trying to reclaim the area and are so far successfully doing so. Violent types of Islam are also on the rise in Northern Nigeria where Boko Haram, a radical jihadist movement, killed approximately a thousand people in 2012. Niger, Mauritania, and Chad are also dealing with violent sects of Islam willing to carry out acts of terror at present. AlQaeda, which is linked to all of these movements, has opportunities for revenue through kidnapping and trafficking in the region, due to poor border controls and policing. There has also been a windfall of weaponry and soldiers from libya, following the fall of Muammar Gaddafi.

By erroneously equating terrorism with Islam, America has arguably contributed to the rise of radical Islamic sects in the North African region. If the U.S continues to politically talk about Islam and terrorism coextensively in-conjunction with its support of Israel and its recent trend of invading the Middle East, then one should expect militant, Islamic associated terrorism, to continue growing in North Africa in the future and wherever else al-Qaeda and other like minded movements can find purchase.

The U.S.A’s war on terror may be the start of it bringing war on itself - the start of Samuel Huntington’s envisioned clash of civilisations.

“The sTarT of hunTingTon’s clash of civilizaTions” stance towards terrorism, is likely to annoy many peaceful adherents of Islam.

Interesting movements are currently occurring in the Islamic world, and arguably, this has been in response to the U.S.A’s misguided political foreign policy. one such area is North Africa. Recent developments suggest the region has become a breathing ground for terrorists from radical Islamic sects. The fatal attack on a gas plant in Algeria, on the 15th of January, was carried out by a previously unknown group called the Signed in Blood brigade.

Extremists from radical Islamic sects took control of a large part of northern Mali last year, taking advantage of a chaotic situation after a military coup by the separatist party MNlA. French military, fighting

By James Nugent

15

POlitics

The Bull 07.02.2013

sYrIa InterVene

Or aBstaIn? as the syrian civil war shows no signs of abating, Duncan Moss, makes the case for a partial intervention

a

fter 23 months, Syrian Civil War shows no signs of ending. over 40,000 people have been killed and millions of Syrians have been displaced. The experienced Algerian peacemaker, lakrdar Brahimi, who succeeded Kofi Annan as the UN’s special envoy for Syria, describes his new task of creating peace in the region as “nearly impossible.”

Rebel forces have made slow progress against President Bashar Assad’s regime, but hitherto have been depleted of the vital arsenal necessary to hold down strategic locations in the country. Now there are signs that this is changing. Mr Assad’s forces are running out of bombs; the army is enlisting its reserves, as its number of 280,000 has been severely depleted by casualties, defections and declining morale.

In November the rebels had a number of successes. They strengthened their position in the oil-rich eastern province of Deir al-Zour, capturing an artillery battalion base at Mayadeen and the airport in Abu Kamal. More significantly, they took control of the 46th regiment’s base at Atareb, a major pillar in the government’s garrison in Aleppo. They weaponry is growing larger as they now possess more tanks and anti-aircraft weapons than the Syrian army. They have used these to great effect as they shot down a government MiG23 jet and helicopter. The threat of

surface-to-air missiles represents a major milestone towards taking Aleppo since the Assad regime currently relies on the air corridor

“briTain, france and The gulf sTaTes now recognise The naTional coaliTion” between Aleppo and Damascus.

Should Aleppo be deprived of its airport, the government garrison would soon fall, paving the way towards a bloody standoff in Damascus. Were that to happen, could the West afford to sit passively by?

Under the most likely scenario, Western intervention would begin by supplying the opposition with weaponry. Many countries are reluctant to follow this course of action, however, because of fears that the growing presence of Jihadist and Islamist militants among the rebels could work to their detriment in the future. In addition, without an effective overarching umbrella group overseeing the rebels, the fighters could become fragmented, leading to a power vacuum after Assad’s downfall. This largely depends on the National Coalition for Syrian Revolutionary and opposition Forces’ ability to become a unified

and effective opposition group to the Assad regime. Britain, France, Turkey and the Gulf States now recognise the National Coalition as the legitimate leadership in Syria, with the US expected to follow suit.

Following NATo’s approval of deploying Patriot anti-missile batteries on the Turkish border, arming the Syrian opposition looks more likely . Estimates show they could deprive Mr Assad of up to 80% of his air force in under 24 hours, using of drones, missiles, and stealth aircraft, and subsequently enforce a no-fly zone.

But that path could lead towards a full-scale ground troop intervention, an outcome that nobody wants. The obama administration has repeatedly stated that use of chemical weaponry would force the US to intervene , but concerns have risen over the humanitarian cost of not deposing Mr Assad. one army pilot, whose MiG-23 was shot down after bombing Al Bab, claimed that he did not know Al Bab was full of civilians when he bombed it. A hospital in Aleppo was bombed in November. The FSA was accused of using human shields and serious crimes against humanity by the UN in February of this year, with YouTube videos revealing they hanged a man for conspiring with the regime.

Intervention on a humanitarian basis comes with a double sided blade, as there is no guarantee that the conflict would end after Mr Assad has been ousted, or that atrocities would stop. Should the war continue, the west could be-

come embroiled in yet another “democratisation” operation in the Middle East. The political implications of another intervention in a small matter of years could have disastrous consequences on the entire region. Although Mr Assad is viewed by many as corrupt, he is still the leader of an important Arab country. Saddam Hussein was despised when he was deposed in 2003, but instead of being garlanded as liberators, the Western troops who intervened were soon viewed as occupiers and oppressors .

“many sTill supporT assad, buT we and The people of syria cannoT go on in ignorance” The Russian advisors present in Syria also complicate the idea of intervention, as Russia would surely veto any attempt by the UN to intervene. Mr Assad’s regime is supplied with arms by Iran and Russia.

Flight records suggest that Russia supplied hundreds of tons of bank notes to help Syria stave off economic collapse . If the US and Britain continue to abstain from interference, then rebel fighters will look for military aid from Jihadist groups instead. Syria’s minorities are fear-

ful as Qatar is arming and financing the Muslim Brotherhood, and Saudis are aiding Jihadist groups such as Jabhay al-Nusra, the spearhead behind recent rebel gains. The West needs to retain some influence in a post-Assad Syria; otherwise the Jihadists will dominate the subsequent political landscape of Syria.

“My enemy is terrorism,” Mr Assad proclaims, before continuing that the only way to decide his fate as president is through ballot boxes. If only his words were reflected in his actions; it is all we can do to hope that one day they will.

So we are faced with a fierce conundrum: be drawn into a yet another conflict in a major Arab state, or sit idly by as the new Middle East unfolds before our eyes. Both routes could lead to a greater humanitarian disaster. The Syrian people are divided. Many still support Assad, but we and the people of Syria cannot go on in ignorance of the atrocities committed on both sides, lest we forget what is at stake. The West cannot dictate the resolution and direction of any embryonic government in Syria; that must be done by its people. Should we be there to see it happen? The conflict and crimes against humanity in Syria may worsen, and thus Mr Brahimi plays the waiting game, biding his time until the moment when peace can finally be realised. As Syria becomes the battleground for liberation sweeping across the Arab world, it is its people who pay the ultimate price for this vicious circle of violence.

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politics

The Bull 06.02.2013

Britain and the EU: Trouble Brewing Today, we find ourselves faced with a question that has faced many unions in the past. That is, what are the long-term consequences should a member secede, both for the Union and for the member-states concerned?

The map of Europe gives a convenient guide, as it is ripe with the culminations and ruins of various unions. Two interesting examples can be found in the Iberian Peninsula. Spain itself only came into existence in the 1500s, due to a dynastic marriage between those who would become the rulers of Castile and Aragon. Though these two kingdoms retained separate institutions for a long time thereafter, unification proved to be robust, in spite of repeated rumblings for Catalan and Basque independence.

A less successful union was the

››

Iberian Union between Spain and Portugal under the reign of Philip II of Spain, who vied with three others for the Portuguese throne. He was successful, and the Union lasted for 60 years. However, Portugal eventually seceded sixty years later, due to Spanish demands for military aid in European wars, and the lack of Spanish help in aiding Portugal defend its colonies from the Dutch.

The late entry of Portugal into the Spanish union evokes parallels of Britain’s late entry into the European Community. Paralleling the Portuguese experience, Britain in the 1970s found itself entering into an institution that had already evolved in a way less amenable to them, increasing the likelihood of an eventual secession. The Iberian experience may further indicate that a two-speed Europe is

really a one-speed Europe, in that if a country is not at the forefront of integration from the beginning, the structure will develop in a way unpalatable to it in the end, unless there is a high willingness to integrate.

A second union existed in the form of the Holy Roman Empire, which at one stage incorporated the lands of Germany, broken down into hundreds of states, along with Belgium, Luxembourg, Switzerland, Austria and the Czech Republic, and parts of Poland and France. It gradually weakened under religious strains between Protestant and Catholics, and most of the states it contained became allbut independent in the wake of the 1648 Treaty of Westphalia. It was formally disbanded after Napoleon conquered many of the states on its

western border.

In the post-Napoleonic European settlement, it was resurrected in weak form as the German Confederation, under Austrian tutelage. However, the nationalistic spirits kindled by Napoleon, and championed by the liberal bour-

“Nationalism is Driving a wedge between Britain and the European Union” geoisie, were unsatisfied with this; they desired the creation of a unified state. Though they differed on whether it should include the non-German Austrian lands such as Hungary, Slovenia and Croatia.

Because of this, Austria favored maintaining the status quo. The formation of a German state would mean that their state would be split; German Austria included, with the rest excluded.

They would be unsuccessful.

Prussia, another German state, formally attained the exclusion of Austria from German affairs in 1866 with the Austro-Prussian War. Following a short war with France in 1871, Germany became a unified nation-state.

Three lessons emerge at this point. Firstly, despite the fact that the German reunification seems robust in retrospect, it was regarded as a fragile creation for nearly 30 years

A troubled relationship

after its inception. It has, however, mostly survived two World Wars and a 45-year partition. This is useful to remember in the current context, where voices, though receding, question the existence of the Eurozone.

Secondly, exclusion from a Union, though regarded as temporary, and despite efforts at re-inclusion, can be permanent. Austria, despite being caught up in the German nationalistic current over an extended period, and eventually annexed to Germany for a number of years, is highly unlikely to be united formally with Germany again, unless under a federal EU. Lastly, we see that Austria, despite being a great power at the time, was unable to subdue German nationalism sufficiently to bring about a looser unification. Nationalism would later result in its reduction to a European minnow, after the secession of the Poles, Hungarians, Serbs, Ukrainians, Croatians, and Slovenes, among others, in 1918.

The parallels with Britain are striking. Nationalism-lite is driving a wedge between it and the EU. However, by virtue of its departure, efforts to integrate the EU will have less of an obstacle. The type of E.U. that will thus emerge in some thirty years time will be quite different, and quite unpalatable, to the British.

Similar to the Austrians, they will not succeed in bringing about a looser confederation. As in Germany in the 1800s, integrationist forces are too persistent, even if such sentiments exist among a small part of the population. Similar to the Austrians, they may too come to be regarded as a European minnow.

By Tony O’Connor

The Black Box of Northern Ireland Aaron Buckley amends many of the misconceptions about the Northern Irish economy Very little is known about Northern Ireland. Apart from the recent wave of protests in response to the limitation of the number of days that the Union Jack could be flown outside Belfast City Hall, people understand very little about it.

Some basic facts about the Northern Irish economy should help amend some of the misconceptions about Northern Ireland.

According to the most recent figures, Northern Ireland currently has an unemployment rate of 7.9%, a rate lower than in Ireland (15.1%), France (10.1%) and the UK itself (7.8%). When viewed within a comparative framework, this certainly is an impressive statistic. In tandem, it is predicted that the Northern Irish economy will grow by 0.5% in 2013 and 2.0% in 2014 - higher than the forecasted growth of Germany. Both these figures clearly

illustrate that the Northern Irish economy hasn’t suffered as badly from the recession as its European counterparts have.

This reading of the situation is highly problematic, however.

Northern Ireland’s easy weathering of the great recession is largely down to that fact that it receives a

“Northern Ireland needs to attract fdi to take pressure off public finances”

block grant of £10 billion from the UK. The problem with having a block Grant is that it takes away any incentive to generate a balanced and self-sufficient economy. This is why the Northern Irish economy has not felt the full brunt of austerity: It can ultimately rely on Britain to cover any of the losses incurred by the Northern Irish State. At some point the North must accept responsibility for its own budget. Currently in Scotland most people are afraid to vote for independence because they don’t believe their politicians can run the economy properly. 64% of the budget in Northern Ireland is spent on the public sector, a level that is clearly unsustainable.

Northern Ireland needs to attract Foreign Direct Investment (FDI) to take the pressure off the public finances and allow spending on further development. A recent

›› Shipbuilding remains symptomtic of NI’s falure to modernize report by Lisney estate agents highlighted the problem with Northern Ireland’s failure to attract FDI has reduced its competitiveness vis-à-vis the Irish Republic. This contrast in fortunes has made the Irish Republic a more attractive for foreigners to invest their capital than Northern Ireland. One of the central issues the Lisney report outlined was to do with the take up of office space in Belfast, “Take-up of space in Dublin is over six times that of Belfast and occupiers indicate that they are opting for Dublin

because of its more competitive corporation tax rate.” This explicates that the Northern Irish economy is weakened by competition from the South and that Northern Ireland is at an enormous economic disadvantage to the Republic.

Perhaps this could issue could be solved by greater devolution to Stormont and by the reduction of the block grant to reduce Northern Ireland’s reliance on the UK. What’s certain, however, is that status quo is unsustainable.

personality profile The Bull 06.02.2013

Mario Draghi

The Euro’s White Knight?

As the Eurozone begins to show tentative signs of recovery, Niall Casey lauds the impact of Mario Draghi

M

ario Draghi had a baptism of fire as he walked through the doors of the European Central Bank on November 1st 2011.

Ahead of him as the newly minted president of the ECB was the task of bringing order to chaos, reestablishing the euro as a stable currency, solving banking and sovereign debt crises, and guiding a floundering European economy back to growth.

The fate of the single currency seemed to rest on the shoulders of this reticent Italian.

Growing up in postwar Europe,

“Draghi changed both the personnel and the remit of the ecb” Draghi was surrounded by the chaotic inflation that characterized the era. His strict Jesuit education in Rome instilled in him the cautious, formal manner that he’s renowned for. The son of a commercial banker, Draghi says, “there was an economic ingredient in all of the discussions we were having [at home].” After his parents died while he was still a teenager, high inflation diminished his inheritance. As such he still holds to the visceral fear of inflation of his predecessors. Price stability, rather than ensuring robust growth and full employment, should be the central aim of any monetary policy, he believes – a controversial view at a time of near 12% Eurozone unemployment.

Draghi first rose to prominence as Director General of the Italian Treasury in 1991. Italy was facing a crisis that resembles today’s: a large structural deficit, soaring inflation and an economy on the brink of default. It was Draghi’s levelheadedness and urbane manner that endeared him to his colleagues. “He is extremely cool in situations where normal people are freaking out,” a friend at the time recalls. After an austere few years of spending cuts, currency devaluations and privatization, Italy emerged from the malaise and joined the euro on schedule. Draghi earned international plaudits for his actions and received the nickname ‘Super Mario’.

ECB officials say the replacement of the workaholic, micromanaging Frenchman Jean Claude

Trichet by the more relaxed Italian had a palpable effect on the culture of the ECB. Monti brought with him a looser, more hands-off approach to the day-to-day running of the bank.

Monti commented in an interview to Reuters that, “I trust the people who are working for me; I delegate.

I told people they should make their own decisions. You should delegate but you should want to be informed.” Draghi not only changed the culture of the ECB, but also its personnel and remit. His new style of leadership would be put to the test over the coming year.

As crises followed crises during his term, the ECB became one of the few properly functioning institutions in Europe. At the height of the crisis, at the moment when it seemed Spain and Greece were on the verge of collapse, Draghi declared, “the ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.” This unequivocal statement from the usually circumspect Italian helped calm nervous investors and strength the resolve of European leaders.

One of the greatest challenges Draghi had to face was when contagion had seemingly spread to Italy.

Italy at the time was suffering under the premiership of Silvio Berlusconi and had long faced economic uncertainty. Italy’s deficit surged as Europe dipped into recession and investors began to lose faith in the Government’s ability to reform the public finances. As voices across Europe called on the ECB to intervene, Draghi hesitated. He announced that he would not allow the ECB to become a lender of last resort for governments uninterested in serious fiscal reform. As a result, Italy’s bond yield’s rose and the Berlusconi government collapsed. Draghi was vindicated when a technocratic government led by Mario Monti was appointed to power.

Draghi’s actions have divided opinions across Europe. Some see him as the embodiment of everything that is wrong with Europe’s leaders at present; nameless, faceless technocrats with no democratic mandate but vast power over the Europe’s future. Others criticize the lack of more strong, decisive action to combat shockingly high levels of unemployment across some member state. Draghi dismisses critiques of his policies as too stringent, commenting that there are no quick fixes available. “Productivity growth is the only possible way to achieve prosperity, to create a solid, sustainable foundation for wage increases and to ensure the country’s

development, for ourselves and for future generations.”

After considerable ordeal, the evidence of success is less statistical than anecdotal. In the recent World Economic forum in Davos, near consensus was reached among the participants that that a certain level of stability had returned to the currency after a tumultuous few years.

Although far from openly optimistic, the entrenched pessimism over the future of the currency seems to be dissipating. The euro’s survival now seems certain. Concerns now turn to Europe’s long-term fiscal future and the structural illness that stalks the continent. Western Europe’s share of world GDP has fallen from 36 percent in 1974 to just 26 percent in 2011, and is projected to fall to 15 percent by 2020. In contrast, the US share has remained roughly steady at about 26 percent of world GDP. Europe’s problems are deep and entrenched and not wholly related to monetary concerns.

A slow stagnation rather than sudden collapse is now the main source of concern for European policymakers. As European Welfare States, bloated from years of profligate spending, begin to buckle, questions are raised about Europe’s economic future. As Angela Merkel

“The Euro’s survival now seems certain” recently remarked, “If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life.” It’s clear that without a fundamental reform of the archaic entitlement systems, Europe has a bleak fiscal future.

Opinion of Draghi remain mixed.

Is he the resolute Captain in tumultuous seas, or the unaccountable bureaucrat more concerned with pleasing bond markets than the plight of Europe’s unemployed?

Draghi has one of the most visible and commanding presences of any European leader. Though more stable, the Eurozone is far from out of the woods, and a multitude of concerns remain. How Draghi confronts these problems over the coming years will determine his place in history.

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18

studeNt maNaGed fuNd The Bull 07.02.2013

MACRO REPORT

Adam Power is sanguine about the fund’s prospects for 2013

head of Macro research Ed Flahavan outlines the potential promises and challenges of the global economy in 2013 THE CoMING year promises to be as interesting as the last, providing many risks and ample opportunity to the investor. In this article I will discuss some of the ideas in the Investment outlook Newsletter that the SMF Macro team put together in December (The link at the end of the article takes you to the Newsletter).

The annual World Economic Forum in Davos ended last week. This year the forum was organised under the theme of ‘Resilient Dynamism’.

This is the idea that despite the challenges facing the global economy, a dynamic outlook can lead to increased opportunity and heightened prosperity. A number of the topics in the December Newsletter fitted this theme nicely.

In his assessment of the Eurozone James de Boisanger found the luxury goods sector was outperforming, despite the dark clouds perpetually hanging over the continent. Companies such as Hermes and lVMH have found selling high-end European brands in the Asian markets to be a lucrative reprieve from the stale markets at home.

The investment insight here is not necessarily that lVMH and Hermes are ideal investments but, as an

investor, value is what is you are looking for and that is often easier to find in places which are out of favour with most other investors.

The theme of ‘Resilient Dynamism’ also shines through in Caitriona Gallagher’s overview of the challenges facing the Chinese economy.

Dynamism is perhaps the greatest the challenge facing the autocratic state which is often criticised for not being capable of meeting the ever-changing challenges of the globalised world.

However the pace of political decision-making in the US and Europe over the past couple of years gives cause for a little self reflection on the part of the West.

Caitriona sees the Chinese economy accepting that 10% growth is unlikely to return and that if the Government can continue liberalising the economy it could begin to look quite dynamic. This will certainly lead to investment opportunities; companies like Hermes have gained from the new rich in China, but look out for companies that will gain from the emerging middle class consumer.

Since the New Year talk of a ‘Great Rotation’ in the market has been prominent in the financial press.

This is the idea that investors are turning away from bonds which have been sought out as a safe haven but where yields are now very low.

This was highlighted by Jamie Khan in the Newsletter as a strong argument in favour of the SMF’s aggressive investments in the past couple of months.

This rotation is causing an influx of money into the equity markets.

The week ended January 9th saw the fourth largest inflow into equity funds since 1992. The ‘January Effect’ of strong market rallies at the start of the year didn’t let us down this year and a correction will probably come.

Nevertheless the overall market trend will favour the SMF, which only invests in equities and so has missed out on the strong bond market in the past couple of years.

The insights and ideas outlined above are only a small portion of the topics covered by the Macro team in the Investment outlook Newsletter.

The newsletter can be found at the link below or by going to the blog section of TrinitySMF.com. http://trinitysmf.com/smf-economic-outlook-for-the-new-year/

Fund Performance THE WoRlD’S financial markets have had an eventful start to 2013.

The first few trading days of the year saw some big changes in Equities, Rates and FX on the back of a trifecta of announcements: 1) Fiscal cliff compromise 2) Surprisingly hawkish FoMC minutes from the Fed’s Dec 11-12 meeting, hinting early exit from QE and 3) A decent U.S. employment number.

As a result, risk was better bid with stocks rallying and bonds getting crushed. In the past few weeks markets have kept to the same theme of the first few days, with equities approaching their fiveyear highs and credit spreads their five-year lows. The rally in equities may seem overdone given modest Q4 earnings and lack of changes in growth expectations. However, the rally is consistent with the fading of tail risk fears that kept some investors on the sidelines before.

The major tail risks a year ago – China’s hard landing, Eurozone exits, US fiscal cliff and Middle East conflicts – have not been realized.

As a result, it seems that fear has diminished and investors are likely to have reduced their safe asset allocations. The remaining concern is really only a recurrence of the Fiscal Cliff; investors have pushed scenarios such as a Grexit to the sidelines. This leads one to believe that markets have become somewhat complacent. It seems that longs in risk assets are more a broad value and momentum consideration rather than outright bullishness on the world economy, earnings or event risk. The prospect of this is frightening, as it has been a long time since we have seen a sustained move based on fundamentals. The moves of late have been more down to a reversal in risk perceptions as

opposed to investors putting on value-based trades.

In FX the main mover of late has been the USDJPY pair. A new Japanese PM has proved to be incredibly dovish, pushing USDJPY and the Nikkei to extreme heights. The USDJPY is rallying more than what shifts in US versus Japan interest rate spreads would imply but it is a scary proposition taking on the other side of this trade at the minute.

In commodities, gold has taken a hit after the FoMC minutes were released. Many investors had put on a long gold trade based on a view that the Fed would continue with unlimited QE for the foreseeable future. The minutes have undoubtedly changed this assumption with the range of timings of potential exit from QE discussed being as early as mid-to-late this year, well before a promised 2014.

The fund is performing well and has captured much of the rally of the past few weeks. We have not made any new acquisitions since William’s last report but maintain the view that equities are still relatively cheap. The investment committee has also discussed the possibility of converting some of our cash holdings into an ETF in order to be able to better measure ourselves against our benchmark, the world MSCI Index. We will keep everyone in the fund updated if this comes to fruition. other than that it is business as normal within the fund. The quality of pitches still remains exceptionally high, testament to the great work being put in by analysts and sector managers. The investment committee is still eager to invest and encourages all involved to keep up the quality of the pitches to date.

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Opinion

The Bull 07.02.2013

editorial:

Time to Face the Fracking Facts

R

ecent films have stoked the controversy over the process of hydraulic fracturing, more commonly known as ‘fracking’.

Matt Damon’s most recent blockbuster, Promised Land, depicts the somber tale of a small Pennsylvanian town’s valiant fight against a large natural gas company that, by sheer use of its market power, crowds out the local farming community, destroys the local habitat and, in turn, renders the area inhospitable to the very prospect of commerce.

To many, this confirmed many of the prophecies laid out in the 2010 HBO film-documentary Gasland, which showed a man setting water from his faucet ablaze, claiming that the chemicals used in the process of fracking had seeped into his water supply. It’s easy to have misconceptions about fracking based on the above information. Closer to home, Clare County Council banned the practice of fracking from County Clare, citing environmental concerns as their main reason for doing so. From afar, this seemed like a sensible move on their part; in practice, it was a foolhardy decision that’s likely to deprive Irish people of the benefits of cheap fuel that has been made available en masse in America as a result of the process.

The process of fracking – the pumping of a small amount of chemicals laced with sand and containing a small amount of chemicals into deep underground shale rock formations - has made it possible for drillers to extract enormous amounts of trapped natural gas.

Shale gas production has grown exponentially and will continue to rise until around 2040, allowing for a clean, cheap and efficient source of fuel to become available to the average American.

Thepotentialenvironmentalbenefits of the increased supply of natural gas compared to other sources of fuel are indeed gargantuan. Natural gas is leading coal in terms of energy production. The result of this is that America’s cumulative Carbon dioxide emissions have declined to levels not seen since 1992 – far ahead of the targets set by the Kyoto Protocol.

Furthermore, a comparative analysis carried out in the February 2013 issue of Energy Policy found that natural gas produces fewer air pollutants the emission of sulfur dioxide, nitrogen oxides, soot and mercury.

The authors concluded that this increased shift from the more conventional forms of energy to natural gas would “reduce the overall likelihood of health problems affecting the nervous system, inner organs, and the brain.”

This has also had a positive effect on the US’s ailing labour market. According to 2010 figures, the production of shale gas supported a total of 600,000 jobs, a figure that is predicted to grow to 870,000 by

2015 and generate $120,000 billion to the overall economy if the current trend was to continue. But this shift towards shale gas has had a more inconspicuous effect on the US economy; it has been largely responsible for the revival of old US manufacturing industries such as the steel and manufacturing sectors, while it is also serving the US chemical industry in good stead.

Environmentalists raise many concerns, claiming that the beneficial effects of the reduced carbon dioxide emissions are offset in large part by the leakage into the atmosphere of more powerful greenhouse gases such as methane from the drilling of the gas wells. Armed with a study called Climate Change, published in 2011 by Cornell University biologist Robert Howarth, environmentalists claim that between 4-7% of the methane from shale-gas production escapes to the atmosphere in the venting and leaks over the lifetime of a well. A 2012 study by two other Cornell-based geoscientists, however, found that Howarth’s estimates for unintended methane leakages were too high and actually placed the figure closer to 1%.

Similarly, a 2010 MIT study concluded that, “it is incorrect to suggest that shale-gas related hydraulic fracturing has substantially altered the overall greenhouse gas intensity of natural gas production.” Simply put, fracking wells are no worse than conventional wells when it comes to discharging methane into the atmosphere.

Greens have spent years chasing a global green unicorn. While praising the efforts of Europe and Australia to adhere to carbon-trading initiatives, they chastise the United States for not having signed what created it all – the Kyoto protocol.

In doing so, they obfuscate the fact that the US has performed far better than its carbon-trading peers.

It’s time to put to bed our misgivings and accept fracking as the best means of meeting our short-term energy demands in an environmentally friendly way.

editorial:

Failed Vision, Failed Leadership By cathal o’domhnallain Editor

A

new wave of optimism swept through America, as president-elect Barack Obama stood triumphantly outside Capitol Hill to be sworn in for his second term as president of the United States of America by Chief Justice John Roberts. In his speech titled ‘Faith in America’s future’, this beacon of hope, purveyor of confidence, and ‘change you can believe in’, vowed to imbue a renewed sense of belief in America’s future, to harness economic growth, and to transcend the partisan rancor that has marred the effective functioning of the American political bureaucracy since the ascension of the Republicans to a majority in the House of Representatives in 2010.

The American public was equally as sanguine. Fresh off the brinkmanship that characterized the ordeal of the fiscal cliff, they had grown tired of the perpetual squabbling, the endless roadblocks to progress and everlasting strife that had tarnished the reputation of the United States, forced Standard & Poor’s to downgrade America’s credit rating and reduced America’s public morale to levels not seen since the seventies. A new mandate, they believed, would engender a new epoch of cooperation in America’s highly polarized political landscape, and force both the Democrats and Republicans to put aside their differences and work towards a brighter future for both America and its citizens.

Mr. Obama has indeed made some sizeable accomplishments during his first term in office. His $800 billion package is widely credited with having staved off the second coming of the Great Depression during a time that the American economy was contracting by 5% per annum and losing 700,000 jobs per month when he took office in 2009.

His 2010 Affordable Healthcare Act made medical treatment available to those that could not previously afford it, outlawed the prohibition of healthcare to customers on the basis of preexisting medical conditions and set in motion a mechanism for reducing healthcare costs over time. These achievements are undeniable and unquestionable.

Unfortunately, Obama failed to address many vitally important issues during his first four years. The American economy remains overregulated, private sector job growth is still sluggish, in spite of his assurance that it was ‘doing fine’, and the number of private sector jobs remains 4.3 million below its January 2009 peak. Though national deficits have been declining since he was put at the helm of the American government, they still remain above the $1 trillion mark and who no signs of being brought down to desirable levels in the coming years.

If the previous term provides any evidence to go by, this will continue anew in Obama’s second term.

While the American economy can function at a high level of debt in comparison with European ones, debt will be the bane of America’s existence unless it can be brought under control through reforming America’s highly cumbersome tax code and the enactment of substantive entitlement reforms. While ‘Obamacare’ has indeed set in place a motion that may reduce healthcare costs over time, these have yet to be reflected in the figures.

The Congressional Budget Office estimates that the expensive new entitlement of subsidized health insurance to low-income earners will force healthcare spending by the federal government to rise from 5 percent of GDP to 10 percent in 2037. Adding to this the increased Social Security expenditure that is projected in the coming years, the total bill for these new initiatives will rise to 16 percent of GDP in 2037. This could be pushed even

higher by the end of the decade, as the baby-boomer retire and the number of dependents rises. Unless this burden of debt can be reduced, a drag on America’s economy will be created and will likely accelerate America’s ongoing process of relative decline to China.

True leadership involves facing up resolutely to the challenges that one encounters, to provide stewardship in the most tumultuous of times and to help one’s followers to navigate through the most turbulent of terrains. Dwight D. Eisenhower kindled America’s vibrant and robust economy during the fifties through his instigation of the interstate highway system; Ronald Reagan helped promulgate the 1986 Tax Reform Act, a program that created the conditions for America’s strong economic performance until George W. Bush’s presidency, and Bill Clinton worked with House Republicans to curb spending through Paygo rules and reform America’s bloated welfare system.

Unlike the aforementioned presidents, who addressed the most important issues of their times, Obama has failed to replicate their boldness and ambition in tackling the most vital issue of his day – debt. Currently at 74% of GDP and rising, according to the International Monetary Fund, America’s economy, while still functional, will begin to struggle unless this mountain of debt is brought under control. While it cannot be denied that Obama inherited a abysmal economy when he assumed office in 2009, his failure to initiate a program to curb the spiraling deficits in the medium to long run has cast doubt on America’s propensity to function at its current level.

Sadly, Obama is to blame for this.

Having established the National Commission on Fiscal Responsibility and Reform, Obama chose distanced himself from the commission’s findings, choosing instead to pander to his party’s left and offering no signs, other than rhetorically, of reforming entitlements or curbing the deficit.

Mr. Obama can do much to rectify this. Enacting a debt reduction package that is substantive as it is ambitious will provide a vital impetus to America’s long-term economic sustainability. He can also draw on the successful free trade agreements he ratified with Colombia and South Korea by setting in motion a bolder one with the European Union.

“Fortune rewards the brave,” goes the old Machiavellian adage. If Obama is to assure his place on the mantle of greatness, he must face up to these challenges that America faces; otherwise, his presidency will be looked back upon as a failed opportunity to change America for the better.

Trading Technology Quantitative Research SIG is a technology-driven, global quantitative trading firm. We commit our own capital to trade equities and derivatives including options, futures, and ETFs, as well as commodities, bonds, and other financial products around the world. SIG is a place where analytical people work together to trade profitably in uncertain markets.