Anglo-Irish relations are a casualty of Brexit

The convergence of the two countries has been disrupted by the UK’s vote to leave the EU

Gideon Rachman

Over the past 50 years, the image of Ireland and the Irish has been transformed in Britain.

Thinking back to the 1970s, I cringe at the memory of the “Irish jokes” about “thick Paddies” that were a staple of my London school playground. When the Irish were not laughable, they were dangerous. The IRA bombing campaigns in the UK tarred the whole of Ireland as somehow linked to terrorism.

But in Britain today, Ireland is cool. The Irish are no longer the butt of jokes — they are the ones telling them. Entertainers such as Graham Norton and Dara O Briain are mainstays of BBC schedules. Dublin has the dubious privilege of being a favourite haunt for British stag weekends. And Anglo-Irish friendship is celebrated on the sporting field, with an Irishman, Eoin Morgan, captaining the England one-day cricket team.

The economic boom in Ireland and the passage of time have done a lot to bury old stereotypes. But so has joint membership of the EU. The danger now is that Brexit has reintroduced a dangerous strain of bitterness into Anglo-Irish relations, with the British and Irish once again harbouring resentment and anger towards each other.

Ireland and the UK joined the then European Economic Community together in 1973. Their joint membership helped to create a new kind of relationship, based on mutual respect and shared interests. European law also provided the legal framework for Dublin and London to work together on the Good Friday Agreement of 1998 that effectively ended the Troubles in Northern Ireland. In the European single market, a hard border could be erased and binary questions of citizenship — British or Irish — blurred.

Within the EU, the British and Irish discovered that they have a lot in common. In Brussels, they were allies in the struggle against “tax harmonisation”. When the UK stayed out of the Schengen border-free travel area within the EU, the Irish did the same — in favour of preserving the common travel area between the UK and the Republic of Ireland. Both countries have felt a pull from the US, with Mary Harney, former deputy prime minister of Ireland, once remarking that the Irish were spiritually “closer to Boston than Berlin”.

This vein of Euroscepticism led the Irish initially to vote against the ratification of the EU’s Nice and Lisbon treaties (referendum results that anticipated Britain’s 2016 vote for Brexit). In the Irish case, the initial referendums were later reversed in second votes.

But this convergence of Britain and Ireland has been radically disrupted by Brexit. Many Brexiters are enraged by the Irish insistence on a “backstop” to prevent a hard border between the Republic of Ireland and Northern Ireland, believing this to be a largely invented problem designed simply to thwart Brexit. Many Irish people are, in turn, outraged by what they perceive as Britain’s high-handed dismissal of their concerns, believing this to reflect old colonial attitudes. It is an uncomfortable coincidence that the Irish war of independence started a century ago, in 1919, culminating in the creation of the Irish Free State.

At the moment, the British and Irish governments are locked in a game of chicken over the backstop. Unless one of them swerves, there is a clear danger that Britain and Ireland will go over the no-deal cliff together on March 29.

Both countries would suffer badly. The British are already transfixed by no-deal horror stories, involving bureaucratic chaos and shortages of food and medicine. The Irish face an economic rupture with their second-largest export market, after the US.

The implications for Ireland’s crucial agricultural sector are particularly grim, given that the British government has announced that it will impose tariffs on food imports; in the event of no deal, Irish beef farmers would be particularly vulnerable. Last week, the Irish government published emergency legislation designed for a no-deal Brexit; an idea that Simon Coveney, deputy prime minister, described as a “lose, lose lose” proposition.

Even a more orderly Brexit will damage Anglo-Irish relations. Having felt humiliated by Ireland in the negotiations, some Brexiters will want to demonstrate that Britain can still push around its smaller neighbour. At the same time there will be continuing paranoia in Westminster that Ireland may enlist its bigger friends in Brussels, Berlin (or, God forbid, Washington), to once again get one over on the Brits.

Negotiating new relationships on trade and immigration and a host of other issues will be a constant irritant. And the question of Irish unity will also be back on the table. The thought of “losing” Northern Ireland will enrage British nationalists, many of whom are also strong Unionists. But the prospect of a united Ireland could also be a big problem for Dublin, with alarming financial and security implications.

Ireland might also find itself newly vulnerable within the EU. There is already grumbling from some of the other EU members that Ireland must repay the “solidarity” it has been extended over Brexit, by abandoning its insistence on setting its own (low) corporate tax rates.

As the process of Brexit unfolds, we are discovering how many pleasant aspects of modern life in Britain are closely linked to EU membership. A good relationship between Britain and Ireland should be added to that list.

How the shale revolution is reshaping world markets

The fast-growing industry in the US is proving doubters of its sustainability wrong

Nick Butler

A tanker docked at Cheniere Energy’s Texas terminal by the Sabine Pass in February 2016 to ship LNG to Brazil for the start of US shale exports © Bloomberg

The latest short-term outlook for US oil production published by the Energy Information Administration shows output rising to 13.2m barrels a day by the end of 2020. If this is achieved (and the EIA is traditionally cautious), the US will be the largest producer in the world, by a clear margin over Saudi Arabia and Russia.

Two-thirds of that production will come from “tight oil” — that produced by fracking shale rocks. Ten years after the shale business began, the revolution is as dynamic as ever.

Commentators who said shale was a marginal short-term phenomenon that would be killed off by falling prices, or rapid reservoir depletion, have been proved wrong. What began as a gas play now supplies the US with the bulk of its oil and gas needs.

Threatened by the downturn in prices after 2014, the shale industry has achieved a remarkable reduction in costs. The current outlook is for output to continue to rise until at least the mid 2020s even at current oil prices.

The impact on the global market and trade has been profound. The US is now a net exporter of both oil and gas, and recent figures from the International Energy Agency suggest that exports will continue to grow steadily.

That means US production growth is absorbing most of the annual increases in global oil demand (around 1m b/d), leaving Opec and Russia little or no scope to increase their own exports or revenue.

US export growth is the main reason why, despite the falls in production in Venezuela and Iran as a result of sanctions and social disintegration, the oil price at just over $60 for a barrel of Brent crude is below what it was 40 years ago in real terms.

US exports are also reshaping the world market for natural gas. The latest surge in gas exports, built on the growing volumes of that produced as a byproduct of oil extraction, is adding to a global glut. Prices can only fall further and expectations of a price surge in the early 2020s now look misplaced.

The past year has seen something of a pause in shale development because the infrastructure necessary to move additional volumes, particularly from the giant Permian field in Texas and New Mexico, had to be put in place. Nevertheless, US output rose by over 1m b/d last year.

Shale gas has taken market share from coal in the US and despite the best efforts of the Trump administration the gradual decline of coal will continue. Shale gas has also undermined the US nuclear business.

Oil from shale has removed the US dependence on oil imports. Last year only some 1.5m b/d of oil was traded into the US from the Middle East, clearly reducing the strategic importance of an area that was once a priority for American foreign policy.

The revolution is live but has not yet been exported. The potential exists. There are shale rocks in China, southern Africa, Russia and many other places around the world. But progress has been slow, not least because additional supplies are simply not needed in a saturated market.

Now, however, the situation is beginning to change. Shale development in Argentina and Canada is growing and the big energy companies, including BP and Chevron, are investing at a material level for the first time. The lesson of the US experience is that once a new industry is in place with the necessary skills and infrastructure, output from identified basins can grow beyond all initial expectations. The global shale revolution has barely begun, and the changes to the pattern of trade that we have seen so far are no more than a hint of the disruption to come.

The writer is an energy commentator for the FT and chair of the King’s Policy Institute at King’s College London

Whatever happened to the EM rally?

Strong positioning data suggest investors may have little appetite for more

Jonathan Wheatley

For emerging market investors, 2019 began promisingly. The US Federal Reserve has held back from adding to a run of interest rate rises that hurt EM assets last year, while fears of a more bruising trade war between the US and China have receded.

However, a January rally in the bonds and stocks of many developing economies has since fizzled.

Given the more benign backdrop delivered by a shift in policy from the Fed, the failure of EM markets to sustain their zip may lie in the fact that investors began the year with plenty of exposure to them, according to Robin Brooks at the Institute of International Finance, an industry association and gatherer of EM data.

The IIF examined balance of payments data from 23 emerging economies, broken down by cross-border flows and shifts in asset prices, to see how the value of foreign holdings of each countries’ securities, such as stocks and bonds, have changed.

Their research underlined that a decade of quantitative easing by western central banks triggered a flood of foreign money into EM assets.

Between 2010 and 2018, investors poured money into the majority of EM countries, with only Russia and Hungary missing out over the period. Although the effect of changes in the prices of EM assets was less uniform, the broad trend was that the value of foreign holdings of securities, as a share of total GDP, rose across EMs.

Mr Brooks and his colleagues also found that, despite last year’s rout in EM assets, most foreign investors took the hit to valuations without reducing their exposure. The IIF’s data suggest that flows were mildly negative, at most.

The analysis indicates that fund managers began the year with significant exposure to EM assets, putting a curb on their appetite for more. Until there are signs that global growth, and the Chinese economy in particular, can recover some momentum, the EM rally may well stay on hold.

Copper Prices Get Shanghaied

Prices of the metal, which have lost steam recently, bear more than a casual resemblance to trends in China’s rates and stock market.

By Nathaniel Taplin

Molten copper flowing at a smelter in Tongling, China, on Jan. 17.
Molten copper flowing at a smelter in Tongling, China, on Jan. 17. Photo: Qilai Shen/Bloomberg News

Students of global markets may have noticed that when it’s sunny in Shanghai, copper prices tend to gleam brighter, too.

The Shanghai Composite, China’s main stock benchmark, and global copper prices have risen in tandem since the start of the year, with the latter gaining 9% and the former up a full 23%. Recently both have lost steam.

Copper, the metal that supposedly has a doctorate in economics, is widely considered a reliable barometer of economic activity. The Shanghai Composite, filled with trend-chasing retail investors and heavily managed by the government, is not. What’s going on?

The man behind the curtain is, most likely, Chinese short-term borrowing costs. This latest run-up in Chinese stocks, like the last big bull market in 2015, was fueled by margin borrowing.

Early this year, China’s central bank was busy easing, too—a cut to the amount of cash banks must hold in reserve pushed short-term borrowing costs down near 2016 lows for much of January and February. That helped supercharge the stock rally, initially sparked by rising odds of a trade deal with the U.S. Meanwhile, speculators—watching the monster rally in Chinese stocks—probably concluded the worst was now over for the Chinese economy and bid up copper.

That now seems to have been premature. What ultimately matters for Chinese copper demand isn’t overnight borrowing costs, but how much companies that actually build things borrow and pay for loans. Corporate bank lending rates remain stubbornly high, and real credit growth has barely begun to recover. And China’s property market, the most important global copper demand source, is starting to look soggy.

Meantime, the People’s Bank of China, worried about a new stock bubble, has already mopped up much of the liquidity released in January. Short-term rates have moved back up, while margin borrowing has flatlined again, as have stocks and copper.

The Chinese economy is still slowing—just ask those real corporate borrowers and builders. That means more easing looms, which could spell a lot of volatility in short-term rates, stocks and metal prices in the months ahead while the central bank keeps trying to wrestle down long-term borrowing costs without pumping up a new stock bubble.

Short-end rates and shiny stock rallies are all very well. Investors looking for a clearer signal on metal prices should keep an eye on more-boring but reliable barometers, such as credit growth and weighted average bank lending rates.

Risky U.S. Loan Markets Lean Too Much on Japan

A single key source of funding has been a critical element in funding private-equity owned companies

By Paul J. Davies

Relying too much on one group of buyers is always dangerous: If they disappear, your business is toast.

The world of risky loans used to back private-equity deals is doing this twice over: Demand for loans is dominated by investment vehicles known as collateralized loan obligations (CLOs) and those vehicles, in turn, rely heavily on one group of investors, Japanese banks.

Japanese buyers haven’t stopped buying yet, but other investors see their appetite as a critical element in the funding of private-equity backed businesses. If they do stop, fewer loans will be available at a much higher cost and that would spell trouble.

CLOs buy portfolios of loans and get their funding by selling a mix of equity and debt. They currently buy more than 60% of all new leveraged loans issued in the U.S., a greater share than before the 2008 crisis.

As the CLO market has boomed, Japanese buyers have taken between 60% and 75% of all the most senior, AAA-rated debt, according to various market participants. One bank alone, Norinchukin, owns $62 billion of this debt, equivalent to owning nearly 10% of the entire CLO market.

The banks have rushed into CLOs in the hunt for higher yields than they can get on other safe debt. CLOs and the loans they hold also offer protection from rising interest rates because they pay a floating-rate coupon. They also proved resilient during the last crisis: While other vehicles exposed to subprime mortgages collapsed, no CLO defaulted on its senior debt.

This time around, though, the popularity of CLOs has helped to increase the average riskiness of leveraged loans. CLOs must stay full of loans and they need to earn a certain amount in order to pay bondholders and generate a return for equity investors.

A pedestrian walks past a stock board in Tokyo. The reliance on Japanese buyers is one of the threats to the loan market.
A pedestrian walks past a stock board in Tokyo. The reliance on Japanese buyers is one of the threats to the loan market. Photo: Natsuki Sakai/Zuma Press 

As loan yields have been squeezed, CLO managers have been forced to buy riskier loans to produce enough income for their investors. This has lifted demand for lower-rated loans: In the U.S., the share of the loan market rated B or B-minus has grown from less than 20% in 2011 to nearly 40% now, according to Barclays .CLO holdings are concentrated around B-ratings, according to Fitch Ratings, while their holdings of CCC-rated loans are also higher than in the past.

CLOs have limits on how many of the worst quality loans they are allowed to hold, raising concerns they could become forced sellers if loans suffer a spate of downgrades. However, it is more likely that CLO managers would simply stop investing and use income from their loans to pay down their debt.

This ratings issue and the reliance on Japanese buyers are twin threats to the loan market.

These threats are less about a wave of fire sales and more about a sudden stop to new funding.

That matters because private-equity backed businesses don’t tend to pay down their debt, but rely on repeated rounds of refinancing. If the taps are turned off, a rise in defaults will likely follow.