This is an expanded version of an oped published in the Irish Examiner 12/January/2013
So, we are back in the bond market, which must mean that every thing is great, and the recession is over….. three cheers….no? really?
Well, one cheer for the NTMA anyhow is due, they did a solid professional job of tapping the existing bond base for additional money. What a lot of commentators fail to realize is that it’s a very long time indeed, back in the late 1970s, when we actually paid off debt. National debt, the stuff that plugs the still yawning gap between government income and expenditure, doesn’t any more get paid off but instead gets rolled over. Absent any banking crisis we still have that gap and it has to be filled. The concerns of Dr Honohan, that the markets don’t get it and demand a risk premium over Germany, are I fear misplaced. We are nowhere near out of the woods. As Van Rumpoy noted, we would have to take much the same corrective action as we are now doing, absent a banking crisis, to fix the broken government finances. And broken they remain
Between this year and next we need to redeem over 13b of government bonds, monies previously borrowed. Between now and the end of 2016 the sum is closer to 27b. So this modest sum is a useful step towards the funding of that repayment, which must be made before a single penny is borrowed to fill the 20b or more that will be spent by government in excess of its income.
Governor Honohan, and to some extent the Taoiseach in his talk to the CDU have expressed concern that the markets are not recognizing fully the efforts that have been made. The NTMA have expressed their concern also. However, the reality is that the markets are only vaguely efficient, if even that. Bond investors are concerned with getting their money back: in the pre crisis period the assumption was that within a union there was, somehow, equalization of risk and that lending to Greece or Ireland was no riskier than to Germany. Of course, we know now that that was completely untrue – it relied on an unspoken and untested assumption that the richer nations would bail out the poorer in a manner that would not scorch the economic earth. That this equalization is not going to return was noted by the Governor. But it then becomes clear that for the very long term we are going to pay much more than Germany or Austria for our debt.
If we examine Ireland and Greece over the last decade or so we can see why. The government have done an excellent job of making clear that Ireland is not Greece. But from a high-level financial analysis perspective its not that clear that we are in fact so very different. Take debt/GDP ratios; for Greece that has risen by 80% from the 2000 base while for us it has gone up by 350%. The difference was that Greece started at a high level, while the banking crisis has dragged us up. EU forecasts are now for debt GDP ratios in 2014 in Ireland to be 120% (140% vs GNP, which given we are unwilling or unable to tax MNC’s at any higher rate is the more appropriate level) versus a Greek level of 188%. Over the period we have run cumulative primary deficits equivalent to 40% of GDP while Greece ran at 25% ; Greece will be paying 6% of GDP in interest payments on debt in 2014, we will be paying 5.6% ( 6.7% of GNP) ; the implicit interst rate on Greek debt is forecast to be 3.2% while we will be paying 4.8%. What distinguishes us from Greece is a) a perception, broadly correct, that we as a nation have played “straight” in terms of making public our problems and in terms of having an effective and efficient tax collection system, b) a perception, again broadly correct, that we have better midterm economic prospects. Thus Ireland is able to contemplate returning to “normal” borrowing while Greece is still in deep trouble. But normal borrowing, even at what the powers that be consider to be inflated prices, is contingent on several stars coming into alignment
First, we must continue to get our basic financial position in order. Despite all the pain that we have taken the reality is we still face deficits of 7% and 5% for 2013 and 2014. Little radical change has been done or will be contemplated in many areas of the economy. Second, and related to that, we continue to pin our hopes on export led growth, into a challenging world economy. Third, government trust (even if ratings agencies and the Troika and independent analysts disagree) that the banks are sorted, in that the slow erosion of capital by the slower writing down of mortgage loans will not ersult in a need for more capital. And fourth, the market perception is that a meaningful deal will be done on the bank debt. The latter is getting more and more unlikely. Noonan has signalled that he is keen to exit the banks, selling the ownership stakes valued at 8b. These represent the NTMA valuaton of the 20b injected. The only large chunk of debt on which meaningful (setting to zero) action is the anglo note, and Brian Hayes stated last Wednesday that it will be paid back in full. So no meaningful deal will emerge – nor should it, if we are back in the markets, out of the banks and singing that we are all ok. Meanwhile, with industrial production slumping, exports (patent income washing excepted) flat, consumer confidence falling, house lrices remaining under lressure, incomes falling , health costs rising as service provision declines, and bank mortgage lending back somewhere last seen in the 1970s, singing that all is well to the international markets will merely sound cacophonously surreal to the domestic audience. But for six months we can be ignored as the government scurry about in fleets of shiny new cars “running Europe”. Running indeed…