Opinion = Fact = The Whole Truth?: 24th July The Recession Diaries

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On the One News at One, RTE’s business editor David Murphy concluded his piece on the National Treasury Management Agency’s Annual Report:

‘The other problem is that the credit rating agencies have downgraded Ireland’s debt. International markets will want to see serious spending cuts so the country can stop bleeding money day after day.’

There are three things wrong in just this last sentence. First, did David actually interview the ‘international markets’ to assess their views on the Government’s budgetary strategy? Indeed, how does one actually interview a ‘market’? Maybe, David meant those institutions that purchase bonds – insurance and pension funds, investment funds, banks (including Central banks) spread throughout the world. Did he interview them? Maybe, David meant the syndicates through which debt is bought and sold? Did he interview any of them?

I suspect not. If he had, he might have got a number of different opinions. Maybe they want to see ‘serious spending cuts’; or, maybe tax increases. Maybe they want to see stimulus programmes to restore growth and employment to the economy (for instance, this whacky employers’ group wants increases in wages, tax increases on the rich, increases in social benefits, and stimulus programmes out the ying-yang).

Or, maybe, the ‘markets’ don’t really care about budgetary strategies in wee little Ireland. After all, if you just want to make some money on the six-month paper market, you know you’ll get your money back plus interest regardless of what shape the country is in unless the capital is about to fall to economic Khmer Rouge brigades. But we’ll never know any of this because David in all probability didn’t investigate. He just repeated a line that comes straight from The Report.

Second – ‘ . . so the country can stop bleeding money day after day.’ Nice image. But there’s as programmed assumption that ‘serious spending cuts’ will somehow stop the bleeding. Maybe. Maybe not. It’s a contestable position. But David presents this as a ‘fact’ – an automatic cause and effect.

Now, I’ve gone over this ground a number of times but it’s worth doing it again. Because all we get in the media is ‘we’re borrowing €400 million a week’ (horrified tones, shaking of the head) – repeating a phrase used by The Chair of The Committee that wrote The Report. Now if the ESRI’s simulations are correct – that cutting €3 billion off public spending will only reduce our borrowing requirement by 0.9 percent – this would mean reducing that €400 million a week figure to €371 million a week – at best, at absolutely best.

That would stop the bleeding? To be honest, I wouldn’t want the Committee to apply triage to me.

Third is the way that opinion morphs into fact. The debate is no longer about different ways to bring the fiscal deficit under control. We just have the facts: markets want = serious spending cuts = stop the fiscal bleeding. The debate is circumscribed, limited, short-changed.

Let’s look at one fact. David referred to the credit agencies downgrading our debt. This did happen (first, Standard & Poor, then Fitch, then Moody’s). Sounds terrible. Must really be affecting both our ability to sell our debt and driving up the cost of selling our debt. Is either of these true? Let’s test these assumptions.

From an economic perspective, the higher the Bond Index the better. A high index indicates reduced cost of borrowing. A low index indicates increased borrowing costs. For instance, in the last 12 months:

  • The lowest point in the Index was on January 26th when tit fell to 91.81 – with a gross redemption yield of 5.74 percent (yes, that was the time when Anglo-Irish was nationalised)
  • The highest point was on December 3rd when the Index topped out at 101.43 with a gross redemption yield of 3.97 percent

We want to head back towards the December 3rd point. But surely with all those credit agency downgrades we must be going in the wrong direction. Are we?

Bond 5

No. The graph charts the Bond Index from March 23rd – a week before the first downgrade by Standard & Poor. We find that the credit downgrades didn’t have much if any affect at all. The Index continued to rise after two downgrades (Fitch downgraded the week after Standard & Poor). It dipped starting in May but returned to growth quickly and continued rising after the Moody downgrade.

Where are we now? In the four month period, containing three downgrades, we are edging closer to our previous 12 month high. We are closer much closer to this high than our previous 12 month low. We are moving slowly in the right direction. In the last few months we have closed the spread with German bond yields by a third.

Are we having trouble selling our bonds? Doesn’t look like it. In the last three days, the NTMA auctioned two bonds and Treasury Bills. They took in €2 billion and were over-subscribed by three to four times. In effect, they were turning away investors. The NTMA has pretty much borrowed all we need for this year and, in addition, have a cash cushion of €20 billion. Maybe we should get on to the credit agencies and ask them to downgrade us again (okay, a bit cheeky, but you get my point).

This is not an argument for treating the bond ‘markets’ as a cash cow. We have to take into account issues of debt, interest payments, yields, borrowing sustainability, etc. But a starting point is to, first, identify the real facts on the ground – and not just repeat something we heard and treat it as fact. Second, it is imperative that we separate out fact from opinion. This is not to dismiss opinion – informed opinion is always helpful, even (and especially) when it doesn’t coincide with our own.

When that happens, the quality of the debate improves, different voices are heard and new options may appear.

Unfortunately, that’s not happening now.

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