The Rage and the Ridiculous. The Recession Diaries – August 23rd

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The Central Bank Governor, Patrick Honohan, is outraged. In particular, he is outraged that Irish bond spreads are so high, ridiculously high. Don’t the ‘international markets‘ realise the dynamism of our export sectors, the budgetary and tax reforms, the pain we have suffered to get our public finances under control? Why are they still doing us down?

I find this outrage hard to fathom; not because the international markets are any more prescient or knowledgeable (they did, after all, lead us into the financial meltdown). Rather, that Governor Honohan surely knows better. It is one thing to be positive; it is quite another to ask all of us to be blind to certain realities.

First, it should be noted that much commentary on our bond performance has an insular character to it. Ireland is a minnow in the global bond market. Analysts don’t spend a lot of time examining the highways and byways of the Irish economy. When constructing their investment strategies, Ireland is seen as a good risk for a good price. Unless you think we’re going to default anytime soon, our bond yields give good value for money. This is what the National Treasury Management Agency has been able to exploit. That is why we have borrowed all we need this year and still have €20 billion in our back-pocket – even after all that bank bail-out money.

But let’s not lose the run of ourselves. The Irish economy is well known internationally as the ‘double Irish’ – a significant tax-laundering staging post in a complex world-wide network of corporate tax avoidance. The combination of our ultra-low corporate tax rate along with our accommodating rules on transfer-pricing are what we are well known for. The audiences that Governor Honohan spoke to would have known this. So when he spoke about the dynamism of ‘exports’, there must have been some wry smiles.

There are other reasons why international markets might be unimpressed with the PR campaign being launched on behalf of Government policy. The ESRI recently showed that the current fiscal policy will lead to an incredible level of debt – over 100 percent of GDP and over 130 percent of GNP by 2020. This would make any investor nervous.

Nor is there evidence that Government policy will bring the deficit under control anytime soon. Again, the ESRI projects it won’t be done this side of 2020. The Oxford Economics/Ernst & Young study showed that, maybe, by 2018 or 2019 we’ll get it back to Maastricht compliance.

And then there’s that ‘affordable’ and ‘manageable’ bail-out of Anglo-Irish and INBS.

With the OECD, the EU Commission, and the IMF all warning the Government that its growth projections are too optimistic, investors might see dangers down the road. Low growth equals low tax revenue and higher unemployment costs equals sluggishly high deficits.

Still, with all this deflationary luggage, Governor Honohan took to the road to sell ‘Ireland’. The result probably wasn’t what he was hoping.


We might better served if public officials got down to the hard task of repairing a dysfunctional economy. And being a bit more open about what this will require.

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One Response

  1. Pope Epopt

    August 24, 2010 12:26 pm

    My guess is that the bond market yield is certainly based on a calculation of risk but also an assessment of sovereign will and political vulnerability. This market charges what it thinks the customer will bear – they are not in it for the public good, after all!

    The vampire squid has decided that the political elite has been thoroughly suborned and the citizenry of the Republic is sufficiently cowed and blinkered to ensure that they will continue paying high yields without defaulting.

    So pile on the charges, why not?

    Wry smiles, indeed.