Ratings Downgrade? Blame Raspberry Vinaigrette. The Recession Diaries – August 27th


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One can only chuckle. Last year the pronouncements of rating agencies were treated as though they were written on Mount Sinai. Downgrades, or the threat of such, were interpreted by our high priests of deflation as demands to cut public spending. That’s what we did – big time; slashing public spending by nearly €9 billion in one year (nearly two-thirds more than the McCarthy committee recommended). Surely our sacrifices would please the gods.

Now the high priests are confused. Our bond performance kept weakening and the downgrades have kept coming, even after all our fiscal sheep and goats were sacrificed (and earnest assurances that our bank bail-outs are affordable and manageable). So, instead of questioning whether they got the translation wrong, the high priests have turned on the gods themselves. The economy hath no fury like a deflationist scorned. Some of us, however, never treated the rating agencies as anything other than culprits in the international financial crisis.

But that doesn’t mean we shouldn’t be worried. Maybe the ‘international markets’ know something that is not being reported here. Take the recent projection of the ESRI.

According to the ESRI, if the Government persists with its present strategy our debt as a percentage of GDP will be 106.9 percent by 2020 and rising. With regards to GNP, it will be 134.1 percent and rising. No wonder the Government’s policies are getting hammered.

What has been the response? What little there has been shows that old habits die hard. It was suggested that the Government should, maybe, considering cutting €4 billion out of the next budget, not €3 billion as they have announced. Shovel. Hole. Dig.

What effect would this have? Hardly any. Using the ESRI’s real growth projections (and taking the consumer price estimates as a proxy for the deflator) I calculate the following.

Over the edge

Our general government debt will be approximately €275 billion by 2020. Is anyone really suggesting that cutting an extra billion in 2011 is going to have any impact whatsoever? Even on a static basis, it would only reduce the debt by a couple of percentage points. Actually, it would be less because the impact of the cut would be to slightly reduce economic growth, slightly reduce tax revenues, and slightly increase unemployment costs. Overall, the impact would be a fraction.

Cut €2 billion more? Cut €3 billion more? Twice, thrice a fraction still remains a fraction.

We are at the end of the road but the deflationary wagon train still keeps going forward. It’s heading towards the abyss. And the problem is that we can’t jump off. Unless we stop the train – and stop it now – we’ll be heading over the edge with it.

And no doubt the high priests of deflation will then find a new scapegoat. I nominate the decadent effect of raspberry vinaigrette on modern fusion cooking. For the purposes of avoiding the truth, it works as good as any.

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6 Responses

  1. William Wall

    September 1, 2010 6:32 am

    Michael, can you (or anyone else who reads this Review) explain the Anglo situation to me. Supposedly, Anglo is costing us 25-50 billion because we are protecting depositors. According to Lenihan there were 250,000 depositors at Anglo at the time they were playing Monopoly and Blind Man’s Buff. Now if I was a depositor there I’d have buggered off as fast as I could, so let’s assume there are still 100,000 hard core depositors left, people who believe in the brand etc. How much money does this represent? Suppose it represents 10 million euro (or a 100 million, or even 10 billion… at this stage it doesn’t matter). Could we, the citizens, simply not say, ‘Come along then, take your money and put it somewhere else.’ Would that not be the cheapest option? We could then close the doors, dust our hands, and congratulate ourselves on having got away lightly enough considering the shower of chancers who ran the place.
    I realise this must be a fantastically simplistic assessment. Can anyone explain why?

  2. Michael Taft

    September 1, 2010 7:10 pm

    William – I don’t know which typo you might be referring to in the Green Party statement, but I do know that we now have a bizarre debate contrasting quick vs. slow wind-down. There is a grave danger that we miss the point entirely. Whether quick or slow, if the bondholders are protected, the taxpayer will pick up the tab. There is a trade-off between the two. On this point you might be interested in Jim Stewart’s excellent post over on Progressive-Economy: http://www.progressive-economy.ie/2010/08/what-to-do-about-anglo-irish-bank.html

    I don’t know quite what the differenece between an ‘orderly’ and ‘disorderly’ wind down would look like; I haven’t heard anyone arguing the latter.

    If all things remained constant in both scenarios (quick vs. slow)- that is, bondholders were treated the same – then there is probably an argument for a slow wind-down as this would allow any of the functioning assets in Anglo to appreciate in value (e.g London property, etc.). It might be of less value in a quick close-down – though I’m open to being completely wrong on that one.

    All I do know is that the issue is probably not how we can avoid paying over the odds on Anglo, but how we can limit the exposure.

    I hope to be putting up a post on this issue on Progressive Economy tomorrow.

  3. William Wall

    September 1, 2010 7:16 pm

    I look forward to it, Michael.
    Ps. The typo is tantalising…. “that the party be wound down…” etc I presume they meant the bank, but, you never know…