Government has learnt nothing from the latest economic crisis

IT has been a crazy few days and weeks in the financial markets.

Sovereign debt crises in Europe, US debt limits almost breached, before the US was downgraded by S&P at the weekend. The effect? Falling interest rates, oil prices and stock markets, rising gold and emerging markets.

So what does it all mean?

There are four main fallouts: Possibility of a double -dip recession is re-emerging; the relative financial weakness of the West (and strength of the East) becomes all too apparent; the fragility of the euro is increasing; failure of politicians on both sides of the Atlantic to grasp the issues is starting to bug the markets.

There are some positives: Oil prices are down coming into the winter; long-term interest rates are also falling; short-term interest rates could stabilise for now — no more base rate hikes this year looks a reasonable prediction — both of these trends should translate into stable mortgage repayments into the New Year.

Perversely, Ireland had its credit rating reaffirmed as investment grade (above Junk status) and the interest costs of our borrowings are set to fall.

The political ramifications could run for close to 18 months as President Obama starts the re-election process and the (far) right are a force this time. Finally, their deficit is not far off Ireland’s. So on the face of it, a large deficit, nervous investors and political uncertainty that could prevail for a significant period of time should not be good news for the US dollar.

The solution is increasingly looking like a need to issue some sort of common “Euro” bonds. But that would require the Germans in particular to underwrite the risk, would result in higher borrowing prices for the good quality borrowers and would require very tight terms and conditions as a result.

The euro has been hugely beneficial to date for Germany. Indeed, one could argue that Germany has had the benefit of weaker countries being members of the euro for a decade. So, there must come a point where it either “pays up” in some way to support a weaker euro or else depart in the knowledge that its mark would be very strong and this would have a different cost in the form of lower economic activity. The question for the Germans is: which is the lower cost?

The conjoined nature of the risks and rewards makes it very complicated. What are the possible solutions?

* Assess the debt capacity (ie. what debt can be taken on and repaid) of the peripheral euro economies.

* Allow these countries to issue bonds in their own names and at their own rates for a significant % of this level of debt.

* The gap between their actual debt and the debt financed by their own bonds could be filled via the issuance of “Euro” bonds which would be centrally issued, cheaper, (possibly subordinated?) but would require the underwriting of the Germans and others for some rather than all of the sovereign debt of Greece or Ireland.

Finally, some questions for the Government. Why are borrowers penalised in their efforts to manage risk when every report on our bank crisis pointed to appalling risk management on their behalf?

Why are banks charging a premium to their business customers to fix rates when reduced risk benefits both banks and borrowers? Why not facilitate tracker holders to fix? Why not approach the EU/IMF to provide hedging lines to provide the above?

I would suggest that risk management remains anabstract concept for our Government and its departments. The practical benefits of it have not been grasped, leading me to conclude that it has learnt nothing from the crisis.

* John Finn is managing director of Treasury Solutions Limited, a Cork-based corporate treasury and corporate finance consultancy