Every silver lining, they say, has a cloud. Or is it the other way round? The new year has certainly got off to a bang in terms of the nascent Irish recovery.
In the last week we saw three developments which on the face of it seem to be proof positive that we have moved forward — turned the corner to face green shoots — and so forth.
The NTMA succeeded in getting away a bond issue, so did Bank of Ireland, and Michael Noonan was voted best finance minister in Europe. While all three are nicer than stories about the impoverished of south Dublin resorting to hunting and eating rats with wings, none of them actually amount to much more than the return of delusion.
Let’s take the last one . It’s ego-boosting to Michael Noonan, one can be sure, to be so voted. And in so far as we have a representative democracy we should bask in the wan reflection. It’s less embarrassing than the 2009 and 2010 rankings when the then minister, Brian Lenihan, was ranked at or among the worst.
However, the rankings are really nothing to do with the minister and all to do with the economy. In so far as the minister has an influence on the economy and its performance reflects theirs, then there is a relation. But Noonan is lucky in that Ireland has been determined to be the best boy in class, taking its beatings and not complaining. The whining noise from the proles is a mere irritant to the markets who applaud (while simultaneously laughing up their sleeves at) us for paying all our debts and more.
Bank of Ireland raised €750m in unsecured unguaranteed bonds. This cost them approximately the same as the government 10- year, and around 1.25% over the government five-year rate. This again is hailed as being a great harbinger of recovery. It is not.
We have seen unsecured unguaranteed senior bonds being repaid not by the issuer but by the taxpayer time and again. There is no doubt in my mind this would happen again. These are as secure as government debt, in practice, when you are a ‘too big to fail bank’, as for us BoI most surely is. So again, why ask for a premium when you know you need none? It’s either delusion as to the real state of repayment or simple greed. We need to see banks becoming more reliant on deposit base not on bonds.
Irish banks have reduced the percent of assets financed from international bonds from the low teens (at the height of the boom) to about 3% now but domestic deposits still only account for third of all funding. This needs to be significantly increased.
In the Draghi era, where the ECB shows its muscle without having to use it, our bond yields have collapsed — that means prices have risen, gifting massive profits to the holders who calculated that no bond would burn.
Combined with the exporting of much of the unemployable youth, state activation actions to prepare people for jobs (whenever they happen) and a rise in desperate entrepreneurs, we have reversed headline unemployment. To top that we have swallowed the austerity medicine to move to a near primary surplus — that is we now more or less pay our way on a daily basis so we can slap down hard those that gibber “sure we’re borrowing billions to pay the ‘insert public sector/welfare media target de jour’.”
Noonan has been lucky and has made his luck — a canny politico he knows how to do that and who can begrudge him this valedictory honour. But it’s as ephemeral as morning mist.
On the markets also we are being lauded. The NTMA had a good week with massive demand for Irish 10-year debt — it could have sold €14bn worth when it wanted €3bn. Irish bonds are now seen as safe, and there is a clear trend for much greater convergence of bond yields across the eurozone.
This is strange, not that there is slow convergence but that there is any remaining divergence. There is no prospect, apart from perhaps Greece and Portugal, that sovereign bonds of eurozone countries will be allowed default. None.
Therefore these are as risky or not as Germany. That is the logic of the Draghi era — no sovereign bondholder will be burned. So why is the market not believing that? The premium for these bonds can’t be liquidity — there is no problem moving the majority of these bonds. So why is there a remaining premium?
Clearly either the markets are deluded and do not accept, despite all the evidence, that European states will go to the wall to repay debt, and that there remains a risk, or governments are deluded they can continue to do this into the future.
Or both. Markets will continue to lend regardless of the reality of the macro-economy so long as they are confident of getting their money back. Being willing to lend is one thing but we should not be willing to borrow regardless.
We now are in effect borrowing on an interest-only basis and need to get back to the habit of repaying debt without incurring further borrowing.
Facing into an era of low nominal GDP/GNP growth we can only ensure that we do not increase our debt/GDP or GNP ratio by actively reducing debt. This habit should become ingrained and not be simply a reaction to critically high levels.
Brian Lucey is professor of finance at Trinity College
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