The argument that our current programme is working just fine is a fallacy. The scale of our debt burden is far too high to allow any bond market return – but a simple EU deal just might do the trick, writes Karl Whelan.
It is a political truism that, after a brief period in which a new government can blame their predecessors for a nation’s ills, the PR machine switches tack and suddenly the wise and wonderful policies of the new administration are seen to be bearing fruit (if you squint at the world in just the right way).
Sure enough, our new government has proved just as adept at the green jersey rhetoric as its predecessor, even down to the Eamon Gilmore (formerly Ireland’s angriest man) literally urging the opposition to “pull on the green jersey”.
The principal talking points of the green jersey agenda are that the Irish economy is recovering, that the EU and IMF say that we are doing a fantastic job implementing our austerity programme and that international bond markets think we are doing much better than Portugal and, of course, Greece. Our business pages confirmed the latter with large headlines and enthusiastic copy about Ireland’s “return to the bond market” in January.
How are things really going? Let’s start with the recovering economy. Though you wouldn’t know it to listen to government ministers, Irish real GDP declined by 2% in the third quarter of last year. This largely reversed the tentative recovery that had been evident in the previous quarters, so that real GDP in the third quarter was a bit lower than a year earlier.
The tentative recovery had been driven by a strong export performance. Despite claims that this performance was largely due to Ireland’s improved competitiveness, the evidence shows that it was driven by an increase in import demand from Ireland’s leading trading partners.
This demand had largely tailed off by the third quarter of last year and the evidence suggests a further weakening in the fourth quarter. Both the UK and the euro area economies contracted at the end of last year.
The figures that have emerged since the Irish budget was released are likely to have serious implications for the ability to stick to the targets set out in December. For example, suppose Irish real GDP managed to maintain its third-quarter level through the end of last year and all of this year, thus avoiding a technical recession of two successive quarterly declines. This would be a creditable performance against a background of recession in Europe.
However, in that case, the year average of real GDP for 2012 would be 0.7% lower than the year-average level for 2011, a full two percentage points lower than projected in the budget. Budgetary arithmetic, of course, actually depends on nominal revenues rather than real GDP, so it’s also worth noting that the budgetary figures assume an increase in the GDP price index of about 1% even though this index has declined on a year-on-year basis every quarter since 2007:Q4.
While acknowledging the volatile and revision-prone nature of the Irish national accounts, the facts to hand suggest the likelihood of a significant growth shortfall relative to the projections built into the budget, one that could result in little or no progress in reducing the deficit this year.
Against this background, Enda Kenny has chosen to stick with the budget forecast of a 1.3% expansion in the economy this year. Mr Kenny clearly studiously avoids all things Keynesian, including the great man’s maxim about what he does when the facts change.
What about our return to the bond market? Well, this was largely fictitious. A number of Irish financial institutions either partly or wholly-owned by the government chose to swap a government bond maturing in 2014 for one maturing in 2015 that had a higher yield. The gap between this and a genuine new issuance is considerable.
The reduction in government bond yields is certainly good news. The bond markets have decided that the prospect of an Irish default is lower now than they perceived last summer. However, that doesn’t mean they are ready to start funding Ireland’s deficit and significant debt rollovers in large quantities over the next few years. Indeed, I suspect part of the reason bond yields are as low as they are now is the expectation that official funding from the EU and IMF will allow debt defaults on privately-owned debt to be avoided.
Why be critical of the green jersey approach to economic spin? Isn’t it only normal for governments to emphasise the positive? Well, yes, but these are not normal times.
The argument that our current programme is working perfectly and a return to steady bond market funding is imminent is an argument for keeping the EU-IMF programme unchanged.
For this reason, the Government is undermining itself in relation to issues such as dealing with the immense burden imposed on the State by the promissory notes issued to Anglo and Irish Nationwide, a burden that could be substantially reduced on the basis of a fairly simple agreement with our European partners.
The insistence that all is fine perhaps explains why the official line from the Government on this issue focuses on “technical discussions” rather than on the reality that Ireland’s debt burden is likely to prevent a return to the bond market and that it is in both Ireland and Europe’s interests that this burden be reduced.
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