Some overseas views on Ireland"s woes wide of the mark
Just before Alan Ahearne, an NUI Galway lecturer and astute commentator of the economic slump, was appointed special adviser to Brian Lenihan, he urged the Minister for Finance to go on a roadshow of European capitals to counteract the negative publicity Ireland was generating overseas about its economic woes. One particular piece had troubled Ahearne. Research from a big London-based bank lumped in the activities of overseas banks based in the International Financial Services Centre (IFSC) purportedly to show that the liabilities of the banks here towered nine times above the annual value of the whole economy. There was no denying that the Irish domestic banks were in trouble, but the taxpayer was certainly not exposed to the €1.6 trillion figure the senior London economist believed. Its publication at the end of February was a serious matter. The Irish banking system had been under extreme strain. Over the previous eight weeks, large companies reportedly shifted out tens of billions of euro from the banking system here. Despite the supposed safety of Government ownership, smaller depositors seemed to be again transferring money out from the nationalised Anglo Irish. The wider State guarantee put in place only a few months earlier, also under the most extreme circumstances, appeared to be unwinding. The pressure was showing in other very significant ways, too. People trade countries" debts, including those of Ireland, on the so-called sovereign debt markets. These markets determine the annual price, or interest rate, that a country must pay to raise more debt and to roll over existing borrowings when various bonds come up for repayment. The more people who are ready to lend to a country and accept its sovereign debt paper, the lower the interest rate that a country needs to pay. At the time of the publication of the London bank"s offending research, Irish debt paper was changing hands at the exceptionally high level of six per cent, more than double the rate most other western European countries needed to pay. It appeared to point to the danger that Ireland would fail to tap international debt markets for more cash. Inaccurate The inaccurate research could not have been published at a worse time. Speculators were placing a lot of money on the break-up of the eurozone, implying that small countries, such as Ireland, would be forced to abandon the single currency. That bet became a beaten docket. The economic news continued to be grim. The Irish budget deficit widened alarmingly, necessitating the Government to call an emergency budget to siphon more money from the economy. However, little noticed, the funding crisis for Ireland was, in fact, easing. The interest rate on Irish sovereign debt fell substantially to about 5.1 per cent from the six per cent level it hit in late January. Investors still demand a risk premium to trade and lend the country new money. The Irish premium is about two percentage points above the three per cent rate that Germany must pay and about one percentage point more than Italy"s four per cent rate. The market appears to be saying that Ireland"s Government debt, from a low base, will soar after the taxpayer here buys out all the bad property loans from the banks through the National Asset Management Agency (NAMA). The debt pile will climb to match Italian debt levels of over 100 per cent of our annual GDP. The best we can possibly hope for is for sovereign debt interest rates to fall closer to Italian levels. Ireland is in a tough economic place. But the sovereign debt market appears also to be saying that the country will not share the same fate as Iceland. The splurge of downbeat economic analysis from overseas newspapers and commentators has continued, nonetheless - and some are more accurate than others. The BBC"s economics editor, Stephanie Flanders, wrote a thoughtful piece last month about the crux facing Lenihan: a finance minister needing to raise taxes and cut spending during a slump to soothe the fears of sovereign debt lenders. She was, of course, exploring whether Britain could soon face the same crux of needing to cut spending to satisfy its overseas" lenders. Last week, the New York Times comment pages dealt with the entwined Irish economic and banking crises. Its regular columnist Paul Krugman, an economics Nobel Laureate, also wondered about the policy fix that Ireland faced of having to raise taxes to calm the sovereign debt markets when the same policies could only deepen the economic slump here. The headline under the Princeton University"s commentary, 'Erin Go Broke", and a comparison between Iceland and Ireland, suggested that Ireland was facing a sovereign debt crunch. Meantime, the Daily Telegraph"s coverage of Ireland has been obsessively focused on the euro. One commentator, writing before the British budget last week, stated that Ireland had been a victim of inappropriately low interest rates fixed by the eurozone bankers in Frankfurt. The writer failed to explain how the Bank of England"s higher interest rate regime failed to stop the British economic crisis. Overseas opinion matters. Maybe, on the roadshows, Minister Brian Lenihan will need to convey a few straight messages. The Irish economic crisis is deep. The deficit is about the same as Britain"s. But, lads, the country is not going broke.