Michael Burke: Moody’s is the first of the credit ratings agencies to cut Irish government debt to below investment grade – the sovereign debt is now ‘junk’. It will be recalled that when the ‘austerity’ programme was introduced- in reality a project to drive down wages and the social wage in order to revive profits- a key justification was that the financial markets needed reassurance that Ireland would remain credit-worthy.
Along with junk status, Irish 10yr yields at the time of writing are 13.65% and Irish 2yr yields are at 18.64%. This ‘inversion’ of the yield curve indicates the perceived market risk of the imminence of default. When the price of shorter-maturity debt falls below that of longer maturities it reflects the perceived risk of an immediate default. Currently Greek long and short-term debt are both trading fractionally above 50 cents in the Euro. Irish 2yr debt is just above 60 cents, while 10yr debt is around 55 cents.
This can be summarised as the view in the bonds market is that both are highly likely to default, and that Greece may do so very soon; Ireland might take a little longer.
There is some anger at Moody’s decision. The complaint is that successive Irish governments have done everything asked of them, that the programme agreed with the Troika is on track and that the real failing is the insufficient capital of the European Stability Mechanism.
These are strange complaints. It is true that successive governments have done everything asked of them – and more. In Fianna Fail’s case severe cuts were imposed when no international body was calling for them. But everything is not on track. Final domestic demand (the bit that actually generates jobs and taxes) is contracting at an annual rate of 5.5%. As a result, despite higher taxes and the imposition of the USC, tax revenues are actually below target and the shortfall seems to be growing. The complaint that the ESM is now not large enough to cope with the crisis in Greece, Ireland and Portugal (let alone Italy) is actually an admission that the problems are deepening.
Of course the interconnected European crisis is also a key factor. But this is far from a one-way street. The failed loans of German, British and French banks to the Irish banking sector and to the State are an important factor in the general crisis.
Moody’s offered this reason for the downgrade. “Ireland has shown a strong commitment to fiscal consolidation and has, to date, delivered on its programme objectives, the rating agency nevertheless notes that implementation risks remain significant, particularly in light of the continued weakness in the Irish economy”.
‘Implementation risk’ is a strange term in this context. It is often used, quite spuriously, in relation to Greece- the implication being that the protestors outside the Parliament in Syntagma Square are somehow preventing the implementation of the cuts and privatisations. On the contrary, all necessary legislation has been passed.
But there are no similar protests outside Leinster House. So in this context especially ‘implementation’ is an abuse of the language. All the packages have been implemented. But they have not been successful, the domestic economy continues to contract and tax revenues to decline as a result.
The reason they have not been successful is suggested in the Moody’s statement; “in light of the continued weakness in the Irish economy”. It is the weakness of the economy that is the source of the crisis, and the downgrade to junk status.
Without policies to re-establish growth, the Troika and the government are navigating the economy towards the rocks.
PS: if there is any silver lining from this round of the crisis, it is this: all talk that the widows and orphans of Ireland (or anywhere else) would be hurt by a default can end. Most pension or insurance funds would have exited high-risk sovereign debt markets a long time ago. But they are simply not allowed to invest in sub-investment grade debt, that is the point of the rating. The private holders of Irish debt are now banks, hedge funds, vulture funds and other parasites.