Belfast Telegraph

Friday 26 December 2014

Wait and see: it’s sound advice in uncertain times

Brian Lenihan’s assumption of 4% annual growth looks ambitious
Brian Lenihan’s assumption of 4% annual growth looks ambitious

Festina lente — make haste slowly — said the ancient Romans. “Don't panic,” said the futuristic Hitchhiker's Guide to the Galaxy. Good advice but hard to follow when you're in trouble.

And the Republic is in a good deal of trouble. Broadcasters fear their audiences will vanish if anyone speaks continuously for more than 20 seconds. Newspapers are more determined to find somebody to blame, and less interested in explaining what went wrong.

All these characteristics were on display this week as things went sour on the bond markets. These are important and worrying events, but they do not yet require urgent action. They do require careful thought, both at national and EU level.

There is no doubt that Ireland's credit rating has suffered over the last couple of months as evidenced by rising rates (yields) on government bonds.

Yet the relentless focus on Anglo Irish Bank misses another major reason for that change.

As recently as April, hopes were high that a sustainable recovery was under way in the big economies. Since then, there has been clear evidence of weakening and fears that the US could slip back into recession.

Growth matters desperately to Ireland's prospects. It is a more volatile economy than that of Greece or Portugal. All will need growth, but Ireland will need a lot.

Brian Lenihan's five-year plan assumes average real growth of 4% a year from next year onwards. If this plan worked out, the |national debt would be 80% of output in 2014. A fairer measure for the taxpayer would be 95% of national income (GNP).

That would be alarming, but just about bearable, with annual interest costs twice 2009 levels. But the unknown figure for the banks must then be added.

Watching and waiting seems a lot more sensible than dramatic pre-emptive actions in a world more uncertain than at any time since early 2009.

How long we can wait is unclear. There could even be a crisis over the next few months, if the banks find they cannot replace the loans they took out after 2008.

It could come early next year, when the National Treasury Management Agency next has to do some serious borrowing to cover the 2011 budget deficit and replace old loans.

It is difficult to know what such a crisis in a eurozone country would mean.

EU leaders will have to find a mechanism for debt renegotiation within the euro area to have any chance of avoiding a full-blown crisis. It might still be Greece which tests the mechanisms. Whoever is first, markets will assume that others will follow.

One of the paradoxes is that a debt default of this kind is simultaneously perceived as doom, and touted as a solution to our problems. It is neither.

The fiscal austerity programme is so severe that not much more medicine can be prescribed, although lenders might insist that more pressure be applied to public sector pay and numbers.

The purpose of such a deal would be to cap interest payments on debt. We are unlikely to get away with an annual interest bill of less than 10% of national income — which means 15% of tax revenues.

One difficulty is asking lenders to the state to take a hit, while protecting those who lent to the banks. Yet the 2008 question remains: if any banks default, what would happen to the banking system and what would be the long-term consequences?

The important questions are the ones where answers conceivably may not be found. Costs, productivity, education, public sector efficiency, honest, competent government. These, not bank debts or bond markets, will determine our fate in the end.

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