Belfast Telegraph

Saturday 19 April 2014

We may be able to sell PIG, but not in a poke

Brian Lenihan says the deficit needs most attention

One swallow does not make a summer and one falling leaf does not make winter. Especially not in August.

Government borrowing of very short-term loans, in a month when most financial market operators are sunning themselves on expensive beaches, is not the best test of the state of Ireland's credit rating.

But the winds have been getting chillier for some months, and the apparent doubling of the cost of those loans, as compared with a few weeks ago, will have caused more than a few shivers.

The most common explanation as to why this six-month money cost the Government 2.8%, instead of 1.6% as in July, was that it came a day after more bad news from the gaping maw that is Anglo Irish Bank. (One hopes it had nothing to do with the Daily Telegraph mistakenly calling Anglo AIB (Allied Irish Bank) several times in an interview with Central Bank governor Patrick Honohan. Especially when the governor “fumed at the mere mention” of Anglo).

It will have had something to do with the fact that the bailout for Anglo approved by the European Union Commission last Wednesday was bigger than had been expected. It is also still not the final figure — or the final approval. Markets can deal with bad news, but not with uncertainty.

Dr Honohan believes that the final cost of rescuing the whole banking system will be €25bn.

The terrible thing about that, if he is right, is that AIB, Bank of Ireland and the three smaller mortgage lenders could all have been pulled through for very little final cost. It is all down to Anglo.

But it is quite wrong to think that Ireland's problems on debt markets are all down to Anglo, or the banks in general.

The two eurozone countries with worse credit standing than Ireland, Portugal and Greece, |have relatively minor banking problems.

What all three have is large deficits, and doubts about their economic prospects.

In Ireland's case, the economic prospects may be better. Dr Honohan thinks markets have not taken that into account enough. But the budget deficit in Ireland — at 12% of output (GDP) — is possibly the worst of the three (it is always hard to be sure about Greece), and it has the banking costs as well.

Brian Lenihan himself has said that people should bang on less about the banks and pay more attention to the budget deficit.

You might think he would prefer if we didn't, such is the scale of the problem, but he is clearly worried about the loss of political momentum in dealing with it.

There is no doubt which is the bigger concern. The country borrowed €25bn last year alone to keep the public services running. That amounts to one banking rescue, if we take Dr Honohan's figure. It will have borrowed the same again by next March. Two banking rescues.

Even on the Government's own figures, the cost of a third banking rescue will have been borrowed by the end of 2012. And these figures may be worse than that, as the global economy lurches into what looks like a double dip, and last December's hopes of strong growth by 2013 start to fade.

Last month's government bond auction sent mixed signals, coming the day after one ratings agency cut Ireland's credit standing. Six-year bonds cost just under 5% — down on June — but 10-year loans were sharply higher, at 5.5%.

If, as expected, the Department of Finance reduces its growth forecasts in its next budget estimates, the Government will have to produce a more credible plan for avoiding a debt crisis. This can hardly avoid detailed spending profiles for health, education and social welfare over the next five years, and precise taxation measures to pay for them.

We may just be able to sell |the markets this PIG (as Portugal, Ireland and Greece are called), but not if it's in a poke.