Irish eyes are not smiling

"Is Standard & Poor's being overly pessimistic in its view on the Irish economy?" The Irish Times asked its readership to poll and the voting was a fairly close 53 percent "Yes" to 47 percent "No" by the afternoon of Friday 27 August 2010.

"Paul", posted a comment on the Irish Times' website: "...they are being honest if you look at the history of this crash/depression in Ireland. There has been a willing tendency among our establishment to ignore the hard facts...This has been going on for several years, probably since 2005-6 when it was clear that the property bubble was finally starting to falter and our banks were up to their necks in it. It was at that point that exhortations to put the "green jersey" on, and "talk up" the prospects of "Ireland Inc" started to be heard. Mostly coming from people who have a vested interest in us not looking deeply at what happened...and from those reliant on overpriced assets remaining overpriced..."

Recognise any pertinent criticisms? Paul is obviously not a politician, I can only remember John Prescott when Deputy PM saying that house-price inflation was getting out of hand and not a good thing. Unfortunately, he was not able to do anything about it.

Despite S&P's Tuesday downgrade to AA-, on Wednesday, Ireland's National Treasury Management Agency (NTMA) was able to sell 600 million euros of short-term Government debt at a lower interest rate than the auction only a fortnight before. The average yield on maturing bills in February 2011 fell to 1.978 percent from 2.458 percent two weeks previously on a sale of 200 million euros, whilst paper maturing in April 2011 had an average yield of 2.348 percent, falling from 2.81 percent from 11 August 2010 on a sale of 400 million euros. There was a strong bid-to-cover ratio of 10:1. Eleventh of August's auction had been for a total of one billion euros.

The Irish Government can take cheer from comments made by Canadian Finance Minister, Jim Flaherty, in Dublin for a three day visit. In an interview with The Irish Times, he told reporter Simon Carswell: "Quite frankly, some of the work done by ratings agencies did not assist and contributed to what became a serious global crisis so they are part of the story."

Mr Flaherty went on to say that, following meetings with Irish officials, he realised "even more intensely than I did before being here" the seriousness of the crisis and "...what a mountain there is to climb to restore confidence and stability." Not certain whether this should be taken as a compliment!

Emphasising that markets and ratings agencies need to realise it will take time for (Irish) government policies to take effect, Mr Flaherty praised Ireland, saying it had led Europe "in taking the necessary, courageous decisions towards fiscal consolidation."

Mr Flaherty quite rightly cited the "strong, effective supervision" by Canada's banking regulator as a major factor in the Canadian banks being hardly affected by the global banking crisis. He could have added that Canada's banks operate a rather conservative policy on lending and capital ratios, more in line with Scottish and English banking tradition of the 1960's and 70's.

Unsurprisingly, the S&P downgrade was not well received in Dublin with NTMA's Chief Executive calling the analysis "flawed".

Contrasting the encouraging, credit where credit's due, appraisal of the Canadian Finance Minister and S&P's "flawed" downgrade, The Irish Times' Business section sounded out "three of the markets where Irish bond investors would normally be found."

The paper's Fiona Walsh found that the City of London was the most sympathetic to the Irish enquiries - no doubt praying that the UK is doing enough to hold on to its triple A rating. Nonetheless, opinion was frank in that the downgrade was not unexpected, except maybe for the timing, in the light of Ireland's banking sector crisis. This "crisis" has persistently come to the fore during the past month or two.

Deutsche Bank strategist, Jim Reid said: "The downside risk for the rating is a material deterioration of the banking sector and/or the economy from here." This might ring an alarm bell in Dublin where the Irish Government hopes to produce a primary budget surplus by 2013 and stabilize the country's debt to GDP ratio at 84 percent.

Commerzbank's Peter Dixon expressed scepticism at the Irish Government's ability to meet this GDP to debt ratio and added: "What the Government ought not to do is push through additional fiscal retrenchment, and it may opt to follow the UK lead and exclude the effects of financial sector transactions on the fiscal balance. It would make life much simpler."

Citibank's Robert Crossley told Ms Walsh that he sees the Irish Government's big test in September when 13 billion euros of Government guaranteed bank debt expires, with any issue in discharging or rolling this over only making a further downgrade likely.

Niall Stanage reporting in New York, again found the downgrade unsurprising and the main cause blamed on the banking sector's problems, though from New York's perspective, this sector's failings were not just an issue for Ireland but "across Europe". However, whereas everybody was aware of the Greek crisis, the downgrade of Ireland's rating is due to the "sharp increase in the Irish debt burden over a very short period".

I remember Spain and Portugal complaining back in the spring/early summer about their downgrades from the ratings agencies, claiming that their GDP/Debt ratios were nothing like as bad (as that of Greece) but the agencies had noted a marked deterioration in the trend and reduced their debt status accordingly.

Sara Johnson of IHS Global Insight told the reporter: "As well as the fiscal situation, it (Ireland) is less competitive than it once was..." adding a little ominously: "...I believe there will not be solid growth for several years." A comment echoed by Ulster Bank's prediction of only one percent growth for the Irish economy in 2010. Ulster Bank still expected Ireland's GNP to contract by 0.4 percent. These latest estimates by the Bank for both figures, were better than previously forecast.

It appears that a feeling generally held, not just in New York, is that debt levels in Europe, Japan and the USA "are unsustainable", but a small positive note from Sara Johnson with regard to Ireland is "at least the starting point for the debt levels is lower", than the likes of Greece.

Derek Scally for The Irish Times in Frankfurt must have found this the most pessimistic of the three financial markets surveyed, possibly reflecting Germany's irritation with its fellow Eurozone members at being forever the currency's backstop. Germany's Handelsblatt daily, headlined one of two articles on Ireland's downgrade: "Bank Rescue Brings Ireland To The Financial Brink"

The reporter then quotes The Financial Times Deutschland: "After impressing investors initially with a tough austerity line, now concerns are growing that restructuring the banks could burden state finances more heavily than expected." Note to UK Government, once embarked on an austerity programme, no bottling out! Punishment will soon follow.

Most alarming of all is an editorial entitled "Ireland's Nightmare Bank" in the Frankfurter Allgemeine. The German newspaper warns Europe in general, saying that Anglo Irish Bank may be too big to let fail, but might also be too large for the Irish State to rescue on its own. It calls it a nightmare bank, which has already swallowed capital, equivalent to 15 percent of the Irish domestic product - and no-one knows how much more it will need.

There is no doubt that the Irish Government can only be disappointed at S&P's downgrade, even if the markets had already taken such a measure into consideration. The NTMA will have read these opinions expressed in the major money markets and at the personal level it would be natural to feel a little downhearted at the concurrence of market with agency viewpoint. Even in the UK where one is more likely to expect a greater degree of sympathy with Ireland's problems there was no quibble about S&P's judgement.

Given the harsh corrective medicine imposed by the Irish Government, including amongst other measures, job losses and substantial pay cuts throughout the (large) public sector, Britain can only pray that the ConLib coalition's austerity programme will be sufficient to correct our economic woes. The Irish make George Osborne seem just a cuddly kitten.