‘You can take a horse to water but you can’t force it to drink’. A truly wonderful phrase that has been around since time immemorial but that in the case of Ireland may just be about to be proven wrong. The fact that Ireland does not have any immediate need for additional funding or requirement to pay down or even replace existing debt before next June matters far less it seems than that markets combined with maybe EU and the struggling ECB authorities appear to have decided that enough is enough.
That the Irish government had almost a year ago set out what appeared as a bold strategy to bring the current (net of banks) 12% budget deficit down to just 3% by 2014, that unlike the situation in Greece it seemed that although it had little respect for the Fianna Fail government the Irish public appeared to be onside attempts to bring down unprecedented levels of deficit matters far less to markets that getting this dangerous problem off the books. To do that in market and maybe eyes of other financial authorities mean that Ireland must now follow Greece going cap in hand to a one, other or a combination of the International Monetary Fund and European Financial Stability Fund. Given the extent of visible market pressure it would probably be crass stupidity to argue that they are wrong and that Ireland should just be left to get on with the job in its own way. This is after all a property induced crisis that has destroyed the credibility of several Irish banks and brought the Irish economy virtually to its knees. With property prices in a market that clearly has substantial real estate overcapacity falling by the day the genie it seems is now all the way out of the lamp. The message is clear – unless the Irish government acquiesces to market demands the ride ahead could be much further troubled. That means that the cost of borrowing on the bonds that it has issued will probably rise and rise.
Are markets right to be so troubled about Ireland’s plight? With the problems of Greece far from over yet and given that the Euro is increasingly being seen as a powder keg waiting to blow-up it seems to me that unless the fast growing heat can suddenly be doused the answer to that question can only be yes. The renewed and to some, seemingly unreasonable pressure now being placed on the already struggling Irish government and that may yet be followed by similar pressure being brought to bear on other troubled Euro member states such as Portugal and Spain is clearly about belated attempts to avoid further contagion. Exposed for its failure to impose sufficient financial discipline on Euro members and for allowing a gaping wide hole to be blown through whatever strategy was in place to cope with such eventualities of economic collapse of an individual member state the credibility of the Euro and indeed, the EU authorities has probably never been lower. We may thus ask whether the Irish situation and how the Euro and EU authorities now handle to also be seen as a last ditch attempt to save the Euro itself? Possibly it very well is. And if that view turns out to be right some might even soon start to say we could be talking weeks and months rather than months and years before we are in a position to decide what the future really does hold for the Euro.
At this stage we do not know just how much external pressure really is being brought to bear on Ireland by internal EU and Euro authorities. We do know though that bond markets are saying that enough is enough and that they want some kind of formative agreed salvation to the Irish problem that brings things to a head. To do that means that if Ireland and its government is to maintain credibility in the eyes of those on whom its financial and economic future depends (bondholders) it probably has little choice but to go into some kind of arrangement with one, other or both of the IMF and the far from credible European Financial Stability Facility as directed by the increasingly hapless European Central Bank. I like is no less than you do but markets are always right – fail to listen and you will be the one that loses out. Throwing straws into the Irish wind hoping that the government plan will work would now be an absolute nonsense given the amount of debt that Ireland is sitting on and the increasingly worsening state of some aspects of the economy. This matter needs sorting now – meaning this week, this month rather than next!
Whilst painting a picture undignified gloom for the plight of Ireland and certainly Greece right now I do not share the same view that Spain will necessarily need to follow whatever route Ireland is persuaded to go although In would of course not rule anything completely out. However, the sad fact is that if markets believe that Spain is the next most serious pot boiling that in the interests of avoiding the spread of contagion further they will exert further pressure. Portugal too would surely benefit from seeking to protect itself better from market forces. But as a permanently weak economy with limited resources, a country that has always had limited export potential and in which some 90% of the population live on close to the coast Portugal’s problem is very different from the property based over expansion that currently ails Ireland and Spain. Arguably Portugal should not be compared with Greece – a country that lived beyond its means for far too many years. Put simply Portugal is an economy that almost did its best and failed which is another way of saying that it probably deserves help.
Thankfully I am not in the Alan Greenspan camp that (no doubt for self or should I say selfless publicity purposes) appears to believe the financial world is on the cusp of another disaster. The reference I guess is to bonds. To this I simply say buyer beware and that most of what Alan Greenspan says these days is merely an attempt to avoid the central issue of the damage for which he solely, as former chairman of the FED, bears responsibility and yet who resolutely fails to accept any blame. Meanwhile, whatever one thinks of the hapless Euro authorities and the EU as an instrument of combined governance (and who doesn’t!) we may do better to believe that somehow they will cobble enough together to avoid really destructive contagion to take hold.
This next two weeks will in my view be seen of a real test of EU and Euro currency authorities resolve. That the rescue package that they put together in the form of the European Financial Stability Facility for Greece lacked a certain degree of credibility right from the start and that both the Euro currency controllers in the form of the ECB and the separate EU authorities have seemingly failed every test that international markets have set through this past year matters less than accepting that to avoid contagion and further fall out will require the authorities to regroup if the glorious currency is to be allowed a credible future. Politically whilst everyone is battling to cover up differences from public gaze there is no doubt in my mind that the EU has reached a critical stage in its development from which, just like the future of its much loved currency the way forward from here may well be contraction.
We will see. For now though the matter at hand for markets isn’t so much the weakness of the dollar, FED policy in the form of even more questionable quantitative easing, the slowing pace of western recovery, the increasingly fast pace of economic power shift for west to east in the form of Chinese and other emerging nation growth, today it is about the avoidance of further deficit and debt contagion from semi-failed Euro member states. Markets want a change of stance and make no mistake, they will get it. The very fact that the troubled Irish government is perceived let alone in reality struggling to cope with deficit to GDP of 32% (if one includes the cost of funding Irish bank bad debt) not to mention a debt to GDP which is well over 300% has forced markets to take the bull by the horns. That Ireland doesn’t actually need to borrow any additional funding until next June matters not one jot. What does matter though is the avoidance of further contagion.
