Tuesday, March 17, 2009

Housekeeping and S&P

You can see a quick snippet of my contribution to the Bloomberg report on Ireland today here.

But for now, the main piece of news of the week so far is the S&P downgrade of Irish Banks.

The downgrade is the second in just 4 months - took Ireland's Banking Industry Country Risk Assessment from Group 1 (prior to December), to Group 2 in December and now to Group 3. We are now in the sick puppies crate with Portugal, Austria and Japan. The first (December 2008) downgrade was based on S&P's negative assessment of banks loan books exposures to housing and construction. The latest downgrade is based on an all-but-silly argument that Anglo Irish Bank loans scandal has undermined reputation of Irish Banking, as if a litany of bad loans did nothing of the sort, or as if unethical manipulation of the banks books via cross deposits between IL&P and Anglo did nothing of the sorts.

More importantly, S&P has also threatened a further downgrade due shortly - this time on the back of "significantly weaker long-term prospects for the Irish economy". Such a downgrade will place us in a banking ICU with Greece, Israel, the Czech Republic, Slovakia and Slovenia in the neighboring beds.

But the real unspoken issue remain unaddressed.
  • The Irish taxpayers have guaranteed the banking system's liabilities, nationalized one of the big 3 banks and committed to injecting capital into other.
  • Yet, the ability of the Exchequer to cover these commitments has been deteriorating at a speed that would make Einstein's theory of relativity go bonkers.
  • In the mean time, not-too-often remembered smaller banks, building societies and credit unions are getting their closets opened up by scandal-seeking media. And rich pickings these parish-pump financial institutions present under the inspecting lens of public attention.
  • All along, housing markets are still falling, commercial property is heading South like a flock of geese sensing a winter chill and the economy is shrinking like ceran wrap on a fireplace mantle.
So here is a question that S&P is trying to avoid so desperately and our Government is bent on denying with the trustworthiness and passion of the banker telling the markets "Our books are sound and we need no new capital": Given Irish Exchequer decision to blend public debt with banks' liabilities and capital exposures, why should Ireland's General Government bonds be rated AAA?

Rome or Reykjavik?
In the mean time, economic silliness (I am avoiding here a much stronger word) continues to grip the Government, as the latest statements by Minister for Finance (see here), attest.

“A lot of political pundits say the choice next time for Ireland will be Rome or Reykjavik,” Lenihan said on Bloomberg TV today. “Most people will vote for Rome."

Yes, Minister, we get the historical pun. But do you actually mean what you are saying?

Ireland is already in the company of Rome in many senses. Being a part of the APIIGS countries we are in a club of the sickliest countries in Europe (and OECD) alongside Italy. We have surpassed Italian levels of unemployment and, should we adopt Minister Lenihan's suggestion and chose Rome, we will be settling into a trend (long-term) growth rate of 0.5% annually over the next 30 odd years. But then again, we have already surpassed Italy as a more corrupt society (according to the World Bank) and as our economy shrinks by 7+% this year and 16% between 2008-2010, we are well on track to be the Mezzogiorno of the North Atlantic (minus weather, food, wine and beaches of Sicily). And, of course we are heading for the glorious 100%+ public debt to GDP ratio should Brian Cowen, have his way with the economy. So, Mr Lenihan, is Irish Government really bent on getting Ireland to join Rome? Is this what you will be telling the international investors?

In reality, what this comment illustrates is that Mr Lenihan is much better fit to be a Minister for Justice than a Minister for Finance, for even his European references set is so limited to the legalities of European treaties that he forgets that the brief he has is in finance!

But there was more to Lenihan's comments than Rome v Reykjavik blunder. “The ECB stands behind the entire Irish banking system, just as the Bank of England will stand behind the banks in the U.K.,” said Lenihan. “So there’s no default issue in relation to the banking system.”

Irony has it, I predicted after the last issue of Government bonds in February that in effect Ireland is already being rescued by the ECB. Now, we have a confirmation. Mr Lenihan's reckless actions on Irish banks have been preconditioned upon his belief that the ECB is going to back him up!

Here are two follow up questions to this statement:
1) If this is true, when did you negotiate with the ECB actual arrangements for emergency financing for Irish banks?
2) Do Germans and French know about this ECB commitment to Ireland?

Lenihan said nothing on this, other than claim that Ireland will be "in a position to fund ourselves as a state this year and the European Central Bank stands behind our banking system... So we’re a solvent state and we’re well able to do our business.” This is eerily reminiscent of Eugene Sheehy's infamous battle cry that AIB will not take any public money last Autumn. We know how that one turned out in the end...

Setting aside the arguments as to whether or not Mr Lenihan can actually finance our Exchequer deficit this year, can we please see the actual contract that commits the ECB to underpinning the Irish Government guarantees to the Irish banks and provide capital to these banks?

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