The Cedar Lounge Revolution

Well I never… Moody’s have spoken… July 20, 2010

It’s funny, and not ha-ha, reading this piece in the Irish Times yesterday. For the Gods of the bond market have spoken, and all is not well. Yea, verily, after two years of prodigious feats of expenditure cutting Ireland Inc. [as they would see it] has yet to cut the mustard.

Moody’s has downgraded Ireland’s credit rating. We’re Aa2!

It’s amazing stuff really, because it shows up just how dependent we are – on certain levels – on those whose analysis has already been shown to be hugely faulty.

In August 2004, Moody’s Corp. unveiled a new credit-rating model that Wall Street banks used to sow the seeds of their own demise. The formula allowed securities firms to sell more top-rated, subprime mortgage-backed bonds than ever before.

And…

The world’s two largest bond-analysis providers repeatedly eased their standards as they pursued profits from structured investment pools sold by their clients, according to company documents, e-mails and interviews with more than 50 Wall Street professionals. It amounted to a “market-share war where criteria were relaxed,” says former S&P [Standard & Poor's] Managing Director Richard Gugliada.

No doubt some will say that was then, this is now. Not according to Angela Merkel not that long ago, May to be precise – calling for a European credit ratings agency, or indeed a range of voices from within the capitalist consensus.

But hold on a second, what are the reasons for our downrating?

“Today’s downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability,” said Moody’s lead analyst for Ireland Dietmar Hornung.
The support provided to the banking system, including the transfer of loans to the National Asset Management Agency, was also cited as a key factor in the rating downgrade. Recapitalisation measures already announced may reach €25 billion, the agency said, but Anglo Irish Bank may require further support.
“While we do not expect the government – not even in a moderately stressed scenario — to incur permanent losses in excess of 25 per cent of the country’s 2009 GDP as a result of these obligations, we believe that the uncertainty surrounding final losses would exert additional pressure on the government’s financial strength,” the agency said in a statement.

But surely all the measures taken over the past two years were done specifically in order to prevent the bond markets and rating agencies taking fright? And if they’re not working? Well Michael Taft has long noted that the optimism of various bodies, including the government, as to the efficacy of the economic policies has been misplaced and Moody’s appears no more sanguine about the future.

The agency said it expect expects economic growth to be below historical trend over the next three to five years due to the weak banking and real estate sectors, and the fall in private sector credit.
“If the GDP growth trend were to exceed Moody’s expectations – with a quick resumption of domestic credit flow and a supportive global economic environment — then the government’s debt metrics could stabilise earlier than is currently being assumed,” said Mr Hornung.

Of course that’s far too depressing an analysis for the IT, who have championed precisely those policies so that we would arrive at a better place than Aa2, so they must scrabble to find some good in what is being said…

“Given Ireland’s wealthy and flexible economy and its very high institutional strength, these debt levels are commensurate with a Aa2 rating. Ireland’s demonstrated adjustment capability and its economic vitality — reflected for instance in its ability to attract foreign direct investment — are important characteristics that support the rating,” the agency said.

Great news.

Actually, note too where premium responsibility for this is placed, ‘support to the banking system including NAMA’. Not public expenditure per se, not our supposedly bloated public service (interesting to read in the Sunday Business Post the first indications of a new front against wages there – what on earth is coming down the line in the Budget and what of Croke Park?). And all that considered, it was slightly entertaining to read our beloved Minister of Finance’s plaintive cry last week that people were worrying too much about the one off costs of recapitalisation and NAMA when the real problem, the real problem I tell you, was in the annual expenditure.

Well yes Minister, but this ‘one off’ is the last straw – or x billion straws – that have tipped a difficult but not unsustainable deficit that some pruning and reasonable economic growth in the future (few seem to disagree will now take place, despite the more apocalyptic prognostications of the last year or two which seemed to suggest that Ireland couldn’t function as an economy) into something that is genuinely unsustainable. And small wonder that in the face of state largesse to the private sector – for what else is the recapitalisation and NAMA – that people resile from this.

But this piece here also points to heads they win, tails we lose dynamic that the obeisance to the rating agencies generates. Nothing satisfies them because they quite literally operate in a context where social aspects of public finance are simply not a factor they take into account. And in fairness why should they? They’re there to analyse the profitability of markets, not to concern themselves with how this cut in expenditure or that cut will impact on a community, or a society.

Indeed as noted in the Guardian the agencies are almost ignorant of the social impacts of the policies they explicitly seek…

While confirming the UK’s prized triple-A rating, S&P said there was at least a one-in-three chance of it being downgraded. Britain was put on negative watch in May last year when the scale of the deterioration in public finances caused by the recession alarmed rating agencies.
“The negative outlook reflects the potential of a downgrade if the government does not implement its challenging fiscal consolidation programme on the scale planned,” said S&P’s Trevor Cullinan. “A slackening of that, in our view, could put the UK’s net general government burden on a trajectory that would be incompatible with a triple-A rating.”

But such policies are far from uncontested with even the IMF sounding a warning that ideologically driven cuts in expenditure (as seen in the UK, and in a sotto voce way here as well since God forbid that we should do ideology even if we do).

The Organisation for Economic Co-operation and Development (OECD), and Mervyn King, governor of the Bank of England, have supported the tough plans, but in a general warning to western nations embarking on austerity programmes, the International Monetary Fund said last week that over-hasty tightening of policy could derail economic recovery and lead to a double-dip recession.

And yet still they are afforded a credibility, and more, that in any other circumstance would seem absurd. And where that absurdity exists then profound caution should be exercised as to their pronouncements.