Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 13/7/11

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It’s been an interesting 24 hours since my last blog, with Ireland downgraded to junk status by Moody’s and Chairman Bernanke hinting at the possible introduction of QE3.


From an Irish perspective, the main news really since my last blog has been the Moody’s downgrade of our sovereign debt to junk status. And there may be worse to come, given that Moody’s outlook on our debt remains negative and there are a further 10 rungs of the “junk ladder” below our new rating, Ba1. In terms of the practical consequences of this move, it is clearly negative in terms of domestic confidence and international sentiment towards Ireland. It probably won’t have too serious an impact on deposits, given that most corporates have already moved their (typically) ratings-sensitive money out of the Irish banking system, but on the bond side it is a negative given that some bond funds can only hold investment-grade bonds in their portfolios (although, granted, they were probably underweight Ireland to begin with) and will consequently be forced sellers. Therefore it is no surprise to see Irish sovereign bonds were under pressure on the markets today. In terms of what Ireland should do now, the government should heed Moody’s advice that it could upgrade Ireland’s rating if we continue to hit fiscal targets and return to sustained growth – that presumably would read: “will upgrade” if we close the fiscal jaws faster and facilitate a more rapid return to economic growth – by cutting red tape, keeping business taxes low and redirecting what little money there is away from useless stuff like Fás and towards giving grants and/or tax breaks to entrepreneurs. However, instead of doubling its efforts to win what is essentially a war to regain our sovereignty, the government and “Auntie Mae” (the NTMA) have instead been spinning like crazy – you know that they’re out of ideas when one of the first things they said in response to this was that the other ratings agencies haven’t cut us to junk. The word “yet” comes to mind – I have pointed this out before, but it should be noted that total Irish government voted spending was up year-on-year in the first 6 months of 2011. Some people like to pretend that this is “austerity”.


Taking a step back for a moment, I find it surprising that, despite all of peripheral Europe in crisis, so many people here still buy the line that Ireland’s mess is solely down to “pantomime villains” in the banks. If only it were true that: “If it wasn’t for Seanie and Fingers we’d be grand”. The truth, of course, is much more complex, hence again I recommend that you read this presentation which explores the causes of our problems by Cormac Lucey.


Across the water, Chairman Bernanke has been hinting at the possible introduction of another round of quantitative easing. I highlight four things in response to this. The first is that he has correctly been labelled a “hooligan” by none other than Russia’s Vladimir Putin. The second is the video, “Quantitative Easing Explained“, which exposes the “Mugabenomic” policies being implemented by the Federal Reserve. The third is that the US unemployment rate increased from 9.0% in January to 9.2% in June, during the last six months of QE2. Some stimulus! The fourth is the violent reaction in the commodity markets, which is no surprise given that, as everyone who doesn’t work for the Fed knows, you can’t print gold.


Just a follow-on from something I covered yesterday – Greencore CEO Patrick Coveney gave an interview to RTE about its Uniq acquisition which you can download here.


Things are bad in Ireland, but they could be about to get just as bad elsewhere – this is what Bloomberg’s Nick Dunbar tweeted yesterday:


I spoke at a conference on reunifying Cyprus today. Their banking sector would need a 30% of GDP bailout if a full Greek default happened.


That’s not far off the cost of our own bailout.


Written by Philip O'Sullivan

July 13, 2011 at 4:04 pm

One Response

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  1. […] this improved stance, and there’s a lesson there for Irish policymakers, not least given that the State is rated as “junk”. We could solve a lot our financing woes at a stroke by living within our means, rather than […]

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