Japan woke up to the sound of chickens coming home to roost as its foreign currency sovereign credit rating was lowered from AAA to AA+. Fitch/IBCA, the agency that first cut Japan's rating, cited the country's weak banking system, mounting public debt and hesitant policy responses as a rationale for the downgrade.
Hesitant is the word - it's nearly a year since the first problems emerged in Asia and the subsequent difficulties of the Japanese banking system. The economy is going down the tubes and political parties are still arguing about how to solve things. They can't actually agree on whether the Long Term Credit Bank is solvent or not - if it's solvent public funds can be used to recapitalise it, but if not, the only option is to nationalise it. Either way, the taxpayer is carrying the can.
A senior Liberal Democratic Party politician commented (rather sourly) that if banks were healthy they didn't need any public money and if they were not they shouldn't get any. That's the clearest statement to come out of anyone in Japan in weeks!
In another clear statement, the Bank of Japan has announced salary cuts for its employees of around 4 per cent. The bank had agreed to review salaries ever since a senior official was arrested earlier this year on charges of having provided confidential information to commercial banks in return for lavish entertainment. Not that the confidential information was much use to the commercial banks if half of them are practically bankrupt now anyway and are hanging around in the hopes of a bailout. So the current backdrop is pretty horrible and has replaced last week's nascent optimism with gloom and paranoia.
The reason for last week's optimism was that some traders had pinned their faith in co-ordinated interest rate cuts by G7 countries. But there isn't a compelling domestic reason to cut rates in the US or in Europe immediately although it is becoming more likely that the Fed will ease sooner rather than later because equity holders are being pummelled mercilessly right now. Those of us on bond desks who were laughed at while equities were doing their thing can now take comfort from the fact that investors have decided bonds are the financial instrument of choice for them. This is having the result of driving yields down - commentators are expecting 30-year treasury yields to be below 5 per cent soon.
Lower worldwide interest rates simply add to the dilemma of the Central Bank which brought out its wet blanket report last week. I know it's the job of the Bank to be a wet blanket but, honestly, only a central bank can make a strong economy sound even worse than a weak economy. So despite the fact that interest rates are due to fall by the end of the year, courtesy of our attendance at the single-currency party, the Central Bank is keeping its repo rate at 6.19 per cent and muttering that we can't go to the ball, at least not until we clean out the cinders in the fire.
Of course rates are frighteningly low as far as the Central Bank is concerned and, with a galloping economy, the standard policy response would be to tighten them. But the invitation to the EMU party has put paid to that.
There seems to be a belief that everyone will go on a massive spending spree when rates finally fall, but most of us will probably still just be paying off the debts incurred on the last one. And anyone who counted their stock options as part of their salary won't exactly be rushing to spend the money that they suddenly don't have.
We'll know that the bubble has really and truly burst when the property supplement of this paper decreases to a mere two pages again, instead of being bigger than the paper itself. But the damage has been done on the property front. House prices may ultimately decline a little, but they'll never crash back to the levels of a couple of years ago. Well, never say never, I suppose, but I think it's highly unlikely.
As a northsider I know I'm meant to have a chip on my shoulder about the relative prices on both sides of the river - and there continues to be a greater demand for southside property - but I continue to value the quality of life which exists when you're nowhere near the Rock Road or the Stillorgan dual carriageway and I'm prepared to accept a lower valuation for the Clontarf semi on the basis I can actually drive onto the main road any time there isn't a presidential visit going on.
Although I have to come clean and confess that the quality of life when driving through Fairview has dramatically decreased since the road-planners introduced a "quality" bus corridor. I have no problems whatsoever with bus lanes. When I'm in a bus I think they're great. And even when I'm in my car I can appreciate the rationale behind them. So the bus lane going into the city from Fairview isn't a problem. What is, though, is that one of the car-lanes to the city has disappeared while the lanes for both buses and cars coming out of town have been significantly widened. It's causing hysteria in Fairview even at the unearthly hour of 7.15 a.m. so I can't imagine what it's like later. What the traffic gurus seem to be telling us is that twice as much traffic comes out of the city to the northside as goes in again. Where are all these people going? And why don't they go back into town? And what effect will a continuous stream of people seeking solace from the southside do to house prices this side of town? A separate northside supplement is needed, obviously.
Finally, I suppose Bill Clinton would have given anything to be the leader of Norway rather than the President of the United States of America this week. The Norwegian Prime Minister Kjell Magne Bondevik has been on sick leave since the end of August. The media has pretty much left him alone to recover from his "depressive reaction to overwork". A couple of reporters apparently tried to contact him but went away when asked. I can't imagine Bill being allowed to have a few weeks off to get over his depression. And he must be depressed. Four hours of testimony! I watched a little of it, but not much. It was like waiting for a Central Bank repo cut - everyone talks a lot about it, everyone hopes that it'll finally be over and done with, but all you get are false hopes that it will all be over soon.
Sheila O'Flanagan is a fixed-income specialist at NCB Stockbrokers
