The rating agency Standard and Poor's does not trust the Government and a general election may be needed to clear the air, CIARAN O'HAGAN.
THE STAKES are riding ever higher on the outcome of Tuesday’s budget. Get it right, and Ireland can hold on to its AAA ratings at credit raters Moody’s and Fitch. Get it wrong, and Standard Poor’s, along with the other agencies, may downgrade Ireland even further.
Already SP has left its outlook on Ireland at negative after its downgrade this week from AAA, meaning Ireland’s economic policies are still on probation.
The prospects for the growth of wealth and income are the chief criteria used by rating agencies. That is understandable. The wealthier a country and the more likely creditors will be repaid. A rating of AAA, therefore, reflects a strong capacity to withstand the global economic turbulence that lies ahead.
There would seem, then, to be a correspondence of interests between the ratings agencies and the taxpayer. Both want prospects for wealth and incomes.
Yet there is one key difference. The rating agencies want to see strong income and wealth growth over the coming years. Voters, however, want to see their incomes maintained now. But that is not possible without making the pain worse in the years to come.
Wealth in financial assets and property in Ireland over the past two years has fallen by well over €350 billion. That is about the equivalent of national income each year. It is illusory to expect financial or property prices to recover. Ergo, living standards need to be cut, and unfortunately much more than seen to date.
Avoiding a cut in living standards just puts off the pain, and probably worsens it. There can be no recovery in broader business sentiment until the uncertainty over the budget and the banks is dealt with firmly and credibly. Worse, a fair chunk of the spending that results from overly-low taxes (in particular) is just helping fuel imports.
The Government’s largesse is making a modest contribution to global reflation at a time when global demand is not able to absorb Irish exports. So the Government’s deficit just amounts to throwing away good taxpayers’ money.
Better to try to ride out the storm on a tight budget and then expand Government spending when global demand is on the rise in two or three years. Easier said than done, of course.
It is the duty of the Government to step in and take a less myopic view than voters. Ministers say they want to act responsibly. SP’s rating downgrade reflects the fears that the Government has not the courage and/or the means to take the necessary action.
Brian Cowen backtracked last week on a promise to keep the budget deficit below 10 per cent this year. Doubtless this helped SP make up its mind.
Back in January the European Commission already saw a public budget balance of 13 per cent relative to GDP ratio next year. GDP is falling, so the underlying trend in the deficit is even more serious than that.
Worse, the Government is formulating its fiscal adjustment plan around a target path for the structural deficit. This, it is feared, is obfuscation.
The agencies just want to see significant and credible budget measures that will put Ireland back on a long-term growth path. Above all, the measures need to represent permanent belt-tightening if they are to be credible.
Indeed, SP frets that a credible multi-year strategy of fiscal consolidation will not emerge until a general election clears the air. Only then will policy-makers be unshackled from the myopia of the ballot box.
It would be wrong to see the rating agencies as some kind of sadistic enterprise. If the losses are ignored, and budget deficits continue to print in double digits, Ireland will end up with years of sclerosis, zombie banks and phantom companies.
Rating agencies Moody’s and Fitch still rate Ireland AAA. Many taxpayers would agree it is worth tightening our belts to keep them.
SP’s downgrade of Ireland now increases the onus on the Government to show that the move was unwarranted. But can the Government find the wherewithal next Tuesday?
Ciaran O’Hagan is head of rates research at Société Générale in Paris