Monday 19 July 2010

Ireland Downgraded, Can UK Walk the Fine Line?

On the eve of the election, Moody's helpfully opined:

"If [the next UK Govt] were to tighten fiscal conditions too quickly, this could potentially choke off economic recovery. Alternatively, if the UK did not tighten fiscal conditions soon and credibly enough, ... market opinion may move against the UK"

This morning, Moody's have downgraded Ireland's government bonds. That's Ireland, amongst the first countries to go for austerity, neatly illustrating the dilemma all western politicians face:
damned if you do ... as we said at the time.

Osborne's decisions for the UK have been criticised for being too much, too quick - and not just by the massed ranks of the Labour leadership candidates. Here is a representative detailed critique, the key points of which are:

- there is little risk of a bond-investors' strike; and bond yields have disconnected from deficits & debts
- if the transition from public to private takes a while, default rates will increase in the interim
- the private demand to replace public spending has not been identified: for the past 10 years most private investment has been in real estate
- pro-cyclical fiscal policy (possibly inadvertent) was the problem, and can't be the solution.

It still ends up with the same tautology: too much and you'll get a double-dip, too little and the markets'll 'ave yer.

Which we all knew anyway. Helluva line to walk and it seems Ireland has missed its footing. Can Osborne do better ?



Bill Quango MP said...

Shame about that. Ireland was quick to wake up to what they had done. Tried hard to stop the spiraling debt and very quickly tried to reduce the deficit, even at the expense of political concerns.
Contrast with UK who felt there was at least a year to pretend all was well..

Anonymous said...

I don't see that there is this fine line to walk.

The fact is this country just overestimates its wealth, while selling off the family silver to pay for the social largess. The situation is finally coming to a head and we are in a mess, all these bankers and 'economists' keep using totally false analogies.

"pump-priming".. As if the economy is going to magically spring to life with a few tricks from the government.

"Walking a Fineline", as if the right kind of balancing act can make up for the fact we have run out of money..
What can the private sector do?, we have the highest levels of personal debt in history, people aren't suddenly gonna come out spending. The only reason things haven't totally collapsed so far is because of the o.5% interest rate aberration.

"Plotting a course through a minefield"
As if we are innocently heading in the right direction but just need to avoid a few obstacles on the way, when in reality we've been on the wrong track.

A better analogy would be to talk about having strong foundations, but they can't do that because Britains has been chipped away at for years, and its still happening. For example the green energy boondoggle.

Budgie said...

As Anon at 6:55pm says.

BQ, I told one of my children who works in government to look out for cuts - two years ago. If I could see it then, why couldn't our lords and masters?

ND, the dichotomy you highlight is false. Even James Callaghan in the 1970s said that you cannot spend your way out of a recession. We have to cut our cloth according to our real means not what we wish our means to be.

Instead of the government perpetually trying to do everything it should free up people by cutting red tape and taxes (that includes leaving the EU). We all know that will work, it always has whatever the country or the period. But it doesn't suit the suits.

Laban said...

Wasn't the Irish downgrade due to the Green leader (a coalition partner) questioning whether the cuts were feasible or socially possible ? Or was that Alphaville being mischievous?

Nick Drew said...

Laban, "key factor driving Moody's rating action is the crystallization of contingent liabilities from the banking system as a result of the government taking on debt to provide support to the country's ailing banks" (Moody)

the Green leader's burblings were on Sunday a.m. it seems, i.e. not a direct factor in a decision probably taken before then; and you'd have to say AV were citing him by way of background colour (equally, it seems, few take Boyle very seriously)

but the Irish govt is keeping up the austerity: "The emphasis will be on spending cuts in next December's Budget, Finance Minister Brian Lenihan said"

Nick Drew said...

Anon, Budgie - points well taken. But irrespective of how you'd diagnose how we got here / fundamental causes / long-term malaise etc, the bicycle (to switch analogy) must be kept upright, whichever direction you'd have it take us next

Electro-Kevin said...

...and to take it even further there is the option to drop the bicycle and learn how to walk again.

If this makes the chav-scum getting a free ride in the panniers learn to walk again then we may have a future.

Things have got to get worse before they can get better. The funny-money boom which we have just 'enjoyed' has darn well near destroyed this country both culturally and socially. We would do well to avoid another.

Phil said...

Some countries (Greece? Possibly Ireland) are in the invidious position where they're going to end up in default either way. Cut government spending -> economic collapses -> tax receipts fall -> default. Keep spending -> tax receipts never rise sufficiently to pay the interest -> default.

Hopefully, we're in a position where there's still a middle road for us to walk...