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Call in Cavalry from the IMF

Posted on: November 14th, 2010

DO you expect to wake up one morning, switch on the early news and hear that the International Monetary Fund had swooped at dawn?

Do not be surprised. And do not be too upset.

Welcome or not, reinforcements are at hand, poised to take over.

Energetic measures have been taken to prevent the humiliation.

Last week the Government called in virtually every remaining joker in the pack. First, they rolled out two local big guns with residual credibility. Finance Minister Brian Lenihan reiterated the message of reassurance on RTE’s Morning Ireland and Prime Time, while Central Bank governor Patrick Honohan carried the same message to his well-flagged appearance at an Oireachtas Committee. European monetary czar Olli Rehn, European Central Bank chief Jean-Claude Trichet and even European president Jean Manuel Barroso all lined up to be supportive. Grown-up economic powerhouses donned the green jersey and togged out for Ireland.

At the other end of the pitch, alone, stood the slight figure of Morgan Kelly, the much reviled but heroic economist. Last Monday, Kelly penned a piece of polemic in the Irish Times that sent shudders running down the spines of the mandarins in the Department of Finance. Kelly predicted the next apocalypse.

Gathered around the pitch in the stands stood the detached spectators — the bond market traders — surveying the game. Unmoved by green jersey emotions or even loyalty to European team players, they simply wanted to back a winner. They had no time for sentiment.

First they pitted the combined wisdom of the powerful against the analysis of the volatile loner, then they made a decision: they placed their money on Kelly.

And this weekend the much-maligned UCD professor is ahead on points. His final haunting words — “From here on, for better or worse, we can only rely on the kindness of strangers” — are ringing in the ears of that dwindling band of those who believe that Ireland can make it on its own.

The bond markets are in Kelly’s corner. They have given their verdict. They do not believe Honohan, Rehn, Trichet or Lenihan. They gave the thumbs down to the mantras of the mighty by sending Irish bond rates soaring — in the wrong direction.

They do not believe that we can tough out this crisis without help.

On Thursday morning, predictions of a collapse were given an unintended boost. No less a person than Greek premier George Papandreou waded in on the side of the establishment. The man who had led Greece — the serial offender in the fiscal recklessness stakes — into the abyss, totally uninvited, joined the green team. It was the kiss of death.

Papandreou pronounced the Irish economy “basically sound” — and rates on Irish bonds went even higher.

Was not this Papandreou the Greek, the man who had claimed last January that Greece would “resolve our problems by ourselves”. Simultaneously he had frivolously insisted that “tax evasion is our biggest problem”.

In February, the same Papandreou told the BBC that “we do not have a need for borrowing, our borrowing needs are covered until mid-March”.

The parallels with Ireland are eerie.

Even a week before the final curtain fell on Greece, Papandreou’s finance minister had insisted that they would not be using the European bailout mechanism.

In the same week European Central Bank chief Jean-Claude Trichet was asserting that Greece was not near the point where it needed a bailout and that “default is not an issue”. Sounds familiar.

Jean-Claude’s backing in April did not save Greece from accepting an €110bn European/IMF funding bailout within days. Nor will his pleas save Ireland today.

Ireland’s credibility is shot.

The markets are unambiguous. They have looked hard at the Irish economy, but even harder at the Irish political landscape. They have made a judgment: the economy can be saved with the right remedies; but Irish politicians cannot be trusted to implement them.

The bond markets will be satisfied by the €6bn spending cuts agreed for this year. They will give their blessing to the €15bn aspiration over four years — but despite our commitments to these figures, they do not believe that we will deliver.

The truth is that the bond markets have already rejected the December 7 Budget before the measures are even agreed.

Worse still, the same bond markets have already rejected the unpublished Four Year Plan.

They are unimpressed by the approval of Commissioner Rehn, central banker Honohan and maybe even by Angela Merkel, knowing that those currently destined to implement the Budget and the plan are poised to wobble.

Patrick Honohan’s astonishingly honest admission on Wednesday that the IMF would not do “very much” differently from the Irish Government unwittingly exposed his political masters.

Although the medicine is agreed, the fitness to practise of the doctor is in dispute. While the IMF does not wobble, politicians are already beginning to throw shapes. The electoral timetable is playing havoc with Lenihan’s December package. While his aunt Mary O’Rourke and his brother Conor have laid down firm markers about not cutting the pensions, more lightweight copycats are making similar demands.

Elsewhere, opposition politicians are playing clever as the Donegal by-election forces them to criticise the Government while hoping not to be seen to damage the nation.

The markets watch, wonder and despair. All outcomes look grim. The Budget could be defeated, resulting in financial anarchy and political mayhem; alternatively the betting is still odds-on that it will be passed, only to be succeeded by the Social Welfare Bill and the Finance Bill — both guaranteeing a series of voting cliffhangers in the Dail.

Overseas investors see the Dail’s fortunes in the hands of independents Jackie Healy-Rae and Michael Lowry, extracting massive concessions for their constituencies as the national debt rockets. Ireland, the patient in crisis, is seen as the prisoner of pork-barrel politics.

Are the current crop of politicians the right guys to implement the most stringent package ever prescribed? Or will they duck, dive and dilute?

The package is hardly rock-solid, nor a sure bet to be implemented once local politicians and trade unions have set to work on the weaker- kneed TDs. Any retreats will result in the starvation of loans on the global markets. We will run out of money.

The prospect of a general election is no solution, no comfort for the bond markets. The efforts at political consensus collapsed. While Labour is equivocating on the timeframe and the figures, there is little indication that Fine Gael has produced a plan that will restore confidence.

Quite the opposite, the opposition’s natural inclination towards fiscal fudge may win them the coming election but could result in the borrowing pot being empty when they come calling.

Budget or no Budget, Rehn or no Rehn, Honohan or no Honohan, Irish politicians are neither strong enough nor (with rare exceptions like Brian Lenihan) brave enough to implement the package necessary to rescue the nation’s finances. Instead of calling in the cavalry, they should be heeding the warnings of Morgan Kelly.

That is what the bond markets are signalling. We need reinforcements from outside. The game is up.