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False Confidence Will be Fatal

Posted on: July 17th, 2011

THERE is a tall tale told of British pluck at the time of the Mau Mau wars in Kenya . . .

One of the Brit colonials was found trussed to a tree by a passing patrol. He was delirious, battered and bruised, bleeding to death with a spear through his stomach pinning him to the trunk. Blood was everywhere.

One of the shocked rescue party stood and stared. After a few seconds of paralysis he somewhat tactlessly asked the dying man: “Does it hurt?”

The pukka Britisher looked up at him cheerfully: “Only when I laugh,” he uttered as he took his last gasp.

Last week, Michael Noonan was showing similar pluck in the face of adversity. Sadly for Ireland, Noonan is not delirious. He is delusional.

Every time he laughs a little he is mocked by the markets. He will have to stop. His bullish outbursts are in danger of becoming a contrarian indicator. Shrewd market operators would have made a fortune if they had sold Ireland short whenever Michael went upbeat.

A few weeks ago, he hyped up a minor change in the obscure “preferred creditor” status of a bailout fund as a breakthrough. The markets were dismissive. Bond yields rose.

While visiting the US last month, he announced that Ireland would burn the Anglo and Irish Nationwide bondholders. Nothing has been heard of it since. The markets treated his words as fanciful, political posturing.

His trysts with Christine Lagarde are already a tearful memory. In recent months the starstruck Minister for Finance emerged from increasingly regular rendez-vous with the French beauty, energised. He had a bounce in his step. Fair Christine would deliver.

Well, fair Christine never delivered. Fair Christine fled. Michael never won as much as an interest rate cut from his weekly waltz with the French finance minister.

Last Monday he was at it again. Noonan surfaced after a meeting of European Finance ministers (minus Christine) walking on water.

Michael always insists on sharing his delusions with the entire Irish nation.

Despite the open discussion of selective default during Monday’s meeting, Noonan emerged from the encounter ebullient — extolling the virtues of a new deal.

He announced “a significant advance in Ireland’s interests . . .” We were promised a lower interest rate on our loans, longer repayment times, even buy-back programmes. He insisted that he would be “euphoric if it were not for the problems facing Italy and Spain”.

The words of a man new to the tables of the mighty, and of a novice to the ways of the trading floors of global markets. Once again, he was proving a contrarian indicator.

Global traders gave Michael the thumbs down. Sceptical dealers sent yields to new highs as Irish bond prices plunged. The euro sank below $1.40 as dealers saw default looming larger than ever.

Just 24 hours later, Ireland’s credit rating was slashed to junk status by Moody’s, the hated ratings agency. Talk of selective default had spooked Moody’s. Selective default would see Ireland in the frame. The markets were signalling that Ireland, like Greece, would need a second bailout.

The reaction at home was to attack Moody’s. Selective default breeds selective memories. In the past, we all hated Moody’s because they rated sovereign debt and bank debt far too high during the banking crisis. They were in the pocket and the pay of the bankers. Suddenly, when they are rating Greek, Irish and Portuguese bonds as junk, we are rubbishing them.

The ratings agencies had a different interpretation of Monday’s deal. They saw default looming. They saw the nations of Europe split on its implementation. They saw that the European Financial Stability Fund was too small to bail out either Spain or Italy. They saw political instability in Rome with a dangerous split between Berlusconi and his finance minister Giulio Tremonti, as they tried to push through an austerity package.

Worst of all, they saw a gulf developing between Angela Merkel and Nicolas Sarkozy. The Franco-German split, originally about policy, took a turn for the worse mid-week. Angela was miffed because the French had leaked to the media that a European summit would be held on Friday. She would not be bounced into a sudden meeting. The summit was postponed. Europe was falling apart.

While Michael’s optimism seemed to blind him to the chaos looming, foreign newspapers recognised that the euro was now in mortal danger. The Guardian ran a feature breaking the unpalatable news that the currency was in the departure lounge. The Wall Street Journal took an independent look at the turbulence and gloomily forecast that more than one nation might be forced to leave the euro. The obvious first two in the firing line are Greece and Ireland. Maybe no one in Merrion Street reads the WSJ?

The WSJ did not mince its words.

European banks, it said, are again wary of lending to each other, threatening another credit crunch. Untapped credit lines to Spanish and Italian companies were being withdrawn. Banks with operations in countries likely to default and devalue were taking precautions. Deposits were flowing into the safer European banks, despite their low interest rates. Ireland lived on in a bubble, fed by a diet of detached optimism.

The fantasy that Ireland was winning its lonely battle was fuelled on Thursday, when AJ Chopra and Ireland’s other bailout lenders dropped by to pat Michael on the back for being a good and obedient servant of the first troika’s tyranny.

Michael and fellow minister Brendan Howlin held a press conference, boasting that we were meeting all our fiscal targets. Brendan Howlin added: “We are delivering on the commitment we made to our external funders.”

Brendan’s claim was shorthand for admitting that the Irish taxpayer was paying off reckless European bankers. Ireland is “compliant” while the rest of Europe is playing brinkmanship.

IMF chief Chopra gave a parallel media briefing. He let the cat out of the bag. After giving plaudits to Michael and Brendan, he admitted his frustration that Europe was not addressing the crisis. This was a European problem. The sub-text was that Irish optimism was immaterial. The real action and the crisis was offshore. He delivered the same forlorn message from his new chief (and Michael’s old flame), Christine Lagarde, now directing IMF operations from across the pond.

At the other side of the same pond, the US was threatening to default on some of its debts, somehow dwarfing our dreams of recovery.

Despite all the spinning, behind the scenes in Dublin Plan B must surely be ready. Even as the IMF was giving us a clean bill of health, dark rumours were circulating in financial circles that the Central Bank was secretly printing its own Irish pound notes.

They might be prudent to do so. Plan B is undoubtedly already hatched down in the vaults of Merrion Street. First Greece, then Ireland, next Spain and finally Italy spells Armageddon, even to the optimists.

Next stop, France. The French sovereign debt may not be as scary as others but France is hopelessly exposed to Greek and Italian banks. If they sink or are forced to burden share , the mighty France could be the next domino to tumble.

Back home, Noonan seems speared to a tree in Merrion Street, oozing optimism as the Continent collapses. This weekend the euro is in mortal danger. But Ireland is supposedly doing just fine.