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Leo was Never a Loudmouth

Posted on: June 5th, 2011

IS Leo Varadkar a leader-in-waiting or a loudmouth? Last week, members of the Cabinet were spitting blood at the Minister for Transport’s gaffe about a second bailout for Ireland.

The gaffe was vintage Varadkar: “It is very unlikely,” volunteered the honest young minister, “that we’ll be able to go back [to the financial markets] next year. I think it might be a bit longer. 2013 is possible, but who knows?”

Such rare glimpses of reality spread fear about Ireland around the markets of the world.

The Cabinet’s brightest babe (32) did not know the score. Government spin runs directly opposite to Leo’s forecast: Ireland will not default and we will be back borrowing in global markets next year.

Domestic political denials about an Irish default have been growing louder of late. The Coalition is sticking to its motto: ‘One in denial, All in denial, Forever in denial.’

In recent weeks, seasoned observers spotted danger signals when Enda Kenny’s denials of an impending debt default became more intense. The Taoiseach, increasingly surefooted in his Dail performances, sounded less convincing when he was dismissing the danger of default.

And so he might. Bond markets are taking the opposite view. They are pricing in the probability of an Irish default. They fully expect to see Ireland back begging at the IMF/ EU door next year.

Leo is in line with the markets. Kenny, Finance Minister Michael Noonan and Enterprise’s Richard Bruton are publicly rubbishing them. Some cabinet members are living in the fantasy world that sane lenders will be shovelling money at Ireland in 2012. Privately, others are admitting that Leo is on the money but should have buttoned his lip.

Last week, the cost of two-year borrowing for Ireland supported Varadkar’s stance. It stood at a prohibitive 11.2 per cent. Not Greek-type levels yet, but rates that make the EU/IMF loan sharks look like the 12 apostles.

Global market traders are telling us that we are bankrupt. They know that we will need to refinance at least €18bn in the next three years. As there are no willing lenders in their number, we will again be forced to look elsewhere. There is only one “elsewhere”.

“Elsewhere” is the IMF and Europe, the last refuge of destitute countries. The knee-jerk political response — a blanket denial — has kicked in. Leo has not been in politics for long enough to learn the denial game.

He was not in government last November when the markets were convinced that the collapse of the Irish economy and the arrival of the IMF was imminent. Two ministers, Dermot Ahern and Noel Dempsey, denied that talks with the external lenders were taking place. Yet IMF chief Chopra and his gang were camped in the Merrion Hotel opposite the Department of Finance within the week. Sceptical traders made a killing on the bond markets. The markets made a monkey of the ministers.

During the banking crisis, denial reached epidemic levels. Bankers were in permanent denial about the solvency of their banks. Politicians and regulators joined the chorus of ostriches. Auditors and economists provided the cover that suggested all was well.

But the markets brushed aside the consensus. When all the official channels were assuring investors overseas that Irish banks were sound, the stock markets were the first to rumble the charade.

While Anglo’s David Drumm was issuing frantic statements about the sound fundamentals of his crumbling bank, incredulous dealers were dumping its stock.

Ditto Brian Goggin’s Bank of Ireland and Eugene Sheehy’s AIB. The Regulator, Paddy Neary himself, insisted to the last that publicly quoted Irish banks had no need for capital.

Disbelieving traders had a picnic, selling stock in the face of hollow official reassurances. Politicians, led by the nose by the Department of Finance and the Regulators, were among the last to admit the crisis. The markets were right and the State’s propagandists took a bath. The nation went bankrupt.

Old hands in the markets have recently been recalling similar days when Bertie Ahern was Minister for Finance back in the early Nineties. Devaluation then, like default today, was dismissed as out of the question. Bertie was blue in the face reassuring the world’s markets that Ireland would never devalue.

It took several months and billions in currency reserves — spent supporting the Irish pound — before the inevitable finally happened. Ireland’s currency enjoyed a few breathing spaces, but in the end the markets conquered. Official Ireland surrendered and devalued.

And, incidentally, Ireland boomed. Devaluation was far from the disaster predicted by its opponents. For many, it provided the realistic foundation for economic recovery.

Default need not be a disaster — but it will be worse if it is forced on us after months of denial.

Denial helps us to live in our current bubble of euphoria, a relief partly brought about by our change of government, and partly buoyed by two visits from world leaders. But we cannot live on the goodwill of the US president and the UK monarch for long.

The markets do not see Mr Obama or Queen Elizabeth putting bread on the tables. They see the razzmatazz as marginally helpful hype.

The cold index of Irish shares is reflecting a less emotional message. Ireland’s stock market is a tombstone. Last week the ISEQ languished 70 per cent below its all-time high. It has not enjoyed the sort of recovery seen in Mr Obama’s Dow (just 13 per cent below its peak) and Queen Elizabeth’s Footsie (only 15 per cent off the top).

Investors in Irish stocks are telling us that Ireland is a massively underperforming nation. They see little hope of us reaping the benefits of any global recovery. We are down and out. And on our own.

The Irish stockmarket is contradicting the bullish noises made by our politicians.

It does not recognise the temporary lift generated by royal or presidential visits. It reflects hard realities and the bottom line — not political spin, pageantry or flowery oratory.

Instead, stockmarket dealers will have noted that in the last 10 days the redundancy figures have rocketed, tax revenues have disappointed, retail sales numbers have fallen and bank lending is declining.

The Irish stockmarket, a cold barometer of economic prospects, is reflecting the raw reality that there may even be no growth this year.

It is showing little confidence in the Government’s ability to pull us out of the swamp. While there remains a mountain of popular goodwill for the new Coalition at home, it is unlikely to last when unfair measures like the penal pension levy begin to bite.

Investors from home and abroad are up in arms at the confiscation of 0.6 per cent of citizens’ pension savings. They are fearful that the Government will develop an appetite for such “smash and grab” raids on savings deposited elsewhere. They are already nervous at the splits in the Cabinet about punitive property taxes, the introduction of water rates and household levies. Measures are being announced by ministers, only to be modified following the emergence of pockets of resistance within the Cabinet itself.

Leo’s gaffe was not a pocket of resistance. It was the honest view of an inexperienced minister, thankfully not yet coached in the politics of denial, telling the unvarnished truth.

Leo is no loudmouth; Ireland could do with more like him.