Stefan Wermuth
On the fringe of Europe's sovereign bond markets, the good guys are getting beaten up but the superheros in Brussels have not a clue what to do about it. Ireland and Portugal initially did all the right stuff, taking early and decisive action to curb public spending. Ireland's hideous hairshirt initially drew fawning admiration, not just from the cynical credit analysts of investment banks but from the European Commission. Ireland's bloody attrition of its public sector - sackings, wage cuts and savaged budgets - was held up as a model where Greece was the corrupt prodigal. But where is Ireland's reward? The Celtic tiger is looking ever more like a motheaten rug.
The bond markets have been trashing Irish government debt - the yield on the Irish 10-year bond has gained more than a percentage point in a month and government borrowing in Portugal has risen to a record. Portugal is on target for a 9 per cent deficit to GDP ratio this year, well ahead of its 7 per cent target and the Irish government is already giving warnings that more austerity may be necessary to keep its deficit reduction on track.
Ireland tapped the capital markets this morning, selling €1.5-billion in medium-term debt. So high was the yield on the notes that the auction solicited five times as much money in bids as there were bonds on offer. Only a month ago, the Republic was selling notes with a 2014 maturity at 3.6 per cent but today they were being offered at a yield of 4.7 per cent. A €1-billion tranche of 2018 notes was priced at more than 6 per cent; Ireland is paying almost 4 percentage points more than Germany for its money. Small wonder that Willem Buiter, the chief economist at CitiGroup today said that the issue was great for investors and horrible for Irish taxpayers.
The issue is being watched closely in Europe's debt markets, not because anyone truly expected the Irish bond issue to fail but because the yields on these fringe euro zone government bond issues are becoming alarming. There must come a point when a government reckons that borrowing further to fund the deficit has become unaffordable. When the domestic economy is not growing at a sufficient rate to extinguish the liabilities within a manageable time frame, borrowing makes no sense. The Irish government is not yet prepared to throw in the towel. On Monday, Ireland's central bank governor, Patrick Honohan, gave warning that the Irish economy was not evolving in a way that would allow it it to meet its target of a 3 per cent deficit in 2014. More cuts in public spending would be needed in excess of the €3-billion planned for this year. In a notorious radio interview last week, the Irish prime minister, Brian Cowen, struggled to deny that more austerity measures were planned.
His slurring and faltering responses to question were widely interpreted as the consequence of excessive celebration at the end of a party conference. It could be a metaphor for Ireland's boom and bust - the long party into the night and the morning after when the celebrants regret the final libation. Unfortunately, no one has discovered a good hangover cure for a 12 per cent public sector deficit and the cost of a €25-billion rescue of the Irish banking system. Meanwhile the cost of borrowing soars; it is the mother of all headaches.
Carl Mortished is an award-winning Canadian financial journalist, based in London. His columns and articles have appeared in leading newspapers and publications including The Wall Street Journal and The Times, where he was recently World Business Editor. His expertise extends over a wide canvas including world trade, energy, resources and the global economy.