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  • irishtimes.com - Posted: November 30, 2011 @ 2:24 pm

    The budget that can’t really budge it

    Harry McGee

    One thing credit agencies don’t lack is chutzpah. I was a little agog  at Moody’s putting the whole of the EU on a kind of negative watch. Yep, they’re the same guys who passed dodgy bank derivative with triple-A flying colours back in the day

    It’s amazing how all of that is forgotten now and the agencies are again enthroned at the apex of omniscience. And the media with their goldfish memories pounce on their every pronouncement as if they have been carved into stone on the foothills of Mount Olive.

    It strikes me that the function that ratings agencies fulfil is that of a panickometer: giving authority and validity to the fears  and vague sense of foreboding – sometimes ineffable – of the markets and of the media.

    Of course, morality and fairness are not qualites that can be measured by rating agencies. Unless of course they cost money. On a kind of related point,  I am a huge fan of the Financial Times with its ability to combine rigourous analysis with a readable style. But I am always shocked to turn to the letter pages to read letters from the titans of industry saying stuff like: it doesn’t really matter if Russia is clamping down on democracy or eliminating opponents. As long as it is stable and the economy is growing, who cares. It remains a good place to invest.

    That’s been a long-winded way of introducing an anecdote of profound cynicism but also of profound truth.

    The ratings agencies certainly do their homework. As a matter of course, when visiting Ireland, they meet just about everybody including ranking journalists. One year, probably in 1992,  a guy from one of the agencies was over meeting a senior political correspondent. He was concerned about the prospect of Labour getting into Government and asked how that would change the dynamic of the Government and of the economy.

    “Don’t worry your head,” responded the correspondent. “Sure Labour in Government won’t really change anything.

    Point being no matter how big the change of government, things continue much as they were.

    I am now tending to think that the phrase that will damage this coalition most may not be Labour leader Eamon Gilmore’s silly Frankfurt comment but Enda Kenny’s hubristic claim that a “democratic revolution” had occurred.

    Fine Gael and Labour arrived into government promising change. A bit more change, indeed, than either had bargained for. Labour losing ground and Fine Gael sniffing overall majority resulted in a number of grandiose promises. None of which will be fulfilled.

    Perhaps the fear of backlash over shock cuts and taxes has led to the pre-announcement of so many Budget items. The amount of leakage that has gone on so far with this Budget has been so torrential that it has reduced what happened during Watergate to the status of trickle.

    Has it been artful or cack-handed? I’d say that individual ministers and their handlers think the former. But it evidently wasn’t coordinated by Government. And once leaks started coming from one Department, the contagion effect took hold. Before we knew it, most of it was out. And it was messy. A few Ministers (who have tried to keep schtum) have complained privately about a certain lack of collegiality among colleagues and of minor turf-wars taking place between departments.

    Politically, what they are trying to do is to shock-proof the Budget. The logic is that no Minister wants to be landed with the 2011 equivalent of the scrapping of the over 70s medical card. So there has been conditioning and mood-testing and kite-flying. But it has been so pervasive that it has all become messy.

    The other thing that’s extraordinary is this: A principle, in modern political parlance, has the equivalent value of a vague promise.

    Two months ago, I was convinced the honeymoon period of the Government would last beyond the Budget into the New Year. That was on the basis that at that stage, there was a more co-ordinated conditioning process of the nastiness that lay ahead – namely a €3.6 billion slash, erm, adjustment.

    But when the Cabinet’s Budget discussions came down to the nitty gritty detail, Ministers realised they were not going to be candidates for Mr or Ms Popularity 2011. Ireland was in a programme and that meant no deviation. No burning of bondholders. No jobs budget. No selling of State assets for New Era. It meant lots of conditionalities: a €2 billion cut in social welfare budget by 2014; increases in taxes; other punitive cuts. Suddenly a lot of solemn promises such as child benefit and no increase in third level fees and mortage interest relief were unattainable.

    In their hearts of hearts, they knew it. You know the old cliche that politics is the art of the possible. When  you are in hock to the Troika, it’s the art of what’s permissible.

    Kenny’s use of the term “democratic revolution” sounded dissonant to my ears. It’s not just because it’s an oxymoron. It’s to do with my own belief that in settled democracies like ours, politics is about continuation and administration (i.e. under new management) rather than about the trading, or clashes, of ideas.

    I’ve been dipping into an online version of  book called Political Parties written by the German political scientiest Robert Michels early last century.

    One of its central theses is that no matter how democratic they are starting off, all organisations eventually become oligarchies.

    A number of reasons underlie that, namely that they become dominated by their leaders; an element of self-perpetuation creeps in; and then there is the tendency to passivity  of the foot soliders and followers.

    I believe those qualities are abundantly evident in the Irish political sytem.

    One of the corollaries is the lack of original thinking. Most of the changes that have been effected by the Coalition have been somewhat superficial and populist. The purpose has been to address concerns about a pampered elite and making a mark on those is easier than say, a wholesale shake-up of the public service that would be highly contentioous (bye bye salary-and-a-half tax-free pension for example).

    But the predictability is not only confined to Government but also extends to the oppositoin where there is a lot of talk of radical and fundametnal change, but none of it backed up by any fresh thinking. Sinn Fein, for example, got away by presenting a pre-budget submission this year that was about 95 per cent similar to its pre-budget submission from last year. Sure, a few figures were changed to reflect what’s happened in the past year. But the measures were the same. The maths didn’t add up last year. The maths didn’t add up this year. Nor will the maths add up next year when it repackages the 2010 pre-budget submission for 2012. Note: Pearse Doherty is by far the most effective and most competent finance spokesman the party has ever had.

    Likewise the left-wing parties. Their solutions are so ancient that a case could be made for displaying them as artifacts in the national museum.The ideas are now so fragile and threadbare that they can only survive if taken out of the real world and put into a rarefied atmosphere.

    And Fianna Fail? And its new way of doing politics? Didn’t we hear that before from Fine Gael and Labour and their democratic revolution?

    The party needs to wear sackcloth and ashes for a period. But that period of penance will end. Sure, the party will never be as subservient to rapacious developers as it was for a decade or more. But it’s primarily a national movement. And for such movements loyalty is always more important than ideologies. Within the next 12 months, the party will have reverted to a traditional opposition (having a lash at every turn). It may never be the power it once was but it will be vying for Governement within a decade. Never underestimate.

    And Fianna Fail is a very good example of Michel’s iron law of oligarchies. Despite its best intentions to reform, inevitably Fianna Fail will revert to form.

    Democratic Revolutions just don’t happen in settled and established western societies.

    Anyway, it’s more gloom and doom than boom and bloom at the moment. The ESRI forecast of slower growth next year plus the eurozone’s continued flailing around doesn’t bode well. The coming together of central banks of all the major power at lunchtime does seem like the first of the kind of game-changing responses that will be required.

    But sorry to sound fatalistic – irrespective of who is in charge, you can’t go very far when you are sitting in a boat with no oars.

    • Nice post, Harry. One point I’d make about settled democratic systems is that in normal times, the People seem to broadly accept the establishment, minus the odd grumbling, the politics of continuation as you alluded to. But in crisis situations, the establishment’s position is much less stable, as voters become increasingly disillusioned. Hence, the government’s honeymoon period is rapidly coming to an end. Of couse, we are in hock to the Troika, as you point out, but voters will see only Michael Noonan and Brendan Howlin outlining the budget measures next week, so the government will be the one getting the grief.

    • RPE McCarthy says:

      Good post Harry. While not wishing to speak up for the ratings agencies and they have not been their own best friends on this, rism management in an economic sense it quite complex and fluid.

      They are behaving now as I would expect them to behave. They may have previously behaved in an unrealistic manner but if this latter statement is true then it is true for the markets as a whole.

      Assets were inflated and products created that made risk assessment difficult to accurately achieve. When asset quality deteriorated it brought down a house of cards.

      I would be quite hard on the ratings agencies as a result on their approach to assessing credit and market risk on specific products.

      I would however equally think that their approach to country and sovereign debt risk is appropriate and sceptical as it should be.

      We may not like what the agencies are saying on sovereign debt but they perform an important function.


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