Lenihan must convince the markets

Brian Lenihan's tour of European financial capitals next month is vitally important, writes ARTHUR BEESLEY

BRIAN LENIHAN’S latest attempt to pacify the public finances found a measure of praise yesterday from the most unlikely of sources, the editorial column of the Daily Telegraph.

A day after chancellor Alistair Darling unveiled a budget that will bring British public borrowing to a peacetime record of £175 billion this year, the paper lauded Lenihan for treating Irish voters like grown-ups in the emergency budget a couple of weeks ago.

“He made no attempt to gloss over the scale of the sacrifice needed from everyone, politicians included. What a contrast to the chancellor’s lifeless recitation of a string of footling, inconsequential measures, and his stubborn refusal to admit any responsibility whatsoever for the cataclysm that has befallen us.”

As the ailing domestic economy goes from bad to worse, and much worse again, the tone of these remarks is rare indeed.

By way of contrast, Ireland’s predicament was the subject a searching analysis days earlier at the pen of Nobel-winning economist Paul Krugman. “Erin Go Broke” was the grim headline over Krugman’s column in the Sunday edition of the New York Times: circulation 1.4 million, readers 6.1 million.

In the often-fickle world of media reporting, there’s nothing Lenihan can do to prevent the appearance of items that reflect badly on the economy in his charge. Given the extent of fiscal decay, negative reports about the Ireland’s parlous condition are inevitable.

For Lenihan and the handful of officials and advisers at the heart of the fight to arrest the decline in the public finances and revive the wider economy, this is crucial.

Given the abundance of information about the world at large flowing through the skyscrapers of the market, international investors might spend no more than a few minutes per day thinking about Ireland, if they think about the country at all.

In that context, every single headline counts. And every headline opens up potential for distortion, misinformation and misunderstanding. This is particularly so in the economic arena, a field in which the reliance on statistical comparison can lead to confusion when comparitors vary.

With loud drumbeats from the IMF warning this week that Ireland will pay a higher price than any other country to stabilise its banking system, international perceptions of Ireland’s woes are dominated by negativity.

On the upside, it must be pointed out that no country is immune from the forces of recession. But having borrowed €12.3 billion from the international markets since the start of this year, the Government still has a mountain to climb to reach the record €25 billion it will require to run the State. That’s not counting the billions that will have to be borrowed next year and beyond.

Thus Lenihan’s grand tour of European financial capitals early next month will be hugely important. Domestic politics was dominated this week by Brian Cowen’s limited cull of junior ministers, but it was no more than a symbolic sideshow and irrelevant in the wider economic scheme.

As work continues on the creation of the National Asset Management Agency (Nama), Lenihan plans a charm offensive in London, Frankfurt, Milan and Paris. In this attempt to directly convince the markets about the merits of his budgetary strategy the Minister is, in essence, cutting out the media as middle man.

At issue here is the spread between the price of Irish and German 10-year bonds, the market’s prime measure of a European economy’s condition. As Ireland boomed in the past decade, the average spread was 20 basis points or 0.20 per cent. The worse the conditions perceived by the market, the greater the spread. On upward trajectory for months, the spread reached a 10-year high of 284 basis points in March. It came back in recent weeks and stood at 213 basis when the National Treasury Management Agency raised a €1 billion in two bonds last Monday.

Lenihan’s ultimate task is to convince the market that these spreads should narrow in light of his new Budget and the Nama plan. It is of immensely more importance than trying to bring back the price of Irish credit default swaps, a form of insurance against the risk of the Government not paying its loans. The decision of rating agencies Standard Poors and Fitch to drop their triple-A rating can be seen in the same light. Important, yes. Main event, no.

“Financial market participants, who are purchasing our sovereign debt and our bank debt are absolutely the critical audience,” says a senior Dublin stockbroker. “You’ve got to get on the road because you’re dependent on these guys.”

The emergency Budget – Lenihan’s fourth attempt to recast the 2009 public finances – doled out considerable pain to middle- income earners and held out the prospect of a lot more pain to come. But that effort will be futile if he cannot convince the markets that he and his Cabinet colleagues have the mettle to see the plan through and the drive to execute the cuts required.

“International investors need to see that Ireland has a comprehensive, credible, multi-year plan to tackle the emerging deficit in our public finances, to place our banking sector on a sound footing, to transform the funding outlook and to support our economy,” said a joint report earlier this month by stockbrokers Davy, Goodbody and NCB.

In normal times, these three rivals never ever speak with one voice. Their assessment reflects the markets’ desire for clarity from Lenihan. There will be no scope for error or uncertainty as the Minister boards the Government jet.