Troika or bond markets – external forces still master our universe
One way or another, albeit through different channels, the troika will also be exercising influence.
Left to right: Klaus Masuch of the ECB, Istvan Szekely of the European Commission, and Ajai Chopra of the IMF at a troika press conference in Dublin following the third review of the EU/IMF programme.
Financial and economic life in a post-bailout world will, initially at least, not feel that different. In a sense, we just exchange one set of external masters for another, both of whom have pretty similar ways of judging us. As the troika leaves town, symbolically at least, the bond market moves back in. Bond investors are less visible, perhaps, than the regular visitors from the ECB, IMF and Brussels, but they are likely to be just as tough to deal with.
Debt sustainability is not a particularly complex matter: in some ways it is just about arithmetic, the relationship between how much we hope to borrow, its price and how fast our economy is growing. One way or another, albeit through different channels, the troika will also be exercising influence. Our debt arithmetic is finely balanced: it is perfectly possible for us to get through the next few years without regretting the lack of a financial backstop – but there are plenty of risks.
Ever since we joined the then EEC, we, like all other members, have been subject to rules not of our making. The financial crisis has prompted much soul-searching and identification of what must come next: lots of change. In fits and starts, greater centralised control over nation states has been hard-wired into the evolution of the EU.
Indeed, if we had made greater progress on both political and economic union, the worst effects of the crisis may have been avoided. In any event, there is widespread recognition that deeper integration is necessary if the euro is to survive over the medium term, if it is to survive its next crisis, whenever that might occur.
The euro was poorly designed, with politics taking precedence over the economics. The technical shortcomings of the euro have to be fixed over the next few years. This is widely accepted but agreement on both method and timing remains elusive.
If fixing the euro’s design flaws is likely to remain troublesome, the single most obvious financial shock wave that awaits us is either a Greek default or exit. The likelihood of this arises from the almost hopeless nature of the trajectory of the key Greek debt-GDP ratio.
If another Greek meltdown is likely, its timing is extremely uncertain: it could take several years before the true extent of the problem prompts a final denouement. Either that or the new German government figures out how to tell its electors (and courts) that a large cheque now has to be written.
Some in the hedge fund community (in particular) think that Italy could prove to be as big a problem as Greece. The Irish Government needs to think carefully about a possible – probable – resumption of the euro crisis. It may not come in the next 12 months, but it is there waiting for us unless there is a dramatic policy change.
How the EU chooses to evolve will present many different challenges, particularly over the medium term. By contrast, our immediate future will be shaped almost entirely by how much economic growth we manage to achieve.
Our growth rate will be the single most important indicator monitored by the bond market; a growth disappointment will be serious, a negative growth shock could prove fatal – or at least drive us back into second bailout territory.
Back in the spotlight
In such circumstances the price will not just be the interest rate on any new loans; our corporate taxation regime will be back in the spotlight. Indeed, our corporate tax rate will remain a constant source of tension for some of our European partners.