Hasenstab endorsement carries international clout

 

Michael Hasenstab has spoken and he has said lots of very nice things. But of course it is important not to get too carried away by the bullish sentiments of a bond trader who has a €8.5 billion bet riding on Ireland.

There is huge self-fulfilling dimension to his prophecies about Ireland. When the manager of a €165 billion bond fund says the Irish turnaround is “probably one of the investments of the decade” people tend to believe him.

This in turn leads to improved sentiment towards Ireland, which results in lower borrowing costs, higher bond prices and more profits for those like Hasenstab who bought Irish bonds when they were on the floor.

But, at the same time, everybody knows this and to a certain extent it gets discounted into the price if the market is big enough.

What is far more interesting is the impact of his comments on us – the Irish.

His endorsement of Ireland is a vote of confidence in the approach adopted in Ireland towards restoring order to the national finances and should steady the hand of the Government.

The timing of his interview – in the midst of the post-budget fallout – could not be better in this regard. But most likely it is a coincidence. What seems to have provoked Hasenstab into speaking is comments made by some of his competitors to the effect that he has cornered the market in Irish bonds and this has artificially supported the price of Irish bonds. (He dismisses this as sour grapes on the part of those who missed out on the Irish recovery story.)

However, the point holds true that Hasenstab’s comments will encourage the Government to keep going with what you might call, for want a better word, the “Irish” approach to fiscal austerity.

While the broad parameters of Ireland’s fiscal consolidation is prescribed by the terms of the troika bailout, the Government has been left quite a lot of scope as to how it goes about hitting the various targets.

Much of what they have done is exasperating to those in business and elsewhere who believe national salvation lies in firing more public servants and cutting welfare payments. It might be a mistake, however, to interpret Hasenstab’s comments as lending succour to such views.

His belief in Ireland seems to be based fundamentally on the economy’s growth potential. “What really attracted us on the economic side, and still attracts us, was the very competitive economic fundamentals. Taking aside the chaos of the financial crisis, where clearly there was an over-investment, and a crash, this was evidently a country with an incredible wealth of long-term drivers of growth,” he said in last week’s interview.

He would also appear to have set great store by the Government being able to sort out the public finances without Greek-style fractures appearing in society. He noted both the “relative bipartisan” support across the political parties , coupled with relative social cohesion, which has helped to instigate change.

Taken in the round, his comments could be interpreted as an endorsement of an approach that has seen €35 billion taken out of the economy in five austerity budgets with no serious political upheaval or social unrest.

And despite the protests and the Labour Party’s post-budget wobble, no one really expects the Government to break up any time soon or for the unhappiness over the budget to lead to civil disturbances on a scale that would force the Government to change tack.

It is a source of genuine bafflement to many that the Irish seem so placid compared to the Greeks and Spanish. But it shouldn’t be. By accident or design, peace has been bought by not cutting core social welfare rates and preserving the pay, benefits and jobs of public servants. These are the things that drive some business people crazy, but they are also the things that brought people out on the streets in those other countries. Holding income tax rates steady was at best a secondary factor.

If you accept this line of reasoning then you arrive at the rather surprising, but pleasing, conclusion that Michael Hasenstab with his €8.5 billion bet on Ireland is actually the Croke Park agreement’s biggest fan, although he may not know it.

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