Time to thank Moody's and embrace our junk status

 

BUSINESS OPINION:Downgrade puts the Government ever closer to having to make a decision on our future

WHEN YOU see a messenger being lined up against the wall, the instinct of a journalist should be to rush to their defence.

When the target is credit rating agencies and Moody’s in particular the impulse is somewhat dampened, but it’s there none the less.

Worth noting in this regard is that credit ratings rely heavily on the first amendment of the US constitution guaranteeing freedom of speech. A credit opinion, which has the power to collapse governments, is just that: an opinion. This, incidentally, explains why they did not all have their backsides sued off following the sub-prime debacle.

But this travesty of first amendment rights is not the real reason for defending rating agencies, or at least trying to dissuade the lynch mob that formed around Moody’s last week after it downgraded Ireland’s credit rating to junk.

The real reason for not wasting too much time on Moody’s is that it is a mistake to see them as players in what is going on. It makes no more sense to string them up than to hang all the gilt dealers who sold Irish bonds on foot of their downgrading.

The junking of Ireland by Moody’s was a logical consequence of the decisions taken on Monday night by the euro zone finance ministers to reopen the can of worms which is a default by Greece on its debts.

Any cursory reading of Moody’s commentaries on the peripheral sovereigns would have told you to expect the move. Arguably it came sooner than expected but the writing was on the wall from that night. The reason being – as the Minister for Finance was keen to point out – that any measures adopted for Greece should also be available to Ireland.

Ireland cannot have it both ways. We cannot hope to avail of measures such as debt rollovers and buy backs and retain an investment grade on our debt. The reason for this is because these are all forms of default and countries that need to default are not investment grade.

By downgrading Ireland last week Moody’s was merely stating the obvious; Ireland is going to be given the opportunity to default by the European Union and will have to give it some serious thought. The markets know it and are placing their bets.

If the events of September 2008 and the decision to guarantee the entire banking system was the defining moment of the last government, then this one’s hour of truth will be when and if it decides to default.

A default by Ireland is not a given. Government policy is still to repay senior bond holders in the pillar banks and honour the €70 billion of debt we have taken on to rescue our banking system and underpin the European banking system.

But many doubt that the Irish economy can foot the bill, hence the markets will not lend any more money and are pricing in a default as inevitable. The events of last Monday take us further down this road and Moody’s downgrade was simply a marker. In a perverse way it is to be welcomed as it indicates we are coming closer to facing up to the issue of what is the best direction to take.

Moody’s don’t care. They will earn the same amount of money if we default – and have our rating cut a few more notches – or if we try and avoid default and our rating bumps along at the edge of investment grade for the foreseeable future. Likewise, they will happily re-rate Irish debt as investment grade following a “successful” structured default. It’s all the same to them. It’s just business.

Well that is the theory at least. The credibility of rating agencies has taken a battering since the sub-prime crisis exploded. Without a doubt they were captured by the industry they serve. The reason they are still around after 2008 – apart from their first amendment protection – is that they are so deeply embedded in the infrastructure of modern finance that they cannot be abolished. It is legitimate to question their impartiality, but people only tend to do it when a rating decision goes against them.

The simple truth remains that an investment grade rating from Moody’s or anyone else will not save Ireland.

Ultimately the markets will look at the national finances and decide if we are good for our debts. Right now, they don’t think we are.