Stephen Kinsella

Wednesday 20 August 2014

Stephen Kinsella: Forget about bonds and house prices, the best guard against poverty in this world is a job

Stephen Kinsella

Published 28/01/2014 | 02:30

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Michael Douglas depicted traders as greedy in the 1987 movie Wall Street
Michael Douglas depicted traders as greedy and immoral in the 1987 movie Wall Street

I spoke to a bond trader this week. Thoughtful, calm, polite, educated in classics at Oxford, he is not at all like the priapic, red suspender-wearing Wall Street parody you might have in your minds when you think about people who work in the markets.

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I asked him why he thought Ireland's recent bond issue was such a roaring success. He actually wanted to buy some of the debt issue, but didn't win in the auction. Potential investors bid over €14bn for a bond that matures in 2024. In the end, the Government sold only €3.75bn, meaning the bond issue was oversubscribed by about three to one.

The cost of the State borrowing from private investors has fallen from around 15pc in 2011 to around 3pc today. This is a reversion to the pre-crisis cost of borrowing, and at times recently the markets have seen Ireland as less of a risk than the UK, which is remarkable.

The Irish authorities will tell you three events matter for investors' perceptions of Irish debt: first, the declaration by the eurozone heads of state in June 2012, when the European authorities agreed to 'examine' separating Ireland's banking debt from its sovereign debt, combined with European Central Bank president Mario Draghi telling the markets he would do 'whatever it takes' to save the euro. Second, the country's exit from the EU/IMF bailout without a precautionary credit line, and third, the evidence that Ireland's fiscal house is getting into some rough order as the troika-mandated fiscal consolidation takes place.

All of this is true, but none of it mattered particularly for the bond trader. No, for him only two facts mattered. First, from 2008 to 2013, Ireland has beggared herself to repay bondholders who had invested in banks like Anglo Irish Bank. Fools who should have lost almost all of their money in any system of actual capitalism where stupidity and failure is allowed to take its natural course got 100 cents on the dollar back from a bankrupt state which promptly began cutting services for its citizens to compensate for this repayment. The simple fact that Ireland repaid everything when it shouldn't have lends confidence that today's bond holders will be repaid in the much more favourable conditions Draghi has created.

Second, the markets have had a field day with peripheral sovereign debt. If you bought and held Spanish sovereign debt over the last two years, you would have realised a 30 to 40pc return. In a low inflation environment, with interest rates very low and promised to stay low for the next two years at least, these traders need to find places where they can make a solid percentage return, or yield, and Ireland is a relatively safe bet with a decent-sized return. Combined with the very good salesmanship of the Ireland's bond issuing agency, and expectations the European Central Bank will need to do something about the low level of inflation across the eurozone, and you've got the conditions for borrowing costs to fall substantially, which they did.

Now you might be sitting there thinking what, exactly, has this got to do with me? In the short term, not much – except the lower the interest rate on the debt, the less the Government will have to take from taxation revenue to pay the interest. In the medium term, your taxes will end up paying off the debt Ireland has just issued.

REGARDLESS of whether the bond markets like us or not at a given moment in time, there is no recovery until employment levels increase, until domestic demand begins to trend upwards for at least nine months, and emigration returns to pre-crisis levels.

Forget house prices, bond yields, rating agency upgrades – none of it matters unless people have jobs and money to spend. The best anti-poverty programme in the world is a job. When real, domestic incomes are rising, everyone will see the recovery– even the economists, we don't get out much.

We need the bond markets, but we should not be persuaded that just because someone wants to buy our debt, or pats us on the back for taking painful decisions without setting half the country on fire, that things are fine and are returning to normal. Threats to the recovery are still real. Let us focus on the measures we know show an economy entering an upturning phase.

STEPHEN KINSELLA IS SENIOR LECTURER IN ECONOMICS, UNIVERSITY OF LIMERICK

Irish Independent

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