Thursday 17 October 2019

David McWilliams: High bond rates will leave us an economic wasteland

David McWilliams

Years ago, when I worked for a Swiss bank, we would go to the Alps every month or so to examine all the trades we had made and make sure that the assets we held were sound and could be relied on.

If something didn't quite add up with a country where we had exposure, we would decide what to do in order to sell the stuff as soon as possible. For example, if a bankrupt country was raising money at an interest rate of more than 6pc, alarm bells would ring.

On my first visit to the Alps, quite apart from the complexities of finance, which were hard enough initially, the one thing I could never figure out was how Hannibal got elephants through the tiny passes. As a young boy I was fascinated by this story of the African general, driving his army from Africa, to Spain and then through the Alps into Italy.

Hannibal was from Rome's great rival city, Carthage, in what is now Tunisia. By the time Hannibal made it to Italy, the Romans and the Carthaginians had been at war for more than a hundred years, but Hannibal's heroism shocked the Romans and they decided to subdue this problematic rival once and for all. At the end of the third Punic war, the Romans succeeded in 146BC.

The legions laid siege to Carthage. When they took the city, they killed most of the inhabitants, sold the rest into slavery, and destroyed the entire city. As the scribe Tacitus said in a different context, "they make a wasteland and call it peace". In the Leaving Cert we were told that the Romans ploughed up the city to ensure that no one would ever live there again.

A Carthaginian peace came to describe a situation where a place is destroyed and the victors call it peace.

When I heard the crowing on the radio from bond market salesmen yesterday that Ireland had managed to borrow yet more money at exorbitant interest rates, I was reminded of the expression 'a Carthaginian peace'. Apparently, Irish bonds are as "safe as houses" according to people who sell bonds to other people and take a commission on the trade. Well they would say that wouldn't they? After all, they make a few quid on the twist.

If our bonds are as safe as houses, what explains the fact that Ireland raised money at 6.28pc yesterday and Germany raises money at 2.47pc?

Maybe they should be described as safe as Carthage houses, although in fairness anyone who uses the expression 'as safe as houses' to describe something as financially secure clearly hasn't lived in the country for some time.

The bond market is betting that the Irish authorities, in cahoots with their friends in the ECB, are happy to preside over a Carthaginian peace. Any economic destruction will be deemed necessary so long as Ireland remains a pliant little European borrower.

This means the ECB will continue to backstop Irish bonds irrespective of how much damage the policies are doing to the Irish economy. It will not matter that the Irish economy is a wasteland so long as we continue to honour our debts and continue to plug holes in our banks with taxpayers' money.

Over the past few months it has become obvious that the financial markets see the world in a totally different light to the ECB and the Government. The financial markets do not want a Carthaginian peace because a wasteland can't generate income to pay back the debt. However, this view is not shared by the people who run the Irish economy in our name. These people -- the politicians and the top civil servants -- appear to think that we can put up with anything.

As a result of these differing views, the financial markets are not rewarding austerity as the mandarins are suggesting. In fact, the markets are doing the opposite. The more we cut, the higher the interest rate. And the bond market is being kept open by the fact that the markets see Ireland as a "carry trade" which will be guaranteed by the ECB.

A carry trade is when you borrow cheaply to fund a trade which yields much more than the interest rate you borrowed in. During the past 10 years when Japan kept its interest rates at zero, the emerging markets were fuelled by what was then known as the "yen carry trade". This involved borrowing in Yen to buy higher-yielding bonds. This created all sorts of "hot money" bubbles around the globe. When the rate of interest in Japan rose, these trades were unravelled. Something similar may be developing in our bond market.

THE Pyrrhic victory is one where the costs to the victor are enormous. When you pay 4pc more for money than your neighbour, borrowing is hardly a victory.

On the ground, the evidence of an economic wasteland in Ireland grows. On the day the bond auction was oversubscribed by opportunists taking advantage of the carry trade, jobless figures came out which revealed the real picture.

Unemployment is the true barometer of economic success and the labour market figures yesterday tell their own story.

Emigration in the second quarter is the highest since 1989 -- 35,000 people left the country in three months. It is highest amongst the 25 to 34-year-olds. The number of people employed in our country has dropped by 253,000 in two years. Around 43pc of our people on the dole are now described as long-term unemployed, this is up from 21pc in 2008.

One of the most shocking revelations in yesterday's figures was that 112,000 people under 35 have left the labour force since spring 2008. Unemployment among the young is rising rapidly. Four out of 10 people between the age of 15 and 19 in the labour force are on the dole -- so too are a quarter of people between the age of 20 and 24.

Ireland is an economic wasteland for young people. This is not a sustainable status quo. This is becoming no country for young men (or women).

I watched Michael McDowell's excellent programme on Michael Collins the other night and it struck me that our greatest general died at 32, the same age as Hannibal when he took his elephants over the Alps.

At 32 today the average worker in Collins' Republic is facing unemployment, negative equity and the prospect of paying bond vultures years of tax income, all to bail out bust banks.

A Pyrrhic victory spawns a Carthaginian peace.

Irish Independent

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