JP Morgan says Irish position strong

Business World and RTE are reporting on a new research note from JP Morgan that gives Ireland a vote of confidence by telling clients not to bet on the state defaulting on its debt. The note describes Ireland’s financial position as “remarkably strong” despite the banking crisis and economic downturn. On the issue of banks’ bad loans, the analysts at JP Morgan are pencilling in a worst-case scenario of €27bn in write-offs over the coming years. Not trivial, but certainly manageable.

5 replies on “JP Morgan says Irish position strong”

The 27bn figure tallies when with the figure David McWilliams has mentioned based on other countries where property crashes have taken place. I think Morgan Kelly pointed to a similar figure?

A newly issued report by the IMF helps relativise the contingent liabilities of sovereigns, in particular in relation to banks. It can be read here

I find the IMF data and analysis still generally the best for sovereigns, reflecting the far bigger resources at their disposition, like for other international agencies, and in contrast to rating agencies and credit analysts. Unfortunately, these bodies like banks, are constrained in what they can say. I would think the IMF’s upcoming Article IV On Ireland will give an intelligent analysis of the data – much as here – and suggest sensible policy action, but not much more.

This IMF report looks on the sunny side. The underlying assumption is that “fiscal balances are expected to improve, while remaining weaker than before the crisis. Beyond 2009, activity is expected to recover… “.

It asks more, “What should be done to reassure markets that fiscal solvency is not at risk?” rather than proposing measures to tackle solvency, even if it recognises that “This somber fiscal outlook raises issues of fiscal solvency, and could eventually trigger adverse market reactions.” That is a big understatement, in my books.

The comparative data is what I find most interesting, and Ireland is a stand-out on several counts.

Prospective bank losses are only one part of the jigsaw. Wealth and income are what interests Moody’s and Standard and Poor’s most of all, in forming a judgement on credit worthiness. That is easy to understand. A creditworthy sovereign is one that is sufficiently wealthy and has enough income earning capacity to withstand global economic shocks. Those last few words are very important… to withstand the possible global economic shocks that still lay ahead of us. The rating gives especially an idea of the degree of resilience in the face of the unexpected. One issue is the estimated size of the bank losses and the distribution of risks. Another is the ability to cope should an extreme event – most likely in the wider economy – occur.

The uncertainty around bank losses is only one of several factors that that determine the level of Irish CDS in relative terms. Others include:

– Uncertainty over commitment to Europe.
The Lisbon No vote is the Number 1 question that investors ask, along with … will there be another vote? … when> … and what result? I understand the technical reasons for putting it off beyond June. That is unfortunate.

– Uncertainty over the future face of politics.
Allied to the concern over the commitment to Europe and the euro, is a preoccupation about government stability, and that the line of the fundamentalists will be followed. So stories like that in the Indo that “Irish government may struggle to get the votes for new budget”
or advocacy of easier fiscal polices (e.g. David MacWilliams) are seen as the risk scenarios, with a fear that a populist party could cause an electoral upset.

– Sterling.
The drachma has nothing else to peg itself to. The punt does, and investors fret about that. Sterling’s weakness has done far more damage to eurozone stability than any quantity of eurosceptic diatribes in the press. If sterling had joined EMU, Irish creditworthiness would not have been so seriously weakened.

Ergo, if Ireland wants to keep its AAA ratings, it needs most of all to follow long term policies that will maintain a level of national income and foster the creation of wealth. I would see the long term interests of taxpayers and of sovereign ratings as very closely aligned. It is possible to keep the AAAs, even at this late stage, with a strong political will to shift the budget deficit decisively under 10% pa, and with strong public support.

That seems like it is too much to hope for. But even matters trundle on, with no obvious signs of improvement, Ireland’s CDS, still trading at a good 100bp above other Eurozone sovereigns, strikes me as far too high, at least in relative terms. It is also too high relative to the yield spreads on Irish debt. That said, I wouldn’t attach much importance to it per se given the lack of liquidity.

Investors think that CDS will pay up in a number of scenarios – for the reasons alluded to above, among others. Trigger clauses in contracts could be set off by a restructuring and a redenomination of debt. My own view is that the market underestimates the legal challenges in CDS contracts, and the capacity of the authorities to work around such icebergs (not that CDS is or should be a policy target).

Slightly off-track, but related to the forthcoming budget:

The so called punitive taxes on the ‘super-rich’ (incomes > 100k and 250k) seem to be the prime focus on this budget. From personal experience and from speaking with many who will be affected I can absolutley guarantee that if penal taxes are imposed it will be the undoing and final ‘nail in the coffin’ for this economy – however populous the opposing view. Especially if it is not coupled with cuts in social welfare – including JSA which is one of the highest in the free world!!

I know my company (which directly employs 500 people in Eire) will probably relocate if these upper taxes are not at least comparable or better than competing lower cost countries. My company produces ‘high value’ product and pays comensurate salaries in many cases multiples of the average industrial wage. These of course are the type of so called ‘fat cat’ salaried jobs we absolutely have to retain!! The key decision makers in this company (and others like it) will be those targetted by these new taxes.

These important highly paid employers, who are not vocal politically, are watching very carefully and you will not see them protesting or lobbying – the first and last thing we will see is a big announcement followed by redundancies shifting the tax burden further down to the lower paid.

As for me I am brushing up on my Dutch, just in case.

@johnD15 If I hear you correctly you are telling me that the fat cats are too important to tax, that they are of systemic importance and that the little people should pay! This sound familiar and a little like double Dutch to the average tax payer. These “highly paid employers” are the very ones who got us into the mess in the first place and lost investors billions. Their own companies should pay them what they are worth and that would put them closer to the average industrial wage, reducing their tax worries considerably.

Going back to topic, This assessment makes you wonder about J P Morgan. The rating agencies certainly don’t agree, Krugman and Engle both Nobel Economics prize winners do not agree and furthermore any economist worth his salt knows that NAMA will bring the house of cards down so what is J P Morgan about with this silly assessment.

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