March 28, 2011
I belong to an oppressed sect.
Like every sect, we are bonded by strange rituals, unusual texts, strange chants and ferociously long memories. Past adventures gel us together, as do journeys made and risks taken.
We know that we are on the true path and that, unlike the other imitators, we are in possession of the truth. Like all sects, we believe that current difficulties are temporary and that all sacrifices are necessary.
We know that our day will come.
Our saviour will arrive, the messiah is on his way, and all we need to do is keep the faith.
I am a Leeds United fan. Following Leeds is the closest thing football has to a cult. And because Leeds have fallen so far, the sense of wrong is amplified each time I see smiling Manchester United fans glorying in another piece of silverware.
This weekend, Leeds play another club that was once top dog: Nottingham Forest.
It is a crucial match as both clubs are in play-off position for next year’s Premier League.
Both teams’ falls from grace have been spectacular, but the Leeds self destruction is the footballing equivalent of Ireland.
Forest are more like Portugal, hampered by structural problems. Leeds are a more straightforward boom/bust.
They borrowed loads of money, bought hugely expensive players and, while the team performed, all was manageable – but then the bubble burst and everything imploded.
Leeds went bust and were relegated.
After relegation, they sold all the expensive players. They got relegated again and had to start from scratch. But Leeds never stopped playing football, they just played football at a lower level.
The objective, when you are relegated, is to get promoted as soon as possible.
Ireland is the Leeds United of the European financial markets and, when we default, it will be just like relegation.
Being relegated doesn’t mean you stop playing football every Saturday – you just play against opposition you thought were beneath you. But you still play football.
Similarly, defaulting doesn’t mean that you stop being an economy which buys and sells, trades, employs and provides a living for your people. You simply play at a different level. Yes, your standard of living falls a bit. Your cost of living does, too.
But you still compete. You borrow from different people, get benchmarked against different countries, and then you ultimately focus on getting promoted again as your economy turns around. This is the way the world works.
Countries that mess up and can’t pay their way get relegated and countries that grow and do all the right things get promoted. We should know: we only got promoted recently.
The capitalist system works reasonably well and, like the football league, everyone understands the rules of the game. It is when you tamper with the rules that people get confused.
The eurozone and its treatment of weaker members are like the Premiership without relegation.
We are playing in a division which is too strong for us. The countries at the bottom – Ireland, Greece and Portugal – don’t get relegated despite being beaten week in, week out.
The authorities that run this bureaucratic Premier League won’t allow the weakest to play at the level that they should do.
But without relegation, the future is a purgatory of underachievement for the weak countries.
In turn, having no relegation – no default – doesn’t make the Premiership more credible, it makes it less credible. So everyone loses.
For some football clubs, relegation comes as a relief. It is a chance to rebuild, to see what is wrong and where, to give the fans hope of some upward progression. It allows a small club to return to its footballing academy without having to buy expensive mercenaries and it allows managers to try out systems without the mad pressure of fighting in the relegation zone.
Similarly, a default on bank debt gives breathing space. It allows a country to reorganise itself and to come up with a better model of how to run the place. The country never stops competing, it never ceases being an economy, it just joins a bunch of other countries which investors regard as a similar risk. And there are always investors.
The world is full of money with differing appetites for risk.
The key is that the country should be on the right track. It’s not the rating itself that counts, it’s which way the country is going. If you have a poor credit rating but are getting your act together, it is better than having a good credit rating while being in a pickle.
The problem for Ireland, Portugal and Greece is that the EU supports are preventing us from slipping down the credit rating chain, so we look like being a permanent default risk.
This is the worst place to be. It’s like being a team which gets beaten all the time with no hope of redemption. Relegation in this context is redemption, remember, so it just gets beaten and beaten.
In order to see what the world would look like if Ireland (and the other peripheral countries) were allowed to default as the numbers suggest, like a proper country, we must compare the interest rate that is being charged on Irish, Portuguese and Greek debt. We then must calculate the spread over Germany.
This spread is the risk premium – how much more an investor must be paid to hold these assets over German assets.
Armed with this risk spread, we can then calculate where Irish bonds would trade in a free market without the EU bailout and what would be our credit rating.
This will give us a true reflection of the situation but would also reveal the upside. It would tell us what sort of company we might have to keep in order to get financed in the free market. The following calculations were done by friends I used to work with at a trading house in London (www.exotix.co.uk).
According to these guys, who trade debt all the time, Portugal’s ten-year bond spread of 417 basis points (4.17 per cent above equivalent German bonds) delivers a credit rating of BB-.That is seven notches below the current average A rating.
Ireland’s spread of 637 delivers an implied credit rating of B, also seven notches below the current average BBB+ rating.
Greece’s spread of 897 delivers a credit rating of CCC+, six notches below the current average BB+ rating.
So if we were allowed to move up and down, get promoted and relegated according to the real risk that the markets accord to us, Ireland – at present rates of interest on ten-year government bonds – would be a similar risk to somewhere like the Seychelles. But we know that we are much richer than the Seychelles, so what is going on?
We are like a big club that has been relegated, being compared to a minnow.
The reason the market sees us as such a risk is that it knows we will not be allowed to be relegated by Trichet et al – even though we deserve that. As a result, our economy will be forced to pretend it is stronger than it actually is.
We will not be allowed to default and, therefore, our future is one of guaranteed deflation and deficits, emigration, high unemployment, generating surpluses to pay odious debts.
Therefore, we are in the worst of all worlds, a rich country getting poorer but still behaving like a rich country.
Leeds United sold their players, slimmed down and started again from scratch. If we want to get back up, we have to sink first and stop pretending to be a Premier League team when we are, at best, a Championship outfit.