Another item to be filed under “Am I the only person who finds this bizarre?”

According to the most recent Register of Interests of Members of Dáil Éireann, our Minister for Finance, Michael Noonan, thinks it is a good idea to own German Government bonds.  Under the heading “Shares”, this is what he discloses for holdings at 31 December 2010: 

    1. I-shares FTSE 100 ETF;
    2. Lyxor  Eurostoxx 50 ETF;
    3. SPDR KBWUSBanks ETF;
    4. Lyxor MSCIIndia ETF;
    5. Lyxor ChinaEnterprise ETF;
    6. Ipath S&P 500 VIX ETF;
    7. German Government Bond 1.75% (15/04/2020);
    8. SPDR Metals & Mining ETF

So, besides some exchange-traded funds, the only investment Mr Noonan holds is in a bond issued by another member of the Eurozone.  He is in fact sacrificing quite a yield difference by holding German, as opposed to Irish, government bonds.  Does he know something we don’t?  I think we should be told.

Seriously though, at a time when the Irish Government is trying to stem the flow of deposits from Irish banks, and the flow of money out of Ireland generally, it’s bizarre that Mr Noonan sees nothing wrong (apparently) in this state of affairs.  Here we have the Minister for Finance keeping a chunk of his money in what has become the safe haven of choice for those who fear for either the solvency of the Irish State, or our ability to remain in the Eurozone.  What a message!

Incidentally, his register of interests as at 31 December 2009 shows no holding of German Government bonds, so Mr Noonan actually bought them last year, at a time when he was opposition spokeperson for Finance, and when capital flight from the banks and the country became a serious issue.  What a depressingly stupid thing for him to do.

Morgan Kelly‘s latest episode of “The Sky is Falling” appeared in Saturday’s Irish Times (here).  The opening sentence says it all: “With the Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable.”

I took refuge in Seamus Coffey’s “Economic Incentives” blog, which was more measured and thoughtful.  I hope he doesn’t mind me quoting a few paragraphs.  His analysis helps me to get a clear picture of the components and dynamics of our indebtedness as a nation, and underscores the fact that the cost to the taxpayer of the bank bailout(s) is responsible for only a minority of the debt mountain we are bequeathing to future taxpayers.  The real issue continues to be the chasm that exists between tax revenues and government spending, a problem that we have barely begun to fix.

Starting with the €154 billion GDP outturn for 2010, and assuming moderate nominal GDP growth rates of 1.0%, 2.0%, 3.0%, 3.0% and 3.0% between now and 2015, means that the debt ratio in 2015 will be around 120% of GDP using the General Government Debt measure.  By just looking at the money that would actually have been borrowed by then the debt-to-GDP ratio will be around 108%.  Higher nominal GDP growth would reduce that but there is little sign of that at present.

If the country had avoided assuming the debts of the banking sector the GGD ratio in 2015 would still be around 95% of GDP, which is better than 120% but would not eliminate the fear of default because of the annual deficits……

Servicing the €205 billion debt mountain we have created will cost about €10 billion a year and this will consume close to one-fifth of government revenue.  The actual servicing cost will depend on the average interest rate.  This is a huge burden for the country to carry and one that will require further adjustments just to keep expenditure constant.  It will be just possible to manage this but it may be decided that this is a burden that the country should not carry…..

If the option to default is to be taken those to suffer will be holders of Irish government bonds.  It is more than a little incongruous that those who invested in our delinquent banks are getting their money back while those who invested in our country may be forced to carry losses.  As with a lot of things in this crisis, this just does not add up.