Figures show markets don’t reward big cuts


by Sunny Hundal    
11:00 am - August 27th 2010

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Paul Krugman at the New York Times made a very astute observation yesterday.

He pointed out how the fortunes of Irish and Spanish economies show that immediate, deep cuts doesn’t necessarily bring market confidence.

A couple of months back I asked, does fiscal austerity actually reassure markets? I noted there the curious case of Ireland, which embraced savage austerity early on; quite a few press reports declared that this had gained it the confidence of markets, but the actual numbers said otherwise.

And I noted the contrast with Spain, which has been relatively slow and reluctant to embrace austerity, but has been treated no worse by investors.

Look at the contrast between the two economies.

He adds:

Now, this isn’t a clean experiment: Ireland had an even bigger bubble than Spain did, so you could say that’s the issue. But since austerians were claiming bond market approval as a sign of its policy success, it is worth pointing out that dutiful Ireland looks as if it’s entering a runaway debt spiral, while malingering Spain is looking considerably better.

Indeed.

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


I am not convinced this would count as actual evidence of any one measure, considering this is a comparison of two economies with multiple considerations. Indeed, the Spanish banking sector survived the last few years pretty well (Santander is expanding with good reserves) whilst the Irish was pretty well battered – perhaps this may explain something about the bond yields?

“immediate, deep cuts doesn’t necessarily bring market confidence.”

Entirely true but utterly superficial. Lots of factors affect market confidence, what we need to know is whether the market is more or less confident than it would have been without these cuts, (not sure how to find that out to honest with you).

I agree with Paul Krugman’s general point that just slashing budgets will not necessarily be rewarded by the bond market. However, part of the deterioration for Ireland and the most recent downgrade is because the state bad bank vehicle NAMA is assuming the liabilities from Anglo Irish Bank assets. The bond market and rating agencies believe they will need to continue to inject huge sums of capital relative to size of the state. That puts more pressure on the government balance sheet and means they will have to cut more as growth disappoints.

Richard W above is entirely correct about Ireland, but let me (in my position as an interest rate/bond trader) just say that bonds globally have been trading well, but countries with low deficits, low national debts and ideally well funded pension schemes are massively outperforming.

@Tyler

Richard W above is entirely correct about Ireland, but let me (in my position as an interest rate/bond trader) just say that bonds globally have been trading well, but countries with low deficits, low national debts and ideally well funded pension schemes are massively outperforming.

Is there a country on earth which is able to boast a decent record on all three criteria?!!!

You might say Germany has a low deficit, but its national debt is up there with the UKs (if this was a pointed comment about the UKs budget deficit).

And I don’t believe anyone has “well funded pension schemes”.

@5 BenM

Yes, there are many, though not that many in the so-called first world.

If you include the UK’s unfunded pension liabilities national debt looks more like 300% of GDP. The US’s pension black-holes induce nose bleeds. Both are higher than Japan’s approx 250% debt/gdp ratio, whch includes most of it’s state pension liabilities.

Germany on the other hand, whilst not traditionally low debt, has a pension system which is mostly funded, and bore a huge cost of East German reconstruction. So do the Scandinavians on the whole (Norway is over-funded). A lot of emerging market countries can also boast similar stories….Russia, Poland, South Africa, Chile to name but a few have low deficits, low debt/GDP ratios and on the whole well funded pension schemes. Those countries bonds have all massively outperformed.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    New evidence shows markets don't reward austerity cuts http://bit.ly/93syPf

  2. Carl Baker

    RT @libcon: New evidence shows markets don't reward austerity cuts http://bit.ly/93syPf

  3. Martin Tiedemann

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  4. Dave Howard

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  6. sunny hundal

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  7. fljf

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  8. House Of Twits

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  9. James Graham

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  10. Walton Pantland

    RT @sunny_hundal: New evidence shows markets don't reward austerity cuts http://bit.ly/93syPf

  11. Alex Marsh

    RT @jamesgraham: It turns out that markets are subject to herd mentality like the rest of us. Who knew? http://bit.ly/bN3pfJ

  12. Natacha Kennedy

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  13. JamieSW

    RT @libcon: New evidence shows markets don't reward austerity cuts http://bit.ly/93syPf

  14. Claudio Carvalho

    Figures show markets don’t reward big cuts | Liberal Conspiracy http://t.co/tlhtNKv #austerity #economics #politics #spain #ireland

  15. Four simple reasons why the Government’s economic policy is wrong | Liberal Conspiracy

    [...] the markets are not worried about UK government borrowing – Greece, Spain and Ireland are all facing market jitters over their recessionary budget cuts, [...]





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