The story that initially caught my eye while in the UK last week, and which might offer some hope for those concerned about our fiscal situation and impending downgrade, concerned Greece, the poster child of Europe’s sovereign debt crisis.
It’s a tale of how things can quickly change for the better when pragmatism and realism reign.
It was just over a decade ago that Greece’s new government revealed that its predecessor had been cooking the books and that the budget deficit would be twice what investors had been led to believe. Ratings downgrades and a market meltdown that would eventually push its 10-year bond yields above 30% followed.
At those rates the country found it impossible to raise funding in open markets and it was forced to seek help from its neighbours. The eurozone came through with a bailout package that, at about €290bn (R4.6-trillion), was the biggest in history.
It came with strict conditionality, with the resulting austerity pushing unemployment levels sharply higher. In the face of falling incomes and deep recession, populism predictably followed. Just five years ago, the country had a government that had Yanis Varoufakis as finance minister, whose aggressive and ultimately futile attempt to blackmail the EU into loosening the terms of the loans backfired and almost led to the country falling out of the European currency bloc completely.
The prime minister at the time, Alexis Tsipras, eventually saw sense, though this came after he had unwisely gone along with Varoufakis and inflicted further damage on an economy that was showing some signs of recovery.
Riding on a wave of anti-German sentiment and anger over austerity, he had called a referendum on whether to accept or reject the EU’s terms. The victory ended up being a Pyrrhic one and when push came to shove, he backed down and dropped his maverick finance minister.
And now Greece is making headlines for completely different reasons. Despite it still being rated subinvestment grade, or junk, it is able to borrow for 10 years at yields below 1%.
While the country still has deep problems and the appetite for its bonds is partly driven by a desperate hunger for returns in an era of negative yields in some developed economies, the turnaround shows how quickly sentiment can turn with a credible government in place that shows a readiness to do what is needed.
The lesson for finance minister Tito Mboweni, though he already knows, and President Cyril Ramaphosa should be that it needn’t take too much to turn this ship around.
With the exception of the pie-in-the sky promises, such as a new bank and a wealth fund for cash that we don’t have, implementing some of the plans in last week’s state of the nation address and showing some conviction in getting the nation’s finances in order could see a similarly dramatic turn in investor confidence towards SA.
On the subject of fiscal policy, the biggest story concerned the UK’s own version of state capture, more specifically the capture of the treasury. Prime Minister Boris Johnson did a better job than SA’s former president.
What was meant to be a routine cabinet reshuffle ended up being the story of the week as Johnson lost the chancellor of the exchequer, Sajid Javid. Though nothing like the drama of Jacob Zuma appointing Des van Rooyen to replace Nhlanhla Nene in 2015, it nevertheless came as a shock.
The prime minister, who since his days as London mayor has shown an affinity for vanity projects, told Javid, an ambitious former banker not renowned for standing up for principle, that he could keep his job if he fired all his advisers and effectively accepted that economic and spending policy would be dictated from No 10 Downing street, rather than No 11.
Declaring that no self-respecting minister would accept this, he chose to quit and was replaced by a 39-year-old who has already indicated that he is more willing to limit fiscal rules.
The odd thing about the market reaction was that the pound gained on the news, expecting higher spending and borrowing.
It seems unfair for those of us who’ve been told that fiscal irresponsibility breeds market turmoil. But the UK is not exactly in the midst of state capture 2015 SA style and the markets are simply betting that the higher spending will lead to faster inflation and higher interest rates down the line.
For those who have followed Javid’s political career, it is odd to see him being lauded for standing up to a bullying prime minister. Johnson was probably shocked too.
Javid was initially given his political break by former chancellor George Osborne, an arch Remainer whose own ambitions of one day leading the country went up in smoke when the Brexit vote was lost in 2016, leading to the resignation of then prime minister David Cameron.
Before that fateful date in June 2016, Javid, when still working for Cameron and Osborne, wrote a fairly convincing article about why cutting itself off from the world’s richest trading bloc would be a disaster for the UK, even warning about a “lost decade” that would befall British business. Perhaps that’s where Ramaphosa picked up the phrase.
When the political wind changed, so did his convictions and he became one of the greatest proponents of Brexit, going as far as telling the Financial Times last month that the country’s vehicle makers and other manufacturers with Europe-wide supply chains were on their own. The government was determined to diverge from EU rules, and businesses that saw themselves subject to costly delays would just have to live with the consequences.
No wonder Johnson was caught off guard by his move to quit last week. Javid showed he had some red lines. But they were about his own rather than the interests of the country. Politicians, they do seem to be the same wherever you find them.
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