A Financial Journalist’s Perspective on Debt and Default
John is editor of Business & Finance Magazine.
A default on either sovereign or bank debt would be a disaster for Ireland. Those advocating such a move are a bunch of snake-oil salesmen who either don’t fully understand the facts or are cynically exploiting an emotive and complex issue for self-serving reasons.
If the country doesn’t default on at least some of its debt obligations, then the country faces at least a decade of stagnation or sclerotic growth at best. The social consequences would be devastating; mass emigration, stifling taxes and endemic levels of social exclusion. Not only is a default inevitable, it should be welcomed.
These two narratives are at the extreme ends of a debate that is likely to convulse the country over the next few years. Ireland is facing into one of its most challenging periods since independence. A credit bubble and property bust has lumbered it with a debt burden that may or may not cripple the economy. This chapter will deliberately not take a position on whether it is in Ireland’s interests, or not, to default. There are plenty of economists and other commentators who will slug it out on this issue in other chapters. But the media will play a crucial role in shaping public opinion. In an era of soundbite culture is that possible given the complexity of the issue?
Former Taoiseach Bertie Ahern has made some very withering comments about the state of the Irish media. In July 2007, during an address to the Irish Congress of Trade Unions, Ahern took a swipe at journalists and commentators who were wondering aloud whether the economy was about to hit the buffers. In an unfortunate turn of phrase, the then Taoiseach said, ‘Sitting on the side-lines, cribbing and moaning is a lost opportunity. I don’t know how people who engage in that don’t commit suicide because frankly the only thing that motivates me is being able to actively change something.’
Ahern subsequently apologised to families bereaved through suicide for his injudicious comment. His hostility towards journalists lingered, it would seem. In an interview with Dublin City University (DCU) student radio in October 2011 Bertie had some choice words for the media and in particular its role in the financial crisis:
There should be an investigation into it. They [the media] should have been following the economy from August 2007, but they weren’t, they were following me. I think a lot of these guys really should have looked at themselves.
The government were following the economy but the media weren’t. It was a very poor job by the media really. They were shown to be incompetent and that was the trouble – everything was on me.
The former Taoiseach’s comments are most revealing in many different ways. In September 2006, the Irish Times’ journalist Colm Keena reported that the Mahon Tribunal was investigating payments made to Bertie Ahern. It turned out to be one of the most important scoops in this country for a decade or more. In a subsequent interview on RTE’s Six One news programme with Bryan Dobson, an emotional and sometimes tearful Taoiseach offered a series of credulity-defying explanations about his labyrinthine personal finances. Moreover, Ahern blithely dropped into the interview that he appointed people to state boards because they were friends, not because they had helped him with ‘dig out’ payments. It was a comment that underscored how much cronyism had become embedded in the highest office in the land. Indeed, it is not too much of a leap of faith to argue that cronyism as much as anything else stopped the Celtic Tiger in its tracks.
Investigations thus far into the cause of the banking crisis have revealed a world where the Financial Regulator did not have an objective and arms-length relationship with the institutions under the watch of that office. There was no proper risk management and corporate governance practices in the banks. Non-executive directors didn’t seem to be doing their job. But as dismaying as it may be to the members of the Irish media, does Ahern have a point about the journalists not meeting the standards traditionally associated with the fourth estate?
The Irish banking crisis is one of the biggest in the history of the world economy. It is a small country. How could this have happened? How could possibly the biggest story since independence unfold before the mainstream media, yet hardly a coherent analysis of why the country was heading to financial ruin emerged when it really mattered? It is true that it wasn’t exclusively domestic factors that caused the crash.
In August 2007, the US financial media reported difficulties in the banking system. The US had experienced a building boom for much of the previous decade. Less creditworthy citizens had been granted access to mortgages through the subprime sector. These subprime mortgages were securitised and given AAA ratings by the credit rating agencies. These products had been hoovered up by investment banks. When the property market turned, the assets that backed these securitised products were in some cases not worth the paper they were written on. If there is one thing markets hate it is uncertainty. Yet it was impossible to tell the scale of losses sitting on the balance sheets of banks because of the opaque nature of these asset-backed securities. Uncertainty reigned.
The global economy was on the verge of the biggest financial crisis since the Great Depression. But not only did the mainstream media not pick up on this story well before it became a crisis, even the most prominent financial commentators were caught wrong-footed about the nature and scale of the problem when it became obvious that the banking system was under serious stress.
The economist Nouriel Roubini earned the derisory soubriquet ‘Dr Doom’ when he estimated that subprime-related losses could reach $1 trillion in the banking sector. Initially this was dismissed as alarmist scaremongering. It would prove to be a conservative estimate. Six years ago, Ireland was the fastest growing economy in the Eurozone. It had one of the soundest fiscal positions and one of the lowest debt–GDP ratios. The fact that there is now a debate about whether the country could or should default is testament to the reversal of fortunes for the now lamented and once mythologised Celtic Tiger.
But how could the Irish financial media get it so wrong? Journalists in the US can point to the truth lying beneath a maze of extremely opaque credit instruments that nobody seemed to understand, including the regulatory authorities. In Ireland, the story was much more straightforward. The banks had access to a plentiful and cheap supply of money. Surging population growth caused a demand for houses. The government played its part by offering massive tax concessions to property developers. The traditional banking model of scaling the loan portfolio in proportion to the deposit book put a brake on the almost limitless lending opportunities to the property sector. The short-term wholesale money markets provided a lucrative alternative source of funding to the banks. As it now obvious, not only did Irish banks have a massive sectoral exposure to one asset class, the collateral backing up these loans was not properly drawn up and very often completely inadequate.
Investors were lured by the enormous returns generated by property deals. The more leverage in these deals, the bigger bang for buck invested. The regulatory authorities did nothing to stop the party. One aperçu that I can personally volunteer involved the developer Sean Dunne’s acquisition of the landmark Jurys Hotel Ballsbridge site in August 2005 for €375 million. I wrote an editorial for Business & Finance Magazine at the time asking whether this represented the top of a dizzying and unsustainable market. I made an analogy with the dotcom bubble and Japan in the 1980s. I had recently returned from seven years in London. Many things about the Irish economy just didn’t seem to add up – not least people on average salaries getting access to mortgages that made no economic sense. Yet less than a month after penning that editorial I was in a corporate box in Croke Park watching the 2005 All-Ireland Hurling Final between Cork and Galway with David Drumm and most of the senior management team from Anglo Irish Bank.
There seemed to be an intimacy between journalists and senior businesspeople in Ireland that didn’t exist elsewhere. The objectivity I had brought back from London would soon desert me.
The closeness between journalists, bankers, politicians, economists and market sources militates against what John O’Sullivan, a lecturer at the School of Communications at DCU, describes as the ‘holy grail of neutral, balanced, objective information’. When in 2007 market volatility pointed to potentially big problems coming down the tracks, the Irish media did take notice. In March of that year the well-respected journalist and deputy editor of the Sunday Business Post Richard Curran fronted a seminal documentary, called Futureshock, on RTE One, which posed extremely uncomfortable questions about the soundness of the property market and the wider economy. He concluded that it was all a house of cards.
For his efforts, Curran was subjected to a sometimes personal and vitriolic backlash. The chorus from the banks, in particular, was that this was no time for this sort of scaremongering. Green jerseys were needed to get through this temporary rough patch. Large parts of the mainstream media answered this clarion call. But by 2007 the damage had been done. The Irish domestic banks had mortgaged the house on the Irish property market remaining buoyant for the foreseeable future. Why had the Irish financial media not been much more critical of the reliance on property and the banks’ dangerous over-exposure to this sector in the years leading up to 2007? That is not to say there weren’t any dissenting voices. There were, but they were very much on the margins of the debate.
The failure of the media to put any brake on the frothy excesses of boom years points to systemic problems that don’t augur well for the future. The print media has come under intense pressure in the age of the internet. Newspapers and magazines are no longer the only medium through which news, opinion and analysis can be disseminated. Far from it. There are a plethora of low-cost online news portals and blog sites that vie with traditional media outlets for readers.
The consequence for the print media sector has been declining readership and a marked deterioration in advertising revenues. Now the future of the print media sector is under threat and the type of journalism that goes with it. Should anybody care? Paul Starr, a lecturer in media studies at Princeton University penned a lengthy analysis of the impact the crisis in the print industry was having on US society for The New Republic in an article called ‘Goodbye to the Age of Newspapers (Hello to a New Era of Corruption)’. He concluded that without the proper investigative journalism that newspapers specialise in there will be huge and damaging implications for US democracy because it removes a vital source of information needed to make informed decisions.
Over the past twenty years, stories about the economy and business have become much more prominent and important in the Irish media. The former Guardian journalist Nick Davies has popularised the pejorative term ‘churnalism’ to describe the state of mainstream journalism and in particular financial journalism. He argues that most financial journalism is now PR driven. The news agenda is shaped by journalists rewriting press releases. This is in part explained by the financial pressure experienced by news organisations. There are not enough resources to fund in-depth investigative journalism. Staff positions are steadily being replaced by contract workers, who are very often employed on a shift basis. Consequently many of the skills and knowledge acquired through full-time positions are lost. In other words, where will the Colm Keenas of the future come from?
‘One view is that the media is owned by large businesses which have a conservative agenda. It is a reasonable position to take but it is far too simplistic. What we have in Ireland is a very monotone media. There is very little divergence from the central thesis’, says DCU’s O’Sullivan.
‘It isn’t just about where journalists and reporters come from – it is about how they work. If you look at any economics, finance or business story, the people mediating these stories are business journalists. They have come centre stage over the past twenty years, but they do not grow up knowing what a credit default swap is. They rely on bankers and stockbrokers and market analysts for their stories, so there is a circular flow of information.’
There is also intense competition between media outlets, which means the scramble to attract readers and viewers has introduced an entertainment dimension to the news-gathering process. Contributors are judged on who gives the best soundbite. Very often, it is not about who can give the most nuanced and balanced account of the issue, but, rather, commentators who are the most headline grabbing. Yet many of these commentators, while very good at generating publicity for themselves, are often unburdened by in-depth knowledge of the issue at hand. And that is not to say that it was a peculiarly Irish phenomenon. Kevin Hassett wrote a book called Dow 36,000 in 1999. His argument was that the Dow Jones was on an ineluctable rise and would hit 36,000 sometime in the early 2000s. The Dow Jones subsequently crashed to below 2,000 when the dot com bubble burst in 2001. Yet Hassett continued to remain a TV pundit in much demand by mainstream US business channels. In fact he found his way onto 2008 US Republican presidential candidate John McCain’s team of economic advisors.
So, what role does the media play in the default debate? Is it there to shape public opinion or reflect it? O’Sullivan argues that the financial crisis in this country is discussed in very narrow terms:
The paradigm of the debate is that we must be good boys – we have to be the best in class in Europe. There is almost an infantile mantra about this. Nobody says why? We are still concentrating on being the best boys and girls in Europe because we are not Greece. We have a very conservative dumbed down mainstream media, complemented by voices in the wilderness. … It is not a point of view that will find favour with the markets or advertisers but I think we need to rethink public sector journalism – whether it exists and whether we want it? We don’t have any money so it is a vicious circle. Moreover, is there an appetite for it? Is it about what sells or is it about journalism itself?
Sean Kay is a political scientist at Ohio Wesleyan University who has been observing Ireland’s changing economic fortunes over the past number of years. He argues that it is incumbent upon the media to play a responsible role in the forthcoming debate:
I think one of the dangers of the Irish media is that it could become very inward looking when what is really needed is balance. I would be extremely sceptical about default as an option, particularly if it is presented as some quick and easy and straightforward solution that would be good for Ireland. If the Irish media is going to make a case for default, then it is going to have to walk the reader or listener through what it means when it happens.
Then again, there are other commentators who claim that what is needed is a bit of creative destruction. The free market should be allowed to take its course; banks should be allowed to collapse and a series of defaults should happen across Europe. In a way there has never been more of a need for balanced, informed journalism. Ireland’s membership of the Eurozone is likely to come under intense scrutiny over the next few years. It is an issue that will be closely related to whether the country defaults or not.
The stakes could not be higher. Can the Irish media step up to the plate?