Irish Economy
Irish Economy 2011: Politics and sovereign debt restructuring
By Finfacts Team
Jan 18, 2011 - 5:25 AM

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Irish Economy 2011: NCB Stockbrokers says talk of restructuring Ireland’s debt has been a hot topic of late. The firm says it is worth pointing out that neither the Opposition nor the Government has called for Ireland to restructure its sovereign debt. The Opposition parties have stated that they would seek to renegotiate the EU/IMF deal and they will likely canvass on the back of a possible restructuring of senior bank debt in the upcoming election (likely to be in March).

The broker outlines in the monthly Irish Economy Monitor (pdf) why this will be difficult given European Union (EU) pressure.

The report says by granting Ireland 7 year loans and extending the term of the Greek loans, the EU has implicitly committed to extend the aid available to those governments beyond the term of the EFSF (European Financial Stability Facility) - -  the current Eurozone rescue fund which was launched with the IMF last May and which is due to expire in 2013.

The broker say this of course, will require a new mechanism to be put in place by 2013. Therefore any decision on restructuring of sovereign debt is unlikely to occur until 2013 and this is consistent with the press releases/speeches from the EU, Eurogroup and ECB to date.

NCB says Ireland has time to correct its public finances and get its debt on a sustainable path. At this stage it is highly uncertain what the outcome for the Irish economy, deficit and debt levels will be over the medium term; as such it considers 3 scenarios. Aside from the usual considerations - - growth prospects, political and social atmosphere - - on the solvency of a sovereign, there are two other significant drivers in Ireland’s case at the current juncture:

a) Political decision in the EU – EFSF interest rate, ESM interest rate, conditions
b) Irish policy makers decisions on the Irish banking system

NCB Stockbrokers economist, Brian Devine, says the current aid package will work if economic developments proceed as expected for the Irish economy and only the earmarked €10bn is needed for the banks.

If growth is less than forecast and/or the banks require even more capital injections then the debt to GDP ratios rise. Specifically, if growth comes in close to the levels expected by the Government and the only extra money that goes into the banking sector is the €10bn already earmarked to date, then NCB forecast the debt to GDP ratio peaking at 103% in 2013. In a scenario whereby an extra €12.5bn/€25bn is injected into the banks then the debt to GDP ratio is seen peaking at 112%/123% .

Devine says if the low growth scenario were to transpire for Ireland then it seems highly likely that Ireland would have to apply for funds under the new European Stability Mechanism (ESM), which will become operational from 2013 for member countries of the Eurozone which require a fiscal rescue . Whether debt is sustainable or not would in a large part depend on the interest rate to be charged under the ESM, but restructuring of the debt under this scenario could be a potential outcome.

The economist says despite Opposition politicians' remonstrations against senior bank bondholders, it is clear that unless they can come up with some radical plan to finance the State/banks without EU money then this is the plan that Ireland will have to stick to. A lowering of the interest rate on the EU funds is a more likely win for Irish politicians at this stage.

NCB says a two-tiered recovery is the expected outcome for the Irish economy in 2011. GNP is forecast to expand by 0.3% in 2011 on the back of the continued contribution from net exports, with domestic demand expected to remain weak and contract by 1.1%. NCB expects employment to contract marginally in 2011 as a result of the weak domestic demand.

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