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
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
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
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.