Ireland's debt 'needs 50pc cut' as King slams EU strategy
Published 25/06/2011 | 05:00
THE European approach to Ireland, Greece and Portugal was lambasted by Bank of England governor Mervyn King yesterday as a major international bank said Ireland's debts needed to be slashed by 50pc to restore the economy to health.
King, the second most powerful central banker in Europe, said the crisis was not about liquidity, but about the solvency of certain countries. He said the European approach so far had not reflected this.
"An awful lot of people wanted to believe that it was a crisis of liquidity," Mr King said. "It wasn't, it isn't. And until we accept that, we will never find an answer to it.
"It was a crisis based on solvency. . . initially financial institutions and now sovereigns,'' he told the 'Financial Times' in an interview.
The views of King place him in opposition to his counterpart at the ECB, Jean-Claude Trichet, who is due to retire in three months.
Meanwhile, Citigroup said Ireland needed to have its sovereign debt cut by at least 50pc to put the economy back on a sustainable path.
This would involve a huge default by Ireland of possibly over €100bn.
Analysts from Citi said Ireland, Greece and Portugal needed to get back to debt levels where markets were "comfortable'' lending to them again.
To do this, bondholders would have to take far-reaching discounts or "haircuts'' on their bonds, suggested the bank.
For Ireland to get back to debt levels in accordance with EU rules, haircuts on bonds could be as steep as 65pc, said the bank. They could range as high as 77pc for Greece and 62pc for Portugal.
"Given the high share of debt held by official creditors by then, losses for the private sector will likely be substantial -- probably in none of the countries less than 50pc,'' said its researchers.
The bank made it clear that by 2014 almost 30pc of Ireland's debt would be held by the IMF. Under long-standing practice, the Washington-based organisation gets repaid in full and is a preferred creditor.
Citi said even if Ireland introduced painful budget cuts and sold off state assets, the debt burden still looked unsustainable by 2014.
"We believe debt restructurings with haircuts to the debt principal will be necessary to restore fiscal sustainability by 2014,'' said the bank.
For Ireland, the haircut would involve private investors losing at least €105bn, the bank estimated.
"To sum up, despite all fiscal efforts and liquidity-providing bailout packages, debt sustainability in Greece, Portugal and Ireland is unlikely to look any better in three years' time than it looks today,'' said the bank.
Markets continued to be hostile towards Irish bonds yesterday, driving 10-year debt down, with yields rising 17 basis points.
Two-year debt was trading at 12.6pc, with yields up marginally by three basis points.