Thursday 21 September 2017

Playing canny game with troika may help us avoid 'Bailout -- the sequel'

But not all economists are as optimistic, believing that it's inevitable Ireland will need a second rescue deal, writes Roisin Burke

Michael Noonan has dubbed the prospect "ludicrous" -- but speculation that Ireland might need a bailout beyond €85bn is still hanging around like a bad smell. Things weren't helped by mass sovereign downgrades of France and other countries on Friday.

Frantic negotiations about the restructuring of the €31bn of promissory notes to former Anglo and Nationwide bondholders have been on the go behind the scenes for months.

Italy and Spain's short-term debt bond auctions came off well last week, but 10-year sovereign bond yields for struggling periphery countries remain high and a threat to Ireland's planned testing of the markets later this year.

Can Ireland pull some kind of deal or accommodation out of the eurozone debt crisis fires, or are we heading for another full-blown bailout?

"I think it's almost inevitable that Ireland will need a second bailout," said Megan Greene of Roubini Global Economics.

"When Ireland seeks to return to the markets later this year, it's going to encounter such unacceptably high borrowing costs and it's not going to be worth it. So at that point it will seek out either a bailout or a bail-in -- a debt restructuring.

"The Troika would probably go for another bailout as the less destructive option for the eurozone. Plus there's a precedent for that as well, in Greece."

Like many economists Greene thinks the Government's economic growth predictions are overly optimistic and deficit targets for 2013 won't be met. "When they put together a bailout package they should take that into account, because I think Irish GDP will stagnate at best for this year and next."

Bill Blain of London brokerage firm Newedge Group thinks Ireland could well avoid a 'Bailout: the sequel' scenario if it plays a canny game against its EU/IMF paymasters in the coming months.

"Since the LTRO [the ECB scheme to lend cheap money to European banks, introduced last December] was introduced the market is far more confident and that will also apply to the Irish market as well. I think in the long term this will help with many of the problems that turned the whole market down," he said.

"I think you have to separate Greece as a one-off now, which then means we can look at Portugal and Ireland on a stand-alone basis: can they survive without going through some kind of renewed bailout or renewed refinancing operation?

"Ireland has already gone a long way to solving its problems, and is doing much by continuing its process of horse trading with the EU and the Troika about what interest rates on its debt should be.

"If Ireland gets more realistic support instead of the punitive panic interest rates that were applied in the first case, then its outlook would be more positive.

"Is Ireland going to get caught up in a second bailout? I think it's looking less likely."

According to Blain, Ireland has serious bargaining firepower. "The Irish have shown already that they're not afraid to pull the nuclear trigger with the 'great Irish bank heist' of last year, the bailing-in of subordinated debt holders. Now if they threaten to do that again to the senior bond market, well I'm sure Ireland will get what it wants. The European authorities are terrified that if that happens again then it will severely damage confidence in European banks. That's one of the best cards that Ireland holds."

Greece recently combated its deepening recession by hitting its bondholders with haircuts on its sovereign debt through its PSI scheme, but Megan Greene said it was probably not in Ireland's interests to do something similar.

"Ireland's growth model is based on multinationals coming in and setting up their European HQs as a springboard to European markets -- so if Ireland were to renege on its debt against the ECB's wishes, as Greece has done, it would be burning bridges."

The view that Ireland is basically on course and will simply plough on and clear its deficit in 2013 is seldom heard in the current clamour of bailout hysteria -- except from the Government, of course.

But Ciaran O'Hagan, bond strategist at Societe Generale considers it unlikely that Ireland will fail to meet the "not overly demanding" terms of the bailout memorandum.

"The terms of the accord see Ireland reducing its budget deficits very gradually, so the Government is unlikely to miss its targets," he said.

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