Business World

Wednesday 24 May 2017

One in three big investors expect an Irish default

Global leaders lose patience with Euro dithering

CRISIS: Tim Geithner and IMF boss Christine Lagarde
CRISIS: Tim Geithner and IMF boss Christine Lagarde
Nick Webb

Nick Webb

MORE than one in three major investors believe that Ireland will ultimately default on its debt mountain, according to a new survey of institutional managers by Bank of America.



The calamitous euro debt crisis moved into a more dangerous phase as fears over a Greek default rocketed. More than 80 per cent of the global investors polled by Bank of America expect Greece to default, with 41 per cent predicting a default by Portugal.



The Greek debt crisis which erupted 18 months ago has been exacerbated by dithering politicians and ineffective measures. Last week, the US and China upped pressure on Europe to get the crisis under control.



Ham-fisted European leaders have said Greece is “indispensable” to the eurozone but continue to flub any credible rescue or restructuring plans. A concerted effort by five major central banks to provide dollar liquidity to the markets may deflect the onset of a second massive credit crunch and the collapse of major European banks.



By the end of last week, gauges of stress in the funding markets for European banks fell from levels last seen at the time of the Lehman Brothers collapse.



Shares in European banks rose sharply following the central bank intervention. However, the move by the central banks does not deal with the core problem of the solvency of Greece, Ireland and other weaker European countries.



A default by Greece may lead to the break-up of the euro as markets would turn on other weak countries if Athens is forced to pull out of the euro. As the two other bailedout countries, Ireland and Portugal could be next. “I’d put the chance of default over the next seven days at below 20 per cent, but over 70 per cent within a year,” Sandeep Dahiya, finance professor at Georgetown’s McDonough School of Business, told CNN last week.



A Greek default would lead to a collapse of the domestic banking system which would send shockwaves throughout Europe. Goldman Sachs has estimated that banks in peripheral countries would need up to €92bn to survive the shock. Citigroup’s figures are even more catastrophic, estimating that losses in Greece, Ireland, Portugal and Spain would trigger direct and indirect losses of almost €350bn — more than double the size of Ireland’s economy.



The cost of a euro break-up or of defaulting and leaving the euro could be as much as €44,000 for every Irish family in the first year, says Swiss investment bank UBS. The bank believes that a weaker country’s economy would collapse in value by up to 60 per cent following a euro exit and the creation of a new currency. Apart from a banking meltdown, companies would be forced to default on euro debts and international trade would implode as heavy tariffs would strangle exports to the eurozone.



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