Sunday 18 February 2018

ESM chief upbeat on Ireland but Citi says debt deal essential

Donal O'Donovan and Peter Flanagan

THE head of the new eurozone bailout fund has said that countries such as Ireland and Portugal should be fully back in the markets by the end of 2014. But analysts at Citi are warning that without a debt-relief deal Ireland could be forced to default on the national debt.

The head of Europe's permanent rescue fund, Klaus Regling, said it may not feel like it now but austerity measures, including wage and pension cuts, will help countries now in bailouts to pass "the ultimate test".

That, he said, will be a full return to the bond market, adding that this is on the cards for the end of 2014.

It's understood that Mr Regling was referring to Ireland and Portugal, both of which are regarded by the EU and IMF as having "well-performing" adjustment programmes. However, he stopped short of naming the specific countries that he believes are poised for recovery.

The European Stability Mechanism (ESM) is now up and running and will be in a position to move more quickly when it comes to future rescues, compared to the weeks that it took to put together earlier sovereign bailouts.

The Government here is hoping that some of the ESM funds could be tapped to take on the costs associated with Ireland's banking rescue in order to relieve the pressure on the State's finances.

Banks

However, the positive signals threaten to be overshadowed by a downbeat report from the US banking giant Citi.

Analysts there have said that Ireland could need further international assistance even after the bailout ends next year.

Citi backed claims by the Government that a deal to cut the historic debt associated with the banking bailout is needed to put the national finances back on a sustainable footing.

"The more that can be achieved by restructuring the promissory notes or bank recapitalisation costs, the less likely it will be that haircuts will be needed on marketable government debt," Citi added.

The bank warned it regards a bank deal as now being less likely. Even with a debt deal, Citi said, Ireland could need further rescue support.

"We expect the debt/GDP ratio to reach 120pc in 2013 and then level off. The Government is likely to need external support, even once the current troika programme is completed in late 2013," Citi said.

There was better news on the banking front, after European authorities opted not to penalise Irish banks that hold bonds issued by NAMA when they assess liquidity and capital ratios, according to Bloomberg.

Bonds issued by government-backed bad banks should be given a protected status under new liquidity rule, according to a proposed EU plan. The report said bonds issued by NAMA and its Spanish peer are specifically mentioned.

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