Saturday 17 March 2018

Ireland has lost capacity to borrow

The Government's cop-out on how early and by how much we reduce the deficit is only making things worse, says Colm McCarthy

Without a clear deal on medium-term liquidity support from the European Central Bank, last Thursday's government decision to inject yet more borrowed money into the Irish banks could only be another leap of faith.

The Government appears to have expected something more from our European 'partners', but was left at the altar by the ECB, which is not to deny that the stress tests are a considerable advance on the unconvincing efforts that went before. The difficulty is that neither the Government nor its guaranteed banks are creditworthy, and support from one to the other cannot improve the joint creditworthiness of the pair.

The Irish State is insolvent and headed for sovereign default. This is not my opinion, it is the opinion of the credit markets to which the Government must return within, at most, about two years. Friday's market close saw five-year Irish government bonds offering a yield of 10.8 per cent per annum. To be perfectly clear about this, if you believe that Ireland will exit the crisis smoothly on current policies, you can buy a government bond redeemable for €100 in April 2016, paying a tidy €4.60 each year, for no more than €77. This is a stunning bargain for the believers. The ECB, according to its limp press release on Thursday night, is confident that current policies will deliver. If this view was shared by the market to which the ECB expects Ireland to return next year, these bonds would be trading well above €100. There is no getting away from this cold reality.

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