Tuesday 16 January 2018

Terms of the bailout deal are not unfair -- they are impractical

Fiscal stringency is not enough to resolve the crisis and we're not alone in thinking this, says Colm McCarthy

Colm McCarthy

Colm McCarthy

The wheels have come off the deal agreed by the previous government with the IMF, the EU Commission and the European Central Bank last November. Not because the deal was unfair or because the budgetary tightening cannot be delivered, but because the financial markets have concluded, correctly in my view, that the Irish banks cannot be restructured within the financial parameters of the deal.

The timescale laid out has already been abandoned. The sums do not add up and the laws of arithmetic do not relent in response to the passage of time.

Irish 10-year government bonds ended the week offering a yield of about 9.7 per cent. German government bonds of the same maturity offer only 3.2 per cent. It is generally assumed that the risk of non-payment with the German bonds is zero. If you believe that there is no risk of non-payment with the Irish bonds, they are a fantastic bargain. With no risk they should yield no more than the German ones and their price is far too low. I will spare you the mathematics, but their price should be at least 150 per cent of the price actually available on the market. The reason investors are not rushing to buy is that they expect default, which means failure to pay some or all of the interest and principal due.

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