PaddyJoe
09-05-2012, 12:48 AM
I want to be careful not to misquote anybody or quote them out of context but I remember that a lot of independent Irish economists were making a a very strong point last year that Irish debt is not sustainable.
It seemed that not a day went by when the media was full of people telling us that Irish debt levels were unsustainable.
That's fine but what exactly has changed in the last few months?
What kind of difference will the Treaty make to our debt sustainability?
Karl Whelan March 2012:
First, there is the question of the Ireland’s debt burden.* Even if the programme goes according to plan, Ireland’s debt is supposed to peak at about 120 percent of GDP, a level that many consider to be borderline unsustainable.
One way to make this burden more sustainable is to stretch out the repayments on the debt. Twenty percentage points of the debt burden relates to the promissory notes. However, it now seems fairly clear that the ECB will not agree to a wholesale restructuring of these notes that would allow for a substantial delay in repayments.
The other option available to Ireland to spread out this debt burden is to borrow the money from the EFSF or its successor, the ESM, and use these funds to pay off the IBRC debts that the promissory notes are designed to cover. This would allow the notes to be retired and replaced with a long-term loan (hopefully up to thirty years) at a low interest rate. While this kind of deal has been described in various Irish media coverage as a technicality in which one type of debt is swapped for another, it should be emphasised that a new borrowing programme from EFSF would require European political approval and would be seen as a formal second bailout by most of our European partners.
Colm McCarthy March 2012:
Colm McCarthy: This burden of bank debt is simply not sustainable
No other country in the eurozone has been subject to such threats from the ECB, writes Colm McCarthy
Ireland's ratio of debt to GDP is expected to hit about 120 per cent in a few years' time. Roughly one-third of the total will be due to bank-rescue costs.
If these were not a factor, the accumulated budget deficits -- the normal source of debt -- would total about 80 per cent of GDP, a common figure in the EU and a level that should be sustainable. It is the extra 40 per cent deriving from the rescue of bank creditors that has pushed the total into the red zone and destroyed the credit-worthiness of the Irish Exchequer. Even the huge Irish deficits of recent years have not been enough to destroy credit-worthiness on their own because the initial debt level when the crisis struck in 2008 was low.
Indeed, Ireland ran budget surpluses in every year but one since eurozone membership commenced in 1999 and was one of the few eurozone countries that stayed within both the deficit and debt limits of the Stability and Growth Pact in every year up to 2007.
The International Monetary Fund has been expressing publicly the view that Irish debt sustainability is fragile and that re-entry to the bond market next year as planned is not guaranteed. For this reason, and not because they believe -- in public at any rate -- that a portion of the debt has been inappropriately incurred, IMF staff have argued that Ireland's European partners should do a deal which would reduce the burden of bank-rescue debts.
http://www.independent.ie/opinion/analysis/colm-mccarthy-this-burden-of-bank-debt-is-simply-not-sustainable-3053806.html
In both cases this looks like a pretty unequivocal explanation of how Ireland's debt is not manageable and will have to be reorganized.
There's nothing in the Fiscal/Stability/Austerity Treaty to deal with the kind of debt write downs we need.
It seemed that not a day went by when the media was full of people telling us that Irish debt levels were unsustainable.
That's fine but what exactly has changed in the last few months?
What kind of difference will the Treaty make to our debt sustainability?
Karl Whelan March 2012:
First, there is the question of the Ireland’s debt burden.* Even if the programme goes according to plan, Ireland’s debt is supposed to peak at about 120 percent of GDP, a level that many consider to be borderline unsustainable.
One way to make this burden more sustainable is to stretch out the repayments on the debt. Twenty percentage points of the debt burden relates to the promissory notes. However, it now seems fairly clear that the ECB will not agree to a wholesale restructuring of these notes that would allow for a substantial delay in repayments.
The other option available to Ireland to spread out this debt burden is to borrow the money from the EFSF or its successor, the ESM, and use these funds to pay off the IBRC debts that the promissory notes are designed to cover. This would allow the notes to be retired and replaced with a long-term loan (hopefully up to thirty years) at a low interest rate. While this kind of deal has been described in various Irish media coverage as a technicality in which one type of debt is swapped for another, it should be emphasised that a new borrowing programme from EFSF would require European political approval and would be seen as a formal second bailout by most of our European partners.
Colm McCarthy March 2012:
Colm McCarthy: This burden of bank debt is simply not sustainable
No other country in the eurozone has been subject to such threats from the ECB, writes Colm McCarthy
Ireland's ratio of debt to GDP is expected to hit about 120 per cent in a few years' time. Roughly one-third of the total will be due to bank-rescue costs.
If these were not a factor, the accumulated budget deficits -- the normal source of debt -- would total about 80 per cent of GDP, a common figure in the EU and a level that should be sustainable. It is the extra 40 per cent deriving from the rescue of bank creditors that has pushed the total into the red zone and destroyed the credit-worthiness of the Irish Exchequer. Even the huge Irish deficits of recent years have not been enough to destroy credit-worthiness on their own because the initial debt level when the crisis struck in 2008 was low.
Indeed, Ireland ran budget surpluses in every year but one since eurozone membership commenced in 1999 and was one of the few eurozone countries that stayed within both the deficit and debt limits of the Stability and Growth Pact in every year up to 2007.
The International Monetary Fund has been expressing publicly the view that Irish debt sustainability is fragile and that re-entry to the bond market next year as planned is not guaranteed. For this reason, and not because they believe -- in public at any rate -- that a portion of the debt has been inappropriately incurred, IMF staff have argued that Ireland's European partners should do a deal which would reduce the burden of bank-rescue debts.
http://www.independent.ie/opinion/analysis/colm-mccarthy-this-burden-of-bank-debt-is-simply-not-sustainable-3053806.html
In both cases this looks like a pretty unequivocal explanation of how Ireland's debt is not manageable and will have to be reorganized.
There's nothing in the Fiscal/Stability/Austerity Treaty to deal with the kind of debt write downs we need.