IRELAND CLEARLY needs further financial assistance on “non-market terms”, the chief economist with Citigroup, Willem Buiter, said during a visit to Dublin.
The former member of the monetary policy committee of the Bank of England said the most attractive option from Ireland’s point of view would be a reduction on the interest it pays on an outstanding €30 billion in promissory notes, issued mostly to deal with the collapse of Anglo Irish Bank.
He said Ireland is paying in the region of 6 per cent on this money but it could be refinanced at 3 per cent by the European Financial Stability Facility. This would have a material effect on Ireland’s ability to deal with its debt burden.
It would have attractions for the rest of Europe as it would not be a technical restructuring of sovereign debt. It would also have the political advantage of showing recognition for the enormous effort Ireland has made, he said.
There were two other possible options if that was not enough, he said during a press briefing. These were a restructuring of Irish sovereign debt or the revoking of the Government guarantee on bank debt.
He said he thought European politicians and the members of the troika would prefer to pursue the option of more generous official funding terms. Mr Buiter said Ireland was not like Greece but it was in very bad fiscal shape because of its bank guarantee. He said clearly something had to be done about the “continuing massive sovereign funding gap” that Ireland had after 3½ years of “fierce” fiscal austerity.
Mr Buiter said the euro area was facing into another one to two years of recession as it tried to pay off its household, sovereign and banking debt. Even then he foresaw little more than mediocre growth unless a “non-market” way of deleveraging was found. By that, he said, he meant restructuring.
The restructuring of Greek debt was being negotiated and he expected that only the International Monetary Fund would emerge from Greece with “any significant recovery” of money loaned. He thought Portugal also would have to engage in a material restructuring.
He expected that most of the European banking system would be publicly owned at the end of the current crisis. He thought there would be recourse to subordinated and possibly senior debt-holders of banks as the market became unwilling, and many governments became unable, to provide bank capital.
He said Ireland’s attempt to restructure senior debt was vetoed by the European Central Bank earlier this year but he expected that “budgetary realities will make it less likely that this part of the solution will again be kicked into the long grass”.
The fiscal position of the US was worse than that of the euro zone as a whole, but political paralysis there meant it was as unable as Europe to take a fiscal initiative.
He said the hyperinflation of Weimar Germany, and not the 1930s recession, was the defining moment in European central bank history. There were also some “inflation nutters” in the US’s Congress affecting policy there.
He said the lesson to be learned from the 1930s was not that Government’s should borrow and spend their way out of an unsustainable fiscal situation.
“But can you have fiscal expansion without borrowing more? Yes you can, but you have to monetise. Should you monetise? Yes in my view. In the current circumstances . . . You could have what economists call ‘helicopter money’.”
Monetising is the issuing of money by a central bank to pay off government debt.
Mr Buiter said that this can become inflationary and, “if you go really crazy, it becomes Weimar. But just because you can drown in water doesn’t mean you should not have a glass of water when you are thirsty.”
He said inflation in Europe and the US this year was likely to be well below 2 per cent. An expansion of demand could be created without creating unacceptable inflation.
Mr Buiter was in Dublin for a Citigroup Global Research Day conference.
