OPTIONS:IRELAND SHOULD consider defaulting on billions worth of international borrowings because the Government four-year austerity plans threatens to leave the State with low economic growth "for a generation", a leading London asset manager responsible for $22 billion worth of investments has warned.
“Debt default could be very painful in the short term but it may be less painful in the long term rather than having a situation where Ireland’s signing up for a fiscal plan dooms the economy to multiple years of sub-par growth over the course of a generation,” said Mark Dowding, a senior portfolio manager for Bluebay Asset Management.
Saying he hoped that Ireland “is not doomed to a generation of emigration”, Mr Dowding continued, “the Irish have tried extremely hard and with great fortitude and they are to be commended for it, but the size of the debt makes it hard.
“It is like standing in a bucket and trying to raise it with both arms.
“The authorities still believe that the issue is a liquidity issue and that everything will be okay if only they could get the wretched bond yields down.”
In general, London analysts have raised questions since the publication on Wednesday of the Government’s plans.
They are asking whether the Government can get the budget passed on December 7th, but they have also focused on declarations by both Fine Gael and Labour that they will not be bound by the terms of the plan.
“Personally, I would question whether the budget will be passed and if we are getting a new administration anyway, whether it will want to re-engineer elements of the plan,” said Mr Dowding.
“I am not sure if it makes much difference what Mr Lenihan and Mr Cowen really want to put forward because they are unlikely to be around for much longer,” he said.
“ plan was largely what we expected to see,” he continued.
“It had been flagged to the markets,” he said.
He added that the markets had not expected to see details about the Government’s future intentions regarding the banks to be in the plan.
However, he warned the stress testing that was done has been largely discredited, based on economic scenarios that are no longer the case.
This has greater ramifications for banks elsewhere in the EU than it does in Ireland because the underlying point is that the Irish banks are in a very difficult state and it would be difficult for any news to be worse than the markets expect.
“It is a solvency issue with the banks, it isn’t just a liquidity issue. The size of the solvency issue has created a solvency issue for the sovereign which can’t be funded at the current level of interest.
“The German taxpayer needs to put their hands in their pockets and give a cross-sovereign debt guarantee, or push towards a fiscal union.
“The only other alternative is debt restructuring,” he said.
“It is possible that one could see a situation where the budget is vetoed and the incoming administration then decides to say ‘thanks, but no thanks’ to the EU package before negotiating with the IMF on default,” he explained.
“Given the extent of the fiscal tightening we would expect to see sub-par growth over an extended period, there is likely to be further pressure on Irish assets prices and property prices remaining weak.
“In this environment you will see rising levels of mortgage default and funding pressures on the banks.
“The backdrop is one that one could see continuing for a number of years.
“I could see a situation where you are seeing weaker economic growth for five to 10 years.
“Every time growth gets weaker you will have to run faster to make cuts.”
