CONTAGION:THE GOVERNMENT is campaigning to avoid any pressure from markets to follow an imminent sovereign default by Greece.
Although EU leaders are advancing a plan to impose a loss of 50 per cent or more on the value of the Greek national debt, Dublin is adamant that it will not renege on any obligations to its international creditors.
However, the Greek precedent presents the threat of panic on markets as they take account of the increased risk of other countries following suit.
“Clearly the prevention of contagion and the provision of firewalls is of utmost importance,” said Taoiseach Enda Kenny when asked about the dangers raised by the Greek discussion.
Moves to cut the burden of Greece’s debt reflect growing fears that the country’s existing rescue plan may see it shut out of private debt markets for more than a decade and possibly as long as 20 years.
By contrast, Dublin believes it has a fighting chance of regaining market financing late next year or in 2013.
Therefore, any move to follow the Greek example would be self-defeating and would hamper Ireland’s growth prospects.
The damage Ireland’s standing in the global community would be huge, severely undermining a rescue plan predicated on the State’s ability to continue attracting large volumes of inward investment.
A default would delay Ireland’s return to markets, necessitating yet more bailout aid and opening the door to further international intrusion in Irish economic policy.
Whenever the Government eventually secured market financing again, investors would demand a steep penalty premium to guard against the risk that the State might default again.
The Irish rescue programme is designed to achieve the opposite effect for the Government, which wants to free itself of the strictures of its bailout as soon as possible.
Although the recovery is not yet secure, recent news is good. Mr Kenny continues to receive many plaudits from his international counterparts for executing the bailout programme.
Such praise reflects the view that the Irish programme presents Europe with its best chance of success from its controversial bailout initiatives.
As a result, it is in Europe’s interest to ensure the Government continues to gain ground.
With all of that in mind, Ireland’s sponsors have moved to relax the terms of the rescue with lower interest on its rescue loans and longer maturities.
This reflects the view that Ireland has decoupled itself from Greece. This view was reiterated yesterday by no less a man than French president Nicolas Sarkozy, who pressed the Government for months to dilute its corporate tax regime.
“Ireland was a country that was standing on the brink of the precipice when the 2008 crisis hit us, and yet Ireland today is a country that is almost out of troubled waters, almost out of the crisis,” Mr Sarkozy told reporters.
“That is a fact that cannot be challenged.” This is in stark contrast with the findings of an EU-IMF troika report on the sustainability of Greece’s debt, which says the country will not be able to regain access to markets in 2021 as foreseen in the July deal to provide the country with a second bailout.
While the deal assumed a 21 per cent haircut for creditors, the troika believes it will not work.
“Debt (net of collateral required for private sector involvement) would peak at 186 per cent of GDP in 2013 and decline only to 152 per cent of GDP by end-2020 and to 130 per cent of GDP by end-2030,” the troika report said.
“The financing package agreed on July 21st . . . does help the debt trajectory, but its impact is more than offset by the revised macro and policy framework.
“Greece would not return to the market until 2021 under the market access assumptions used, and cumulatively official additional financing needs . . . could amount to some €252 billion from the present through to 2020.”
Even with a 50 per cent haircut, €114 billion in bailout financing would still be required. A 60 per cent haircut would necessitate a further €109 billion for bailouts.
Such costs do exclude any contagion-related costs but they are significantly less than the €252 billion needed if the haircut is not increased.
Absent any increase in the investor losses and in the case of a further economic shock, the troika believes market access would be unlikely to be restored until 2027. In that case the cumulative need for additional bailout financing would reach €450 billion.
These are scenarios the Government is very keen to avoid.
