Irish minister for transport Leo Varadkar caused a commotion in Ireland over the weekend by saying that Ireland will need an additional bailout to service its debt burden through 2013. Is he right? It looks like it to me. The gap between Ireland’s financing needs over the next two years and the funding it will have available has narrowed, but given that Ireland is expected to remain frozen out of the markets until mid-2013, this gap still looks impossible to bridge.
In the Economic Adjustment Programme for Ireland published in February 2011, the European Commission (EC) indicated that it expected Ireland to return to the markets in 2012 to raise significant amounts funding. In its Spring 2011 update published in May, however, this assumption was changed. The main difference seems to be the amount of the EU/IMF bailout package earmarked for the banking sector. In the February report, this was assumed to total €35bn. By May, in the wake of the stress tests, this had been reduced to €19bn (the stress test results mandated that €24bn be used to recapitalise the banking sector, but the Irish government has recently announced that around €5bn of this will come from private investment and liability management exercises (LMEs)). Consequently, around €16bn that was previously dedicated to bank recapitalisation has been freed up for government funding.
As a result of this, the EC’s assumptions for market financing have changed dramatically. In February, the EC expected the government to raise nearly €40bn in the markets in 2010-13. By May, this figure had been more than halved to around €19bn. Still, according to the European Commission, Ireland will need to raise €14bn in the markets in 2013. It is extremely unlikely that Ireland will have regained the confidence of investors by 2013 to achieve this, particularly given that discussions about debt restructurings and reprofilings in Greece, Portugal and Ireland will be at fever pitch in the run up to the implementation of the European Stability Mechanism (ESM) in mid-2013.
Furthermore, the European Commission’s calculations are based on overly optimistic assumptions. According to the May report, the EC expects Ireland’s GDP to grow by 0.6% in 2011, 1.9% in 2012 and 2.4% in 2013. I expect Ireland’s economy to contract by around 1% in 2011 before returning to more moderate growth of around 0.5% in 2012 and 1.5% in 2013. Consequently, I expect Ireland’s funding requirements in 2011-13 to be slightly larger than those laid out in the May report.
If Ireland cannot meet its debt servicing requirements through the end of its bailout programme, will it be forced to default? This is extremely unlikely. Instead I expect that Ireland will continue to meet the targets established by the EC, the ECB and the IMF (the so-called troika) and that the troika will expand Ireland’s access to EU and IMF funding until 2013. In mid-2013 when the ESM is implemented, I expect Ireland will be forced to restructure its debt in an orderly, managed fashion in cooperation with the troika and the banks.