Would we suit a Greek style haircut?
A key element in the argument that what is appropriate in the Greek case is not appropriate to Ireland is that Ireland is in a totally different situation to Greece.
In Ireland’s case, economic growth is helping to bring about a return to debt sustainability. In Greece, the economy is shrinking and this is compounding the problem of an unsustainable debt burden.
The programme is working in the Irish case
The choice for us is between working the programme and repudiating it. Importantly, working the deal doesn’t mean passively submitting to its terms. It means attempting to make the deal serve us better by renegotiating its terms. Critically, the deal is working for Ireland.
The economy has started to grow again. GDP increased in both the first and second quarters of this year and in Q2 was 3.5% above its level of Q4 2010. This was thanks to strong export growth which was due in turn to improvements in the competitiveness of Irish producers and to Ireland’s enduring attractiveness as a destination for foreign direct investment.
The public finances have stabilised and the budget deficit has started to decline. This year the deficit is expected to be just over 10% of GDP. Last year the underlying deficit was 11.5% of GDP. The 2012 budget will target a deficit of 8.6% of GDP.
Investors’ confidence in our ability to successfully tackle our economic and budgetary problems has greatly improved in recent months. For example, the yield on 10-year Irish bonds (the notional cost of borrowing for the government) has fallen from 14.5% to 8.5% since mid-July. This has occurred at the same time as yields on Greek government bonds have risen to new record levels and is a reflection of the fact that Ireland has met all its programme performance targets to date and is expected to continue doing so.
We have secured better terms under the deal. The most easily quantifiable example is the substantial reduction in funding costs in relation to the EU element of the financing package, the savings from which will be about €900m in 2012 and will rise to almost €1.2bn in 2014. But there are other ways in which the terms of the deal have been improved including (i) the acceptance by the Troika of the measures contained in the Jobs Initiative, and (ii) our securing of the Troika’s agreement to the replacement of the fiscal adjustment measures incorporated in the original agreement for the 2012-14 period by measures that the government considers to be more growth- and employment-friendly.
Reneging on the deal would be enormously costly and disruptive
The alternative to working the deal is to repudiate it. This means walking away from a set of international commitments solemnly entered into. The costs of choosing this route would be enormous.
In the first instance, since it would almost certainly bring about a sudden stop to international funding of the government’s borrowing requirement, it would mean that that borrowing requirement would have to be eliminated by abruptly closing the gap between government revenue and (non-interest) spending. That gap currently amounts to the equivalent of over 6% of GDP, or about €10bn. To eliminate it would require measures many times harsher than those that will be necessary in Budget 2012, and would certainly plunge the economy back into recession.
Since the deal is seen to be working for Ireland and since Ireland is seen to be on the path to debt sustainability, a repudiation would be viewed by investors as a situation of ‘won’t pay’ rather than ‘can’t pay’. The result would be a large and enduring premium on the government’s borrowing costs when it eventually returned to international bond markets.
The reputational damage inflicted on Ireland by repudiation would likely have serious negative consequences for our international trade and our attractiveness to foreign direct investors.
A Greek haircut is not a panacea (even for Greece)
There is a perception that imposing big haircuts on bondholders will somehow provide Greece with a passport to painless adjustment. Nothing could be further from the truth. Even after the haircut, it is likely that the Greek debt ratio will be higher than Ireland’s. Moreover, extremely harsh austerity measures (much harsher than anything that has been implemented, or is ever likely to be implemented here) will remain the order of the day in Greece, including the following:
The tax-free threshold for income tax lowered from €12,000 to €5,000. (A married couple with one earner in Ireland enters the income tax net at €24,750; a single person at €16,500)
The VAT rate applicable to restaurants and bars to rise to 23% from 13%. (The equivalent Irish rate was cut to 9% as part of the government’s Jobs Initiative.)
Monthly pensions above €1000 to be cut by 20%, (The average cut to public sector pensions in Ireland has been 4%)
30,000 civil servants to be suspended on partial pay. (Any public sector job loss in Ireland must be voluntary under the Croke Park Agreement.)
