Restructure urgently, advises leading economist

IRELAND SHOULD restructure its banks and perhaps its sovereign debt “as quickly as possible” to avoid a “crisis overhang trap”, a leading international economist has said.

Willem Buiter, chief economist at Citigroup, said restructuring of both the banking sector and sovereign debt was “the likely eventual option” in a number of countries. Ireland is likely to become the first European state to go down this route, he added.

“In my judgment, it is extremely unlikely that both the sovereign and the banking sector can get out of this without a restructuring of the debt,” Mr Buiter said, speaking after a Citigroup event in Dublin yesterday.

He said that he expected that, if Fine Gael and Labour were to form the next government, they would introduce an element of burden-sharing for senior unsecured creditors “quite soon after they come into office”, unless persuaded otherwise by the European Central Bank (ECB), the European Commission and the International Monetary Fund (IMF).

“My view is if you’re going to restructure . . . then the time to do it is as quickly as possible, because you take away the debt overhang problem,” he said.

The Irish “won’t wait” until there is a Europe-wide special resolution regime, which could take until 2014 to implement.

“The political pressures to let the creditors of the banks and indeed the creditors of the Government share the pain that taxpayers and the beneficiaries of public spending have felt for this two years-plus now is going to be very hard to resist.”

Europe has run out of “sticks” with which to threaten Ireland, Mr Buiter believes, leaving it with the “carrot” of a renegotiated finance facility, which could involve more money over a longer term and at a lower interest rate.

There were two “crazy features, strange features” to the Irish agreement with the European Commission, the ECB and the IMF, he said.

One was that Ireland was contributing €17.5 billion of the €85 billion facility. The other was the 5.8 per cent average interest cost. “To have a near 6 per cent interest rate on a facility provided to you by your friends is a bit of a slap in the face,” Mr Buiter said.

In the absence of a carrot, there were no great incentives for Ireland not to go ahead with a restructuring, “except a desire to be a good European citizen – and since Europe isn’t being particularly nice to Ireland in all this, I think the ‘let’s be good European citizens’ argument may not gain as much support as it would have, had there been a greater generosity of spirit”.

Portugal is “the natural next candidate for membership” of the club of countries who need to avail of European loan facilities, he said. “After that, we get to the really large animals.” Ultimately, the ECB “will have to cough up”.