Burden of bank debt 'must be shared'

ECONOMISTS NOURIEL Roubini and Ken Rogoff, two of the most prominent academic commentators on the financial crisis, said the Government should compel senior bondholders to bear some of the cost of rescuing Ireland’s banks.

Although second-class bondholders in some Irish banks have taken discounts on their investments, “haircuts” for senior bondholders were ruled out at the time of Ireland’s bailout deal with the EU and the IMF.

Dr Roubini, nicknamed “Dr Doom” for predicting the crisis two years before it struck, said Ireland risked insolvency if senior bondholders were not tackled.

Dr Rogoff, a former chief economist with the IMF, said the scale of the austerity foreseen in Ireland was akin to that seen in Ceausescu-era Romania.

The two men spoke separately yesterday with The Irish Times at the World Economic Forum.

Dr Roubini, a professor of economics and international business at New York University, said it was clear that Ireland faced very significant challenges.

“I think that there has to be burden-sharing and that means that the senior unsecured creditors of the banks have to participate in that pain, there has to be an orderly restructuring,” he said.

“If you don’t do it you’re putting on the balance sheet of the sovereign even more of the social cost and the losses of the financial system. Then you are going to break the back of the sovereign and lead to insolvency at the sovereign level. Therefore, we need an orderly restructuring of that unsecured bank debt.”

Asked how significant the risk of insolvency was for Ireland, he said public debt as a percentage of GDP had already risen to 100 per cent from 70 per cent and could rise to 120 per cent under “any reasonable scenario” of weakening growth. In such a situation “even the sovereign could become near insolvent in the next two or three years,” he said.

Dr Roubini argued that compelling senior bondholders to take pain was part of the solution to the financial bind in Ireland.

“You have to have a whole programme that leads to fiscal austerity that leads to stabilisation of the public debt, which resumes economic growth and competitiveness, so the challenges the country is facing are very difficult.”

Dr Rogoff, a professor of economics at Harvard, said Ireland had “good fundamentals” outside the debt problem and said most of the country’s growth story was real. For any incoming government, the task would be to maintain that and not undermine it.

However, he said it will be difficult for Ireland to avoid some form of debt restructuring. Asked if he was referring to sovereign or bank debt, he said “I’m afraid it might be the sovereign debt”, since the sovereign had guaranteed bank debt.

“It’s not reasonable to say that senior bank bondholders should get bailed out and I think it undermines the whole sense of justice, the whole social fabric in Ireland and elsewhere to have these massive bailouts,” he said.

He acknowledged the view of the European authorities that senior bondholder haircuts were “very dangerous” but the questions that arose were what was in Ireland’s interest and what was in Europe’s interest.

“There may be contagion. The question is how long can Ireland take the pain that’s necessary? A year, two years? Maybe. But three or four? Countries outside of Romania maybe, under Ceausescu, really haven’t done this and so it’s possible but it’s very demanding.

“Ireland’s up at debt levels we’ve never seen before and of course it has an extraordinary history and an extraordinary record of repayment but it’s a very challenging situation.”