Ireland Investors Warned of Coming Losses

Optimism is premature, says Citi head in London

Ireland’s bonds have been the second-best-performing in the eurozone in 2012, with yields dropping, but Michael Saunders, Citigroup's head of European economics in London, says that the country’s hopes to avoid debt restructuring by raising money in the markets are premature.

Bloomberg reported Thursday that despite Ireland's progress in the bond markets—it sold bonds in July on the longer-term markets for the first time in nearly two years—Saunders said that there were still troubled times to come.

“Ireland faces an almost impossible task to get back to fiscal balance,” he said in the report. Visits to Ireland proved that “life is tough, very tough and not getting that much better anytime soon,” he added.

Ireland’s debt has more than tripled in the past five years, and Saunders warned that a slower economic recovery could make that debt unsustainable. He had said earlier in the week, “The key risk is the economy. If it doesn’t come right, and I don’t believe it will, then the math becomes difficult.”

Ireland has diligently worked on its deficit through tough austerity measures. Alberto Gallo, head of European credit research at Royal Bank of Scotland Group in London, said in the report, “Ireland is still the good student.” He added, “Ireland is making good progress on reform and fiscal measures.”

But good progress may not be enough in a slowing world economy, as Saunders pointed out. He predicted that GDP will shrink by 0.6% this year, and that it would and grow by that amount next year.

Ireland has been looking to Europe for help managing its legacy banking debt. The country has either pledged or sunk 64 billion euros ($83 billion) into its financial system—the highest cost for a banking rescue anywhere in the world since the Great Depression.

Saunders was quoted saying, “A lot depends on what kind of deal they get on the banks. Will it significantly reduce the debt level? I’m not sure it will. If they don’t get relief, they are going to find it hard to fund themselves on a sustained basis at a tolerable yield and will be looking at some sort of second bailout program.”

If that happens, Saunders warned, private investors could be in for losses despite the fact that the Irish government has said it will not default on debt. The losses could come through Private Sector Involvement (PSI), said Saunders, adding, “It would be wrong to see debt restructuring as a failure of the current government. It’s a reflection of the difficult debt situation it inherited.” He added, “I stress that’s it’s not by lack of effort. It’s just the scale of the overhang and the fact that Ireland has little ability to stabilize its debt because it’s so vulnerable to global shocks.”

Alan McQuaid, an economist at Merrion Stockbrokers in Dublin, said in the report, “The PSI view is out there because people are looking at the debt dynamics in Europe and wondering how do you grow out of this. But Ireland wants the name of being a good European. It doesn’t want to be seen as not paying back its debts. The only way I could see it happening would be as a part of a wider European restructuring of debt, including countries like Italy, and I don’t see that happening anytime soon.”

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