THE IMPLIED PROBABILITY of Ireland defaulting on its debt is still 39 per cent, in spite of persistent austerity policies and lower bond yields, according to the chairman of the Irish Fiscal Advisory Council.
Speaking at a seminar organised by European Movement Ireland, Professor John McHale said: “We have made a huge amount of progress in terms of reducing the expectation that Ireland is going to default but we’re not out of the woods yet.”
Professor McHale said the right kind of assistance from Ireland’s partners “in terms of getting a deal on the various components of the banking related debts” would help and is an important part of a strategy to improve Ireland’s fiscal stability.
He added that this debt relief could take the form of extending the promissory note maturity date, investments from the European Stability Mechanism (ESM) into Irish banks or extending the maturity of loans from European partners.
The professor also said that withholding or deferring payment of the Irish Bank Resolution Corporation’s (IBRC) promissory notes as a negotiating mechanism for a debt write down was not in the country’s best interest.
To withhold payment on the promissory notes would effectively default on the Irish Central Bank and ultimately default on the Euro system as a whole. I think that would be an extremely risky thing to do.
He said that he felt that a ‘threat’ is not the best way to get a write-down and that the best approach would be one which emphasises common interest.
“There’s a significant common European interest in Ireland successfully getting through its crisis and back into normal borrowing,” he said.
A deal on the promissory notes, or other elements of the debt, makes it more likely that Ireland will be a success story and that’s in everybody’s interest.
“It’s better to focus on that rather than making threats that would be very hard to carry through… and, if [they were] carried through, could be incredibly damaging,” he said.
Professor McHale, who is also head of economics at NUI Galway, said that back in the middle of 2011 the implied probability was close to 90 per cent.
He also believes that “back-up support” after Ireland leaves its bailout program would allow “investors [to be] confident that if Ireland needs additional funding that it will be there.”
“I think that would actually make it much less likely that we would need that funding because I think there will be more [willingness] to invest in Ireland,” he said.
That will help get us back into the markets and essentially reduce any lingering concerns that we might end up defaulting because we couldn’t get the support that we needed, should we need it.
He also said that fulfilling any obligations and conditions set out in the bailout program and any other agreements will help to get the country “back on track.”
McHale accepted that the widespread availability of cheap credit to institutional investors, in addition to Irish government policy, could be a factor causing the drop in Irish bond yields. However, it is his belief that there has been a genuine increase in investor confidence.
“Certainly the European Central Bank (ECB) has injected a lot of liquidity into the European economy…
[which]…drives down yields,” he said. “At the same time investors are not going to buy an asset if they think they are going to make big losses on it.”
“While I think the ECB’s policies and the liquidity in the market may have helped, ultimately I think there has been a real decrease in the perceived risk that Ireland would end up defaulting,” he said.
Professor McHale was speaking at thematic session about how Ireland is an example of how to cope with challenges posed by the financial crisis at a seminar on 40 years of Ireland’s EU membership.
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