THE COST of sovereign funding is becoming unsustainable and Ireland now needs to put “clear water” between itself and the banks, a leading economist said yesterday.
Referring to yesterday’s bond auction, Willem Buiter, chief economist with Citigroup, said Ireland “can’t keep borrowing at this rate”, adding that the current high yields reflect the market’s fear that the full cost of the banking bailout remains unknown.
While Mr Buiter asserted that yesterday’s bond auction was “technically successful”, the “bad news was the yields”.
Although Ireland is pre-funded until well into 2011, at such funding levels, the spectre of the European Financial Stability Facility (EFSF), which can lend money at cheaper levels, is now being raised.
However, such an approach would subject the Government to a “loss of national pride” and the rigours of the European Commission and the International Monetary Fund (IMF), said Mr Buiter. Instead the Government should look to reassure the markets by putting clear water between it and the banks, he said.
“The Government will have to put clear water between itself and the banks – the expense is too big,” he added.
Echoing calls in recent weeks from other commentators for the Government to renege on its guarantee of unsecured bank debt, Mr Buiter said it was “ludicrous” to keep on ploughing taxpayers’ money into Anglo Irish Bank before unsecured creditors lose out, and that bondholders – all the way up to senior debt – should be at risk of losing their money.
“It’s the way the markets are supposed to work,” he said, adding that the Government should not suffer any loss in reputation as a result of doing so.
Mr Buiter also reiterated European Central Bank (ECB) chief Jean-Claude Trichet’s assertion that the State should bear the full cost of Anglo.
“It’s an Irish problem,” he said, adding that European assistance was “about as likely as a snowball’s chance in hell”.
On the positive side, Mr Buiter said Ireland had done more than any other country to put its finances in order. While the total cost of the banking bailout remains uncertain, the Government can have some positive impact on the markets by implementing another tough budget in December.
“It can show even more capacity for pain than the market thought,” he said, adding that there is a willingness, for social and cultural reasons, among the Irish people to take on additional pain through higher taxes and loss of benefits.
“The Irish capacity to take additional spending cuts is greater than in other peripheral countries,” he said, adding, “there is a sense of fair play in this country that makes it less polarised than Greece”.
