Ireland may try to restructure its debt to lower interest payments or extend the maturity on its borrowings as the economy contracts again this year, according to Ernst and Young.
The Government probably will repay its debt and investors aren't likely to lose any of their principle, a move that would imply a default, said Neil Gibson, economist with the financial services and advisory firm.
"It is much more likely that the debts will be repaid in full, but at probably a more modest interest rate or over a longer timeframe," Mr Gibson said in a telephone interview today. He added that he expects the economy to contract 2.3 per cent this year as "the headwinds are too significant".
The economy is struggling to expand as consumer demand contracts and government cutbacks and higher prices damp growth. The economy likely will return to annual growth next year as consumers repair their personal finances and exports increase, he said.
"Ireland is not Greece or Portugal," Mr Gibson said. "Ireland has a genuine prospect of being able to pay off its debts because it has such a strong international business base."
Central Bank governor Patrick Honohan said yesterday that while growth is "very modest at best" this year, the economy will improve in 2012.
"Nothing will work" unless the economy, which has contracted about 15 per cent since the end of 2007, returns to growth, Mr Honohan said.
Ernst and Young expects private consumption in Ireland to decline 4.1 per cent this year and 3.3 per cent in 2012 as the Government pushes through austerity measures to bring the budget deficit to 3 per cent of gross domestic product by 2015. GDP will probably expand 1.1 per cent in 2012 and 2.2 per cent the following year, according to Ernst and Young.
European Union leaders will decide on additional aid for Greece by the end of June and have ruled out a "total restructuring" of the nation's debt, Jean-Claude Juncker, head of the group of euro-area finance ministers, said yesterday.
Ireland needn't "worry as urgently" as countries such as Greece because it won't have to borrow in 2011 thanks to its €85 billion agreement last year, Mr Gibson said. And the country may avoid seeking additional bailout funds from the EU when the current financing run out at the end of 2013, he said.
"The international markets must believe the same thing we do, which is fundamentally Ireland's economic prospects are very strong," Mr Gibson said. "One would hope by 2012, early 2013, the markets would have come around to that view."
Minister for Finance Michael Noonan said yesterday that there's "no question" of Ireland needing a second bailout package in 2012. He was responding to comments by Minister for Transport Leo Varadkar that Ireland was "very unlikely" to re-enter bond markets next year, as set out in the bailout plan.
"If Greece went for re-profiling and it was well received and bedded-down, that might set a precedent and Ireland could follow quite swiftly," said Mr Gibson. "Ireland will be having those conversations, if not officially, then unofficially already."
Bloomberg
