IRELAND IS unlikely to re-enter the debt markets next year, but when it does, it can expect its funding costs to have normalised, a leading economist has said.
Antonio Garcia Pascual, chief southern European economist with Barclays Capital, said that he did not expect Ireland to return to the markets next year given that it was fully funded until the second half of 2013.
“The reality is it doesn’t need to go back to the markets until late 2013,” he said.
When it did go back however, Mr Pascual said he could envision that Ireland’s cost of funding would decline dramatically, with a spread to German bunds of below 300 basis points, compared to the current rate of about 650 basis points.
Noting that markets were clearly seeing a separation between Ireland and the other “PIIGS” countries (Portugal, Italy, Greece and Spain), Mr Pascual said Ireland’s austerity measures were having an effect.
“It’s in the interest of Ireland to pull off an adjustment,” he said, but he warned that the perceived separation “is not necessarily a permanent one”.
“It’s time to continue delivering,” he urged.
While Mr Pascual suggested back in June that the Government should have imposed a write-down on senior unsecured bondholders in Anglo Irish Bank, he said “now it’s a little bit too late”.
Of the planned write-down of Greek private debt – which is expected to be of the order of 50-60 per cent – Mr Pascual conceded that there was a real risk that other countries might follow suit.
“There is a risk of contagion, there is no question about it,” he said
However, responding to assertions that Ireland should look to reduce its debt in a manner similar to Greece, Mr Pascual warned that “default is not a free lunch”.
“You would be penalised in the sovereign market. No one wants to associate with a country that has the inability to deliver policies and is forced to default.”
In any case, Mr Pascual said he hoped that yesterday’s measures to stabilise the euro zone would provide a stable safety net that would enable an orderly write-down of Greek debt – whether it was voluntary or not.
“I don’t think hard restructuring necessarily implies contagion.”
As for speculation that the current crisis might end up in a “two-tier Europe”, with the peripheral nations outside the core of France and Germany, Mr Pascual was unsure.
“I hope not; it’s not in the interests of Greece or other countries to have one, but it’s certainly a possibility,” he said.
