A deserved break for Ireland or a false dawn?

The announcement , or ‘noting’ in the case of European Central Bank President Mario Draghi, of a satisfactory conclusion to the technical discussions between the Irish government and the European Central Bank on the infamous promissory notes issued by the Irish state to cover the future liabilities of the former Anglo-Irish Bank has to broadly welcomed. However, the debate is in full swing about the perceived benefits that will accrue to the state as a result. Minister for Finance Michael Noonan’s assertion that the state will save €20 billion over the lifetime of the arrangement until the new bonds mature are predicated on a number of assumptions. Obviously, inflation and interest rates will affect the value of the bonds over that time period as well as economic growth projections.

There is no such thing as a free lunch and it was wholly unrealistic to expect that this debt would be expunged, essentially transferring the cost to others. Proportionate burden sharing was clearly the only show in town and just as the Irish public has been justifiably angry by the burden of bank debt imposed on it, the other 99% of European Union citizens would be fairly enraged by completing having to cover debts incurred here in Ireland. The devil will be in the detail of this agreement to estimate the savings and benefits for Ireland.

Despite the ambiguity over the numbers, the external stakeholders and players in Irish economic affairs believe this to be a good deal, with Irish long-term bond yields plummeting last week to levels not seen since 2007. The consensus is that at least Irish public debt situation will not get worse and may be possibly more sustainable, particularly if European and global economic growth returns.  However, this is only one side of Ireland’s debt mountain, the other side being the level of private debt that has been incurred by every man, women and child in the state. This will also need to be tackled and unfortunately, macroeconomic factors such as low growth and high unemployment are not favouring any efforts to address this as many struggle to meet mortgage repayment and other obligations. Hopefully the new personal insolvency arrangements introduced by the Irish government will start to bear fruit over the next 2-3 years but a combination of debt restructuring and debt write-offs will be needed as well as increased employment to start to significantly eat into Irish private sector debt.

Cathal O'Ceallaigh

– Cathal O’Ceallaigh, FT MBA 2012/13