Irish See Opportunity in Greece’s Debt Hole

Greece’s difficulty paying its debts may turn out to be Ireland’s opportunity.

Greece’s failure to cut spending and boost revenue by enough to meet targets set by the European Union and International Monetary Fund prompted bondholders to accept a 50 percent loss on its debt. While Ireland won’t seek debt discounts, the government might pursue other relief given to Greece, including cheaper interest payments on aid and longer to repay it, according to a person familiar with the matter who declined to be identified as no final decision has been taken.

“There’s a political problem for the government,” said Gavin Blessing, a bond analyst at Collins Stewart Plc in Dublin. “The Greeks, who are seen to be behaving badly, get rewarded, whereas the Irish, the top boys in the class, get nothing.”

While Irish bonds delivered the world’s best returns during the past three months, they have pared gains on concern slowing economic growth worldwide will derail the government’s efforts to revive the country’s fortunes through exports. The yield on debt due in 2020 rose 74 basis points in October to 8.37 percent yesterday, albeit down from 15.5 percent in July.

Ireland was the second euro member to need a bailout and Prime Minister Enda Kenny is ruling out reneging on its bonds. Yet, he said this week he’s pushing his European partners for alternative ways of reducing Ireland’s “crushing” debt.

Different Road

“What is being done for Greece, including the steps that will need to be taken to make its debt sustainable, reflect a uniquely difficult situation,” Kenny told parliament in Dublin yesterday. “I cannot say it often enough or strongly enough; we will not be going down the same road.”

Changes to Ireland’s plan could include replacing taxpayer- funded bank bailouts with European money, new structural funds, lower interest rates and longer repayment times for official aid, according to the person familiar with the matter.

The cost of insuring against Ireland defaulting for five years dropped to 780 basis points from 1,296 since July 18, according to CMA prices, implying a 49 percent probability of Ireland failing to meet its obligations. The likelihood of a Greek default is 91 percent, swaps signal.

Bond prices suggested Greek investors anticipate losing as much as 60 percent of their investments, with the nation seeking aid from euro-region governments and the IMF worth at least 109 billion euros ($152 billion). European leaders meeting in Brussels today persuaded bondholders to take 50 percent losses on Greek debt and boosted the firepower of the rescue fund to 1 trillion euros.

‘Total Insolvency’

Leaders were prepared for a “total insolvency” of Greece if bondholders resisted the writedown put on the table, Luxembourg Prime Minister Jean-Claude Juncker told reporters after a summit that delivered a revamped debt-crisis strategy.

In Dublin, pressure is building on Kenny to seek more debt relief after the government injected about 62 billion euros into the Irish financial system.

“Why is it acceptable to write down Greek debt, when the Irish pay private bankers’ debts?” Gerry Adams, leader of Sinn Fein, said in parliament on Oct. 25.

Kenny told Adams he’s seeking debt reduction on a “number of fronts.” The IMF said on Sept. 7 it estimates Ireland’s government debt will peak at 18 percent more than the country’s gross domestic product in 2013, equivalent to almost 200 billion euros. That’s up from 25 percent of GDP in 2007.

The government has already signaled it may seek to shift some of the costs of bailing out the banking system to Europe, relieving the burden on the taxpayer.

Sharing Burdens

“Had a European bank resolution fund been in place, some of the resolution of Irish banks would have been part of that,” said Alan Ahearne, economics professor at Galway University, who acted as adviser to former Finance Minister Brian Lenihan. “The Irish government has a legitimate claim that there should be some sort of burden-sharing on a European level.”

The government might also seek lower interest rates and more time to payback its 67.5 billion loans from the EU and IMF. The state is saving about 10 billion euros from concessions granted at a July 21 summit, according to Kenny.

Emergency Funding

Finance Minister Michael Noonan also may seek to tap any structural funds designed to drive economic growth in Greece. The Greek economy is set to contract 5.5 percent this year and 2.5 percent next, according to the country’s 2012 budget.

Ireland’s 10-year bonds yield about 613 basis points more than German bunds, down from an average this year of 705 and below the peak of more than 1,100 reached in July. Greek yields are more than 2,200 basis points higher than those of Germany.

Another option is to pursue a discount on the emergency funding being provided by the Irish central bank and the European Central Bank to Anglo Irish Bank Corp., according to Blessing at Collins Stewart. The nationalized lender, which is being wound up over a decade, owed 40.1 billion euros to central banks and monetary authorities at the end of June, the bank said in August.

“The Irish Government needs something to reassure the general public that we aren’t being treated unfairly,” said Blessing. “Haircuts on Ireland’s sovereign debt may be ruled out given the negative consequences. But there may be other, less dramatic ways of achieving debt reduction by less visible, less damaging means.”

To contact the reporter on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net

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