Ireland May Restructure Debt as Economy Contracts, E&Y Says

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 & Young.

The government probably will repay its debt and investors aren’t likely to lose any of their principal, a move that would imply a default, said Neil Gibson, a Belfast-based economist with the financial-services and advisory firm.

“Ireland is not Greece or Portugal,” he said today by telephone. “Ireland has a genuine prospect of being able to pay off its debts because it has such a strong international business base.”

Ireland’s economy is struggling to expand as consumer spend less amid government cutbacks and higher prices. The economy will probably return to annual growth next year as consumers repair their personal finances and exports gain, Gibson said.

“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 time frame,” Gibson said, adding that he expects the economy to contract 2.3 percent this year as “the headwinds are too significant.”

Economic Growth

Ireland 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 percent since the end of 2007, returns to growth, Honohan said.

Ernst & Young expects private consumption in Ireland to decline 4.1 percent this year and 3.3 percent in 2012 as the government pushes through austerity measures to bring the budget deficit to 3 percent of gross domestic product by 2015. GDP will probably expand 1.1 percent in 2012 and 2.2 percent the following year, according to Ernst & 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-euro ($122 billion) agreement last year, Gibson said. Ireland may avoid seeking additional bailout funds from the EU when the current financing run out at the end of 2013, he said.

‘Very Strong’

“The international markets must believe the same thing we do, which is fundamentally Ireland’s economic prospects are very strong,” Gibson said. “One would hope by 2012, early 2013, the markets would have come around to that view.”

Finance Minister Michael Noonan said yesterday that there’s “no question” of Ireland needing a second bailout package in 2012. He was responding to comments by Transport Minister 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,” according to Gibson. “Ireland will be having those conversations, if not officially, then unofficially already.”

Bank of Ireland Plc, Ireland’s largest bank, said today it will seek to impose losses of as much as 90 percent on 2.6 billion euros of subordinated debt as it offers bondholders an exchange for cash or equity. Noonan said the government will take “whatever steps” are necessary to achieve “appropriate burden-sharing” with junior bondholders, as the state seeks to claw back investments in its debt-laden lenders.

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