Jan. 14 (Bloomberg) -- Ireland has a limited safety margin for maintaining debt sustainability and would benefit from a deal to reduce the cost of bailing out its banks, said Stefan Gerlach, a deputy governor with the nation’s central bank.
“Actions that would help reduce the sovereign-bank link and would improve debt sustainability could greatly enhance Irish prospects” of exiting its bailout program this year, Gerlach said in an e-mailed version of a speech in Berlin today.
Prime Minister Enda Kenny is adopting a two-pronged approach to help lower the burden of the nation’s 63 billion-euro ($84.2 billion) bank bailout bill. He said yesterday that he is “confident” of reaching a deal by the end of March with the European Central Bank to restructure about 30 billion euros of so-called promissory notes used to rescue former Anglo Irish Bank Corp.
Separately, the government is campaigning to sell stakes in Ireland’s surviving banks to the European Stability Mechanism, the euro area’s permanent rescue fund.
With Ireland’s debt at a “high” level of 120 percent of gross domestic product, “the safety margin is therefore minimal,” Gerlach said. “Any unexpected increase in the ratio risks triggering worsening market sentiment about the Irish sovereign.”
Agreements to re-engineer the Anglo Irish promissory notes, which are currently being repaid at an annual rate of 3.1 billion euros a year, “would improve the government’s fiscal position and greatly enhance its ability to regain full access to the markets,” Gerlach said.
While it’s uncertain as to how Ireland may benefit from ESM bank recapitalizations, “greater clarity on this issue could provide support for successfully exiting the program in 2013,” he said.
The yield on the benchmark October 2020 Irish bond is 4.26 percent, down from 14 percent in July 2011.
-- Editors: Simone Meier, Stephen Taylor
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