Ireland does not have enough money to both bail out its banks and pay its government debts, Citi’s top economist says.
Accessing external sources of funds will not mark the end of Ireland’s troubles.The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent. The Irish sovereign cannot from its own resources ‘bail out’ the banks and make its own creditors whole. In addition, a fully-fledged bailout (permanent fiscal transfer) from EA [that's euro area] partners or the ECB is most unlikely. Therefore, either the unsecured non-guaranteed creditors of the banks, and/or the creditors of the sovereign may eventually have to accept a restructuring with an NPV haircut, even if it is not a condition for accessing the EFSF or the EFSM at present.
But in our view, it has long been clear that the sustainability of the debt of an EA sovereign — however difficult it is to establish in the first place — is not the only, and maybe not even the most important, factor to determine the incidence of sovereign debt restructuring, including haircuts. Political concerns about the survival of the EA play a role. But importantly, concerns about the liquidity of fragile banking systems (the risk of deposit runs or a freeze in wholesale funding) or the solvency of banks (the ability to stem losses resulting from haircuts on holdings of sovereign debt) have led EA policymakers to delay the day of reckoning for the sovereigns in the hope of muddling through without another round of bank bailouts. Less visibly, potential losses from sovereign restructuring to pension funds and insurance companies may also have featured.
If two insolvent halves make one insolvent whole, what do 27 or so insolvent states out of 50 add up to?
– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.