Warning over 1% EU bailout cut

ONE of the country’s leading economists has warned that achieving a 1% reduction on the EU/IMF bailout will not be a huge benefit to our debt repayments.

While it would knock about €450m a year off the €45bn borrowed from the EU that is not the real issue for the Irish economy, said Brian Devine, economist with NCB Stockbrokers.

His latest report on the economy warned that under no circumstances should we barter our 12.5% corporation profits tax to secure the 1% cut.

Speaking last night, Mr Devine said the reduction would clearly be beneficial to growth post-2013 and the funding rate put in place will be key in how Ireland gets out of the current debt crisis.

Devine has serious concerns that the growth rates currently in place are highly fragile. He notes that a permanent 1% reversal to GDP growth forecasts from 2011 would push debt to GDP up to 119% in 2013 and the situation would deteriorate further from then on, he said.

If on the other hand growth turns our better than forecast and was 1% above projections the outlook becomes more favourable.

Assuming a 5% lending rate on our EU debt post 2013, spread over 7 years on top of the beer growth, the outlook would be far more favourable even if we failed to get a reduction on the current borrowing rate of 5.8%, he said.

Mr Devine said “what happens after 2013 will be key” to how this country copes with the huge debt burden bearing down on it.

“The key point is that growth and Ireland’s funding rate post-2013 are the key drivers of Ireland’s debt to GDP ratio” in the long term, he said. Given that is so Devine said the important question then becomes “the provision of funds from the ESM (European Stability Mechanism) backstop, consistent with helping a country get its debt under control.”

Devlin has proposed Europe should set up an “S bond” where S stands for stability, to be issued at say 3.5%. If the growth rate of the economy exceeded that the recipient would pay the ESM the excess above the 3.5% in a coupon payment the following year.

In effect S-bonds wold give recipient countries “a greater chance of reducing debt, re-accessing the bond markets and paying back all debt in full,” he said.