Ireland may face ‘disastrous’ sovereign debt crisis

IRELAND may be plunged into a “disastrous” sovereign debt crisis within three years as the cost of rescuing its banks mounts, Nouriel Roubini, who predicted the global financial crisis, said.

The Government has injected €46 billion to bail out the country’s debt-laden financial system, after a decade-long real estate bubble collapsed in 2008.

The banks need another €24bn in capital, and the state has pledged to provide whatever they can’t raise alone.

“Eventually the back of the Government is going to crack” by “taking all the huge losses of the banking system,” said Roubini, chairman of Roubini Global Economics, at a conference in Budapest yesterday.

The approach will “lead us with almost near certainty to a sovereign debt crisis in Ireland in a matter of two or three years.”

The Government sought an international bailout last year as the costs of saving the banks and financing the budget deficit became too big to handle. Ireland’s debt will rise to 118% of gross domestic product next year from 96% in 2009 and 25% at the end of 2007, according to European Commission forecasts.

“Eventually we’re going to have a sovereign debt crisis that’s going to be disastrous for Ireland and for the eurozone,” Roubini said.

The economy is struggling to grow, but retail sales fell 3.9% in April from the same period a year earlier.

Eircom said it is seeing no signs of a recovery in the Irish economy and plans to cut 1,000 jobs over the next two years.

Junior Minister Brian Hayes said the Government isn’t seeking “at this point in time” to lengthen the time period it repays the debt from the nation’s bailout.

The difference in yield between Irish and German 10-year bonds has widened 162 basis points, or 1.62%, since November 26, before the EU and the IMF signed off on Ireland’s rescue.

The so-called spread widened 3 basis points to 807 basis points yesterday.