Ireland has ‘limited safety margin for debt sustainability’

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 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 programme this year, Mr Gerlach said in Berlin yesterday.

Taoiseach Enda Kenny is adopting a two-pronged approach to help lower the burden of the €63bn bank bailout bill. He said yesterday he is “confident” of reaching a deal by the end of March with the ECB to restructure about €30bn of promissory notes used to rescue former Anglo Irish Bank.

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% of gross domestic product, “the safety margin is therefore minimal,” Mr Gerlach said. “Any unexpected increase in the ratio risks triggering worsening market sentiment about the Irish sovereign.”

Agreements to re-engineer the promissory notes, which are currently being repaid at an annual rate of €3.1bn a year, “would improve the Government’s fiscal position and greatly enhance its ability to regain full access to the markets,” Mr Gerlach said.

While it’s uncertain as to how Ireland may benefit from ESM bank recapitalisations, “greater clarity on this issue could provide support for successfully exiting the programme in 2013,” he said.

The yield on the benchmark Oct 2020 Irish bond is 4.26%, down from 14% in Jul 2011.