ESM ‘will not finance legacy debt’

The Government has very little prospect of tapping the European Stability Mechanism (ESM) for a recapitalisation of the country’s legacy bank debts, according to Ashoka Mody, who was part of the IMF team that implemented the bailout programme in November 2010.

The Government has pumped €64bn into the banking system following the collapse of the sector in 2008. About €30bn of this is considered legacy debt that was used to prop up Bank of Ireland, AIB and Permanent TSB.

The Government is in negotiations with the European Commission about securing some sort of recapitalisation through the ESM.

“The likelihood that legacy bank debt will be financed by the ESM is about zero. I would be astonished if it happened,” said Mr Mody, speaking on RTÉ’s This Week programme.

He also raised concerns about the economy’s ability to grow over the medium term.

“Ireland had a genuine growth miracle, but it had run its course by 2000. For the next decade there was a bubble which was seen as a continuation of the miracle.” He questioned where Ireland’s growth would come from in the future.

However, the biggest challenge over the short term was to deliver any sort of growth. The Government had taken “ownership and internalised” the austerity model that it was forced to accept as part of the bailout.

But the benefits of austerity had reached its limits, he said. “It is not possible for a country to grow through austerity.”

With the country’s debt level set to peak at 123% and with little prospect of getting debt relief on the bank’s legacy debts, returning the economy to growth was crucial, he added.

“The move away from austerity is a sensible course of action and it has to be done not just on the margins by taking advantage of short-term windfalls such as the savings on promissory notes.” He recommended postponing austerity budgets for three years in an effort to boost growth over the short term.

He did not believe that Ireland would need to source more funds before it exited the bailout programme in November. Moreover, there would be no downside to putting in place a precautionary credit line from either the IMF or the EU after the exit.

“I don’t see any downside of having a backstop both from a risk management or a reputational point of view. Ireland does not concede any ground of the progress it has made so far.”


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