Private holder of Irish debt still bullish on economy

The largest private sector holder of Irish sovereign debt, Franklin Templeton’s Michael Hasenstab, is still bullish on the Irish economy.

Mr Hasenstab is the chief investment officer of the California-based fund, which has been building up a €6bn position in Irish government debt over the past 16 months.

In an interview with the online magazine Barrons over the weekend, he said his firm was holding onto its Irish debt and will “opportunistically add exposure”.

He argued that Europe needs to follow Ireland’s lead of implementing a combination of pro-growth and pro-austerity measures.

“Austerity means the eurozone has to deal with some of the fiscal challenges. But on the growth side, the eurozone really needs to improve the efficiency of labour and to free up product markets, something that the pro-growth and pro-austerity model in Ireland has followed. It is what has allowed that country to come back to the public-debt markets. A lot of countries can learn from that prescription, including the US,” Mr Hasenstab said.

“On the growth side, Ireland has maintained its competitiveness by allowing a fairly significant and painful downward adjustment in real wages. The effect of that is continued export growth. Even without a change in the value of the currency, an internal devaluation, through wage adjustments, can restore a country’s competitiveness. That’s something that Spain, Italy, Portugal, and Greece need to do.

“Additionally, Ireland has remained very competitive in terms of its tax regime. It has very low corporate and income taxes; that attracts skilled people. It brings in a lot of good foreign direct investment, and the country has continued to be a destination for innovation. So its growth policies have been strong. Then, on the fiscal side, the Irish Government realised that it had to bend the curve and bring debt-to-gross-domestic-product levels down over time, and so it imposed some pretty tough measures, such as big cuts in government spending.”

When asked whether the tough measures introduced in this country will remain politically palatable, Mr Hasenstab said the Government was taking the right approach by frontloading the process.

“During the years leading up to the financial crisis, Ireland was living beyond its means. There was a recognition there that, when you have a period of excess, it needs to be followed by a period of retrenchment, but that the retrenchment doesn’t have to last forever.

“This is the problem with some of the other countries in Europe or here in the US. Instead of taking the pain today, we basically have pushed the problem on to future generations and will make them pay the cost; that never cleans the system.

“The Irish approach has been to deal with the problem more upfront, knowing that it will be hard but that it is not going to last forever.”