Ireland must ‘cut loan interest rate to survive’

A leading German economist has said Ireland’s debt, at close to 120% of GDP, is not sustainable and the only way of resolving it is if the interest rates on the country’s massive loans are cut.

His warning came as Fitch, the credit ratings agency, said that a Greek exit from the euro could severely affect banks in Ireland and Portugal, as markets would see both countries being next in line to leave the euro.

Ferdinand Fichtner of the German Institute for Economic Research, which offers advice to the German government, said he did not believe that restructuring the promissory notes or removing the interest paid from the Government’s deficit sheet would help sufficiently.

“In terms of its exposure to the rest of the world, Ireland is like the US — that is bad,” he said, noting the bank bailout came to around 40% of GDP.

The main problem is not the primary deficit but the interest payments the country is having to make, of up to €3bn a year.

“In this sense, a stabilisation in the euro area can help Ireland because it brings down the interest payments in general and it will bring down the interest payments for Ireland.

“But I’m not sure how long it will take and if it will happen soon enough,” he said.

It could take some time given that the eurozone is in recession and growth in Germany is stagnant, with downgrades of its growth rate forecast for next year. The slowdown in the rest of the eurozone has now affected Germany, with manufacturing orders declining massively, said Dr Fichtner.

On Greece exiting the monetary union, Dr Fichtner said that while it would be a bad solution, it would probably be the most tolerable one, as it would not trigger major problems for the rest of the eurozone.

It would, he conceded, be expensive for most member states because the money Greece owes on the bailouts would not be paid, at least for the foreseeable future, and possibly it would never be paid it back.

Reintroducing the drachma would result in a depreciation against the euro of up to 40% and inflation could run at up to 20%. “Imports and production would collapse and unemployment would rocket — there would be a massive meltdown of the real economy. They would have a problem with private debt which is not an issue now.”

The ratings agency Fitch has warned that Greece leaving the euro could have a severe indirect impact on banks, especially in Ireland, Spain, and Italy.

Banks in Portugal and Ireland “are more vulnerable to contagion risks as these nations could be perceived next in line” the Fitch report said.