Former European Central Bank Executive Board member Lorenzo Bini Smaghi said officials must accept that Portugal and Ireland may need further assistance if they want to limit debt restructuring to Greece.
“It should be recognized right away that Portugal may not be able to return to the markets next year and needs an additional bailout package,” Bini Smaghi said in an article published on the Financial Times website today. “If it is unable to finance itself until 2016, it will need approximately 100 billion euros. The same could be done for Ireland, which requires an additional 80 billion euros.”
Portugal’s implied borrowing costs have increased as investors fret about whether the nation will follow Greece in having to restructure its debt, with the yield on its two-year bond having doubled in the past year to 11.3 percent. The International Monetary Fund said on March 2 that Ireland may struggle to regain “sufficient” access to bond markets in 2013. Both countries have already received bailouts.
Bini Smaghi, who left the ECB at the end of 2011, said acceptance of the two countries’ difficulties would help build a firewall that would ensure Greece remains an exception. Failure to do this would risk repeating the mistakes made with Greece, which Bini Smaghi said involved “helplessly” looking on as market conditions worsened until it became obvious the country would need aid.
Last week, Greece pushed through the biggest sovereign restructuring in history, with private holders accepting more than 100 billion euros ($131 billion) of writedowns, a condition for winning the second bailout.
Ireland’s government is seeking to restructure about 30 billion euros of so-called promissory notes, or IOUs, used to rescue the former Anglo Irish Bank Corp. The nation stepped out of bond markets and sought external aid in November 2010, amid concern that banking woes would push it into bankruptcy.
Ireland “has met all of the targets to date” and is “on track to emerge from the program and return to markets in 2013,” a Finance Ministry spokeswoman said today in response to the Bini Smaghi article.
Portugal is raising taxes and cutting spending as it fights to meet the terms of the 78 billion-euro bailout plan. Vitor Constancio, ECB vice president and former Bank of Portugal governor, said on March 8 that austerity measures are on track and that a restructuring won’t be necessary.
The risk is of “publicly denying that restructuring is even an option, but privately considering involving private creditors and even discussing the details with some market participants,” Bini Smaghi wrote. “Finally, hastily putting in place an additional package and asking the various countries’ parliaments for approval, which they might be willing to consider...but only in exchange for debt restructuring.”
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