Chart du jour from the IMF staff’s Article IV report for Ireland — forecasting the path for Irish debt to GDP if a deal is reached with the ECB to reschedule those promissory notes, and if direct ESM equity replaced bank recaps under the bailout.
If, for illustrative purposes, the ESM invested €24 billion in the banks (the full value of the bank equity increase under the EU-IMF supported program), and the government used the proceeds towards debt reduction, government debt would drop 14½ percentage points to 105 percent of GDP in 2013. Market perceptions of the banks would benefit as ESM equity broke banks’ links to the sovereign, enhancing the value of the banks and their potential to support economic recovery. The other main component of such a package would be a refinancing of the €28 billion in promissory notes (debts that formed a major part of bank recapitalization costs) to extend their debt service schedule. Either long-term government securities or an EFSF/ESM loan could provide such a refinancing, but the former would avoid adding to debts that markets may consider senior. While this refinancing would only modestly lower Ireland’s debt path, it would significantly reduce financing needs in coming years.
If’s the word.