Belfast Telegraph

Debt is a risky business but Ireland will just about scramble through it

By Hamish McRae

Currency and insolvency crises have a curious inevitability to them. The numbers, be they those of a company or a country, deteriorate. The management or government asserts that everything is fine and the assessments of the financial markets, the banks, the rating agencies, whatever, are all wrong.

Speculators are cast as particular villains. Things get worse until, often quite suddenly, the game is over. The country is bailed out, the company goes into administration - and the previous people in charge are booted out.

Sometimes, to be sure, the sequence is slightly different. In the case of the UK, the old team was booted out before the crisis came to a head, leaving the new lot to pick up the pieces and in this case avoid humiliation. In Ireland, the deal was done by the old management and the new ones tried to unpick it. In Portugal, the management was kicked out but the country hit the buffers before the new ones could be installed. But in every case the politics gave way to the economics. The harsh mathematics, that you have to pay debts as they fall due, overrides everything.

You can see how the markets came to the conclusion that these three countries could not meet their obligations. There is a gap between the amount they (plus Spain and Italy) would have to pay for new 10-year debt over and above what the eurozone's most creditworthy borrower, Germany, has to pay. So Greece currently has to pay nearly 10% more than Germany, whereas at the beginning of last year it only had to pay 2% more. A year ago Ireland was able to borrow at less than 1% more than Italy and less than 2% more than Germany. You can see why, mistakenly, the Irish Government thought it could get through. But confidence is a fragile thing and a situation that looked under control suddenly wasn't. And so it has proved with Portugal.

What of the probability of a country defaulting on its debts at any time during the next five years, derived from the cost of insuring the debt against such a default? For Greece, there is more than a 50% chance of it defaulting. For Ireland and Portugal, the unflattering truth is that investors think they have a 40% chance of defaulting. For Spain, it is less than a 20% chance, and investors have become more optimistic in recent weeks, not less, that Spain can make it through.

But that could change. Put it this way - investors are at the moment attributing the same risk level to Spain as they did to Ireland back in the middle of 2009, and we know what happened then.

The important thing to make clear is that Portugal, like Ireland and Greece, is getting a loan, not a grant.

Even in a worst-case scenario we will get something, let's say 60 cents in the euro, and we will have earned some interest.

My own feeling is that Greece will indeed default because the debts are simply too big. Ireland I think will scramble through and be able to repay in full, thanks to the strength of its export sector and the competitive advantages it has of its skilled, English-speaking workforce within the eurozone. And Portugal?

Well, I am afraid I don't like the numbers at all - nor indeed the numbers for Spain either.