Soros Mistrusts EU Aid as Irish Default Risk Soars

Ireland’s bailout money starts to arrive next week, with investors expressing skepticism about the country’s ability to repay its debts by driving the cost of insuring against default to a record.

The government was forced in November to accept 85 billion euros ($113 billion) to bolster its finances and inject 10 billion euros into Irish banks, with another 25 billion euros in reserve. Assessing the aid plan, billionaire George Soros wrote in the Financial Times last month that the country will have to renegotiate the accord. Finance Minister Brian Lenihan said a default would “destroy” the country.

“If the government doesn’t have to put more than the 10 billion-euro initial capital injection into the banks, the package is doable,” said Brian Devine, an economist at NCB Stockbrokers in Dublin. “But there’s a higher probability a government would have to renegotiate on sovereign debt if the bank costs move beyond that.”

Irish bonds have rallied since the country secured the bailout on Nov. 28 and as the European Central Bank bought the country’s securities. The extra yield investors demand to hold Irish 10-year bonds rather than the German benchmark has narrowed to 613 basis points from a euro-era record of 680 reached on Nov. 30. That’s still 10 times the decade’s average.

The cost of protecting Irish debt against non-payment for five years with credit-default swaps has more than doubled to a record 628 basis points in the past six months, according to CMA prices in London. That implies a more than 40 percent chance that the nation won’t repay investors on time, CMA said.

Anticipating Default

“The market seems to be pricing in the possibility that Ireland may have to restructure its debt,” said Michiel de Bruin, who oversees about $35 billion as head of European government debt at F&C Netherlands in Amsterdam. “It’s something that cannot be excluded.”

Ireland agreed on the aid package with the European Union and the International Monetary Fund after borrowing costs soared because of increasing concern the cost of rescuing lenders, including Anglo Irish Bank Corp., would overwhelm the state. That followed Greece’s rescue in May as sovereign debt concerns wiped 6.5 percent off the euro’s value against the dollar in 2010.

“We’re in a cul-de-sac,” said David McWilliams, a former central bank economist and the author of three books on the Irish economy. “You want to avoid defaulting on sovereign debt, so we need to cut the link with bank debt.”

Bailout Terms
Part of the bailout includes money to recapitalize the country’s banks, which the government agreed to reduce in size. Ireland can also tap into 50 billion euros to cover day-to-day spending for the next three years. In return, Prime Minister Brian Cowen’s government agreed to reduce spending, raise taxes and cut the minimum wage. As part of the bailout accord, the government pledged to protect holders of senior bank bonds.

The next administration might not stick to the arrangement, according to Soros, the 80-year-old investor who became renowned in the early 1990s after betting against the pound. National elections in Ireland will probably take place in March, with the ruling Fianna Fail party trailing the opposition Fine Gael by 17 percentage points in the latest opinion poll.

‘Politically Unacceptable’

That next government “is bound to repudiate the current arrangements,” Soros said in his Dec. 14 article for the FT. Soros called the protection of senior bank bondholders “politically unacceptable’,’ and said interest rates charged on rescue packages should be lowered to avert the risk “that the euro may destroy the political and social cohesion of the EU.” Ireland will pay an average 5.8 percent interest rate on the aid.

Michael Vachon, a New York-based spokesman for Soros, said by telephone on Jan. 4 that the billionaire investor wouldn’t comment for this story.

Ireland’s debt will peak at 125 percent of gross domestic product in 2013, rising from 25 percent in 2007, the International Monetary Fund said on Dec. 17. The average for the euro region in 2011 will be 87 percent, the European Commission forecast on Nov. 29.

Even without the bailout, Ireland’s debt interest payments were expected to consume 20 percent of tax revenue in 2014, rising from 8 percent in 2009, the government said on Nov. 24.

“There are significant risks to the program that could affect Ireland’s capacity to repay the Fund,” the Washington- based IMF, which is channeling 22.5 billion euros to Ireland as part of the bailout, said in its report last month.

Greek Extension

Greece unofficially informed EU officials and the European Central Bank that after 2013 it will seek an extension on all outstanding debt and a reduction in interest, Ta Nea newspaper reported last month, without citing anyone. Finance Minister George Papaconstantinou told the Reuters news agency on Jan. 4 that Greece isn’t in talks with creditors on restructuring its debt. The yield gap between Greek and German 10-year bonds widened to a record 974 basis points yesterday.

The Irish government has said it will honor its debts, including bank borrowing. Lenihan said defaulting on senior bank debt isn’t an option, after the state seized Allied Irish Banks Plc, the country’s second-biggest lender, on Dec. 23 as bad debts surged.

“We have to stop having silly arguments about default all the time,” said Lenihan in an interview with Dublin-based broadcaster RTE on Dec. 23. “It will destroy this country if we start defaulting on senior banking obligations.”

To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net; Dara Doyle at ddoyle1@bloomberg.net

To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net