Should Irish Debt Be Restructured

Richard Portes says it is necessary:

Ireland is being made to pay for deciding to socialise its private debt at the end of September 2008. That was the original sin. Advised by Merrill Lynch and pressured by Eurozone authorities, Ireland gambled that its banks were fundamentally sound. A state guarantee would turn markets around, restore liquidity, and give them time to show they could deal with their problems. Not so. Merrill Lynch should at least return its fee. And now policymakers are talking about privatising state assets in order to pay for part of the costs of the socialisation. Whatever the other merits of privatisation, this does not make sense – the right solution is to (re)privatise the debt.
After many subsequent capital infusions of taxpayer funds, the latest stress tests and restructuring plans are supposed to draw a line under the shocking costs of the guarantee and to launch recovery. But the burden of the debt on the sovereign is now unsustainable. The projections in the original IMF programme, endorsed by the European Commission and the ECB, see the debt-to-GDP ratio peaking at 120% in 2013. The IMF itself clearly thinks that the downside risks to the programme are high, likely to materialise, and difficult to mitigate. The government has not convinced the markets – Irish sovereign spreads are today about the same as in November before the IMF programme, and the latest actions have led the ratings agencies to downgrade the sovereign (while upgrading the banks). Yes, a couple of investment banks are now saying Irish debt is a good buy – doubtless because they are now convinced the new government will not dare to restructure the debt. The programme requires some access to market funding from next year. That is not credible unless the debt is restructured.

Private debt should remain private.  There are risks to bond-holding.