Ireland may be plunged into a a “disastrous” sovereign debt crisis within three years as the cost of rescuing its banks mounts, Nouriel Roubini, who predicted the global financial crisis, said.
Ireland’s government has injected 46 billion euros ($65.5 billion) to bailout the country’s debt-laden financial system, after a decade-long real estate bubble collapsed in 2008. The banks need another 24 billion euros in capital, and the state has pledged to provide whatever they can’t raise alone.
“Eventually the back of the government is going to crack” by “taking all the huge losses of the banking system,” said Roubini, chairman of Roubini Global Economics LLC, at a conference in Budapest today. The approach will “lead us with almost near certainty to a sovereign debt crisis in Ireland in a matter of two or three years.”
The government sought an international bailout last year, as the costs of saving the banks and financing the budget deficit became too big to handle. Ireland’s debt will rise to 118 percent of gross domestic product next year from 96 percent in 2009 and 25 percent at the end of 2007, according to European Commission forecasts.
“Eventually we’re going to have a sovereign debt crisis that’s going to be disastrous for Ireland and for the euro zone,” Roubini said.
The economy is struggling to grow, with a report today showing retail sales fell 3.9 percent in April from the year- earlier period. Eircom Group, the Dublin-based phone economy, said today it is seeing no signs of a recovery in the Irish economy and plans to cut 1,000 jobs over the next two years.
Brian Hayes, a junior minister in the Irish government, said the government isn’t seeking “at this point in time” to lengthen the time period it repays the debt from the nation’s bailout. He made the comment in an interview with Dublin-based broadcaster RTE.
The difference in yield between Irish and German 10-year bonds has widened 162 basis points, or 1.62 percentage point, since Nov. 26, before the European Union and the International Monetary Fund signed off on Ireland’s rescue. The so-called spread widened 3 basis points to 807 basis points today.
Roubini, who predicted in July 2006 a “catastrophic” global financial meltdown that central bankers would be unable to prevent, hasn’t always been right. In 2008, he said that he still saw “significant downside risks to equity markets,” failing to predict a stock market rebound that sent shares soaring around the globe. The Standard & Poor’s 500 Index has almost doubled from its low in March 2009.
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