Top US central bankers raised the possibility that Ireland might need a bailout six months before Dublin accepted an international rescue in late 2010, Federal Reserve records show.
Transcripts from meetings of the Fed open market committee, which sets US interest rates, show it was briefed on Ireland during 2010 as officials surveyed the escalating turmoil in the wider euro zone.
The transcripts, released on Friday after a five-year moratorium, show that Fed officials believed Ireland’s €67.5 billion EU/IMF deal in November 2010 would be sufficient. However, there were questions about debt sustainability.
Worsening situation
“Debt dynamics calculations for Ireland and Portugal suggest that the fiscal responses required for these countries to avoid restructuring are, frankly, draconian,” said Janet Yellen, now Fed chair but then chief of the San Francisco Fed, at the December 2010 meeting.
The Fed publishes edited minutes weeks after each meeting but transcripts provide far more detail. They point to serious concern at the Fed, then led by Ben Bernanke, about risks from the euro zone crisis.
The opening months of 2010 were dominated by divisions in Europe over the worsening situation in Greece, leading to the first €45 billion loan in early April.
Within weeks, however, high-level Fed officials noted contagion to Ireland and Portugal and, to a lesser extent, Spain and Italy.
“The good news is that they’re at better starting points than Greece in terms of their debt-to-GDP ratios and in terms of their current account positions. Some countries, like Ireland, have already demonstrated quite a bit of social cohesion and are already adopting pretty significant fiscal consolidation,” then Fed deputy chairman William Dudley told an April meeting.
“The bad news is that there’s nothing beyond what these countries can do for themselves. There’s no discussion, at this point at least, of packages being cobbled together by Europe to provide aid to these other entities.
“So Europe may aid Greece, but, if there’s going to be a package for Portugal, Ireland, or Spain, at this point it’s only from the IMF, and that means a much smaller package.
“So I think the big thing over the next couple days will be to see what Portugal, Spain and Ireland say about their willingness to do fiscal consolidation and how credible that is, because that’s really the firewall at this point. They’re certainly going to be urged to do as much as they can, but we’ll see if that’s sufficient.”
Notable risk
The worsening Irish scene was noted in September.
“While the government has moved resolutely to address these problems, the banking system is very large relative to the economy, and these efforts have raised concerns about the sustainability of the resulting fiscal obligation,” said economist Nathan Sheets.
“The thorny challenge of how to support large banks in small countries, which manifested itself most starkly in Iceland, is a notable risk to both global financial stability and the foreign outlook.”
At the December meeting, Mr Sheets said Dublin was “left with few alternatives” as market concerns over bank losses and large-scale deposit flight led to the bailout.
“Nevertheless, even with this package in place, the sustainability of the country’s debt remains in question. A continued commitment to disciplined fiscal policies and a further stabilisation of conditions in the banking sector both seem necessary to avoid a restructuring.”
