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An art installation of Monopoly houses and hotels by Irish contemporary artist Fergal McCarthy floats on the river Liffey in Dublin, Sept. 21, 2010. The installation was designed to highlight the troubled housing market in Ireland.  (Credit: Reuters/Cathal McNaughton)

DUBLIN — It was a black Friday for the global markets on fears from China as well as Europe. Over the past few days there has been growing concerns about Ireland’s debt situation and its ability to provide enough funds for a big bank bailout. The top finance ministers from the European Union (EU) meanwhile have reassured global markets at the Ireland situation will not be allowed to go out of hand.


 

 

CNBC-TV18’s Shereen Bhan caught up with Sarah Hewin, senior economist (Europe) at Standard Chartered to take stock of the fresh wave of uncertainty in the Eurozone.

Below is a verbatim transcript of the interview.

Q: What exactly is the problem in Ireland this time around? We thought that they laid out how much they were going to spend on the bank bailout.

A: Indeed they have come up with and estimate as to how much it’s going to cost and they have also come up with plans about how to reduce the deficit that they face and put in place the funding for the banks. The latest bouts of problems have risen for a couple of reasons. First of all, the EU has raised the prospects of debt restructuring in the future and when it’s discussing its new bailout package. Secondly, there is uncertainty about whether there will be enough political support in Ireland for it to pass its 2011 budget and at the extreme there is a concern that the government may fail and they will have to in new elections.

Q: German Chancellor Angela Merkel has been very hawkish through this week but she seems to have come around after that G20 summit which has just concluded in South Korea. What do you supposes happen there?

A: Germany has been pressing all along for bondholders for private sector investors to be involved in any mechanism in future that might involve debt restructuring in Europe. They have asked also that the treaty—the EU Treaty—the change so that this becomes a law.
What has been stressed, most recently since the G20 Summit, is that any restructuring element of the mechanism will only apply to debt incurred after 2013. It’s not applicable to current debt and the idea is that that should calm market nerves over these countries on the periphery of the euro area that are suffering under very heavy debt burdens.

Q: You were talking about the mechanism the EU is trying to put in place specially after what happened with Greece but are we going to see that fear of a default resurface every time a problem arise for instance now with Ireland—how concerned are you guessing about the problems in the Eurozone at this point?

A: You are quite right that worries about debt default have resurfaced again and it’s not this time a question of whether a country like Ireland or Portugal going to run out of money because there is now an EU bailout package in place if borrowing costs remain excessively high by the Q2 of next year then Ireland and Portugal will just tap funds from this EU IMF mechanism.
The big concern is that what happens over the longer-term. For example Greece will see it debt-to-GDP ratio rise very sharply and Ireland already faces debt of over 100% of GDP and is not clear that countries will be able to bear this very heavy burden of debt without restructuring at some point in the future.

Q: For the last couple of quarters the EU led by Germany has given a sunnier growth outlook than the US but do you think that’s sustainable given the fact that these worries have resurfaced now?

A: We need to differentiate between what's happening in the periphery and what is happening in the core of the euro area. Countries like Spain, Portugal, Ireland and Greece are undergoing very steep austerity. They are cutting deficits very sharply, raising revenues and inevitably this is going to damage growth prospects. But if we look at the core group of countries—Germany, France, Italy, Benelux, Austria, Finland for example—these countries are still exhibiting reasonably strong rates of growth and they also don’t have the high level of deficit that needs to be tackled.
Overall, for the euro area, fiscal consolidation is not likely to be very damaging for growth in 2011 although we do see slightly slower pace of growth in the first-half of next year.