Ireland will need a second bailout in 2013 and bondholders will likely face haircuts at the same time, according to former IMF deputy director Donal Donovan.
Donovan believes that, when the terms of Ireland’s first bailout run out, it will take a second bailout.
The 2013 bailout would be administered by the new European Stability Mechanism, which allows for debt restructuring.
Here’s how that restructuring would work, according to Deutsche Bank:
Nature and extent to be determined on a case-by-case basis depending on the outcome of a debt sustainability analysis in line with IMF practice.
If country is deemed solvent, authorities will induce private investors to maintain exposure during the adjustment programme (akin to “Vienna Initiative”)
If country is deemed insolvent, authorities will negotiate debt restructuring with private creditors
To facilitate agreement between the sovereign and its private sector creditors in the context of private sector involvement Collective Action Clauses will be included in all new euro area government securities with maturity above one year from July 2013.
Donovan reminds that Ireland’s debt restructuring will be a “reward” for following through with austerity plans, so if the new government veers of course, those haircuts may not actually happen as projected.