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Debt Restructuring: Orderly, Selective and Unavoidable

From the Irish perspective, the impact of debt overhang on long-term growth in the advanced economies presents a clear warning. Ireland’s debt overhang is outright extreme. Across the 18 advanced economies, weighted average real economic debts stood at 307% of GDP at the end of 2010 and are expected to rise to ca 310-312% of GDP or GNP by the end of 2011. Ireland’s real economy debt to GDP ratio is likely to reach above 400% of GDP. In this paper, we show that this level of debt overhang can be expected to permanently reduce potential rate of growth in the Irish economy to those consistent with the deflationary stagnation. In addition, we also show that the internal devaluation option is not likely to produce meaningful debt reductions at these levels of debt overhang. It is, therefore, inevitable that Ireland will need to restructure some of its debts. We conclude by showing that an orderly restructuring of selective debts can result in simultaneous alleviation of the debt overhang and its effects on growth, creating potential condition for swift recovery from the insolvency crisis.