Cowen on Ireland Defaulting

An Taoiseach has said the following in relation to Morgan Kelly’s article:

“Really implicit in some of the argumentation is the idea that it would be better for Ireland to default. But we simply don’t accept that at all and I think all of the implications from other countries where that happens greatly undermines, not just in terms of financial credibility but also the ability to retain confidence at home,” he added.

Let’s compare this with the following passage from Morgan’s article:

We need to explain that the Irish State has always honoured its debts in the past, and will continue to do so. However, the State is a distinct entity from its banks and, having learned the extent of the banks’ recklessness, we now have no choice but to allow the bank guarantee to lapse and to share the banks’ losses with their bondholders. It must be remembered that when these bonds were issued they had no government guarantee, and the institutions that bought them did so in full knowledge that they could default, and charged an appropriate rate of interest to compensate themselves for this risk.

So here’s a question. When Mr. Cowen says “Ireland”, does he mean “Irish banks”? If so, it would be nice if he was clearer about this matter in the future.

44 replies on “Cowen on Ireland Defaulting”

Clarity isn’t all it’s cracked up to be! Events could overtake any statements during the current international instability. Cowen has made repeated the broad principle that generally the Irish Government does not contemplate default and does not see it as an option to be weighed against honouring debts.

The cacophony of voices emanating from economists on the Irish economic crisis indicates a crisis in economics itself.

These kind of broad, simplistic and downright inaccurate response of thought-out criticisms are particularly disappointing.

The Taoiseach is either trying to openly decieve or he is making the implicit assumption that Irish bank debt = Irish National Debt despite the fact the argument rages on.

Is there a turning back not though? If the bondholders / markets were not the taxpayer’s problem before September 2008 then maybe they feel like they are now.

The answer to the question of whether we should default hinges on our estimate of the ultimate cost of bank rescue. If we believed that bank rescue would cost just 5% of national income, default would make little sense. If we believed it would cost 500% of national income, not defaulting would make little sense.

I believe that government estimates of the ultimate cost of bank rescue are likely to be too low for two reasons:

1. the government ignores the role of EMU interest rates in our crisis. They were too low for Ireland over the last decade. Based on a Taylor Rule analysis, they will be too high for much of the coming decade. That will impart a significantly deflationary impulse of which the government / ESRI seem wholly unaware.

2. property (which is the principal asset underpinning bank balance sheets) will, IMHO, fall much further in value than the government contemplates, as I argue elsewhere:

Default on the bank guarantees – as outlined by Morgan Kelly – should therefore be privately evaluated. The problem from a government perspective is that this possibility cannot be publicly admitted as it could unsettle financiers and disturb the raising of fresh government debt needed to finance the government spending deficit.

The other problem is the uncertainty of financial market reaction post-default on the bank guarantees.

It could take some time for the state to be able to borrow again post-default. That would mean that the government could not finance its deficit and might have to close the deficit immediately. An accelerated closing of the deficit at a time when our banks were orphaned and having difficulties raising external finance could unleash a 3-12 month period of financial and political chaos.

@Cormac Lucey, zhou:

You guys are missing the point. Morgan Kelly made a clear distinction between government and bank debt. And Brian Cowen went ahead and confused the two again – I suspect deliberately to engage in political point scoring and to malign the messenger.

@ Garo

I see the distinction.

But I raise the possibility that financial markets may not. That possibility is something which supporters of the Morgan Kelly proposal need to consider.


The issues at stake are a lot bigger than Morgan Kelly and Brian Cowen. Brian Cowen expressed a political intention which is sympathetic to German voters and international markets. He is a politician and he is the Taoiseach. He is not an analyst. It is his job to communicate at given levels in a given modes in given contexts. Dogs don’t miaow and cats don’t bark.

@ Cormac

So politically there will be no consideration of a bank default until the deficit is under control and the government has a more definite picture on property losses. AKA Keep the show on the road until 2012.

@ Celtic Phoenix

I say we should consider a limited default on the bank guarantees now. So you misrepresent my position.

But I raise the certainty (?) that financial markets would attribute a higher probability to a general Irish government debt default if the Irish government were to engage in a limited default on just its bank guarantees.

I have immense respect for Morgan Kelly’s courage, presience and analysis. But there may be costs associated with his proposal which he did not formally consider in his article.

That is not a problem for those who regard Irish public policy discussions as akin to a football match where you boo your opponents and cheer your champions. But it is a problem for those who want to know what the real policy options are and what their respective pros and cons may be.

There would be financial market implications of a government default on the bank guarantees. I cannot quantify them. Others who post here are much closer to financial markets and thus in a better position to estimate the possible reaction.

But we do need an estimate of the likely financial market reaction to a limited default (on bank guarantees) before we can make a reasoned judgement on the merits of the proposal. Is that not self-evident?

@Cormac Lucey, zhou

No one disputes that an argument exists relating to the possibility of a negative market effect on Ireland as a country if the bank (s) default but surely it is an issue of transparency.

Just like it would have better not to use November 2009 as a cut-off point for LTEV in NAMA (at least the resulting even larger recap would have been transparent), surely it would be better for the Taoiseach to simply acknowledge an uncertainty exists rather than simply imply that bank debt = national debt everytime he speaks on the issue.

A perhaps cynical interpretation of your comments might be that Mr Cowen can say anything he likes, depending on who he is speaking to. Does this amount to saying that he is allowed to say merely what his audience wishes him to hear? On very important matters of substance, which you seem to think this is, should he not approximate to the truth? Or are you saying that spinning is OK, particularly if you are speaking to German bondholders?

Ahh, this is nothing to do with economics…. When a country defaults; those who were in charge get the boot; its something that has to happen to restore confidence that measures are being put in place to ensure that it wont happen again and the country can borrow again.

Because those in power have defaulted even more than the country. In this case Cowen, Lenihan & co have personally have made the decisions to sacrifice citizens futures for their own and their cronies positions at the trough. they have turned up at the meetings; they have made the promises behind closed doors; their cronies and their creditors have made decisions based on their word.

Doesn’t matter whether its government or bank debt…

This is the insiders in panic mode…. Default means there will be changes in who runs the country. So Cowen is connecting everything; by God if FF are going down; they are going to take everyone with them.

There was a PrimeTime over a year ago (it could have been after the emergency budget as it had both Brian Lenihan and Richard Bruton facing off) in which Lenihan repeatedly equated any default on monies owed to bank bondholders as being one in the same as the Irish nation defaulting. Did they think the nation was the sole shareholder at that time?

@ Cormac,

Is it legitimate to raise the possibility that investors may fail to see the distinction between sovereign debt and debt issued by private banks?

I find it hard to imagine that there are many investors who would fail to see this distinction.

But for those who do, perhaps we could print up some posters and leaflets and distribute them around City of London, Frankfurt, etc…something like this:

Republic of Ireland : sovereign state, EU member, UN recognised, signatory to Kyoto Protocol, International soccer squad that by rights should be gearing up for SA 2010…


Allied Irish Bank : private company, not a EU member, not recognised by the UN, not a signatory to Kyoto protocol, at best a decent five-a-side team among some of the younger employees….

Such an information campaign might cost a few bob, but might be cheaper that 45 billion….depends on who we get to do the print job of course…

The ridiculous bank guarantee implies no distinction between government and bank debt. It is such a useful hostage to fortune that is hard to see how the government can unwind it. It is been clear for a very long time that few senior government figures are themselves clear on the implications of almost any official action re the banks. When did anyone last not hear a government minister begin a self-satisfying explanation with ‘it’s important to say…’ BTW: I noticed that Tom Gross (PIMCO) made a curious statement in the last day or so to the effect that default may be the only sensible option for some states.

@Cormac Lucey
Property prices will continue to fall. I agree but not in all categories. The aim of the NAMA SPV (murk) is to put an artificial floor price under its assets. Property outside NAMA will continue to be affected by what looks like fire sales, while NAMA tied assets will be put in suspension at the taxpayer’s expense. The interesting piece of political economy theater coming down the road will be the criteria and timing applied to sale of these assets. Presumably this will dovetail with the exhaustion of the professional fees budget assigned to NAMA. Cynical? No. Worldly-wise? Yes.

I feel the shortcomings of the Irish government is that they’re too busy firefighting and defending policy mistakes rather than coming up with viable medium term strategies. (The firefighting being taking actions that ensure it can continue issuing debt over the short term). They need to get real on the amount of tomorrow’s money they can borrow and spend today.

With this in mind, they should:
1. acknowledge corporate debt is not sovereign debt
2. admit mistakes. Their path dependency is too costly. They got bum rushed into the bank guarantee and they still argue it’s the optimum approach. Last September Lenihan expected 30% discounts to NAMA. Even though it now appears losses are much higher, the same approach is still correct! INBS and Anglo are still of systemic importance! – etc, etc, etc.

@Cormac Lucey

“… we do need an estimate of the likely financial market reaction to a limited default (on bank guarantees) before we can make a reasoned judgement on the merits of the proposal. Is that not self-evident?”


Morgan Kelly says this in his article

“same sort of Special Resolution legislation that the Bank of England enacted after the Northern Rock crisis. The more than €65 billion in bonds that will be outstanding by the end of September when the guarantee expires could then be turned into shares in the banks: a debt for equity swap.”

What exactly is he talking about?

Oh sorry, ignore that he is talking about converting the Irish bank debt into shares. Thought he meant the UK.

Would never happen.

While many would consider Hugh Hendry of the hedge fund Eclectica to be ‘the unacceptable face of capitalism’ he does make some common sense points here with Professor Jeffrey Sachs, Economist at Columbia University and adviser to the IMF/World Bank, in conversation with Gillian Tett of the FT.

I happen to support Hendry’s point of view, because his basic premise is there needs to be accountability. Those who caused the crisis need to held accountable and be put out of business. That includes the bond holders who knew very well the risks they were taking on initially.
Our banking system is currently no better off than it was in September 2008 and we now have the pathetic spectacle of the bankers looking for an extension of the blanket guarantee on their unknown levels of debt.
We were originally told that the bank bailouts would bring liquidity back into the system when all that’s happened is that the banks are sucking billions of liquidity OUT of the system.

We need to inject about €5 billion into a ‘new good bank,’ leverage it up to €20 billion and immediately inject some liquidity and credit directly into the Irish private sector to get the country up off its knees.
If the likes of Frank Fahey TD then continues with his sniggering references to this solution as the ‘magic bank’ then Frank, along with his fellow shill Alan Dukes, should also be shown the door with the bankrupt Irish bankers.

Enough is enough; it’s high time our failed banks were allowed to fail and clean out the system. Otherwise, the evermore mysterious Irish bank bondholders will continue to force the economy into bankruptcy by converting ever greater amounts of bank debts into sovereign debts.

@ Cormac Lucey

We should copy the Obama auto taskforce playbook.

Appoint a “czar” who is not part of the public sector to negotiate with the banks and if the Governemnt sticks to its budgetary strategy, the confusion with the sovereign debt is unlikly to arise.

However, the markets would be in a tizz because of fears of other countries also resructuring bank debt.

“It is his job to communicate at given levels in a given modes in given contexts.”

You mean lie? This sounds like that church thing ‘mental reservation’. Ok to misrepresent and distort if some listeners might be a threat? Is it OK for the big T to lie about this? Just because events are bigger than him as you say?

The citizens will still be here after he’s gone. They (we) have decisions to make at given levels at given modes in given contexts.

They (we) need good information. If this is a democracy then the ‘leader leader’ lying is dangerous. I hope it is a democracy but brazen misrepresentations of those in a position to inform on very important (indeed intimate to us all) matters would begin to suggest this is a plutocracy.

Its very clear that we are in the looking glass. “”When I use a word,” Humpty Dumpty said, in a rather scornful tone, “it means just what I choose it to mean – neither more nor less.”
Sovereign=Private corporations
Systemically Important = Large PC’s
Default = negotiated settlement with big boy bondholders

Its the same “logic” that tells us “A range of strong arguments can be advanced to say that byelections are the wrong way to fill Dáil vacancies. They distract both government and opposition from governing, policy-making and parliamentary activity. They are, in fact, undemocratic and their outcomes unrepresentative because they give voters in a particular constituency a distorted electoral impact.”

Duckspeak rules….

[as the car plummets to earth, Daffy calls his stockbroker on his cellphone]

Daffy Duck: Sell all my Warner Brothers stock! I got an inside tip that Bugs Bunny’s about to die!

that clip I referred to is above, it is part of the Lenihan/Bruton exchange and comes just after the 8m40sec mark or so where Brian Lenihan says “that once professional investors discover that Ireland is defaulting on them on payments that it is a nuclear winter for credit and money in this country”.

Seriously, if that is the mindset operating in the Department of Finance then what hope is there for any rational decision making to take place.

@ All,

Looking at PrimeTime this evening, a thought did occur to me about economics, psychology and democracy. Namely, the fact expressed by the participants in Richard Crowley’s panel tonight on PrimeTime – that now would be an inopportune time to impose a property tax, a water charge or anything that might deflate the economy further and leave us worse off. Here is my question or observation. At what point then, does it become opportune for a democratically elected government in Ireland to introduce a new form of taxation? Or at worse, even remove tax incentivisation schemes aimed at the extremely wealthy? Lets face it, when things are ‘good’ in the Irish economy, no government is prepared to take the unpopular stance and impose something like a property tax. Therefore my conclusion is (and I would appreciate a little feedback if possible at all), is that the first assertion is a red herring. Namely, that now is a bad time to introduce a new taxation on society. Lets face it, there is no time at all, during which in any democratically elected Irish government is going to make the bold moves. It is a catch 22. It is very difficult to get an economy in Ireland balanced for a sustained, longterm acceptable level of growth. The kind that would keep abreast of the ever changing needs of society and our modest population increases. BOH.

@ Cormac

In the current febrile environment & with the blanket guarantee in place, any default of senior bank debt in the big 2 would be seen as a sovereign default, despite the obvious distinction between the two classes of debt. Any such default would would result in lack of access to capital markets for some years. Any such action would spread contagion through Europe. It not right, not fair but that is the reality.

@ Celtic

You hit the nail on the head. In a situation where we have to fund a deficit on the exchequer side and term out bank wholesale funding in the big 2, any attempted restructuring at the current time and in the current market context would likely result in lack of access to capital markets. Bottom line, a calamitous fall in GDP.

After that, your conclusion is correct, no default until close to primary balance. Again its not fair, not correct but them is the breaks.

@ All,

One other way to phrase my question above. Could any Irish person see former Taoiseach Ahern or former finance minister Cowen introducing any serious new taxation measures during the boom times? I doubt it. They would be instantly pilloried by media and society for inflicting some sort of mortal wound to the fragile Irish prosperity. How dare they. This is why I believe the current discussion on the budget in Ireland is full of half-truths, contradictions and red-herrings. And that is what has got Ireland into the mess that it is in, to begin with. BOH.

“Really implicit in some of the argumentation is the idea that it would be better for Ireland to default.”

While it is clear that Cowen does not write his own speeches (he, after all, has more important things to attend to) it is disappointing that the word argumentation is abused.

It smacks of undereducated lackey.

If by the phrase Cowen meant to say that …

“Implicit in the argument is the idea that it would be better for Ireland to default” …..

The lackey should have said so.

“Argumentation theory, or argumentation, is the interdisciplinary study of how humans should, can, and do reach conclusions through logical reasoning, that is, claims based, soundly or not, on premises.”


Not true. Not the only meaning.

– 3 dictionary results
   /ˌɑrgyəmɛnˈteɪʃən/ Show Spelled[ahr-gyuh-men-tey-shuhn]
the process of developing or presenting an argument; reasoning.
discussion; debate; disputation: The lengthy argumentation tired many listeners.
a discussion dealing with a controversial point.
the setting forth of reasons together with the conclusion drawn from them.
the premises and conclusion so set forth.
argument (def. 5).

1400–50; late ME argumentacioun (< MF) < L argūmentātiōn- (s. of argūmentātiō). See argument, -ation

Word Origin & History

late 15c., “presentation of formal arguments,” from Fr. argumentation (14c.), from L. argumentationem (nom. argumentatio) “the bringing forth of a proof,” pp. of argumentari (see argue). Meaning “debate, wrangling, argument back and forth” is from 1530s.
Online Etymology Dictionary, © 2010 Douglas Harper

ar·gu·men·ta·tion (är’gyə-měn-tā’shən)

The presentation and elaboration of an argument or arguments.
Deductive reasoning in debate.
A debate.

The American Heritage® Dictionary of the English Language, Fourth Edition
Copyright © 2009 by Houghton Mifflin Company.
Published by Houghton Mifflin Company. All rights reserved.

@ Brian Lucey

Good showing on Vinney Browne. You can tell he’s a regular reader of this site. I’d be interested in hearing how you think we should proceed after the gaurantee comes to an end in September? (You seem to have been cut off by Vincent during your response to this question).

Do you have an opinion on the affect of restructuring the bank debt on our (the States) own ability to raise funds?

And one follow up question? Do you see an optimum time for this restructuring. i.e. Is it worth kicking the can down the road in order to balance the books first?

@Brian O’Hanlon

Hmmm – I was also watching Primetime.

What’s that phrase? “Believe nothing until it has been officially denied.”

I thought I heard the FF guy say there would be no property tax, no water rates, no pension cuts/means testing, etc. …so I guess some of them will happen then. It beggars belief to me that you can take out 3 billion this year and again next year without introducing some kind of tax increases or new taxes. It’s pretty obvious though they are going to widen the net to bring in more low paid people into paying tax. Did I hear the word ‘regressive’ in one of the interviews?

I too was watching Primetime!! We are a sad lot! What struck me was the woman in Inchicore who remarked, “he is just someone sitting in an office what does he know about the real world?” She was sitting in the middle of St. Michaels Estate minding kids doing something important and constructive but she was the one that was going to be cut. At the least she was on the menu and almost certain to be consumed as a nice tasty morsel by the “cuts” gang.

Meanwhile, we had Dan O’Brien and John Fitzgerald trying to sound erudite about the future of Ireland I wondered what they were actually contributing to our GNP?


Thanks for that.

I feel so much more educated now.

Just like being on a FAS course.

I fell less philosophical now.


Who needs the philosophy of thought when we have Government lackeys to take care of what we think.

I love dictionaries. I love how wrong they are.

Who needs to know words Peadar when there are Government lackeys to tell us what to think?

I thought I heard the FF guy say there would be no property tax, no water rates, no pension cuts/means testing, etc. …so I guess some of them will happen then.

Let’s hope so. A property tax, residential water metering, and maybe means-tested pensions are things we should have anyway, recession or no.

Public spending is an issue, but corrupt governance and arrogant, inept public sector management is at least as big a problem. There is not just the issue of whether there is default, there is also the core problem of state reform.

The bank bondholders made a one way bet. They knew that the regulatory system was dysfunctional, and government and civil servants were enmeshed in a network of business and personal contacts with the banks and builders.

That is to say, our state had been thoroughly captured by circles of vested interest. The lenders could, and can, rely on those vested interests to protect their own positon. You scratch my bond and I’ll scratch your politics. Just because the gravy was widely spread doesn’t justify that sort of sleaze.

Protecting our existing social hierarchy entails treating the bust like some sort of natural disaster. A few cowboys can be named and shamed, but the respectable classes will continue to preserve the social ladder in all the old ways.

Meanwhile the prisons are jam packed and the governors have legged it. What’s the betting that the NAMA properties get converted into jails ?

Paul Q

tull mcadoo
How does being cut off from international borrowing lower GNP? Just asking? Have you taken the impact of not paying the interest due into account? Thought so!

Although what you say is true, they only have to go if the IMF comes in. Defaulting usually means there is more money as less is being sent to bondholders etc. In fact, it is the populist thing to do. So banks etc lending in this way, usually have “success fees” at the beginning and the end for TPTB. Usually paid in Switzerland.

Brian O’Hanlon
You catch on fast!

Cormac Lucey Says:
May 27th, 2010 at 12:31 pm

Agreed! But as your 1st point makes clear, the GGF do not know how to calculate and need Morgan Kelly et al. Historically, the govt offers a job to such critics as him, to keep them quiet and occasionally, to solve the problem. In the tent vs outside the tent?

“# Cormac Lucey Says:
May 27th, 2010 at 12:54 pm

@ Garo

I see the distinction.

But I raise the possibility that financial markets may not. That possibility is something which supporters of the Morgan Kelly proposal need to consider.”

Disagree. If they are that stupid they will hardly notice a default either!

@ Pat

Interest costs are probably a quarter of the deficit. A default would remove the possibility of borrowing for the medium term. That would mean the deficit would have to be cut to zero immediately. Public servants would not be paid or possibly economically inactive public service pensioners might not be paid then. That would probably be the least worst option. Alternatively we could just raise taxes or borrow from ourselves.

IMO I think the damage done in the long term not restructuring this bank debt will be more severe. Any short term pain experienced, however terrible, could be coped with, especially if the people believe they’ll get their country back in 2/3 years instead of the current lost decade and a half strategy.

In short. Politically its a populist move, we benefit in the long run, where’s the problem?

Taxes as you point out, are an option!
Normally, they are deflationary, but not when the multiplier is less than one and the government is the main spender!

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