The Costs of Default

Panizza, Sturzenegger, and Zettelmeyers influential 2009 Journal of Economic Literature survey on the economics of debt and default has been referenced on different threads over the last few days.   The message has been that the costs of sovereign default in terms debt market access and borrowing costs are relatively low.   While I know that those referencing the paper know these findings provide only part of the picture, I am concerned that some blog readers will come away with too strong a conclusion. 

The puzzle of sovereign debt markets is that they should only be possible if there are costs to default and especially to voluntary default.   In contrast to corporate borrowers, legal sanctions do not provide much of a deterrent for sovereign governments.   The traditional explanation has instead focused on the value of reputation and thus on future access.   But the finding of low direct capital market punishments for defaulters has put that explanation in doubt. 

Yet sovereign debt markets are alive and well.   From this we can infer that there must be costs of some sort.   Recent attention has focused on domestic costs, such as the costs of severe output losses that have accompanied a number of recent debt crises. 

Here is what Panizza et al. (cautiously) conclude:

If anything, defaults appear to be deterred by the domestic collateral damage that tends to accompany debt crises, rather than punishments from outside.   While it is very difficult to empirically disentangle the causes and effects of defaults, there is at least some evidence supporting the idea that defaults may magnify the output drops observed during debt crises.   Once output costs in line with this evidence are assumed in parameterized models of sovereign borrowing, the level of sovereign debt that can be sustained in equilibrium rise to more reasonable levels compared to models in capital market penalties are the only punishment. 

One interesting possibility is that in a world with uncertainty about government/country type, revealing yourself as non-honest can have implications for broader dealings both domestically and internationally. 

Even if we take a strict cost-benefit perspective, we should approach default cautiously whether it is debt restructuring or the revocation of guarantees.

43 replies on “The Costs of Default”

Indeed John
One of the conclusions that the literature in general seems to suggest is that houses get put in order when default happens. In debt restructuring that may be in order to attract back investors, or to reduce the “standard load” of debt in cases of rate penalization, or to allow a degree of internal financial repression. In any case, two points suggest themselves
a) we need to reduce the debt burden, sooner (rather than) or later
b) we may well find that the existing debt burden and trajectory, including Anglo/AIB et al plus the fiscal follies may become difficult to bear, leading to a requirement to restructure in both/either the default or “why are we borrowing so much” sense.

That debt restructuring has costs is not doubted – what is in doubt is the degree to which these are internal or external, and perhaps the staging of same.

I believe the simplest way and the most ‘principled’ way to approach it is as follows.

“Ireland shall not put itself at risk of sovereign default in an attempt to underwrite unacceptably risky past behaviour by the management and the shareholders of financial institutions, or in an attempt to provide a wholly unwarranted post facto justification for those who underwrote their risky behaviour or in any way extensified this risky behaviour”

That would encompass the failed institutions, rating agencies, bondholders who acted like sheep shareholders who are blown out already and the auditors who provided a true and fair and contemporaneously unqualified opinion of this arrant idiocy.

While Irish regulation failed dismally so did all of the other ‘professional’ inputs into this mess, most of them well known international organisations.

Systemic transnational professional failure is not a sovereign problem.

Rational suppliers of credit to the Irish debt market have concluded that, roughly, there is a 35% probability of default (based on a crude interpretation of the current spread. This probaility will wax and wane with changing circumstances: as the Anglo hole stabilises or not, as the public finances stabilise or not, as AIB becomes the next Anglo (or not).
Rational holders of Irish debt will want to maximise tthe probability of being repaid. Presumably, they therefore wish the Irish government to pursue policies consistent with this objective.
It is becoming widely accepted, if not universally so, that the original decision to load the entire burden of adjustment onto the Irish taxpayer is directly responsible for the high and growing probability of default.
If we accept that premise, the rational bondholder will accept that action to burden-share could well be preferable to the alternative (chaotic default).
Hence, imaginative – and rational – burden sharing propositions, that appeal to rational market participants, might overcome the ‘its illegal and will shut us out of credit markets forever’ set of arguments.

In 1993, the economic and financial establishment of this country explicitly and stridently forecast a permanent economic nuclear winter if we devalued the currency. We devalued and the markets accepted this, with alacrity as it happens, because it was the perfectly rational thing to do.

How about this as a starter for 10: the State announces a cap on its banking liabilities, a cap based on an aassessment of this State’s ability to service the resultant debt. We appeal to the pragmatic rather than the spuriously precise. Once that limit has been reached, it’s time for debt/equity swaps, either negotiated or forced. The essence of the argument being two-fold.

First, we really have to cap these liabilities otherwise we will chaotically default. rational investors know this already.

Second, capping these liabilities brings the clarity that we all seek. It gives the financial system the closure it needs to begin healing.

If one announced the principle I enunciated first I am sure that a few spreadsheets would be loaded up from which liability cap component of the GGD and Shadow GD could be derived.

What ever about the cost of default there are many costs associated with not defaulting. The problem is that the government has allowed the state to be bled white and stands facing involuntary default because of its chosen and failed strategies. Worth taking a look at this article for an explanation as to the governments preferred strategies. There was no panic in september 2008 it was a cold blooded decision.

There are two reason why this state will default, unsustainable borrowing to prop up state guaranteed insolvent banks and unsustainable borrowing to prop up the deplorable waste and recklessly high costs of running the state itself. These costs and the responsibility for reducing these costs reside within the island of Ireland.

Our structural deficit has little or nothing to do with the above scenarios of gently breaking the news to bondholders and subordinated debtors that we are going to have to “burn them” because we have run out of options. Dealing with the latter involves throwing the Croke Park agreement out the window. I am interested to see if the union types have to be told by their members “my cheque bounced” before they decide to do something in the national interest.


Given the airing it has already received, my intention was not to reopen the issues debated in repsonse to Brian’s IT piece. But it seems that your basic principle should make some distinction between revoking the guarantee and imposing losses on legacy debt post guarantee. While it is far from straightforward, I would be with you on the latter.


I think the implied probability of default is actually considerably higher than you allow. If we assume that even in the case of restructuring, bond holders get back 50 percent of what they are owed, then it implies a probability more like 70 percent. Maybe that is not ridiculous, but it looks high to me.

With your liability cap in place, what do you think this would do to the ability to raise new bank funding — something they will need lots of. Again, it brings us back to the need for a very bright line between the legacy debt and future/guaranteeed debt.

Yes. Devaluation is a great lesson to keep in mind.
IT 9/Jan/93, headed “parties united in opposing devaluation” over a page of the manifold disasters that would arise. Inflation was one (remember that…)
15/jan/1993 we had “economists against devaluation (paraphrased” wherein John Beggs told us that the fundementals were indeed sound, that the pressure on the punt was illogical, that the authorities had no plans to devalue, that it was not the solution etc etc.
29/jan/1993 Philip Flynn, speaking for ICTU, lambasted those calling for devaluation of the pound, that it would in fact be disaster
There are many many other such articles. Hindisight is of course wonderful, but its also humbling to realise just how wrong conventional wisdom of the great and the good was then.

@ John McHale

It depends on how you view my sketch of market participants. And my use of the word rational.

The guarantee is rapidly becoming incredible so, on the current policy path, non-ecb funding is heading towards zero. That’s my baseline for this simulation.

If some semblance of credibility can be restored, so can (some) funding. In my ‘model’, restructuring adds to credibility because in the baseline (the one we are in) scenario, we have no crediblity. Even more so on your assessment of the default probablilties.

Call it credibility-restoring-default.


I have come to agree the Croke Park agreement is a blunder. While there is an opt out in emergency circumstances, the agreement substantially raises the political cost of further public sector wage cuts. I think this does damage to Ireland’s creditworthiness, and in particular markets view of Ireland’s ability to deal with further negative shocks on growth and bank losses. While I’m sure the unions see this poltical cost as an achievement, I don’t see how the loss of creditworthiness makes it to anyone’s benefit.

The govt has a very limited amount of political credibilty left and it needs to decide how to best spend it. We are in a zizek trilemma – internal peace, external peace, can kicking as policy. Something will give

I really don’t think we should go back to the issue 2008 guarantee, it happened. I was acutely aware in September 2008 of the possibility and then the probability of a bank run. (EG this ban was enacted after a particularly febrile couple of days)

I do not think that run dynamic exists now. The miracles of the fractional reserve , eh 🙂 . The 2008 guarantee was the best that a lot of panicking people in D2 could come up with at the time and at short notice. They did the best they could….then.

We need an operational principle that can be communicated simply and clearly, namely that the Sovereign will not continue underwrite risk from the mid decade.

We can make up policy based on and consistent with such an operational principle. For now we have no sovereign message or principle on which to hang policy and mesage and the markets assume the we will blindly walk to disaster absent such a principle. We are consistently and permanetly off message in other words.

Even if we do something right we are still off message. My recommendation is to step back and formulate the principle along the lines of what I stated and to communicate this message clearly and consistently. Even the cretins in the current incarnation of the Government Press Office can grasp my message and run with a boilerplate message top and tail based on it.

If our actions are subsequently consistent with this operational message we shall begin to convince the markets that we are not suffering from a collective sovereign death wish and they should respond.

We could be arguing the toss about default/not defaulting for the next 100 years.
What we really need is to secure a low interest credit stream for the next few years.
It would be part funded by IMF and part funded by EU and would be at about 3%.
Not a bailout – a loan. Of course such a thing would have to be bargained very hard for and would be conditional on structural reform too.

What is it that we intend to sell to buyers outside our state that will provide us with that surplus we need to pay down the principle and accumulated interest on our borrowings? It does not exist. Hence we have to reduce, drastically, our national expenditure. We cannot do this – well not easily anyway.

Now we may not be the only state in this quandry. Reform is indeed required but will never come until after a disaster. Will this disaster be sudden (devaluation or default), or slow (inflation). Legislators will opt for the latter, but the capitalist process (aka The Market) may not be able to wait and will not be too pleased if they observe their wealth being diluted. Rock and a Hard Place? Looks like it.

Brian P

@ Brian
“What is it that we intend to sell to buyers outside our state that will provide us with that surplus we need to pay down the principle and accumulated interest on our borrowings?”
That’s the crux of it.
In agriculture – increase access to markets such as China – are we exporting enough in volume of what’s needed and are we adding enough value at home? Are we using by-products efficiently for energy production? Are we using are cereal crops appropriately (possible that due to low protein content, for example, barley for beer will have to be imported/ simply rotating the crop with sugar beet apparently improves this).
Tourism – are we again accessing the Chinese/Asian markets enough – no! Have we set in place easy permits for people to visit – no. Are we looking at working with our UK neighbour so that a Visa for their can automatically apply for here (not sure if this is the case already and stand to be corrected)
Pharma – are we using the expertise generated from people working in the multinational sector to set up Irish based generic companies – again with a view to exporting to newer markets.
IT – are we using the internet to deliver online education across the developing world (don’t laugh – it draws on our innate drive to communicate)
There are only 4 million or so of us. We don’t need a huge amount of industry we just need to target our natural assets and maximize them.
This is what we need to be looking at instead of convulsing about debt and restructuring.
We have forgotten that without real economic growth we’re fubar’d anyway.
But I am sick and tired of people trading insults and peddling gloom. Life is a challenge – that’s it. We’ve come through alot worse than this. No love for the haters!

@John McHale

Well put, I found it interesting – the highlighted party mentioning the magnifying effect of default on the drops, that is something that accounting cannot provide for (or perhaps forecasting for that matter).

It would be nice to cut loose banks that deserve it, but thus far nobody has costs except on the side of how much our current choices are costing us – because the alternative [which we are told is worse] hasn’t been through any rigorous scenario analysis – where are the economists when ya need em?! 🙂

That means you can claim with equal validity that the ‘debt default monster’ under the bed is in fact the angel of death himself, or that he doesn’t exist at all…

@John McHale
Well put, I found it interesting – the highlighted party mentioning the magnifying effect of default on the drops, that is something that accounting cannot provide for (or perhaps forecasting for that matter).

It would be nice to cut loose banks that deserve it, but thus far nobody has costs except on the side of how much our current choices are costing us – because the alternative [which we are told is worse] hasn’t been through any rigorous scenario analysis – where are the economists when ya need em?! 🙂

That means you can claim with equal validity that the ‘debt default monster’ under the bed is in fact the angel of death himself, or that he doesn’t exist at all…

“Once output costs in line with this evidence are assumed in parameterized models of sovereign borrowing, the level of sovereign debt that can be sustained in equilibrium rise to more reasonable levels compared to models in capital market penalties are the only punishment.”

A particularly indecipherable piece of economic prose. Here is my attempt to translate it:

When we assume that production decreases in countries that default on their debt, these countries can then borrow more than if they were foreclosed on or sent to debtors’ prisons.

Clearly, the government of Ireland has more than a fair share of these people!

Why is it that, more often than not, people use the wrong form of principal/principle?

Bankruptcy is an honest state. It is designed to enable productivity, do you agree? When debts become too gross, they disappear as do the unnecessary assets of the defaulter. The process demands transparency, something this government detests. Governments frequently default if there is a violent regime change. The chance of this given the Irish propensity for revolution and violence is real and growing. The Irish are one of the most xenophobic, because up until recent times, foreigners were unknown, detested and usually of a differrent religion. The cohesion of a block of those of one genetic stock, religion and shared history is something that was strong in Ireland and will hereafter be associated with the “good times” before the debt. The Famine is a good reason to distrust our neighbour. A country notorious for judicial bribery as an adjunct to success in war.

Ireland cannot undergo a process of bankruptcy. Japan can. Most of its debt is owned to voters with more assets than the poorest. They are another xenophobic society. Forced to trade at gunpoint by the USA, two centuries ago. Trade means banking. Banking means debt!

Economic war! The victor is the one who arranges to get the most from those who are in debt!


Yes. More so if those who lent did so in the knowledge, possibly demonstrable by emails, that there was a very significant risk to the debt and more important, to the creditor who was being “stuffed” into further foolish but undeniable asset inflation?

The times are producing a realization that economic flows, mainly of debt, have had destabilizing effects, I term this economic war. The effects of repayment in many countries of the short term, less than a decade, recent ongoing US wars last longer than this, stuffing can be devastating.

This is unprecedented. It may be intentional, or simply a demonstartion of greed untrammeled. If intentional, as Spitzer demonstrated, then it is not inm any way moral to self harm by repaying!

Many countries are going to default. Timing does matter as regards perception of debtors.

As we have foolishly committed to banking, and continue to do so in the IFSC, we may have to game this carefully. To do so , we need to borrow more and more, knowing we are going to default, but only after other countries have acted as an icebreaker. Those who generously lend to sick economies like ours at a premium deserve to learn that a high premium can be justified!

@ Pat Donnelly

“The chance of this given the Irish propensity for revolution and violence is real and growing.” The last time the Irish revolted was 1916 and then were only half successful: the English kept Northern Ireland. What did Joyce say (among other things)? A pier is a disappointed bridge.

“Ireland cannot undergo a process of bankruptcy” They have undergone more than one famine (the last one the U.S. owes about 1/2 its white population to) and at least one revolution, why can’t they undergo bankruptcy?

Insult can be effective as a method of debate: “conspiracy theorist” etc. I applaud you desire for the use of reason.

Why not lend to these developing countries? You will say they have excessive savings they will not borrow. I say follow the English. They used Afghanistan to supply China with the gift that demands more supply: opium. That was once a legitimate (!) trade. Very significant too. To buy more opium, they had to sell china and tea and coolie labour.

Shutting down slavery, meant that England gained by trading with cheaper producers.

Or we could create an arms trade? The IRA horizontal mortar has attracted custom from Columbia already.

These are not whimsical. They are a reference to history. Slavery is mainly a debt institution. Children are sold. People sell themselves for travel to a better country or to buy a kidney. If there were no lenders, there would be no slavery. Money does not smell, it stinks to high heaven!

We use debt to motivate people:
No repayments? No house!
No cash? No electricity……..
That is of what slavery can consist. An intrusion into humanity. But we get others to do it, if we have too much scruple.

The Irish have a reputation for alcoholism. We perpetuate that by allowing the publican, who still collects tax for the state, to dictate our laws. One drug is no more destructive than another.

Can we find another motivator? It used to be that food production had no moral downside. Now we know, through economists perhaps? that overproduction leads to dumping and starvation of the targetted. Then they must submit to cash crops like bananas…… Chiquita anyone?

There are few moral activities anymore! Bhutan has a policy of happiness. That would be a start. Curiously, voters can enforce that, if they want it. They clearly do not?

This is a time of crisis, which is a point in time. But this crisis is really a catastrophe that is gathering strength. It will get much, much worse. Getting this message across is vital. The nation must be unified. These comments are designed to help distil the issues. The government clearly is lost. Short term thinking is easily turned against those who use it. Who is going to lead?

It is too late for selective default, The govt has become dependent on the banks for info, runnning NAMA, buying bonds. It will not seperate. It also cannot believe the melt down in loan books. Debt deflation will get worse, spending will rise, taxes will fall, denial will increase and bankruptcy at the govt and indiv level will spiral.

@ Brian Lucey

“That debt restructuring has costs is not doubted – what is in doubt is the degree to which these are internal or external, and perhaps the staging of same.”

The analogy with opposition to a 10% devaluation when other countries facing huge rises in interest rates were giving up the battle, is not very apt.

A default or leaving the euro is a different kettle of fish.

It is surely incumbent on an academic who advocates a particular course, to detail the downsides, potential obstacles and how they would be credibly overcome.

1) To protect Anglo from an immediate winding-up process, would the Government have to introduce emergency legislation that would be contrary to EU company law?

2) You know the ECB’s current position on default and it’s not likely to welcome copycat moves by sovereign-owned entities in Greece and elsewhere.

If the ECB/Ecofin oppose the move and offer the EU/IMF support mechanism, what should we do then?

Tell both lenders of last resort where to get off?

@ Eureka

Forget about China as a panacea.

Some of the biggest companies in the world are complaining about obstacles in selling there, never mind Irish companies trying to sell in Asia for the first time.

@ All

The calamity howling needs to be kept in check.

There is some growth expected in advanced economies in coming years.

Italy has a big stock of debt and while it does have economic problems; Giulio Tremonti, Italy’s finance minister says it has got the second largest manufacturing base in Europe after Germany and a sound banking system. “But we don’t have civil nuclear power.”

Ireland has a low tax base and it can still scale back boomtime spending levels.

Sorry I dont have a complete plan for national salvation to hand – will try harder 🙂
More seriously, a few points
a) Im not sure that it is in fact the role of academics to do what you say. I think that our value, in so far as we have one, is to try to take a more helicopter perspective, not getting bound up in trees when we are trying to see the extent of the deep dark woods (or indeed if they are deep and dark), and to reflect critically on positions, including our own. Im now persuaded that we cannot realistically default on the guaranteed debt, that the legal and administrative problems are insoluble in the timeframe under discussion. Im still not convinced that these problems are so problematic for legacy debt.
b) Why is it not a good analogy? Then, as now, almost all of the banking and financial community were adamant that devaluation would be the end of us. then as now the dominant political consensus was the same. Then as now there were calls that to even have a debate on the issue was inherently dangerous.
c) Whos suggesting that we leave the euro?

now…back to work on that uranium paper, on the course prep, on the journal editing, and on the detailed plan for national salvation…

@Michael H & Brian L,

I think we’ll have to wait and see what Minister Lenihan brings back from Brussels – once we penetrate the spin in which it will be encased. I think, Brian, you summed it up well in ‘internal peace, external peace and can-kicking’. The economics is clear but the politics is treacherous and each of the three elements of this trllemma has a political problem at its core.

External peace: governments in the core EZ countries will not confront their not very robust banks and ordinary savers with haircuts on Irish bank bonds. To do so would reveal the democratic deficit at the core of the EU project. The Commission proposes, the Parliament moiders, the Council haggles before agreeing a fudge and national governments use thier executive dominance to ram this fudge through national parliaments. The core EZ governments and the institutional EU would not welcome Ireland highlighting this deficit – and the attendant economic and politcial costs.

Internal peace: a culture of entitlement has become embedded. It always existed. In the ’50s it was reinforced by power and wealth for a relatively few insiders; the outsiders could take a hike and many did. The ’60s and ’70s opened the game up a bit, but the hatches were battened down again during the ’80s and outsiders were invited to take a hike – which many of us did. For a brief period in ’90s performance out-weighed the atavistic urge for possession, but that soon evaporated during the bubble. It is more problematic now because those feeling entitled have more democratic clout; the insider class has grown considerably. Therefore, no serious internal reform will be contemplated.

Can-kicking: the slowest bank resolution process in history is slated to continue for another decade. No quick wind-down of Anglo/INBS may be contemplated because it would scupper NAMA and the concept of Long Term Economic Values (LTEV) – remember LTEV? The Government’s credibility – and the credibility of FF as political entity – is entirely dependent on managing this processs – and being seen to manage it.

Governor Honohan seemed to let the cat out of the bag when he was reported by the UK Telegraph as saying “without them (i.e. Anglo) it would be manageable”, but he subsequently clarified that it was manageable if painful.

The ordinary Irish citizen can go hang to protect the Government’s credibility, FF’s tenuous politcial future, the grand designs of the institutional EU and the exposed flanks of core EZ governments.

@ All economists and us wannabe commentators…fun question time (dont shoud out the answer if you’ve already read the piece!). Answer and explanation below, which, given that i got it right, probably makes sense (ie cos i don’t understand the theory behind why i got it right, it just made sense).

“You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric?”

A. $0
B. $10
C. $40
D. $50

Can we take it, Eoin, that the value you place on seeking to divert discussion of political economy issues on this board is at least equal to the cost you incurred in extracting and posting on this puzzle? 🙂

@John McHale
Well put, I found it interesting – the highlighted party mentioning the magnifying effect of default on the drops, that is something that accounting cannot provide for (or perhaps forecasting for that matter).

It would be nice to cut loose banks that deserve it, but thus far nobody has costs except on the side of how much our current choices are costing us – because the alternative [which we are told is worse] hasn’t been through any rigorous scenario analysis – where are the economists when ya need em?! 🙂

That means you can claim with equal validity that the ‘debt default monster’ under the bed is in fact the angel of death himself, or that he doesn’t exist at all…

@ Brian Lucey

I have my own national salvation plan!; didn’t have to get hit by a brick on the road to Damascus.

Dateline Dec 2005: Ireland’s Celtic Tiger 2005: Built to last or on a foundation of quicksand?; I concluded the article published in that month: “So as the sands of globalisation, move under our feet, there is staggering incompetence at the heart of government and certainly no interest in contemplating how long will the good times last?”

My point about the 1993 devaluation is that the consequences of default are surely greater; the devaluation would have become a fait accompli irrespective of the dissent if that was the market sentiment. Months before, the BoE had to raise the white flag.

People are looking for simple solutions to complex issues and I have no problem with anyone advocating default.

However, the country is full of half-baked ideas and faith-based policies.

Credible solutions with consideration of the upsides, downsides and obstacles should also be examined.

The principal victims of catastrophic policymaking are the people at the bottom of the economic pyramid.

Cant really disagree with anyone. Re the damascene issue – surely its better to change ones mind in the face of evidence than to say, persist? Of course, that gives brickbats to people who can then cry “inconsistent” but meh.
My point on 1993 is not to equate – its to draw attention to the fact that then as now we had a chorus of people saying doom would happen, some the same as now. I have grown suspicious of elites all pointing one way, and tend now to look the other way.

It is only natural to take advantage of a crisis with a well thought out position paper.

Fiat to be replaced with super fiat.

All going well and according to plan. Banking credit crises are known to recur and clearly show themselves to those who are awaiting them

We should continue to borrow in every currency. It has worked so well so far! Banking is our future! Not! Clearly, the Irish have no flair aptitude or understaning of banking? Look around at the chaos as it grows.

Michael H
Take your own advice! The news is things are getting worse and none of the false positivity is fooling anyone! But it does indict the credibility of those who try to keep things quiet.

Playing with meaning is like respecting the Gordian knot. Alexander dealt with it. Some ploys deserve scant attention.

Get rid of Anglo and open the books of this nationalized institution. The secret accounts will be fascinating! Ansbacher (Cayman) will be in the ha’penny place!

@Brian I certainly see the merit of the comparison with the 1993 devaluation, though wouldn’t push it too far.  It is an unfortunate fact that discussion of both devaluation and default can become self fulfilling, especially if they come to be seen as an escape route and lower the political capacity to accept painful measures.  (Yesterday’s Sunday Independent poll is a bit worrying in this regard.) 

What I take from this is not the need for censorship; on balance, I believe we are better off if all rational views are debated.   But to my mind it does put a premium on arguing the case against default , and hence the stress on both fiscal space and the costs of default.   By the way, you deserve a lot of credit for admitting you changed your mind based on feedback on one or two points, showing the value of debate.  

On balance my sense is that the costs of default would be significantly larger than the costs of devaluation under the adjustable peg in ’93.   The costs of leaving the Euro could be an order of magnitude larger again.

Chinas not a panacea. Never said it was. Just because it is not the complete solution does not mean that it cannot form part of the solution. Even if it’s just a question of a small boost in tourism from there for example that would help. If we need to make inroads that’s where trade missions can be useful.
There’s too much black and white thinking here. Just because an idea doesn’t solve everything does not mean it has to be discounted.


It costs you $0 to see Clapton, therefore the cost is nothing. “Opportunity cost” is a meaningless concept concocted by economists to try and avoid explaining how profits are created by labor.

Its not surprising that professional economists cannot get the answers right on what an opportunity cost is:

“In a 2005 survey at the annual meeting of American Economic Association, 21.6% of professional economists surveyed chose the correct answer to a question on opportunity cost.

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