Another Voice for Default

Wolfgang Munchau is the latest in a growing list of influential international commentators to advocate a default on State guaranteed bank debt and/or State bonds (Irish Times article here).

I would advise the following course of action.

First, Ireland should revoke the full guarantee of the banking system, and convert senior and subordinate bondholders into equity holders.

I am aware that this would create second-level problems, in pension funds, in other banks, but it would be less costly, and more equitable, to deal with those specific problems on a case by case basis, than to dump the entire cost on the taxpayer.

The Government should then assess its own solvency position on the basis of an estimate of nominal growth of no more than 1 per cent per year for the rest of the decade. That may well be too pessimistic an assumption, but at this juncture it would be more prudent to err on the side of caution than optimism. Given the scale of the financial crisis, and its direct impact on growth, and everything we know from the history of financial crises, the case for a cautious forecast is overwhelming.

Without the load of the banking sector, such an analysis may well conclude that the Irish State is solvent. The result would depend to a very large extent on the success and extent of any bail-in programme, and the ability to contain any fall-out from such action.

If the analysis concludes that Ireland is insolvent, the Government should waste no time, and restructure the debt. Massive pressure from the EU will be brought on Ireland not to do so. But the right answer to insolvency is default – not liquidity support. Let the German government pay for the German banks, and for the recapitalisation of the European Central Bank, which may need to be refinanced under such a scenario as well.

As the momentum builds, I think it is worthwhile to recap the case for the alternative avoid default strategy. It is true that the markets no longer consider Ireland creditworthy based on fears about the size of banking losses and medium-term nominal growth. However, if Patrick Honohan is even reasonably close to being right about the size of the banking losses, and we get a half decent draw on nominal growth, then the debt to GDP ratio would stabilise under the current fiscal plan the key necessary condition for solvency.

Perhaps even more importantly, the plan secures a large package of funding support for the budget and for recapitalising the banks, and (with less certainty) an commitment from the ECB to provide a large share of the ongoing funding of Irish banks until creditworthiness can be restored. It would be good to see significant burden sharing with unguaranteed senior debt holders in Irish banks as part of the strategy, but it is likely that this would have been a deal breaker for the ECB and possibly the some European governments.

I believe there is a reasonable chance that this strategy will work to restore creditworthiness. In the meantime, we avoid a crippling sudden stop of funding to the banks and the government through international support, and are better positioned to avail of a broader European debt restructuring solution if the crisis spreads to other countries so that more radical containment measures are required. As bad as things are at present, it is important to remember that through bad policy decisions, borne of understandable frustration with soft budget constraints on investors, we could make things much worse.

I fear that Wolfgang Munchaus embrace default strategy runs a large risk of making things very much worse. Indeed, he admits that the immediate effect would be a considerable intensification of the crisis.

A default would cause havoc, no doubt, and would cut Ireland off from the capital markets for a while. But I would suspect that the shock would only be temporary. With a more sustainable level of debt, and the benefit of a real devaluation, Ireland should be able to pull through this. Once the market recognises that solvency is assured, I would bet international investors would once again be willing to lend. Even Argentina was able to gain funding from investors a few years after its default.

Hardly confidence inspiring. On balance, I think the best course is to continue to work within the present cooperative arrangements to avoid defaulting on sovereign obligations.

140 replies on “Another Voice for Default”

I agree with your analysis – we would all like to default, but where would we get the funding for our PS and welfare etc, and what would be the reaction of the multinational sector here?

Again, we should ask ourselves why our European partners insist on no default or debt/equity arrangement for bond holders. Is it naked self interest, of is it more principled? I suspect it is a bit of both, with Europe clearly unhappy at our taxes, and possibly also at our PS wage levels.

Does anyone here know what academics across Europe think? It we knoew it could help clarify the level of support we have received and the reluctance to tolerate any default.

@John McHale
“I believe there is a reasonable chance that this strategy will work to restore creditworthiness.”

What probability would you put on this event?

Interest payments will be just under 7% of GNP and it is hard to see us getting nominal growth rates of this level. That means we will have to run budget surplus

How much will we have left to run the state after interest rates and how much cuts and taxes will be needed to get us to that level?

Just to note I don’t think the sovereign should default now. We need to get the deficit down and our house in order first.2013 sounds about right

@dreaded_estate

Also, three years without another external (EU or world) shock to the economy? Debt-deleveraging hasn’t gone away, you know.

@dreaded_estate

We need to get the deficit down and our house in order first.2013 sounds about right

Three disadvantages to that approach:

1) If growth etc. disappoints, even the primary deficit could go up not down (how likely is this?)
2) We’ll have to be defaulting on bilateral/IMF sov. debt, not ELG bank debt.
3) With the NPRF and our funding hoard gone up front, we’ll have no rainy-day money to spend in the interval until someone starts lending to us again. Unless we can raise some through privatisations perhaps.

That’s assuming we have a unilateral default. I’m likewise not overly confident that we’ll be offered a negotiated restructuring by 2013 if we behave ourselves.

@ John McHale

I believe there is a reasonable chance that this strategy will work to restore creditworthiness. In the meantime, we avoid a crippling “sudden stop” of funding to the banks and the government through international support, and are better positioned to avail of a broader European debt restructuring solution if the crisis spreads to other countries so that more radical containment measures are required’

Thanks for that, but hasn’t the crisis already spread ? Maybe an eventual European debt restructuring ‘solution’ will not be extended to the periphery.

As @Colm McCarthy said on another thread, our system of governance ws tested by EZ membership and we didn’t do too good. If history is a guide, Ireland will keep following the prescribed path right to the cliff edge, because it requires less thought, and less political nous, in the short term.

John, I think you have made an analytical slip with your definition of solvency, namely ‘a stable debt/income ratio’. As Munchau says, there is no common or legal, definition of insolvency: it is mostly in the eye of the beholder. In this case, the behoder is the market, whose eye is as much on the level of the ratio as it is on its trajectory. Reinhardt & Rogoff think 80% is the levl at which coutries, historically, start to get into difficulties; any ‘stability’ in our ratio will come at a much higher level. There is a level of the debt/GDP ratio which is still way too high, too vulnerable to growth shocks, even if it is locally stable. There is no point in remarking on other countries whose ratio is the same or worse: their time will come (or has arrived).

Moreover, your entire thesis is predicated on ‘enough’ nominal growth. This is where you part company with the commentariat and the market. The view taken by the majority is that you can’t take 15 bn out of a 150bn economy and generate ‘enough’ growth to get the right movement in the denominator of your definition of solvency. Only time will tell.

I have mentioned this several times on this site: Please, please, state what your Economic Model-in-Use is. This is your ‘status quo’ reference point; your beliefs, opinions, views etc. are directly linked to your
Reference Point. Your preferences (real, not normative) follow.

If your status quo is Permagrowth, and that it will resume shortly then may I politely suggest that you are very much in error. Please pay close attention to energy availability – not the quantity thereof, but its quality. Quality energy and Permagrowth are siamese-twin complements! Quality of energy is low at present and probability that it will improve is not good.

Throw those decrepit financials to the bankrupcy courts. We can erect new ones quick enough. (Anyone rem the 10 week bank strike?).
Ireland will have to make some default (the maths prove this) on some of its loans.

The EU: The EU is NOT a state! Watch the political space very closely. This is where the cleavages will show up.

BpW

@John McHale,

Many thanks for your effort to try and maintain a steady and sensible line on this. Despite being among the more enlightened of the UK media organs, the FT shares with all the others a profound lack of understanding of the EU project – and of the extent to which its members will fight politically and economically to preserve it. And we are locked in to this project, in (economic) sickness and health. Ireland is just ‘taking one for the team’. It’s a brutal lesson in not playing silly games where the elephants dance. I’m sure Chancellor Merkel, Pres. Sarkozy (and PM Cameron) are suitably grateful.

The situation is extemely fluid and we will have to see what the ECB comes up with today. It looks like Axel Weber will be overruled on his opposition to QE. This would be a start, but much more needs to be done. The US, finally, seems to be taking an interest. It would certainly be in their interests to beef up the funding available via the IMF. They should be prepared to deploy more treasure to build a firewall against a Euro meltdown. They should also realise that the shredding of bank supervision and financial regulation they initiated in 1998 migrated across the Atlantic as many of the real and shadow bank players took flight to these shores when they tried to clean things up a bit post-Enron and Worldcom via Sarbanes-Oxley.

We need to sit tight, take the initial spoons of this harsh medicine, but there is every reason to expect that the underlying problem – dodgy EZ banks – will be addressed in a more comprehensive manner quite quickly; and this will benefit Ireland and reduce the current onerous burden. Everyone is looking at sovereign bond yields, but the wholesale money markets and the market for corporate debt are close to seizing up, so there has to be some urgency.

Doing something unilateral now would be extremely stupid and damaging. The problem is that arguing against default is seen as closet support for a totally discredited government, but we should ignore them as they are no longer calling the big shots.

@dreaded_estate

Two other snags:

1) It would take real self-discipline and competence to plan and execute a three-year campaign leading up to default. Any number of things could put us off course, such as a change of government.
2) The IMF must have some experience in handling governments which look like they might be preparing to close the primary deficit and then cut bait.

Does anybody realize that when Argentina and Russia defaulted they had their own currencies and their own central banks? They defaulted on external creditors and it was therefore a manageable operation.

If Ireland defaults unilaterally, we will be cut off from ECB funding and our banks will go down. Therefore, we create a massive internal problem and have no way to resolve it.

Mr. Munchau rather blithely assesses whether Ireland should stay in the euro zone after such a default. But we will be effectively expelled!

OK, we have a solvency problem. But proposals such as this are very very dangerous for Ireland at the moment. They feed a political narrative that the state failed and that there is a simple solution. Expect favorable reaction from Gerry Adams.

I cannot believe that the Irish Times published this.

@Gary O’Callaghan

The one thing Gerry Adams is hoping for now is a firm and united dedication from FF, FG and Labour to “working the bailout” over the next few years. He wants nothing more than to be able to run against that.

Why not wait and in the meantime focus on getting the broken system repaired?

The IMF stewardship is very positive in regard to the potential for reform.

Of course there are some advocates of default who wish to retain their status quo.

Besides a country that has only local firms responsible for 9% of its tradeable exports has to be careful with a nuclear option.

The only FDI sector that has had jobs growth in recent times is the IFSC.

Whether internal or external bailouts, there are none for the unsheltered private sector.

No matter what the outcome, there are some who will not lose.

@Gary

We cannot be expelled – it is not legally possible.

@ John

Your contrarian views are most welcome, but I increasingly see your comments as being of a devil’s advocate nature. It is time for some realism:

“but it is likely that this would have been a deal breaker for the ECB and possibly the some European governments.”

I fear this was the attitude of the Irish team and that is not how you negotiate. As I understand it, the Irish team asked for haircuts and the Europeans went mad – that’s laughable.

“In the meantime, we avoid a crippling “sudden stop” of funding to the banks and the government through international support, and are better positioned to avail of a broader European debt restructuring solution if the crisis spreads to other countries so that more radical containment measures are required.”

We will not be able to renegotiate unless we default or threaten to default. If Spain gets a better deal than us, the deal will be for them only. There will be no broader European debt restructuring unless we force it.

In 3 years we will have no chance of returning to the markets especially if our debt is 120% of GDP and if the new “permanent crisis resolution mechanism” is in place. Worse, all our reserves will be gone so we will have no options left then. All the bank debt will be converted into sov debt. There is already talk of increasing the EFSF so that Ireland and Greece can roll over our debts.

Excessive caution has not served us well in this crisis so far – it is time to face the facts. We either revoke the guarantee and default on bank debt now (à la Brian Lucey), or else a much messier sovereign default is assured.

@All
Apologies in advance a slaying a scared cow, but Patrick Honohan’s “Quid Pro Quo” was an absolute disgrace.

He reneged on senior bondholder haircuts to protect liquidity funding for the banks. In effect, he put the well-being of our insolvent banks ahead of the tax-payer. I know his primary responsibility as governor is to the banks, but he was in negotiations on behalf of the the people of Ireland. Furthermore, as governor, his duty is to recognise when banks are insolvent and make grown-up decisions about them, not get some flimsy wink and nod about extending liquidity.

@Brian Lucey,

You have consistently made the point that this is all about politcial economy – with the emphasis on the adjective. This is the case both in the Irish context and EU context. And you have recently, and quite rightly, called out to political scientists to get stuck in. You seem to think that the economists have gone as far as they can; but I can’t agree. The medium term solution requires reform of institutions and procedures in which sensible economic policies may be crafted and implemented. We can’t have one without the other – and the reforms have to be at both the member-state and at the EU level.

However, over at politcialreform.ie they are stuck in their silo and navel-gazing about Irish constitutional matters and how much of an electoral hiding FF might get. When I raised the EU dimension I was politely encouraged to get back into my box.

We need to break down these silos.

It is time that people recognised that the most impotant thing we could do to make Ireland credit worthy again in the eyes of lenders is to be in a clearly solvent position and able to service and repay our debt.

A half hearted restructure of the banks’ blaance sheets would make things worse in that regard – default, but with lingering question marks over our fiscal state.

A single comprehensive and decisive action would more likely clear the uncertainty.

Bazza,

I said that we could be “effectively” expelled. By being shut off from ECB credits.

More generally, I agree that something needs to be done and that the establishment parties are giving no lead on this. But we need to fight our corner within the euro and demand some inflation. We have no realistic option left.

@Geckko
Unfortunately, ‘a single comprehensive and decisive action’ is not possible. As Tull and others have long pointed out, nobody is going to give (as opposed to lending at penal rates) us or our banks money until lots of other things happen. ‘Giving’ is defined to include allowing us to default by the way.
As German tabloids compare and contrast life as an average earnings worker, life on the dole, life as a public sector worker between Germany and Ireland we begin to see how the next iterations of the price of the bailout will work out. And its important to think of this as a process: as we fail to meet the conditions for the 85bn, further iterations are inevitable.

Another factor, completely forgotten in all the noise, is the state of the Irish property market, the one at the heart of the banking mess. There, prices are still way too high. Questions of national and banking solvency have to work through the consequences of equilibrium being restored in that market, which in turn requires further significant falls in prices.

So, no silver bullet, just lots of stuff still to happen.

@Simpleton
Fiscal debt ratios are a load of tosh – by these metrics we were doing quite well until 2007.
No debt is always with us so therefore it is what you do with it that has relevance – will a large percentage of debt be recycled to the debt holders via interest or will it improve productivity or indeed sustain unsustainable short term consumption.
What matters much more to Ireland is the % amount of interest income that is externalised.
Given that the shadow bank sector dwarfs the exchequer and that these vehicles typically have higher debt servicing costs then the total fiscal then these outflows need to be calculated.
Given the secrecy of such payments and destinations any discussion about the Irish economy is not even a acedemic discussion without first quantifying and locating these outflows.
I am still waiting for a economist to publish a definitive or indeed casual study of these strange vehicles.
Perhaps Constantin G. has done so but I have not seen it.

@simpleton

agree with your view of the property market, and I think that is what Morgan Kelly was getting at – debt deflation will lead to ever higher real property prices and higher real mortgage levels, leading to a wave of defaults.

I think Eichengreen is roughly correct with his estimate of a stabilizing debt/GDP ratio of %130 GDP – which is more than €230bn (assuming modest growth in GDP to €180bn or so). The 10% GDP debt servicing figure seems high, but that includes some principal repayment, but just on interest alone the cost is likely to be 7% or a bit more – in the range of €13bn to €14bn. This is more than the entire income tax take – i.e. every Euro of income tax for every worker for every month of the year will disappear in this manner for years and years.

This is what Eichengreen is looking at and then working backwards. Stabilizing at a such a high debt level will have huge costs and will be a tremendous burden on the economy for a very long time. Is this sustainable? With the power and resources and law enforcement capabilities of the state – probably. Should it be regarded as a desirable policy goal, which seems to be the thinking here? Only if you think EU core bondholders should be favoured over Irish taxpayers.

By rolling over and talking about ‘dishonouring our senior debt holders’ Lenihan is saying he would rather fight for the rights of bondholders than doing his job, which is fighting for the rights of taxpayers. A solo run on default in the immediate future would not achieve much. However the first thing to do is to reclaim the agenda from the “Peripherals as SInners” agenda which has been so successfully pushed by Germany. It should be made clear by the government-in-waiting that there is an expectation that final resolution will involve burden-sharing/restructuring/default (fully in line with Angela Merkel’s views on the relative importance of taxpayers and bondholders). There is a very high probability that Greece will restructure or default and this should be the trigger for a much larger EU-wide restructuring. It is in our interests that this happens, and we should be ready for it with national legislation ready-to-go and a full plan for what to do. Since I believe market funding post-2013 will not be cheaper than the ESM, Ireland is effectively off the market for 5-6 years, so the main constraint on default or talking about default is gone. While Ireland cannot directly influence events that much at this point, it can make it clear what its own interests are and what it believes should be done, and that this involves restructuring and/or default, even if this cannot be achieved in the short term. If expressing this viewpoint brings its final realization a little closer then this is in our interest.

Our leaders are paid to act in the national interest. They should start doing their job, and start reclaiming some self-respect.

@Gary,

The IT publishes a wide variety of opinion in its columns, as wide as it can possibly acquire, or afford. (Articles copied from the NYT columnists , for example, may cost a small fortune!) The purpose is to stimulate public debate by providing a platform for disparate opinions on the issues of the day on the assumption that its readership is intelligent enough to sort out the wheat from the chaff. What the newspaper actually thinks, editorial policy as such, is reflected soley through its leader articles.

Muchau acknowledges that the default option would “cause havoc, no doubt.” That’s kind of him, since he wouldn’t have to live with it; particularly the social havoc and devastation likely visited on the most vulnerable citizens in our community in the wake of this brave initiative. Are any of the default advocates willing to take personal responsibility for the social fall-out that would follow from their preferred course of action? Of course not, they don’t have to. But politicians do. It’s one of the great luxuries of opposition that you can say what you like and advocate several contradictory courses of action in the same breath because you don’t have to accept responsibility for consequences of policy options. Or it used to be, until now. In their response to the events of the past ten days, the ‘government in waiting’ have reinforced the conclusion that they are as unfit to hold any kind of public office as those whom they expect to replace.

There is no vision being articulate dof what kind of society we want to be when all this trama has subsided; how we want to govern ourselves; what values should be paramount in our communities and society at large. With the implosion of our existing political system, there’s an opportunity to reshape and redefine who we are and what we want that shouldn’t be left go a-begging.

So as well as working out the IMF/EU deal, since that appears to be the best economic option available when all the arguments are sifted through and the emotional reactions discarded, at least for the next year or two, the next government must be pressurised into substantive political reform. Political scientists are already organising themselves to produce a reform agenda and to push for it (details on politicalreform.ie). A number of social scientists have come together to highlight social fallout from the austerity programme – although their precise objectives remain unclear – and have set up a page on politicoe.ie (the VB show website) to publicise their opinions. Maybe it’s time these groups came together and were joined by non-alligned progressive economists as well?

Incidentally, I have no involvement with either of the two groups mentioned above. But I’ve been tracking the various initiatives that have been put forward and I’ve come to believe that there is a narrow window of opportunity to push a reform agenda that may not arise again and that should not be allowed to go to waste.

@Micheal Hennigan

It is clear to me that at least in Ireland it is the Euro that is the problem – the hollow nature of the Irish domestic productive economy is a direct manifestation of previous Monetory inflows, FDI , Brussels transfer payments etc.
These inflowing bits of paper serve to push out domestic Industry – therefore the civil service , pharmaceutical workers , farmers etc earn wages and gifts and the rest of the population serves this distorted economy via the service industries – when these decline or these workers refuse to spend then you get mass unemployment amongest the proles.

To recycle this money back to the core the shadow banks have interest bearing vehicles that shear the sheep.
Now that foregin credit is tightened and workers refuse to spend and begin to pay down their debt or default the cycle is broken somewhere – yet these vehicles continue to extract interest from a declining money supply.
They are now butchering the sheep in plain sight of the other farm animals yet the livestock hope that their number is not up yet.

@Paul
You say – “However, over at politcialreform.ie they are stuck in their silo and navel-gazing about Irish constitutional matters and how much of an electoral hiding FF might get. When I raised the EU dimension I was politely encouraged to get back into my box.

We need to break down these silos.”

Completely agree. Have you donned your construction hi-vis vest and wandered into politics.ie?

Joe

John

good to see some intelligent comments on the options as opposed to the stock-answer FF line line of “remember Lehmanns”.

Interesting to see the language that you use (perhaps subconsciously) is typical of that used in the some of the on-side commentariat.

“Avoid Default” – Provided bank debt is split from national debt – nobody is advocating default. The correct phrase is “Lets Bail out Creditors of Banks that are not fit for purpose with taxpayer IOUs”.

“significant burden sharing with unguaranteed senior debt holders” should read “Complete bailout of senior bond holders who purchased bonds from insolvent banks”.

Is it really credible that a country that fostered the biggest property bubble in Europe should see that burst and avoid a single major creditor of the banks from losing out….? Does the next government need to tell the ECB and EU to get real…

The 20 sovereign defaults since 1997 were Mongolia, Venezuela, Russia, Ukraine, Pakistan, Ecuador (twice), Turkey, Ivory Coast, Argentina, Moldova, Paraguay, Uruguay, Domenica, Cameroon, Grenada, Dominican Republic, Belize, Seychelles and Jamaica.

Just some Banana Republics among them!

Argentina had to get a loan from Comrade Chavez and while the IMF were charging less than 5%, Venezuela was charging almost 11%.

It’s unlikely that the IMF would be reluctant to become our banker of last resort if the ECB was left in the lurch.

Like leaving the euro, advocates of default tend to avoid the questions about the possible messy aftermath.

If you convert the bond holders to equity now will it not wipe out the Goverments stake ?
This is more evidence of the superioty of Bank bond holders over Govermental structures.
My solution at this point would be to reduce the shadow bank sector to exactly zero – of course this is impossible given the strange power dynamics of today.
The European losses are now in the trillions – what property rights should these Bond holders have ?

@KC: “No debt is always with us so therefore it is what you do with it that has relevance – will a large percentage of debt be recycled to the debt holders via interest or will it improve productivity or indeed sustain unsustainable short term consumption.?”

The math will dictate the nature of the answer. Debt has an exponent attached. Your income (aka: economic growth) better have a larger one!!!

Default is not the ‘end-of-the-world’. Neither is it irrational to believe that IRL and Port. and Gr. will be ‘asked’ to depart the Eurozone. It will be a political dictat, not a financial one. Spain might be sacrificed to keep Italy within the fold. That leaves Finland. ???

Q: If states DID NOT have to borrow to fund their flatline (aka. sustainable) economic activity. Would we need global bond markets? Given the highly anarchic nature of these self-proclaimed ‘markets’ I would expect some states to take strong action to protect themselves.

Couple of you have returned to our ‘little predicament’ – the res property mess. What can I say? Morganization of the Mortgage Market!

BpW

“First, Ireland should revoke the full guarantee of the banking system, and convert senior and subordinate bondholders into equity holders.”

The only guarantee left in place for bondholders is the ELG Scheme. It would demonstrate egregious bad faith to renege on that, especially if people formed the view that the losses in our banks were forseeable.

Furthermore, we may have the option to default on unguaranteed senior debt soon enough. Once it happens before we draw down funds to put into the banks we will not be subject to high interest on these sums. It may be that the ECB favour default on unguaranteed bank debt but that they were not satisfied the correct mechanisms were in place to do so.

Unfortunately we will have put in our cash pile and the pension reserve fund which really should have been reserved for guaranteed senior bondholders rather than unguaranteed senior bondholders.

However, even the greater portion of those funds will possible be swallowed up by guaranteed creditors if assets are split parri passu in the first instance. Perhaps the banks should further be directed to concentrate their deleveraging on repaying guaranteed senior bondholders and depositors to the greatest extent possible . This would tip the use of such funds away from unguaranteed debt.

The amount of the funds being pumped in to be applied to unguaranteed bonds will be a fraction of such sums. However, the size of that fraction is important and should be minimised.

@Veronica

Is it better to perform actions which will cause greater social havoc at a later stage but which may be blamed on the politicians then in power, or is it better to cause take actions which cause less social havoc but cause it immediately so that it will be associated with the people taking the action?

Any comments about this?

“It’s been just a few days since my “Modest Proposal” post and the ECB is (finally) poised to intervene in the government bond market, looking to buy PIG(S?) debt in the secondary market. Excellent decision, if I may say so myself (insert false modesty). And to be really effective it should be a massive, knock-out blow. Hopefully ECB has some canny market operators in its staff who know how to act for maximum effect.

But as my proposal detailed, it’s not enough for the ECB to just buy and hold existing government bonds on its books. The second step in this process, the exchange of old bonds for new ones at cost resulting in a reduction of debt by 30-50%, ought to follow immediately. The benefits to the national economies from a lower debt load and smaller interest payments would be very significant, making the market’s reaction to the ECB operation even more pronounced.

Better yet, if the ECB exchanged the national bonds with Euro-bonds that are – almost certainly – coming, we would be talking about a Perfect Storm hitting the shorts.”

http://www.suddendebt.blogspot.com

@anonym

Indeed. What has been most disappointing is the lack of policy input from the IMF (political reform, Croke Pk, bank debt, interest rate, avoiding debt deflation etc.). It seems they have been steam-rolled into submission by the EU/ECB.

@Brian & D_E

I am not so deluded to think I can put a joint probability on the “ifs”. But my sense is that much of the concern out there is — with apologies for again appealing to the authority of Patrick Honohan — is about tail risk. There certainly is large tail risk relating to banking losses, as the dynamics of a balance sheet crisis like this one are highly unpredictable. There is also substantial tail risk on growth, largely for the same reasons. But there are factors pushing in the opposite direction: the sustained strong export performance and steadily improving competitiveness, and the usual forces of pent up demand as any recession progesses. My guess is that even the pessimists might not be quite so pessimistic as it seems when it comes to expected values.

This point about uncertainty enters into our strategic calcuation in another way. The “option value of waiting” literature shows why caution is required when taking irreversible decisions. Pre-emptive default once done is done. “Kicking the can down the road” has come in for often-deserved ridicule, but I think there is a case for seeing how the uncertainty resolves itself — not least the uncertainty at a European policy level — before letting the default genie out of the bottle.

@simpleton

I was careful to say “key necessary condition”. It is obvioulsy not sufficient and the level at which the debt ratio peaks is important. I don’t see the 80 percent identifed by Reinhardt and Rogoff as a hard rule, however. Their sample has a mix of decveloped and developing counties. With some shoring up of our fiscal institutions, and a demonstration of political capacity (admittedly a mixed bag in recent weeks), we should have a fair shot at regaining creditworthiness if we can manage to stabilise in the relatively low three figures.

There are three things before we consider default.

We have to try to pay back the money we borrowed and promised to pay. We can’t just say “ah feck it”.

We should wait before doing anything we can’t undo. Unilateral default would be a kick in the nuts for all our European partners, both friends and not-so-friends alike. If I was a friendly EU country and Ireland unilaterally defaulted causing pan-Euro chaos, I’d remember for a LONG time. We’re small and we need friends. We need to convince our friends to work with us and to help them help us, not to flip them the finger.

We should have a better back-up plan than “being funded until the middle of next year”.

@bazza..
i dont think you spoke too soon. As far as i can see, the headline is just another meaningless threat to sort out the public sector. When are we ever going to get a headline stating that something has actually been done. ?

The only interesting thing for me was the demand from teh IMF for a list of all public servants and their salaries.

The numbers and salaries of all those working in the public sector must be disclosed every three months.

As far as i know, no such “list” exists anywhere. even for top civil servants, the remuneration system is so opaque that its hard to arrive at a figure that can be agreed upon. This principle seems consistent when you get down the pay scales with perks like “cheque cashing time”, “lanzarote allowances” etc etc for different types of public servants.

@Hugh

“We” aren’t defaulting. The banks, which are still mostly corporate entities limited in liability (oh, the irony) would be defaulting.

It is only the extent to which our elected representatives have told the world explicitly or implicitly that those corporate liabilities are sovereign liabilities that we are talking about an Irish sovereign default.

That is what is so dishonest about Lenihan’s untterances on this issue.

@John

Concerning expected values and tail risk.

Expected values of the individual factors is not really relevant and the problem is not really in the tails.

If we consider G as the future growth rate (a random variable), the level of growth we need to achieve (ca. 3%) is not far in the left tail at all – it is smack bang in the middle of the distribution.

Similarily for the future losses on the banks, say L and future demand, D.

If g, l and d are the levels of growth, bank losses and demand that we need to achieve to avoid default, then the event

{G l} U {D < d}

is a bloody large set and is definately not in the tail of joint distribution – which, I think, is the point Brian Lucey was trying to make.

Incidentally, by looking the past deviation from forecast of growth, bank losses and demand, it should be able to do a rough back of the envelope estimation for the probability of the above set. Given how bad bank losses have been in the past and how government forecasts for growth are being laughed at by the EU’s own estimates, it doesn’t look too good.

Still a problem with the formatting of the set.

Anyway, I meant that the event

G is less than g union L is greater than l union D is less than d

is large and not in the tail of the joint distribution.

@Zhou,

Growing plummier by the second, Eamon Gilmore has been on his feet in the past few moments making his party’s opposition to this ‘document of surrender’ clear. “Labour will not be bound by this document,” he roared. Sinn Fein’s Caoimhghin O’Coalain was immediately out of the traps offering his fulsome support.

Mr. Gilmore also took the opportunity to refer to the ‘scores of economists’ who oppose the deal and to read the names of such eminent ‘foreign’ economists – Krugman, Eichengreen etc. – and the headlines of their articles into the Dail record in support of his ‘No Surrender’ clarion call. (I’m always fascinated by this tendency amongst Irish politicians to rely on the opinions of newspaper columnists, especially ones who are not native to this country and who may therefore be peddling their own agenda or have little understanding of the Irish economy or society, to bolster their own arguments, insofar as they have any arguments of substance to put forward. Incidentally, Mr. Gilmore did not suggest any alternative to the IMF/EU document; so presumably Labour policy favours immediate sovereign default.) Notably, Fine Gael stayed very quiet.

As to your question, havoc now or havoc later; it applies to normal politics and what may motivate governments to postpone actions they should take because they know it will please their electorate more than confronting them with the correct policy options – what happened with the over-70s free medical card two years ago is a case in point, but the analysis applies to a whole host of pro-cyclical policies that were embraced by successive administrations and ultimately wrecked the public finances.

If you’re talking about default now or face the possibility of having to default in two or three years time because the four year plan and IMF/EU deal won’t work, since the consequences of immediate default would be likely horrendous for our public services, our economic reputation, our relations with the EU and for the lives of hundreds of thousands of citizens, then I’m afraid I’d be inclined to take my chances on the current strategy, irrespective of the views of many eminent and respected economists wherever they’re from. I’m afraid testosterone fuelled calls for drastic action, the full implications of which aren’t fully thought through and laid out in black and white, don’t much impress the likes of me.

Besides, if we could foretell the ‘future’ then there wouldn’t be much point in calling it the ‘future’, would there? At the beginning of this year, the outlook was generally assumed as quite different to how it has actually turned out. In the current international climate anyway, surely it’s hazardous to risk predictions any more than a week ahead?

@John McHale

Are you really willing to say that the risk of an external economic shock over the next three or four years is a tail risk? My uneducated impression is that the risk of a recession originating in China over that period, never mind anywhere in the world, is over 50%. Do you think China’s going to pull off that rare miracle, a soft landing, from its post-Lehman bubble? And then of course there are the other risks.

The “option value of waiting” literature shows why caution is required when taking irreversible decisions.

The problem here is that we are facing an irreversible decision either way. As soon as we start to “work the bailout” we’ll have to make fairly serious commitments to the IMF, European Commission and so on. Then we will be disarmed of our funding pile, and we’ll start to be manacled into (basically) bilateral sovereign debt in exchange for ELG bank debt. Not as irreversible as unilateral default of course – but not really close to a simple wait-and-see option either.

@bazza:
“Still a problem with the formatting of the set.”

My attempt at translating it into English: “we need three things to go right and, if one or more of them goes wrong, which is not unlikely, we’re doomed.”

Is that anywhere near correct?

bjg

@anonym

Good point concerning the option value of waiting.

There only exists time value in an option if you can follow the same course of action now as in the future i.e. there is choice between exercising now or exercising in the future.

However, if we do not act now, the course of action now available to us (as outlined by Münchau) will be gone forever. Therefore, there is no value at all in waiting.

This is all quite obvious and it is specious of you to refer to the very general option pricing literature.

@Veronica

I certainly don’t see any justification for defaulting on guaranteed bank debt or for defaulting on sovereign debt. Bank resolution should not be announced until the legislation is there. Therefore, we probably need to kick the can down the road to atleast the end of Feb. To that extent, I agree with you. I share your worries about Gilmore’s actions but oftentimes you need a bad cop as well as good cop. FF-FG coalition?

@BJG

Yes, of course you are right – I was just trying to refute John’s clutching at the straws of Expected Values and Tail Risk.

Everyone know that what you said is not a tail risk.

As I read Munchie he is arguing that it is very hard to call the future course of events. Maybe we will pull out. Maybe if we don’t the EU will give us a real bail out (fiscal transfer). But maybe we won’t and there will be no bail out. So far I am with the analysis all the way.

But then, faced with this uncertainty, he plumps for the certainty of immediate chaos (his admission). Non sequitur so far as I am concerned.

We have kicked the can down the road and whilst that metaphor is usually perjorative it is absolutely the correct policy in such a fluid situation.

@gekko
Perhaps it would have been better if the govt hadn’t guaranteed the bank liabilities but AFAIK they did – irrevocably.

For most of the bank’s creditors the situation is – as I understand it – that if the banks themselves cannot pay then the creditors are entitled to ask the state to pay. If the state refuses to pay what it previously guaranteed then that’s a sovereign default. As I say, perhaps better if the guarantee wasn’t there, but it is. It may be possible to finesse the question and to default on some of the debts incurred before the guarantee, but to default on creditors who came in with the guarantee in place would be dreadful.

Also, I confess to being worried about the consequences of what I think many countries would be entitled to see as a cavalier default. Apart from the fact that we still want to pay public salaries and social welfare rates way above the level that the country can pay for itself, we’d now be defaulting “merely” because we don’t like the economic outlook. It’s not grounds enough…..and even then there’d better be a funding plan as a back up.

Do we have such a back up plan? If we default tomorrow, do we really expect PS salaries down 50% the day after? Social welfare? We’d be spending the cash reserves and the NPRF on food and oil for a while, but is that the plan?

Here is Prof. John Cochrane in WSJ Europe.

The meat of the proposal for Ireland seems to be forced maturity extension via swap of short-term debt for long-term at low interest rates.

Unfortunately, it’s not clear how much he’s read up on Ireland. Hazy on the sovereign vs bank debt distinction, and seems to be assuming that we don’t know anything about maturity matching.

@BWII

I disagree: kicking the can down the road is a good option in a liquidity crisis. It is not a good idea in a solvency crisis when the options open to us are dwindling by the day.

Ironically, I think a failed budget would be the nearest thing to wait-and-see for us at the moment. Between this and that the ECB would probably hold the banks up through the election, and meanwhile things would be cooking elsewhere…

@John/Simpleton
“This is where you part company with the commentariat and the market. The view taken by the majority is that you can’t take 15 bn out of a 150bn economy and generate ‘enough’ growth to get the right movement in the denominator of your definition of solvency. Only time will tell.”

I would think it is certain that John is right if the above statement is correct.The coomentariat thought MK was nuts and he was right. The usual suspects jumped on to a shiny new bandwagon now-“default is the only option”.

The following from Wolfgang should scare the bejaysus out of all of us
“A default would cause havoc, no doubt, and would cut Ireland off from the capital markets for a while. But I would suspect that the shock would only be temporary. ” In other words it is going to really hurt badly for a long time, how badly and how long, I cannot say.

@ bazza

Munchie thinks there is a chance we are solvent, maybe not a vey strong chance. In fact he argues that it is very hard to know what being solvent means. His advice is to be very pessimistic and assume that we are in fact insolvent and so throw in the towel. Doesn’t make sense. Take the 85bn, give it a go. If it doesn’t work beg for debt forgiveness. If that doesn’t work then pull the plug, at least we will have pocketed 85bn more than if we pulled the plug now.

Standing back and being a bit serious for a mo. Munchie’s advice is clearly off the wall in any practical sense. Rather reduces the credibility of the FT. I used to think the FT had a credibility rating of AAA, seems more like junk status these days, at least when it opines on anything euro or indeed paddy.

@Zhou,

If FF supports falls to 10-15% nationally then there’s about 40% of a floating vote to go around. Predictions are unreliable until at least a week or so into the actual campaign. Individual constituency dynamics will also affect results. Right now, nobody knows just how many FFers will bow out, or how many other TDs from the main political parties may decide it’s not worth continuing for another term (reduced wages, pension entitlements, retirement lump sums, expenses all need to be factored in, especially among older TDs and those who have little chance of ministerial or other office).

Poll numbers and bellicose aspirations to become the largest party are another aspect of the contest to come. That FG/Labour ‘competition’ to emerge as the largest party makes for great sport in the media, but the calculations parties make on the ground belie that kind of rhetoric. You would think, for instance that in a constituency like Dublin West which increases its representation from three to four seats and with a high profile deputy leader in situ, and current opinion polls indicating the possibility of winning two seats, the Labour Party would run two candidates? After all, that’s what they said they were going to do. But no, it’s a one candidate strategy for the next election.

Obviously, the economy will dominate the campaign, which I think makes this site and clear-headed discussion of proposals and policy directions advocated by the political parties really important, i.e. provided it isn’t overrun by party ‘trolls’.

In the election itself, the indications are that there’s scope for a massive realignment in Irish politics along left/right lines. Will it happen? Nobody knows. All that can be said with reasonable probability is that there may be lots of Independents elected, the new left alliance may effectively replace the Greens in numerical terms, SF may surge at the expense of Labour in some areas and all sorts of combinations and permutations may be required to produce a viable adminstration at the end of it all. Within this, an FG minority government operating a ‘Tallaght strategy’ type arrangement with a rump FF party for a defined period becomes a possibility. I think whatever happens, FF will go into opposition and will not coalesce with FG under any circumstances. If an FG -FF coalition were to transpire I’d eat my hat. Maybe I should invest in a chocolate hat, just in case?

Veronica writes:

Muchau acknowledges that the default option would “cause havoc, no doubt.” That’s kind of him, since he wouldn’t have to live with it; particularly the social havoc and devastation likely visited on the most vulnerable citizens in our community in the wake of this brave initiative. Are any of the default advocates willing to take personal responsibility for the social fall-out that would follow from their preferred course of action? Of course not, they don’t have to. But politicians do.

I’m quoting this again just in case anybody missed it.

Keep it coming, Veronica.

I agree with BWII and I would also like to say how much I appreciate John McHale’s contributions which are always calm and reasoned.

In a situation of uncertainty “kicking the can down the road” is a prudent policy. The country needs the maximum room for manoeuvre. Decisive policy decisions with uncertain outcomes can close off future options with damaging consequences.

I don’t think the IMF deal was a good deal for Ireland. But I doubt if any different set of negotiators could have obtained a better deal. In these negotiations the creditor always has an advantage over the debtor (unless you want to play Russian Roulette). The Germans for domestic political considerations wanted to act tough. Also, no deal would have been worse than the deal we obtained. We need access to international credit in order to work our way out of this crisis.

I have never been a member of FF, but I have some sympathy for the position it found itself in the last 2 years. Of course it must bear some responsibility for the crisis, but I would say most of the policy errors were made before 2007 (when it was also in govt). And it is not that easy for a democratically elected government to rein in an economic boom, especially with what appeared (falsely) to be sound public finances.

Also, to pretend that this is purely a domestic crisis with no international dimension as the government’s critics like to suggest is fantasy. The idea that a small country ever has complete control over its destiny is an illusion. It was not just Lehmans, Ireland is the victim of a specifically European crisis.

Every decision that FF has made has had a bad outcome. However, I believe that alternative decisions would have been catastrophic. Some people think that things could not be worse than they are. I disagree. Things could have been much, much worse.

@ Veronica
If FF and FG form a coalition, you might as well throw your hat at it altogether. It will never happen, in an ideal world we will have FG falling to the right, Labour to the left and fianna fail so broken they disappear into the ether. Then maybe we could have a proper left/right system of government with one checking the other and no chance of ever returning to one party dominating everything for decades. Clearly it wont work too well when they are in coalition with each other, but hopefully they will establish themselves as the 2 dominant parties in ireland, and then provide two proper alternatives at each subsequent election.

@ Hugh Sheedy

You say “We have to try to pay back the money we borrowed and promised to pay. We can’t just say “ah feck it””

The point is we didnt borrow it. and we promised to pay it when we had no idea how much it was.
Fair enough, the people who promised, on our behalf, to pay it back are refusing to admit they made a mistake and so will carry on regardless…but i think from the perspective of the irish people, the “we” i presume you are referring to, it is reasonable enough to say feck it, we’re not paying that back.

@BWII

Münchau doesn’t advocate default of the sov like you suggest.

He thinks the banks are insolvent but is less sure that the sov is. That is why he advocates the banks defaulting first and then assessing the state of the sov.

If we didn’t have the bank debt around our neck, things would be a lot clearer and the markets a lot kinder.

Also, you says we should “pocket the 85bn”.

Ah, firstly, the 85bn is a loan at a usurous rates and secondly it includes 17.5bn of our own money that will be used up first, thereby reducing our room for manoeuvre later on.

Here’s a suggestion for a PHD dissertation that needs to written.

“A review of the Discourse in the rise, fall and death of the Celtic Tiger”

In a study of the discourse in Ireland post 2000 Andreas Antoniades
(Producing Globalisation) found significant neoliberal and pro-globalisation views within the three main politial parties; all the major papers; and even within the unions. The only place in Irish society where these ideas where challenged was in the Church!

FF deserve to be wipped out…but they were not alone.

@Veronica

Are you willing to take responsibility for the debt deflation, mass unemployment and emigration that will occur over the next decade if we don’t get a better deal?

If we go back to the EU as a broken nation in 3 years time with no reserves, no pension fund and no options, what do you think their opinion of our corp tax rate will be then?

@Jarlath
Thank you for pointing that out. It is surprising that it needs to be pointed out at all however.

@Jarlath
I’ve posted before on the morality of asking Irish taxpayers to pay a bill they didn’t incur. (it isn’t moral, in case you wondered. mind you, I think that most of Ireland’s fiscal policy is immoral.)

However, even if our govt didn’t know what they were getting us into, other people were entitled to believe the promises of our elected govt and to either keep lending us money or to lend us new money on the basis of the promises made. They were sovereign promises, made on behalf of the state and its citizens by a democratically elected govt. If we’re going to pull back on such promises then we’d better do it with a bit more thought than is currently exhibited.

I’m looking out the window at heavy falling snow and I’m glad we still have cash in the bank….cash that foreigners will accept in exchange for food and oil.

ECB buying Ireland and Portugal again today, again very aggressively. This weeks buying numbers is going to be very chunky (though you’ll have to wait til Tuesday week’s release to see most of it cos its done on a settlement basis)

Veronica,

Well said. Many of the advocates of default live far far away and do not have to live with the consequences. For them default would be an interesting opportunity to view what happens to a society with no banking system or public services. Ireland would be a petrie dish to them.
Many of those in our midst who advocate default live life in a cacoon, away from the general populace. Default would not impact on their daily lives since for the most part they do not depend on public services.
Still others inhabit the groves of academe but do seem to have figured out that their comfortable salaries will not be paid.

May be it is because I am an accountant but is not talking about Ireland’s national debt without referring to it’s quite substantial assets not missing half the story. Any business in this situation would look at both sides of the balance sheet. You cannot be insolvent, or at least not immediately, if you have liquid assets. OK so the ESB; Bord Gas et al are not liquid – well they are now that we have a an €85Billion line of credit. It is a very straight forward financial equation – reduction in interest paid versus dividends (to the State) foregone. The soft gains as in greater freedom of manoeuvre are an obvious added and possible critical benefit.

@all

… the game goes on. Accepting full socialization is a no-brainer for any self-respecting Irish [or Iberian, Roman, Greek, Belgii, or Frank] serf …. only questions are when and how much of this banking system debt to [pass on via ECB/structural default(overnite)on] so that Irish economy/society may proceed … acceptance of the present (interim)-alternative is path-dependent to nowhere – consensus may be found between ‘realistic’ left and right around here who are pro EU and pro Euro – both wish to get on to a sounder footing, if from somewhat different points of departure …..

If J.C. Trichet has a Plan C – we could start this ball rolling for him.

@bazza,

What ‘better deal’? I don’t see anyone offering a ‘better deal’, nor do I expect to, until such time as Ireland demonstrates it can operate the deal that’s been offered. With respect, all the rest is histrionics and nonsense.

@Eoin,

Do you think M. Trichet has sidelined Herr Weber? Recognising the lesser of two evils, the Chancellor may have marked the latter’s card as well. Did you mention yesterday the possibility of the Yanks bringing treasure to the party via the IMF? The EU is a slow-moving beast, but it generally stumbles in the right direction – particularly in response to the high-voltage cattle prod the market is able to wield. I think we sometimes forget (as the Yanks are wont) that the EU is an association of sovereign nations governed by treaties and by the laws these treaties permit it to enact (but which are only fully binding when transposed into national legislation in all member-states).

@ Veronica

“I’m afraid testosterone fuelled calls for drastic action, the full implications of which aren’t fully thought through and laid out in black and white, don’t much impress the likes of me.”

Do you perfer head in the sand- cheapest bank rescue ever; Nama will turn a profit; i don’t know why they don’t go and commit suicide etc etc – type decision making?

Have the decisions not to default being fully thought through?

People keep skipping over this bit

“The big question in such a scenario is: Should Ireland stay in the euro zone? I would say, yes it should. Ireland has a sufficiently flexible economy to be able to manage the necessary real adjustment. In a monetary union, you can no longer devalue. The only chance is what economists call a real devaluation – through lower wages and prices.”

Repeat: ..through lower wages and prices.

Seemingly in Ireland this would only be allowed to happen in the private sector.

@ Hugh Sheedy
I agree with you that it was a sovereign promise made on our behalf and that carries a lot of weight, but no matter what way it is spun, the default setting of the irish people regarding paying back the bank debts our government guaranteed will always be…. feck it, we’re not paying that back.
I’m just an observer trying to inform myself, like most on here, but i can honestly say i have not seen it spelled out clearly what would be the ramifications if ireland found some legal method to extract itself from the guarantee, announced that it was committed to repaying its sovereign debt, but that its banks were now a separate matter…

What would happen.

And yes the 2 Brians have chimed off numerous times about the catastrophic consequences of doing this….but i stopped putting any stock by what they say years ago. Since the crisis started, they have either done the wrong thing or just done what they were told.

@tull mcadoo 2:27

Excellently put — and I do think some pchychologising is justified here.

The burden of proof lies with the pro-defaulters, since they are proposing the certainty of great suffering now as opposed to the very high probability of even more suffering later. It’s as though they are arguing:

Which would you prefer:

To have two legs amputated today?

– or to have two legs and one arm amputated in two or three years time?

I think most people would go for the second option.

@Veronica

There is always a better deal if the parameters of the negotiation change. The govt that negotiated the deal for us are totally jaded and have no confidence in their own position.

A new govt with no baggage from the past 2 years of poor decision making would be much better placed to drive a hard bargin.

Throwing our hands in the air and saying noone is “offering” anything will get us nowhere. Almost every single independent analyst and commentator has said that not burning senior bondholders is ridiculous. The IMF clearly also thinks so. If the government had any backbone, it would have pointed the finger right back at the EU/ECB, instead of cowering when the declined our “request”.

@John McHale

I think you avoided Brian Luceys question a bit with your talk of tail end risk. Any chance you could Make a stab at the value of our interest payments in 2013. Then take a look at the impact that would make on any growth attempts. Personally I think we have long gone past the getoutable without default point. Now that we are being made pay 5.8% on the next 67billion we borrow I don’t see how this is anything other than just delaying the inevitable.

What realistic forecasts are you looking at that give you the impression that Irish Austerity contained in the 4 year plan will get us out of this. I don’t see them.

This talk of gaming the ECB is the wrong analogy – you cannot game a institution that has a monopoly of credit while you have none , no they hold the aces so therefore you state you do not want to play.
Throwing down the gauntlet to these malevolent institutions is however dangerous since they did not strive to dominate the planet by being nice guys.

@Jarlath
Again, my own reaction to paying debts I didn’t incur is “feck it, I’m not paying that”.

However, if I want to live in Ireland it seems there may not be too many choices unless and until a better solution is negotiated….and I hope one is being worked on.

“Are any of the default advocates willing to take personal responsibility for the social fall-out that would follow from their preferred course of action?”

Of course not. All those most vociferous for Irish bank default all argued strenuously, in the case of their own countries, to bail out the banks (and the bondholders) at all cost.

@grumpy

Thanks for the detective work. What Munchau is proposing is indeed a kind of selective devaluation that hits the private sector far harder than the public sector — and inter alia is likely to foster inter-group conflict in Irish society.

A ‘natural’ old-school devaluation imposes sacrifices across the board and is therefore perceived to be fairer — in fact, it may add to the sentiment of belonging to a Schicksalsgemeinschaft (‘community of fate’) rather than a random bundle of monads.

But that’ll be the day when Munchau begins to acknowledge that the Euro mightn’t have been such a good idea after all.

a says
““Are any of the default advocates willing to take personal responsibility for the social fall-out that would follow from their preferred course of action?””
or
““Are any of the NOT EVER IT WOULD BE DISHONOURABLE OT default advocates willing to take personal responsibility for the social fall-out that would follow from their preferred course of action?””
Fixed that for ya…

One of the problems I have with this entire process is the continual “well what if our banks collapse” mantra. We need somebody to be working on what the banking landscape (including smaller institutions like Credit Unions) will look like post-restructuring.

In my opinion this will require one or more foreign banks to set up shop in Ireland but preferably without being burdened by the carcasses of the likes of Anglo (with the exception of transfers of deposit books). Were I “BLTD” I would have some officials touring the financial district in Toronto asking the local Big Five under what sort of market conditions they would consider financing the creation of a new bank or banks in Ireland. If GDP growth is even to hit 1% (and that sounds optimistic to me) the viable businesses in Ireland are going to need funding too but the likely contraction of the current failbanks is not going to facilitate that.

We appear to have it mapped out for us what will happen if we dont default…our 4 year plan, the imf on the phone every week, the 6 billion budget next week……it has been done to death what faces the country now from having to pay back x billions of bank debt.
So we know that.
But i say again, what happens if we say no to repaying that bank debt. there doesnt seem to be a 4 or 5 year road map outlining the consequences of that for Ireland. is it just because people don’t really know??
If so, it is even more likely that the irish people would choose that route..do i choose the box full of vipers and scorpions…or the mystery box. hmm, thats an easy one.

@Carolus
“Which would you prefer:

To have two legs amputated today?

– or to have two legs and one arm amputated in two or three years time?

I think most people would go for the second option.”
Well, that tends to depend on how the question is phrased. If the first is presented as a certainty and the second as a chance, the chance will be taken and vice-versa.

Of course, both are chances with varying likelihoods and outcomes subject to talk risks. Being closer to the former in time gives a less uncertain view of the change, but the tail risk outcome is still subject to the same level of uncertainty.

We don’t really know how ‘involveds’ will react to a default (either now or later), because largely it is not an economic decision. It is driven by politics which are subject both to uncertainty and to what else is attracting attention. A good sex scandal between two major european leaders would be the perfect sideshow…

@Bazza

‘In 3 years we will have no chance of returning to the markets especially if our debt is 120% of GDP and if the new “permanent crisis resolution mechanism” is in place. Worse, all our reserves will be gone so we will have no options left then. All the bank debt will be converted into sov debt. There is already talk of increasing the EFSF so that Ireland and Greece can roll over our debts.

You sum it up nicely.’

@All
Another reprieve from ECB. At least the ATM will work for another 3 monts.

Additional measures to calm financial markets aren’t needed – Wolfgang Schaeuble.

??????????

@ Prof Lucey

“NOT EVER IT WOULD BE DISHONOURABLE ”

That explains a lot. Defaulters see themselves as macho men of the world and they see non defaulters as naive wimps burdened by a sense of honour.

Speaking for myself I believe that all our national decisions should be informed by the calculus of what gives the best expected economic outcome. Honour is a luxury that individuals are free to adopt for themselves but no one has the right to enforce it on a nation.

So there, I’m even more macho than you.

@cet. par.

It seems the Austrians, Dutch and Germans are holding out in the ECB. I would be surprised if the markets, unimpressed, were not to come back for more.

@Paul Hunt
Agree. I cannot see the line holding with those sort of comments.

On another note I see the Parliaments of Finland and Germany have voted on the Irish Bailout.

Strange that the Dail will not have a vote on the most important financial and economic agreement ever entered into by the State.

It seems that FF and for that matter the Greens don’t do democracy.

@ Brian Lucey. That wasn’t my question. I was repeating it from someone else far above in the comments. That’s why it was in quotes. So it shouldn’t be “a says”.

I’d add that I don’t visit this site every day, just when the news is interesting. About 6 months ago – I think it was when NAMA was announced – my comment was “you (the Irish) are screwed.” I’d stick by that. Default or not, you’re screwed. Trying to find the optimal path for the Irish is sort of like choosing between whether it is better to die by fire or by getting quartered.

The deal is a total failure. Bond yields are at 9.25% 4 days after the EU forced Ireland into a deal to save a number of insolvent banks. 2 months ago the yield was 6%. 5 months ago it was 4.25% and it is ALL because of the banks.

Nurses are being forced to sell their future pension entitlements to receive their salaries. Sure they are overpaid (who in Ireland isn’t ? ) but without the weight of the dead banks the sovereign would not be bankrupt.

Ireland is in a debt deflation spiral and extracting 5.83% interest from a contracting economy to cover the losses of bank bondholders is shameless.

“It’s the only deal on the table” was what Chamberlain said in 1938 after shafting the people of Czechoslovakia.

In the latest children’s story the monster appears on TV and says :

“There is simply no way that this country, whose banks are so dependent on international investors, can unilaterally renege on senior bondholders against the wishes of the ECB. Those who think we could do so are living in fantasy land. Worse still, those who know we cannot do so but who nonetheless persist with the line are damaging this country and its financial system: and all for the sake of a cheap headline. It is a case of politics as usual even at this most difficult time.”

It appears the reprieve won’t last long – from Bloomberg

‘The ECB will keep offering banks unlimited loans through the first quarter over periods of seven days, one month and three months. That marks a shift from last month, when Trichet said that the ECB could start limiting access to its funds.

Signaling disagreement within the 22-member council, Trichet said an “overwhelming majority” of officials backed the ECB’s Securities Market Program and that a “consensus” supported maintaining the status quo on providing liquidity. Bond purchases will continue to be offset to keep the money supply unchanged, in contrast to the Federal Reserve and the Bank of England, he said.

“It’s not quantitative easing, we’re withdrawing all the liquidity,” he said.

Some strategists said the ECB’s refusal to follow the Fed and the Bank of England may soon end the rebound in bonds. ‘

I think we should look to do the following (very high level)

1) tell the eu we’re not paying for the banks
2) have an immediate election
3) pass laws to completely reform the public sector
4) pass laws to tackle White collar crime.
5) devise a 5 year plan based around solving unemployment

better to try restoring our economy and signaling to investors that we’re serious about getting our house in order rather than having a massive default crises in three years. The current plan ain’t working so why keep flogging a dead horse

veronica Says:
December 2nd, 2010 at 2:36 pm
@bazza,

“What ‘better deal’? I don’t see anyone offering a ‘better deal’, nor do I expect to, until such time as Ireland demonstrates it can operate the deal that’s been offered. With respect, all the rest is histrionics and nonsense.”

The EU/ IMf is not some sort of financial Santa Claus who will give us presents if we’re good and withhold them if they are bad. This is not a morality play. No one is going to “offer” us anything regardless of how we behave. The impetus for any alternative deal is going to have to come from us and should be pursued after we have fully considered ALL the alternatives.

And with all respect, a little less of the “histrionics and nonsense” might be appropriate. Your own comment is a non-sequitur. If Ireland “demonstrates that it can operate the deal that it has been offered” why would the EU see the necessity for it to be replaced by anything else?

@ Prof Lucey

Shows how uninformed the people are as to the real economik of our situation. For ordinary punters to be constantly reading in their Irish Times the latest High Professor saying we should burn the bondholders and live happily ever after, is it a wonder that they have bought into the fantasy.

BTW a poll in some paper or other the other day revealed that 85% of people wanted a wealth tax. Guess how many people think they are not wealthy.

Trichet -Irish can cop

“I am confident that the Irish people who realise that it is extremely important to be for the long run competitive and to prove what they have always proved in the past – namely that they are able to cope with difficult periods.”

The Yanks have an impolite saying – I think it is – blowing smoke up your a***.

@Galviensis

Your limb-whacking analogy is right on the money, I’m afraid. We’re hearing arguments about how the advocates of surgery are callously macho, how they won’t have to live without a limb, how awful amputation is – so let’s keep working the gangrene and hope for a remission. It hasn’t worked so far, and now WAWA.

@Hugh Sheehy

Sovereign default is very bad, but we’re probably headed for a worse default if we gamble on the EFSF. There is such a thing as reckless trading.

“I don’t think the IMF deal was a good deal for Ireland. But I doubt if any different set of negotiators could have obtained a better deal. In these negotiations the creditor always has an advantage over the debtor (unless you want to play Russian Roulette). The Germans for domestic political considerations wanted to act tough. Also, no deal would have been worse than the deal we obtained. We need access to international credit in order to work our way out of this crisis.”

Now let me see. We should have played “Russian Roulette” (e.g. threatened a unilateral withdrawal of the ELG, default on senior bank bonds, etc). This would create a non-zero probability of a run on other peripheral EZ banks spreading to DE eventually. They (ECB/EZ) need(ed) a deal as much as we do.

When the Americans/Soviets were negotiating on Cuba.

Cost to entire EZ/FR/DE of paying for all of Irish Senior Bonds on a per capita basis and a few weeks being knocked about in Bilt: ~200 euro

Cost to Irish taxpayer of paying for all of Irish Senior Bonds on a per capita basis: ~20,000 euro

Better still, make this threat in concert with PO/ES etc. Instead we were divided and ruled.

There are 6,700 billion euro in bonds in EZ banks. Commercial banks are critical strategic interests for FR and DE – their companies depend critically on bank lending. Even a slight probability of harming this scares them silly. They’d have paid far more than the 3 billion interest “subsidy” we’re getting in return for Ireland protecting senior bank debt holders.

What will happen is that a large player (ES? IT) will force a situation where there’s either QE or a bit of fiscal union – and we’ll be stuck with out crappy “deal”.

These EZ guys won’t allow our parliament a vote on this, they tried to get Lenihan/Cowen to sign it WITHOUT even a Cabinet meeting. Listen to Dermot Ahern’s interview. HAD to be approved by Monday morning, etc.

This is economic equivalent of war augmented by a type of coup. Very similiar tactics deployed on us as on Austria during the Anschluss if you read your history.

@ BW2

As opposed to the fantasy that the Irish banks can work their way back to self reliance with 10bn and a 25bn contingency fund. What will AIB , BoI and ILPM do when the ECB says no more collateral accepted ?

And how did Irish Life end up in this gutter ?

from Bloomberg

‘U.S. Representative Mike Pence, an Indiana Republican, said he planned to introduce a “European Bailout Protection Act” to restrict the flow of International Monetary Fund loans to European countries. He said he was responding to reports that U.S. officials might bolster a European fund designed to deal with this year’s debt crisis, which has spread from Greece to Ireland. ‘

Are they ganging up on us?

@ BL TD

the seat numbers are broadly correct but the distribution is a***e ways. Wealthy Dun Laoghaire returns 3 lefties (including 2 millionaire socialists) and Alois offaly returns 3 FGers when they don’t have 2 candidates.

Where will the FF transfers go. On these numbers you are talking about an Eamonn & Gerry show.

@ Ceteris Paribus

Don’t worry. The “adults” at US Treasury et al are in charge of IMF, etc.

There are lots of looney bills out there by randon congressman (reparations for slavery, taking US back on gold standard, banning the olympics, etc). Ah….the beauty of the US.

@Ceteris Paribus

BTW it _might_ have helped had we had a President in the White House who may have given a c***p about Ireland – say McCain or Hillary – rather than Obama (whom the Irish media fawned over – remember that “tax haven claim”).

@anonym
We’re not a company. Besides, we’d be recklessly trading using EFSF money with not only permission, but encouragement.

In any case, I doubt that the outcomes will be quite so binary. It’s not as if we could elect to default now and walk away scot free, nor that if we eventually do an agreed default we’ll default on everything. (although an elective default could be horribly messy, and messy is bad.)

If we were to do an elective default now we’d end up in courts for ever, wouldn’t we? Isn’t it likely that we’d end up paying much of what we owe eventually, based on the fact that we guaranteed it? If we ultimately agree a supranational “restructuring” we’ll still end up owning most of what we owe too, won’t we, but the total might be aligned down to a level based on which ever is the worst of the EU’s basket cases?

If we go unilateral it’s messy and ultimately we’d owe about as much anyway, no? I can’t see us getting entirely off the hook either way. Can anyone?

“So who gets what job?”

Good question by Prof Lucey. Recent RTE Vox Populi suggests that we should hand over goivernent to those academics who know what they are talking about. The recent high powered think tank, Kilkenomics, also endorsed this theme. I suggest:

David McWilliams as Teashop with special responsibility for exiting the euro and confiscating 75bn from US MNCs.

Morgan Kelly as MoF with responsibility for ensuring that mortgagees stop paying their mortage.

Begrudgenov as Minister of Defence with responsibility for selling Rockall to the Russians and securing our entry to the 2018 World Cup

Oh, I almost forgot, Prof Lucey as junior Minister of Finance charged with selling our deposits.

@Remnant
Agree.
Not sure he is a tea party member- sounds like he is.
The Fighting Irish may not be happy with him-then again a lot of Irish support Republicans.

@Veronica/Bazza

We need to hear and see more of this kind of debate among policymakers in Ireland.

IMHO there is no other “deal” on offer at this time but if contagion spreads to Iberia, Belgium and Italy we may find ourselves negotiating a series of “deals” over the next few years.

The involvement of Sweden, Denmark and GB in the recent “bail-out” talks signals to me that some examination of how Ireland can find a “graceful” transition out of the Euro (if it proves necessary or inevitable) is currently taking place behind closed doors.

In time we may be happy that this crisis came to Ireland when it did as we now have the opportunity to examine possible outcomes, strategies and options while we know the Euro is still functioning as a currency.

It is not comfortable to contemplate the demise of the Euro but if it does have a crash landing it will be messy and rapid so we need to be sure that whatever parachute we may have to use is in working order.

Article in the WSJ today on the IMF seeking to double its lending capacity to $450b over the next few months. They say that that “whether this is enough depends on how deeply the problem spreads”.
The USA has agreed to $106b to the new kitty-10 times the previous.
But 7 European countries have yet to ratify.

HANG ON IT LOOKS LIKE IT IS GOING TO BE A BUMPY RIDE.

@Tull

Eamonn and Gerry show.

This was a good bet last week at 28/1. No longer on the boards as Lab/SF.
But 22/1 Lab/SF/Green.
BY tomorrow am Lab/SF should re-appear but at much shorter odds!
A left right divide is emerging FG/FF VS Lab/SF.
Maybe Morgan Kelly was a bit more prescient on the political front that he is getting creidt for.

Who is going to make the economy grow? Assume 1 million people emigrate. How can we grow?

And you maybe you scoff at that emigration rate, but I’d be willing to bet that we’re on course for it over the next ten years.

And I think a 1% growth rate is optimistic, not pessimistic.

@ Ceterus Paribus

apparently the Republicans are trying to enact a “European Bailout Protection Act” (seriously) to restrict/stop the IMF from giving any more funds to a Eurozone bailout.

Joseph Ryan,
Did MK not envisage the rise of a right wing extreme nationalist party. Maybe what we are seeing is the rise of a nationalist and socialist party on the other extreme of the spectrum. Certainly, that most astute of populists Mr Gilmore seems to be sensing a risk of being outflanked from the left. Witness his strident and nationalistic pose in DE y/day.

Tull.
Strong evidence of Left going to Hard left. The picture on the right still to emerge.
Missed Gilmore in Dail yesterday. Is he now saying that he is going to reject the EU/IMF pact? Where would that leave the situation if government fell next week.

Politicians of the left all competing to be the one in charge of the dismal mess they’d create. What a spectacle.

Of course, we don’t have a “right” worth talking about either. We’ve had wrong and wronger, and they’ve already left us in quite a mess.

@Joseph Ryan – “But 22/1 Lab/SF/Green”

22/1 for good reason – the Greens are toast at the next election. I would be surprised if they got even one seat. Are there any odds available (do you know) for Greens getting zero seats as I would like to have a bet on that!

I think it’s a possibility that politics will polarise rather than go to one end of the spectrum or another.

@Hugh Sheehy
re: Politicians of the left all competing to be the one in charge of the dismal mess they’d create. What a spectacle.

Correction-
Wrong tense
The dismal mess that has been created.

@Joseph Ryan
Perhaps you didn’t read all of my post. There is indeed already a mess. Yep, absolutely.

However, even if it’s already dismal it can be made dismaler.

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