Martin Wolf: Ireland Needs Help With Its Debt

Martin Wolf writes on the Irish situation in Wednesday’s FT: article is here.

He cites an overview-type paper that I have written: “The Irish Crisis” which is available here.

109 replies on “Martin Wolf: Ireland Needs Help With Its Debt”

“If the rest of the EU is determined to protect senior creditors, it should surely share in the cost of doing so. Why should the taxpayers of the borrowing country pay all? The new Irish government should make this point firmly”

I suppose this is encouragement for Enda, but surely this is a bit stale and even for international commentators it is time for more concentration on the “how”.

On the German fantasy that deficit limits are the cuase of the problem, there is a bit of an open goal and their illogical position needs to be exposed with the same sort of determination that should have been used on the idea that banking regulation was nothing but a communist plot that had to be resisted in the national interest.

Start by asking the Germans how it can make sense to apply the same deficit limits to two different ecoomies – one low beta and the other high beta.

Is it not interesing that the FT, an un-spinnable newspaper, so far as I know, through its editorials and columnists, appears to get the Irish picture so consistently? Is it possible that the EU Commission and the ECB might be missing something?

@Martin Wolf

Excellent piece of realistic analysis. From an Irish citizen-serf perspective – I’m only a regular FT reader since Doomday 29-10-08!

You do, however, seriously overestimate the ability to battle & understanding of the incoming political leadership, and the extent to which the Irish electorate understands, and takes the extent of banking morass into account. We’re essentiall electing a cloned brother of the previous lot ….

Geman admin, and ECB, appear to be refusing to address issue of capital flows – and that originators of such dangerous flows bear some ‘capitalist’ responsibility: as they are not complete eegits – this must be intentional.

p.s. you might give Lex a little tutorial (-;

@Martin Wolf

A realistic analysis of the incoming Irish administration led by Fine Gael. I recommend you add to your ‘take’ on Irish political economy – and the abject poverty of upcoming Irish contribution to sorting out EZ – and the abject poverty that it is willing to impose on its own in defernce to local financial elites and flawed European power-brokers in Germany, France, and ECB.

Dire straits around here …

@ colm mccarthy

What happened with this guff about punching above our weight?

We appear to have few if any friends among the EMU’s other 16 countries and little influence as well at institutional level.

Pat Cox should have been appointed the Irish commissioner/commotioner.

@ David O’Donnell

What a laugh! Browne concludes; the advocate for the victims of inequality from within the well-connected insiders’ tent, should have some wisdom at this stage that the world is rather more complicated than he portrays.

Earning from 3 media organisations makes him one of the poor!

What did Vladimir What’s his Name call you gullible folk??

The Irish debt burden and the market for simple solutions

@Colm McCarthy

I am struggling a bit with your position based on recent writings. I wonder if you might clarify. Do you agree with those who say Ireland should be willing (unilaterally) to impose losses on the unguaranteed senior bank debt and possibly also the guaranteed senior debt?

Or is your main argument that others in the EU bear a degree of blame for the Irish crisis, and should shoulder a share of the burden? I doubt many would disagree that there is responsibility to be shared around.

But then it comes down to a question of tactics: are we more likely to get needed changes to the bailout mechanisms by telling other EU countries that they share the blame, or by focusing on the common interest in finding a formula that gives Ireland a decent chance of avoiding default, part of which is likely to involve some mechanism for reducing the starting debt burden?

@John McHale

That isn’t necessarily an either-or question.

Other countries may have a shared interest in finding a solution, but that is immaterial if their political leadership don’t share that interest and place their personal interests ahead of those of the nation. Equally, the EU countries could fall over themselves to oblige us but still be faced with a default by an Irish government in 5 years which has no stake in current negotiations.

Dire necessity dictates the government act forcefully one way or another, as it isn’t within its power to guarantee a radical reaction won’t happen in this country in the medium term. Signs of independent action of any sort will spook the markets, upsetting the rest of Europe. It’s not the governments business to satisfy investors and interests abroad, however, or to try and maintain illusions in the currency markets.

The issue needs to be brought centre stage for the electorates of Europe just as it already is for its political leadership. The voters of the union must be made aware of the deception at the core of the plans Merkel and Sarkozy are trying to foist on the continent. Current plans guarantee further euro crises, with political consequences which may be dramatic.

There are constructive and destructive ways of raising awareness of the issues and the stakes, but there are more than budget projections to be considered. Britain is undergoing a social experiment without any direct comparison in history, and a similar experiment is being forced on Ireland. Even managable budget projections are potentially a dangerous mirage in this context — the political environment could be altered beyond recognition in even a few years. Are Irish people in 10 or 15 years likely to feel some sort of responsibility for Anglo etc?

Sadly, FG’s plans to spend the NPRF on infrastructure ‘investment’ combined with ELA to the banks means time and room for manoeuvre is disappearing. In a situation where the cautious policy may prove reckless and the reckless one prudent, it’s not realistic to claim the current course offers security.

There seems to be a profound misunderstanding about how the EU actually operates. National governments, jealous of their prerogatives, never willingly relinquish sufficient powers to the EU institutions to pursue the EU project in line with the grandiloquent declarations the leaders of these governments make at European Councils. Only in crisis or adversity will they consider doing so. But the impact of the crisis must be widespread, or the adversity, if it impacts on some, but not all, members, must be seen to be undeserved, before the political commitment emerges to further empower the EU institutions to address the crisis or adversity.

(As an example of undeserved adversity, we have the impact of the Ukraine-Russia dispute in 2009 which cut gas supplies to many eastern members. The EU is working slowly, but with purpose, to improve EU-wide security of supply.)

The financial crisis had impacts throughout the EU, but the core EZ members were able to fudge and fiddle to manage the brunt of it. It’s still far from being resolved, but it is seen as manageable in the medium term (indeed, Germany’s economy is powering ahead and encountering labour shortages) with the usual slow establishment and empowering of EU institutions to address the outstanding issues and to strengthen the system’s resilience.

The adversity that the peripherals are encountering on top of, and because of, the global financial crisis is seen by the core countries as something they have brought on themselves. Therefore, they, as seen from the core, must take the first painful steps to deal with this adversity before there will be any possibility of securing the core political commitment to contemplate any burden-sharing.

The commitment to fiscal retrenchment is one, admittedly, huge step, but much more will be required in terms of the disposal of state assets to reduce net sovereign debt and in terms of meaningful structural reforms of the domestic economy to enhance sovereign debt service capability.

Ironically, these reforms would be unambiguously in the interests of the vast majority of citizens and of the economy; only those vested interests who benefit from the imposition of the deadweight costs would lose out. But the ability of these vested interests to skew and poison public debate means that state assets disposals can’t be considered during the election campaign and there is no real discussion of structural reforms.

This unwillingness to engage with important issues and to secure democratic consent does not augur well – and is one of the main reasons we are in this mess.

John McHale,

Hope is not a policy. My position is straightforward. Both tactics and strategy need to be grounded in an appreciation of what is feasible. We are three years into this European banking crisis. The parameters of the (next) set of stress tests are being negotiated at political level, including public disagreements about whether negotiable, listed, securities on the balance sheets of troubled banks should be marked to market!

Ireland, and other ‘peripherals’, are headed for def… oops! Re-construction of unmanageable liabilities!

Do you think this is a minor matter? Those who are fond of the European project should be most concerned about the Kick-and-Hope policy being pursued. I am stunned by the (apparent) insouciance of the EU Commission and ECB. You are persistently encouraging policy positions three months behind the pace of the game. What’s the point?


Are you advocating unilateral default now or not? And on what?

I recall a wise man saying that anger is not a policy. We are all dismayed by how the crisis is being handled at the European level. But what are the practical implications for we should do now?

Spot on Colm, and in the FT Europhiles like Munchau are sufficiently clear-sighted that they are obviously very upset about what is happening right now: it risks becoming a complete and utter catastrophe for the ‘European project’.

As I see it there are three options:

1. Multilateral agreement to restructure bank debts, including of course the guaranteed stuff since at this stage so much of the unguaranteed stuff has been paid back. This is the best option IMO, given that we were stupid enough to pay back the unguaranteed debts, but who knows if it is a realistic one politically speaking?

If this option is off the table, then the other two options become more likely:

2. Unilateral restructuring of Irish bank debt.

And the longer 1 and 2 are held off, the more likely 3 becomes, viz:

3. A full-fledged Irish sovereign default, by far the worst option IMO for this country.

(Of course, we might also strike oil.)


I’m a little surprised that you are “stunned by the (apparent) insouciance of the EU Commission and ECB.” Default is not on the agenda for Ireland (or Greece) while it is the EU/IMF treatment room – and particularly while there is so much more Ireland can do itself (as set out in the terms of the EU/IMF deal) to avert any possibility of default.

The EU has to have a ‘manageable’ crisis in order to secure the political commitment to reform its institutions and to take the actions required to resolve the problems. Viewed from the core EZ this is a ‘manageable’ crisis; it may not look like that from the periphery. But this is the view of those elected by the political ‘weight of numbers’ in the core. The message to Ireland and Greece is “just get on with it”.

We will only get some respite when we show that we’re doing all we can and it still isnt working. It’s tough, but we might learn a valuable lesson about not putting ourselves in such a vulnerable position. We have to put in a lot of effort to restore some respect among our EU peers.

John McHale,

I appreciate that the attribution to people, in the form of a question, of policy positions that they may never have advocated, is a standard operating procedure for interviewers on Irish radio and TV. If you feel that I may have advocated unilateral default somewhere, there is a Google button on your PC. If it is broken, get it fixed.

For the avoidance of doubt, your honour, sovereign (d-word) is a serious risk at this stage, and it is time to make this clear to our European ‘partners’. Friends of the European project, including FT columnists, appear to understand this straightforward point. Unilateral policy adventures are for the birds, but a failure to draw attention to the feasibility of current policy serves neither (Euro) Philes nor Phobes.

We may be in the age of twitter, but on a crucial issue such as unilateral default, proponents should detail

1) what is the value of the debt involved

2) if all the debt should be defaulted on

3) worst-case scenario if the ECB would not continue emergency funding

The later is very important for the indigenous business sector and workers already at a high risk of unemployment.

@ Michael Henningan
Well done on the website Michael. I became a fan in 2005 and it helped me to see the wood for the trees and made up my mind on the sale of my over-priced and under-sized house in 2006. You’re one of the few that talks any kind of sense.

As for McWilliams and co, a friend calls them “charlatans”. Very few of the ordinary folk I talk to have any faith in the simple minded solutions advocated by these guys.

A Word of caution.

‘Our institutions’ – you can make your own list, have been constructed over a long time-frame. Lets, call it The System. We all recognise that TS is (has) started to malfunction is significant ways. Clearly some remedial action, of whatever hue, is required. But what?

At your peril, you attempt to unbolt or disconnect any of the essential components. Its a ‘system’ – consequences (usually un-intended ones) follow. But repairs are essential. So, the choice is Hobsian. Seek the simple (not simplistic) way to rectify. Anything else will only delay the eventual.

The engine of economic activity requires fuel (fossilized carbon) and, oxidant (credit). The exhaust gas, debt, is an asphyxiant. If the level of this asphixiant becomes high enough efficient combustion ceases: The engine stalls (has stalled). You must reduce that gaseous pollutant if you wish to restart the engine.

Nobody, like nobody, wants to do this; stop emitting debt. That is the predicament.



My problem is that I never actually believed that you do advocate unilateral default (on the ELG or State bonds) — which I would suppose is so clear in your mind that you don’t feel you have to say it.

But would you not forgive people for drawing a different conclusion when you close your more recent Sindo piece will the following?

“The problem with the bank guarantee is not that it was unfair, although it was. The problem is that it was a mistake, and mistakes, fairness aside, have to be undone as a matter of practical policy.”

I also note that others — see Kevin above — are more openly considering the use of the unilateral option. So I don’t think asking for a clarification on a matter of such national importance is in any way out of order.

As always, this, at heart, is a political issue. The only card that a new Irish government will have to play with our EU partners is a clear declaration that Irish voters will not consent to severe fiscal retrenchment and to major structural reforms (even if these are in the interests of most of them) while those who invested unwisely in Irish bank bonds are being allowed to escape unscathed.

I think Colm is simply advocating the playing of this card judiciously. Going in too hard and too fast could provoke a popular response in the core that says “just lose them; they’re not worth the hassle”. Holding it back will encourage a belief that Ireland is a push-over and core EZ politicians will use this to avoid confronting their voters with costs of the refroms required at the EU-level.

But Ireland needs to recognise that membership of a club of this nature has costs and benefits. Since 1973 it has generated a stream of net economic benefits. But you can’t deliberately break some of the windows in the club house without being expected to contribute to the repair before the club’s maintenance fund kicks in. What is needed is aggreement on the split between the individual contribution and the club’s funds.

@colm mccarthy

It is fair to say that when the EU IMF deal was agreed you appeared to be in the “there’s no choice, no cards to play camp”

So it is reasonable to find this from you interesting”

“The bank guarantee: a mistake we must fix”

“The government guarantee burdens the State finances but is now valueless to the banks it was designed to assist”

“The problem with the bank guarantee is not that it was unfair, although it was. The problem is that it was a mistake, and mistakes, fairness aside, have to be undone as a matter of practical policy”

I haven’t argeed with JMcH’s take much over the last six months, but I thought his comments on here:

were perfectly reasonable:

I found your position a little unclear too (see below), but you either were either content for the ambiguity to remain or didn’t read the thread:

“Very good article but I cannot agree with this line:

“The government guarantee burdens the State finances but is now valueless to the banks it was designed to assist”

Just over a week ago there was a downgrade of senior unsecured Irish bank debt and I would suggest careful readers should read all the words in it. This followed the “not a penny more” rhetoric and a technical breach of the MoU by Lenihan. This has made the banks’ position even more pressured. However nobody should underestimate the importance to the banking system in Ireland of the government guarantee on deposits, it is far from valueless – if you want the Irish banks to continue to function.

I have argued for a wind down of these banks but anyone thinking of doing so must be very very careful about having a convincing story for the depositors with respect to transfer to new institutions and that any scheme of compensation is watertight. Deposits are very different to bonds in nature. Get the ducks in a row.”

@John McHale / Colm McCarthy / Kevin O’rourke

One hugely important criterium in deciding if, how and when you should take unilateral action is your capacity to do so.

As more and more of our debt becomes governed by foreign laws through the EU/IMF deal we lose our power to act.

The time to decide on taking unilateral action is now as it cannot be done later. Once we lose that option our views will be less important and our ability to influence European policy will be less.

We have been waiting for the EU to develop a solution for some time. Their consistent failure suggests they lack capacity in a times of widespread and worsening political stress to act in the interests of the EU.

If this were a commercial transaction and you were Ireland’s agent you would have to advise your client that, notwithstanding all the talk of partnership and cooperation from all parties, the other side had not shown sufficient bone fides through their actions to date. Therefore no further money should be committed to the deal until workable binding commitments and structures were signed up to.

We can still default on senior bank debt and can [probably] restructure the eligible liabilities guarantee and even much of our sovereign debt at this stage using our own legislative powers.

I don’t think politicians should issue ultimatums, but we must let it be known through officials where our interests and concerns lie and that we are willing to take action that involves risks if we think it is probably the best course of action for our country.

However, I am worried that at this stage our civil servants are utterly fatigued and beat-down and that they may, on a personal level, be willing to hand over control to Europeans who have the capacity to deal with all the legal, administative and financial requirements. This poses a very grave risk for our country.

BTW – The art of creating deals through consensus and compromise has been pervasive throughout Irish commercial and political life over the last 10 years. People who raised problems were deemed to be the problem themselves. Only those who get back into the mind-set of tougher times will succeed in these altered circumstances.

Not entirely related to the post (Wolf excellent as ever) but more to the election.

I’ve been unable to find (via Google,, and a conversation with ‘me Ma’ about what she’s heard on the radio) any mention of expected turnout, polling est. etc.

I think considering everything that’s going on around the world anything less than 85% would send a terrible signal to our representatives / European brethren (who will get in on quota no matter what the level of interest). I’d say 95% but I think 10% of registered voters live abroad (like myself) and can’t make it back (as I often have) to vote.

Electoral reform is obviously on the cards in some fashion, postal / embassy voting for the (growing) 1st. generation working around the EU should be considered. I know there are a lot of us (+ 1m)

There was no worst case scenario considered on the infamous night of 29-09-2008 and shame on the leaders involved for clearly not considering that crucial aspect of consequential decision making.

So what is the worst case scenario of the latest prescriptions?

Anger is not a strategy as Colm McCarthy may say when in a calmer state but sometimes it can have a purpose and it’s a tragedy that so many took the gains of the bubble, kept their heads down and traps shut as they
succumbed to greed, while knowing better.

@zhou: here is a choice quotation from a Deutsche Bank report issued a few days ago:

“The good news is that the EU at least implicitly acknowledges that markets view the loan programmes as unsustainable. Separately from the sentiment for renegotiation being generated by Ireland’s election campaign, the EU looks like it is moving towards agreeing revisions to the terms and conditions of the rescue loans at the end of March that include a meaningful reduction in the interest cost. Although this will come at the price of having to agree Constitutional Rules on deficits and debt (and more controversially for Ireland, perhaps a normalization of corporate tax rates), the direct and indirect benefits are not to be underestimated. The direct interest savings of a 100bp rate reduction is about EUR600m a year in a loan programme with average life of 7.5 years. The indirect benefit of a programme with a better perceived sustainability is a quicker return to the market.”

The notion that we’d give away our one big bargaining chip, the corporation tax rate, and change our Constitution into the bargain, in return for some fiddling around the edges with the interest rate, which is not the real issue at this stage, is a pretty terrifying one, both economically and politically.

@Paul Hunt,

I read your comments on these matters with great interest particularly with regard to the workings of European decision making.

Very little seems to be said about the European Parliament and the MEPs. Are these part of the solution? Do you have any thoughts on how Irish MEPs could/should enage with the process?

@Michael Hennigan

There were plenty of people who spoke up during the boom including professional advisers, but not many people took notice of their opinions when everybody was a property expert and the advisers had been wrong for the last five years up to 2007. One has to play the hand one is dealt and let others play theirs. That is the way it works in a mass market.

@Kevin O’Rourke

At least the political leaders have all agreed with the idea that a percentage point off the interest rate is not going to solve anything. The arrogance of dangling €600m p.a. in front of us as we have to make €9b in changes is appalling. The political price of giving up the corporation tax rate will be an awful lot higher than the price of giving up the €600m. I think our politicians know that.

So now we know John Mchale and Colm McCarthy are against Unilateral default.

Of any kind? How about the 750 million non senior bonds the ECB told us we had to pay back a couple of weeks ago?

So what happens, even if we make the blindingly obvious case that Ireland needs debt restructuring but the ECB continue not to care? Their position has been consistent. No restructuring of any bank debt. Citizens of any country are fairly low in their pecking order of importance.

I agree with a point made by a contributer recently.
If this is left for the ECB to decide “nothing will be sorted until everything is sorted”

The ECB have been quite willing to continue almost blindly on their can kicking exersize until very recently.

In the last month it has come to our attention that They are forcing the ICB to become lender of last resort rather than they on 51 billion and also that they want Bank assets sold quickly so further losses fall on the Irish tax payer rather than risk that there is “an event” and they get cought with their pants down i.e. the 100billion they are on the hook for.
I disagree with Karls point on VB last night.
Their would be buyers of Irish assets. It just may not be at the prices the Irish citizens need them to be.
The ECB will try to force us to go ahead with the sales regardless of the size off the loss because at least they will get some of their money back.

@Kevin O’Rourke

Don’t forget Deutsche’s bit about not haircutting seniors being important for any revised deal to work.

Have to say leadership (academic and political) in Ireland wrt preparing the ground domestically for the reality of “hardball” with these guys has been absolutely pitiful.

In relation to unguaranteed seniors, in my view, the point in the debate where it is appropriate or useful to refer to them as a collective is gone.

Instead what needs to be focused on is the position in each individual bank.
When we do this the position and the range of options become clearer.

In relation to INBS and Anglo, given the scale of the losses at the banks, the fact that they are nationalised and the fact that they are to be wound down, (implying, inter alia, that they do not need to hold deposits and therefore do not need to have equity) puts us in a much better position to impose losses on seniors.

However, at BOI, imposing losses seems much more difficult – we haven’t even destroyed the private sector equity capital of this bank yet. Therefore, talk of burning seniors seems pre – mature. However, clearly this could turn on the outcome of the capital review to be published end of March.

In any event, our negotiating position would be substantially improved if we had in place a resolution regime that enabled us to rapidly impose losses on seniors in the event that the review of the banks reveals greater losses. If a resolution regime is not in place, or at least drafted, then our negotiating position will be weakened.


The problem is that those, here and elsewhere, who, quite rightly, advocate a strengthening of Ireland’s resolve in pursuit of vital national interests in its engagement with the EU are, inadvertently, playing into the hands of the ‘burn the bondholders’ brigade who, in many instances, are those who are seeking to protect their ill-gotten gains, are adamantly opposed to any structural economic reforms and who subscribe to the notion that by burning bondholders they will be back to business-as-usual. Why do you think any consideration of the structural reform issues (coming up in the implementation of the EU/IMF deal this year and next – and where Ireland retains considerable sovereignty as to how these are addressed) was deliberately excluded during the run-up to the general election?

@Gavin Kostick,

Thank you. Although the European Parliament’s powers have been increased somewhat under the final version of the EU Constitution (the TFEU), it has no power to initiate legislation that would change the EU’s institutions or the functioning of these. In general – and very much in this case – the Council sets policy and empowers the Commission to draft the necessary primary EU legislation; the Parliament’s primary role is scrutiny and amendment of this legislation. This is between voters and their national governments; Parliament might have a limited ability to amplify or moderate these discontents.

Isn’t there the small matter of democracy to be considered?

There is an election taking place. Unless the polls are totally wrong, the next government will be led by FG. During the election campaign, the leader of FG pledged that (a) there would be “absolutely NOT” a default (his words) and (b) corporation tax was “NOT negotioable” (his words). Links to both these pledges can be found here.

The fact of the matter is that the defaulters have lost. They had a chance to put forward their case in the election, but failed to convince the electorate. Either they chickened out from standing in the election (like the Fintan O’Toole/Eamonn Dunphy non-party), or they did stand but failed to convince the electorate (like SF and the various left-wing groups).

Even Fintan O’Toole acknowleded this in his Irish Times article yesterday, where he wrote: “Voters set to endorse EU/IMF deal” and bemoaned the ‘timidity’ of the Irish electorate (by ‘timidity’ he means, of course, daring to disagree with himself).

If the election goes as the polls indicate, it will be scandalous if the incoming FG-led government comes under pressure from unelected economists and journalists to break these election pledges. These people had their chance in the election. They must accept that the electorate has decided to ignore them.

Of course, some on here will argue that the economy is collapsing at such a rate that the FG-led government will be forced to break these election pledges. But, that is nonsense. As today’s merchandise trade figures show (link below), merchandise exports are growing at a phenomenal rate. It looks as though the volume of merchandise exports was about 25 per cent higher in December 2010 than in December 2009.

It is no small matter when exports are growing at such a rate. Ireland has one of the most open economies in the world, with exports being over 100 per cent of GDP. When exports are growing at 20 per cent plus, that has much more effect on GDP growth than in a country like the UK, where exports are 25 per cent of GDP. Even with flat domestic demand, such a growth rate for exports will ensure that GDP growth targets are comfortably met.

I know several people in Italy who lived through the Argentinian crises (plural) both in Argentina and Italy. Even though their stories are mesmerizing – losing most of their savings and seeing their pension pots of equities evaporate – they do not inspire me to support default. Italians invested heavily in Argentinian bonds and took a bath in the process.

In the event of default, what will happen to credit agreements between importers and exporters and their customers/suppliers? They’ll die and be very difficult to revive. Will those sparkly MNCs hang around for long post-default?

On the leaders debate last night.
The credence given to the new stress tests by the party leaders last night was a joke. Why are we supposed to believe these stress tests.
We have seen in the past that they have been politicised and worse than useless.
Brian Lucey has correctly said that the government are continuously undershooting the extent of the losses. That is true but so did the last set of EU stress tests.
As Colm McCarthy has pointed out before, No stress test is better than a bad one.
If the true extent to the losses had been established an a semi honest way we could have been having these multilateral discussions a couple of months before the bank guarantee was being contemplated.
The FF Government (esp Brian Lenihan) and regulators belief that prioritising “market confidence” (bluff) over reality has added hugely to the eventual bill that will be given to the taxpayer.
I wonder will we even learn this lesson from the crises.
I have my doubts.
We see very favourable news items about Nama ofloading the google building at 250mill but less on the news that they are expecting 8-10% write downs over all on commercial properties since the valuations in Nov 2009.

Also On the laedsr debate.
Micheal Martin made the admission that ” We dont know who the Anglo bond holders are”
Now I know that the public don’t know but isn’t it a bit shocking that a member of Cabinet doesn’t know the people that the Irish people are going to have to pay billions too.
I Demand to know who these people are.
And I want a thorough break down.

Until we see the capital review figures, it is difficult to put a figure on what could be saved by burning seniors.

In any event, what the ECB is asking / telling us to do is to take this loss to avoid contagion.

If the eurozone financial system is so weak and vulnerable that it can not take a hit on senior debt at peripheral banks then it needs to be reformed ASAP.

This would include increasing equity ratios across the european banking system.

In any event, it is unreasonable to force the Irish state to bear a disproportionate share of the burden of supporting the fragile euro zone financial system. We did not cause the fragility of this system so we shouldn’t be forced to pay the resulting maintenance costs

@Paul Hunt

“the hands of the ‘burn the bondholders’ brigade who, in many instances, are those who are seeking to protect their ill-gotten gains, are adamantly opposed to any structural economic reforms and who subscribe to the notion that by burning bondholders they will be back to business-as-usual.”

I don’t see how this is so. How will burning bondholders help people hang on to ill-gotten gains? Also, who other than SF and ULA are saying everything will be all right if we burn bondholders? Everybody with a tither of wit knows burning bondholders is painful. There will alwyas be fools in favour of and aopposed to the right policy. The point is that it may be less painful to burn bondholders than not to burn them.


Enda Kenny said he would not put more money into Anglo is things were worse than they were told and further that he would be reluctant to put more into AIB. He said he cannot burn bondholders if the banks were solvent and he was waiting for the reports. Gilmore agreed that it was right not to put more money into the banks and senior debt would have to share the pain.

@ Christy
” We did not cause the fragility of the system”

I disagree. By expanding credit at such a ridiculous pace we were part of the cause of the fragility. But so were the banks who supplied the credit.

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”
– Ludwig von Mises

You also have to have bullets in your gun if you are going to a gunfight. Perhaps the possiblity of unilateral default is like the nuclear weapon that prevents nuclear war.
Roubini’s G-zero where countries see economics as a zero sum game is a disaster we should be ready for.

I dont care if they are held in the crystal maze.
I demand to know who these people are.
I want a thorough breakdown.


Ex Minister William (now Tank-less) O’Dea ordered 20 million bullets for the Irish Army while in power.

These are now (almost) in the hands of Fine Gael.

Wonder who these bullets are to be aimed at?

@Paul Hunt

We have to put in a lot of effort to restore some respect among our EU peers.

And what could engender more respect then sublimating our needs to theirs and completely agreeing with a false narrative that guarantees our future financial impoverishment and political redundancy?

It is a little sad to read again and again that what we should do is not fight our unjust conviction or the system that allowed it to happen but instead to keep our heads low and try to make the best of prison life (or structural reforms and fiscal retrenchment if you like).

Advocates of a more “reasoned”, “realistic” approach to these issues need to accept that that that approach has not worked so far, at all, even slightly. Why continue to advocate a failed policy?

As Colm McCarthy noted, hope is not a policy. I think everyone but those more committed to the EU’s current direction and establishment than Ireland’s well being can agree on that.


“Have to say leadership (academic and political) in Ireland wrt preparing the ground domestically for the reality of “hardball” with these guys has been absolutely pitiful.”

And you’re surprised! Most academics are loth to leave their silos and besmirch whatever ‘science’ they pursue with grubby politics. No politician in the peripherals has ever engaged with voters to explain the reality of membership of the EU – and I would include Britain with Ireland, Spain, Greece and Portugal. It has generally been viewed as a gravy train with the occasional requirement to implement modernising and beneficial public policies – and, even in these cases, when any hint of voter rejection might be detected the EU could be blamed.

For the long established members of the EU its functioning requires the suppression of fear and self-interest – the principal motivators that politicians tap into. Politicians in the periphery have long relied on tapping self interest to maintain support for the EU. Now that the chips are down they’re lost.

@JtO: Kenny said he wanted restructuring, not default; and he was making a distinction between bank debt and sovereign debt. I would agree with him regarding these distinctions.

O’Toole’s piece has to be understood for what it was: he is ticked off that there hasn’t been a major left-wing realignment in Irish politics, and so is making a claim that is pretty clear not supported by the data (i.e. by what both FG and Labour are saying about the bank debts).

It is not the case whether we default or not, we have already done so. The stress tests and €150 bn debt overhang and growth turning to deflation, mean the debt cannot be paid back and our economy is broken, 800 percentage points the markets give us mean the markets know this, even if some here don’t. We are in a state of default. The problem for some is a catchup one that needs to deal with their state of denial. At EU/IMF level it can be argued, the euro project has foundered, the Stability and Growth Pact should be revised to incorporate elements of the Glass Steagal Act, the abandonment of whose regulatory principles played a large part in the deregulatory mess that gives rise to problems such as ours. Yes, there needs to be an insurance and regulatory mechanism the ECB needs to put in place to deal with future banking chaos and end present chaos. There needs to be a restructuring framework that takes citizens off the hook for regulatory failures, fraud, incompetence and crony abuse of the banking system at the expense of citizens, otherwise the EZ is just a noose under a different name. We need to play hardball, not toadie sychophantic nonsense that looks to europe rather than ourselves, to solve our problems. If the EZ no longer works for us, lets examine other options, such as joining with sterling. If there is no deal worthy of the name that EZ can put together to rescue Ireland, its time to abandon ship, before there are no young people left on the island, except those looking to make rich pickings from asset stripping what is left, or those telling us how to run our economy to better suit external debt repayment systems that have no input from us. Perhaps ECB should consider boosting the EFRF with some form of quantitive easing along the lines of Obama’s €700 bn QE, the problem is, there are others in the queue ahead of us and even that amount may not come close to the cost of what is required.


“I disagree. By expanding credit at such a ridiculous pace we were part of the cause of the fragility. But so were the banks who supplied the credit.”

I should restate – while we were a principal cause of the fragility of our domestic financial system, and this may have had an incremental effect on the stability of the euro-zone system as a whole, we did not force or encourage or cause, to any meaningful extent, European banks to carry too little equity or to engage in risky lending.

The fragility of the European financial system is the reason why the ECB is insisting that we take these losses – but this is a nonsensical position to take for a variety of reasons.

If the financial system is as weak as the ECB seems to believe, that weakness needs to be addressed in a fundamental and effective manner, instead of dealing with the consequences of this fragility in a piecemeal, arbitrary and ineffective way.

However, if the ECB, the commission and the EU take the view that they are not willing, or it is not possible to deal with the cause of the problem (ie the fragility of the financial system) then it is unreasonable for them to expect us to pick up the tab for this policy or situation.

All political parties now wish to impose losses on seniors – but they can’t because our EU partners won’t countenance it. This policy will cost us billions of euros.

@Zhou (and Shay),

All I am saying really is that, in addition to the proposed fiscal retrenchment, Ireland needs to make a clear commitment to privatise state assets (to reduce net sovereign debt) and to conduct meaningful structural reforms to enhance the performance of the domestic economy (to increase debt service capability). Doing this would strengthen Ireland’s hand immeasurably; and burning bondholders unilaterally would be the nuclear option in reserve.


….unless you havn’t noticed, we are already in a state of default, that’s why the EU/IMF are here.

But you require further proof. I presume you are kicking the can down the road to the March stress tests and the summit to follow when eu leaders will look at the figures.

You don’t need to wait, our figures are out there already. They are publicly available and included in Martin Wolf’s excellent article above.

@Kevin O’Rourke 9.12am

This is essentially my personal position. [2] is only sane option. The blind can see that [1] will not even be in the footnotes March 24, so why wait?

@Colm McCarthy

…. expect to be labelled a ‘trotskyite’ by the in-bred in-house self preservationists – I’m sure you can handle it … you are a minor step from [2] … make the leap! Pragmatic realists are way beyond ideology NOW.

@Paul Hunt

The only problem with that is that we can burn bondholders now whereas reform will take time. We have already shown our willingness to sign up to a harsh deal with a lot of restructuring. The element which is missing is a commitment from the EU to allow us to restructure the private debt burden to the extent necessary.

If a bindig commitment is not forthcoming formt he EU now then we should strongly consider withdrawing our commitment to support unguaranteed senior bank debt and should further consider introducing collective action clauses (whereby a majority of creditors can accept a write-down of debt) into the ELG scheme.

@ zhou_enlai

There were plenty of people who spoke up during the boom including professional advisers, but not many people took notice of their opinions when everybody was a property expert and the advisers had been wrong for the last five years up to 2007.

There were people with commonsense (educated people as distinct from people with education) who had the memory of the bitter experience of the 1980’s but it would be ridiculous to claim that this scepticism was reflected in the media.

The bank economists could peddle their propaganda with impunity and whether it was benchmarking which some recipients at least knew was a sham or a fraud, Niall Crowley of the Equality Agency, was the only official to see fit to resign on principle – – simple self-interest usually trumps principle if there is recognition of such a concept.

With the chief boomster Bertie Ahern using the argument that people would have lost out if the doomsters’ advice on house prices had been taken on board but there were many other valid arguments to make against these individuals.

@ Shay Begorrah

It is a little sad to read again and again that what we should do is not fight our unjust conviction or the system that allowed it to happen but instead to keep our heads low and try to make the best of prison life (or structural reforms and fiscal retrenchment if you like).

You can blame the publican, brewer or distiller for making you an alcoholic but this victimhood is ridiculous.

This is akin the chancers who were shocked about the revelations about Haughey.

There is blame to go around but what the hell does independence mean?


“We have already shown our willingness to sign up to a harsh deal with a lot of restructuring.”

Harsh deal maybe, restructuring?!! Don’t think so…

The reason there is so much resentment in Greece is that the tax collection measures have wilted and it is the ordinary folk that get squeezed while the connected and protected continue more or less as they were.

@ David O’Donnell

Eaten bread is said to be soon forgotten but remember that there is no particular bravery in offering the masses free bread or cake for that matter.

I know from experience what it was like to oppose the ignorant ‘consensus’ during the bubble; it is of course an ideal to be open to dissenting views but in practice it’s rare.

@Paul Hunt

For the long established members of the EU its functioning requires the suppression of fear and self-interest – the principal motivators that politicians tap into. Politicians in the periphery have long relied on tapping self interest to maintain support for the EU. Now that the chips are down they’re lost.

Are you genuinely suggesting that the approach of Germany and France to the banking crisis is less motivated by self interest and fear than Ireland’s? We are arguing in bad faith and Bin-Smaghi is not?

That is a hard position to justify intellectually and at odds with the majority of analyses of the situation from outside the EU as well as the analysis of the left within the EU.

Could it be instead be the case that you believe that Chancellor Merkel’s and the ECBs approach (the monetarist, Mitteleuropan, center right consensus) to the structure, economy and political direction of the EU is the correct one and by definition that anyone opposed to it is motivated by self interest or petty nationalism rather than the common good?

I just depair at this failure to grasp the perspective of governing politcians in the core EZ countries – who, at the end of the day, will have to craft and decide a resolution to this EU-wide mess. They are trying to deal with the fear and self-interest of their voters – and considerable anger, whether fully justified or not, with the peripherals.

One thing we can be sure of is that they will not let the EU fail – or the EZ collapse – if they can at all avoid it. We have a choice: do we mandate our politicians to engage with them to establish and agree what we can do to provide them with the support and cover to persuade their voters to consent to an EU-wide resolution that will benefit us? Or do we force them into a corner where the continued functioning of the EU, the EZ and our membership become issues with an uncertain outcome?

The more I see of the debate in Ireland, here and elsewhere, the more I’m convinced that Ireland no longer belongs – nor deserves to belong. I haven’t forgotten – nor is it forgotten in the EU – that voters in Ireland twice rejected proposed changes in the EU’s institutions.

monday Nov 8th. Morgan Kelly,s best quote:

Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.
From here on, for better or worse, we can only rely on the kindness of strangers.

@Michael Hennigan

Where we agree, we agree; where we dissent with each other – we dissent – to do otherwise would be selves-contradiction in terms.

The ‘Dissenters’, as you put it, have always had a rough ride around here (and we might both have a little pedigree in this regard, if somewhat heterogenous shades of dissenting heterodoxy) since Tone’s time, and continuously since the early days of the 19th Century when our overlords at the time switched from eating bread/grain to the delicious aromas of ‘roast beef’ and we have been basically f*c*ed out of the place for claiming a voice of our own ever since – in favour of Cattle at that time to the present time in favour of vichy-bankers in the european core. Never a shortage of Irish quislings to keep the masses in order or to direct the most dangerous to the boats ….

Enough I say! The remnants of the possesive class now in positions of power and influence are obviously so genetically inbred, and intellectually challenged, that they are a danger to the idea of ‘ Irish Sovereignty’, let alone its realisation.

Off with their heads; back to 1789 and we start all over again.

A continuously growing debt/GDP ratio would sooner or later become unsustainable and lead to default.
To stabilise or reduce this ratio we must achieve a primary (non-interest) budget surplus. How large a surplus depends on the initial level of the debt, the rate of interest on the debt, the rate of growth of GDP, and how quickly we wish to stabilse the debt ratio.
Martin Wolf states in his article
“Even excluding recapitalisation of the banks, the primary fiscal deficit (before interest payments) was close to 10 per cent of GDP last year. Under the IMF programme, this is to be turned into a surplus of 1.5 per cent of GDP by 2015.” This may exaggerate the size of the adjustment somewhat, but not much.
From the Economic and Fiscal Outlook document attached to Budget 2011 the relevant numbers appear to be: primary balance in 2011 = -5.9% with a target of +3.0% in 2014. Given the assumptions about GDP growth and the interest rate on the debt, this would stabilise the debt/GDP ratio.
The nub of the debate is therefore whether it is possible to achieve an increase in the primary budget balance equal to 8.9% of GDP over the next five years.


In answer to your question I would much prefer to see a liberal/progressive/left-of-centre plurality in governance throughout the EU, but those on the left-of-centre carry so much ideological baggage and assiduously defend selected insider interests so determinedly that they repel large swathes of voters with genuine liberal and progressive instincts so that they are prey to the wiles and ploys of the Neocons.

The reality is that it is unlikely that Chancellor Merkel will be unseated before Sep. 2013 and that Pres. Sarkozy will be in office until May 2012. There is a right-of-centre government in the Netherlands, an unsteady one in Italy (but an apparent right-of-centre popular plurality), a centre/right government in Britain and a similar complexion in Sweden, Denmark and Austria. With the exception of Spain and Greece, this is the political stance throughout the EU.

These are the heads of state and government that will meet in the European Council next month and who must be persuaded to cut a deal that will give Ireland some relief. You may find some comfort in the ‘analysis of the left’, but I fear – and regret – it will cut little ice there.

I know this might smack of semantics, but I think we have been asking the wrong question: Will we repay the bondholders (and others)?

It might clear up some confusion (e.g. between Colm Mc and John Mc) if we asked another question: Who will repay the bondholders?

Thinking of the second question, one quickly realizes that we can not and should not repay all of the debt that has been associated with us. (The D word is irrelevant to the second question and this makes it easier to think clearly). Then, with this conclusion intact, go to Brussels to discuss a joint problem.

Brass tacks:

There’s no perfect poker system. Playing to a system will eventually allow other players to reliably anticipate your actions, and this is enough to guarantee defeat. This applies to also to business, warfare and to a certain extent politics.

In the current Irish context, what Nixon referred to as the ‘madman theory’ applies. This is associated with Thomas Schelling but has a very long history.

Essentially, if serious negotiations are to occur, Ireland must employ creative ambiguity to convince the counterparties to any negotiation that it may be willing to employ measures that seem contrary to its own interests. It’s a sad day when this is the case, but a patient examination of all options, taking account of the fact that this country and its EU partners are complex societies with internal structures rather than monolithic entities, leads inescapably to this conclusion.

The superficially prudent path has outcomes that cannot be foreseen. We need to engage the attention of the people of Europe, and this may require an unusual degree of drama. Visionary policies advanced with sincerity will be needed to counteract the understandable aggravation this will cause but the alternative is to permit a dangerous and short-sighted policy to continue, one that serves the interests of political elites here and abroad instead of those of any nation.

Tacks of some material other than brass:

As constructing a complete personal treatment of Ireland’s predicament would be a labour of months, here are some hasty notes instead. They might be termed imaginative digressions.

Suppose some group or groups here resort to political violence in the future. Remembering that our new Taoiseach has a negative approval rating even before he’s elected, this something I’d guess to be quite likely if current trends continue. I don’t mean to slight Enda Kenny by this remark; the fact is the country has lost any faith in its political leadership, meaning faith in itself as it’s a democracy.

Initially the country would probably pull together, but suppose some security-related scandal(s) were then to occur. Maybe a prisoner would be mistreated, a trial rigged or security legislation employed to favour the personal interests of ministers. At that point, trust between the government and the governed could break down. The scenarios described sound outlandish until it’s remembered that every one of these things has already happened in this country within the last three decades. This time around, the establishment won’t be protected by a feeling they’re defending the nation. It’ll be felt it’s protecting itself.

To take another flight of fancy, suppose young Jimmy lives in a nice home and is doing well in school but the family’s principle breadwinner suffers a chronic illness. The family lose their home and find themselves in one of the chaotic estates where the scattered remnants of Sherrif St or one of the other consciously demolished communities now live, places Ireland was always adept at pretending don’t exist. Jimmy works hard at school in spite of the crime, poverty, unemployment, addiction and violence of his surroundings. By this stage, however, it’s €5,000 p/a to attend university and he’s no chance of ever raising the money. Frustrated ambition is a powerful motivator, but where it drives a person can be hard to guess.

It’s been said of Britain and the US that the baby boomers are pulling the ladder up behind them. The 45-80 era is over already, but now an experiment is being conducted that is deeper and more pervasive than any imagined by Thatcher and Reagan. In fact Thatcher, whose zeal was driven by a sincere if consciously antagonistic sense that her Britain was a land where opportunity was shared by all, never contemplated anything a remotely as radical as what is today becoming a reality. If Niall Ferguson is to be believed, nothing like it has happened since the immediate post-Napoleonic era.

Current trends will see opportunity vanish for upwards of 50% of the population, engendering maybe on the one hand a return to the personal conservatism of the pre-war era of prudence and thrift but on the other a militant resistance on the part of those who do manage to elevate their status to any policy they consider as depriving them of their hard-earned rewards.

This time round, the mobility of capital and skilled labour, which hollow out the potential of the state, will prevent redistributive measures. Political and economic action are occur at different levels and work to different rules.

Perhaps the social safety net was only ever possible due to the majority gaining a fleeting grip on the state due to the sacrifices forced on it by conscription, that’s to say maybe the state’s iron grip on the individual during the 20th Century enabled the marginalised to exercise a reciprocal moral grip on the state.

This was interpreted as modern between 1945 and 1980, as the way of the future, but it may have been a historic anomaly. Another possibility is that each nation’s desperate need for heroic squad sergeants in the era of automatic weapons forced governments into populism, but that that need has vanished in the era of $2Bn bombers and guided missiles.

All this matters because the state power that permitted fascism and communism to emerge also facilitated social democracy and the release of the latent potential of the 75% of the population that never enjoyed economic opportunity before: women, the poor and, most pointedly, poor women. The modern world depends much more on this transformation than on technological progress — after all, powered transportation, electricity and the like have existed for more than a century.

Now if the right wing press or the Tea Party, say, were governed by some sort of Machiavellian figure behind the scenes it actually wouldn’t be as bad as what’s really happening. This beast is a hydra however, knowing only the now and the individual conflicting interests of a small legion of the wealthy and powerful.

This hydra’s individual heads neither know nor care about the beast itself. The rules of the game mean that each must pursue its own ends, even if this drives the beast to its own destruction. It must choose profit now, even if this damages the wealth-generating capacity of the economy by destroying the quality of the workforce, because if one head doesn’t then some other one will. This isn’t a fantasy, it’s the reality in dozens of countries globally like Guatemala or Pakistan where tax revenues are too low to support anything resembling a modern state.

This isn’t an era of naval reviews and march pasts and saluting the flag. If the powerful see no interest in building up the nation, the nation won’t get built up.

The most dangerous feature of the world today is the pervasive role of fantasy in all modern lives. Advertisers dream more vividly than we do and do so with tremendous dedication. No matter how cynical or detached a person is, it’s not possible to escape their influence.

We’ve been taught to believe in a fantasy, but Irish fantasies have taken a knock. Even here, it will be a decade at least before the full impact is generally felt, however, and Angela Merkel and Nicholas Sarkozy are working as hard as they can to preserve the consumerist fantasies of their countrymen. King Canute would have some wise words for them if he were alive today.

Anyone who doubts the power of fantasy should simply consider how Ireland powered past the frontiers of possibility in the 2002-’08 period. People chose self-destructive paths because they believed in a carefully crafted fantasy engineered by property interests that the government and media did nothing to disturb.

In an essentially static world, with the social transformations brought about by contraception and women’s economic independence behind us along with the practical limits of technology to meet human needs, fantasy is all that convinces us today that there is such a thing as progress. We anchor ourselves in time by the clock of technical and social progress, but it’s stopped ticking.

A little imagination might allow a sense of how unnerving and disorientating this might be to rich-world consumers — it’s a little like moving from the rolling landscape typical of this country to the billiard-table grain fields of Iowa or Hungary. Add in the psychologically oppressive feeling that the planet is undergoing irreversible changes and that we’re looting the last of its resources and the possibility of radical, perhaps millenarian ideological shifts arises.

@Paul Hunt

The more I see of the debate in Ireland, here and elsewhere, the more I’m convinced that Ireland no longer belongs – nor deserves to belong.

Paul, submitting to the current Germany government plans for Europe would not make Ireland more European. It would not reform Irish governance. It would not make the world a better place. It would not make the EU more democratic.

You also know that if more European countries had had referendums on the Lisbon treaty there would have been many more rejections – however this lack of democracy seems to be of the kind that EU integrationists heartily approve of, particularly when it moves policy decisions further from public attention and influence.

I remember reading David McWilliams noting that Ireland needed a banking system, just not this one. Our situation with the EU is similar, lets not make the same mistake twice and agree to help preserve a configuration of the EU that does not work for us.


I agree with Gary O’Callaghan. If any progress is to be made Ireland’s engagement with the EU has to be on the basis of seeking the resolution of a joint problem. It has proved expedient for core EZ politicians to focus attention on the peripherals to deflect attention from their own failings. Ireland (and the other peripherals) must try to shift the focus back to the institutional and procedural flaws of the EZ.

The chicken that is coming home to roost for the EU’s Grand Panjandrums with this crisis is the extent to which they have pursued EMU (and the EU Constitution) without securing their voters’ informed consent. There has always been a gap between what the EU seeks to achieve and the actual mechanisms it puts in place to achieve this, but this gap has widened over time. And now they require their voters’ consent to close this gap – and these voters are feeling pretty stroppy.

You’re perfectly free to propose that Ireland should reduce its engagement. I’m no starry-eyed Europhile. Having had exposure to policy formation and implementation in other areas, I am as critical as the next person. But I would argue for continued engagement as I fear any conceivable alternatives.

In any event, the political tide will turn in the EU – it always does. But it will be hard-won. In the run-up to what is generally accepted will be a mould-breaking general election, Labour’s failure to secure the support of liberal, centrist, potentially porgressive voters will set it back for a generation – irrespective of the number of seats it gains. That is where the battle has to be joined. And it is best joined in concert with other EU voters.

Ireland cannot pay back what it owes, ergo it won’t pay back (see Keynes and the Versailles treaty).
Your European partners understand that. A default is not acceptable for them ,because of the huge losses they would occur but also mainly because it will be the end of the European project of sixty years (not an Irish project by the way).
A default would set the Irish standard of living back a generation. So, we have to talk .Interest rates, repayment period, burning the bondholders, everything is on the table .But you can expect that your partners (especially the ones ,like the Germans and the French who will incur most of the cost) will push any advantage that they can have to the maximum .They are pretty mad at you ,about the referendum ,about the corporate tax rate ,about the ill-advised visit of Kenny to Merkel,….
Also their public opinion will be against any concessions that they will make and they will have to prove that they got a pound of flesh from you.
I do not quite understand why you seem to believe that an SPD chancellor or Strauss-Kahn as a president would be more favorable to Ireland’s position .Historically the center-left has been more in favor of European integration and a strict governance than the right and it would probably ask for tighter constraints than Merkel ever will.

Remember in mid-2008 when the hubris of the bubble period was still strong, there was a big song and dance made about the claimed ‘democratic deficit’ in Europe (it was of course a case of myopia for what was under our noses at home)?

Shock! Horror! The ‘elites’ were making decisions without regard to the views of the people.

The ‘Democracy Now’ folk want a referendum on the debt issue – – they want to participate in an election in which they can be assured of being on the winning side.

The problem with this sort of game is that extremist parties in countries that would have to contribute to bailouts could insist on similar referenda.

As for the earlier suggestion of a worst-case scenario on unilateral defaults, I will checkin overnight on whether anyone has bothered to consider this.

@Paul Hunt

“The more I see of the debate in Ireland, here and elsewhere, the more I’m convinced that Ireland no longer belongs – nor deserves to belong. I haven’t forgotten – nor is it forgotten in the EU – that voters in Ireland twice rejected proposed changes in the EU’s institutions.”

Agreed. But A largely agrarian socially conservative society could not have been expected to reach out and grasp a largely secular EEC. For as long as the EU handed out the cash to stoke politicians’ clientelist furnaces, it was dandy. No need to explore deeper philosophical commitments, just widen the wallet and fill it up quickly.

And as for CAP, it is one of the most outlandish subsidy schemes in existence. No semblance of a business plan required to draw down the dosh (disclaimer: I have benefited from CAP). The opportunity to engage with Europe was (and still is) reduced by the political establishment to how much cash Ireland can extract. When did one last witness a Taoiseach speak any continental European language?

@Dominique Jean-Raymond,

Thank you. Once again you provide an antidote to the navel-gazing and the self-pitying shouts of defiance.

I don’t think a centre-left shift in governance across the EU would mean that Ireland would receive better terms – in fact, like you, I think they might be harsher. What it would do is force some change in the Commission’s so-called ‘neo-liberal’ (but really Neocon) agenda.

But this is of no relevance over the next year when the current crisis will have to be resolved.

@Adrian Kelleher

Your post is very interesting and a stimulating go at a grand summary. I do have some queries though.

“The family lose their home and find themselves in one of the chaotic estates where the scattered remnants of Sherrif St or one of the other consciously demolished communities now live, places Ireland was always adept at pretending don’t exist.”

Umm, I’ve lived in one of those estates for years and I work across a number of them. The (current and former) residents of Sherrif Street are great. Give me Cabra over Dalkey any day – much better bakeries and a kinder class of neighbour. You over-egg the pudding, and express the anxiety of the middle classes over perceived downward mobility. Come into the Finglas Leisure Centre swimming-pool – the waters lovely. Truly criminal surroundings are the IFSC – wouldn’t want to go there at night.
Excessive fees for working-class students are a nasty problem, but you have confused class snobbery, with moral special pleading (parents had a chronic illness eh, does that make Jimmy a better person than if his parents were just middle class wasters?) with a straightforward economic problem.

“It’s been said of Britain and the US that the baby boomers are pulling the ladder up behind them.”

By whom? Do you mean David Willetts? I wouldn’t have thought there’s any reason to take him seriously.

“In fact Thatcher, whose zeal was driven by a sincere if consciously antagonistic sense that her Britain was a land where opportunity was shared by all”

I thought her zeal was driven by whisky and a desire to impress her father. I expect lots of people have lots of ideas about that. Maybe you should ask her. She never owned Britain either.

“All this matters because the state power that permitted fascism and communism to emerge also facilitated social democracy”

Tricky. I think you mean right ‘bad’ , left ‘bad’ , ‘good’ in the middle. Aristotle smiles (but not too much) being rarely praised on this website. I appreciate that you’re attempting to articulate difficult things, but the word ‘permitted’ may the problem here. ‘Permitted’ may be too passive a verb.

“Advertisers dream more vividly than we do and do so with tremendous dedication.”

Simple rebuttal. They do not. As ever with these argument, to which ‘we’ do you refer?

“Angela Merkel and Nicholas Sarkozy are working as hard as they can to preserve the consumerist fantasies of their countrymen”

I have a regard for Angela Merkal. She and Colm McCarthy would get on fine. She has made the point that the current issue is ‘who rules’?: the managers of financial institutions or the elected representatives of the people? The problem for Ireland is that the impression I get she wants the taxpayer to rule, but at the schedule of her (and her party’s) choosing.

I find, the last two paragraphs are a bit confusing. Are we in a “static world” only driven by fantasy, in which technological and social progress have stopped? Why? Last time I looked technological progress promised immortality, but sadly not for a few generations yet. That’s a pretty big offer.

Or are we in a world which must focus in the fact that things cannot go on as they are, or we (the famous ‘we’) will destroy ourselves. Is this ‘psychological’ ot practical?

@ Adrian Kelleher

‘fantasy is all that convinces us today that there is such a thing as progress. We anchor ourselves in time by the clock of technical and social progress, but it’s stopped ticking’

+1 for that and the rest of the post. You sure said a mouthful there. One of the things we are looking at is the dissolution of the liberal ‘western’ world. Perhaps the fall of the Berlin Wall was just the opening act.

@Paul Hunt

Your relentless reasonableness and prodigious output has worn me down Paul.


Firstly we will not change the EU’s current approach to the banking crisis in a significant way by basically complying with it and the current approach undermines the Irish state and society in ways that may be difficult to ever recover from.

Secondly the current EU core states are just as likely to keep us as a whipping boy for the the failures of the international financial system and a feckless foreign villain for their own restive voters as save us so we have to do our best to make the second option more appealing than the first.

Given the current EU’s alienating democratic deficit and the fact that Merkel’s “EU of the GDPs” is meeting widespread opposition from smaller states the EU is now as likely to yield to pressure as it will ever be and for a limited time, before we exhaust all our funds and sell off all our assets, we can attempt to apply some.

The other option is self flagellation and appeals for charity.

Thinking about it now – Could it be said that the real or effective cost of the bailout is not simply the interest rate being charged it also includes

1 The losses that must now be borne on senior debt


2 At least potentially, losses that must now be borne as a result of firs sale of assets to de leverage the banking system.

Clearly, what is the relevant counter factual is a question of importance in determining whether these effective losses would have occurred anyway or would have been outweighed by other losses brought about by a sudden stop. In this regard however I’d say that the relevant counter factual would be some sort of IMF led bailout – we might even have got the yanks to give us some measure of support.

@ Michael Hennigan
“The problem with this sort of game is that extremist parties in countries that would have to contribute to bailouts could insist on similar referenda.”

This doesn’t make sense to me unless you are talking about a military escalation?

Let say Le Pen in France gets The french to put a referendum saying that Ireland must not default on any bank debt and pay everything back in full with interest.

Lets say its passed.


@Eamonn Moran



We are clever and can tell (I think this is actually correct). Those foreigners however are so dumb they can’t see this and actually expect the country to have a go at curbing some of its upper-middle class (very comfortable) excesses in order to try, and maybe fail.

The words arrogant and brats – or their german equivalent – spring to mind.


I don’t think we’re a hundred miles apart. I suppose all I’m saying is that the new government will have to say a number of things quitely, calmly, but firmly, to our EU partners. Such as, using an earlier analogy, we didn’t break all the windows and we can’t and shouldn’t be expected to pay for all of them. Irish taxpayers won’t consent and the economy or society can’t sustain it. Part of it is your problem as well. And another is that they can forget about a specific focus on our CT rate, but we will participate in further review of taxation in the EU with a view to changes and we will review our industrial and economic strategy. But this will need to be accompanied by a commitment to the structural reforms in the EU/IF deal.

Our EU partners want this resoled as much as we do. The difference is that they have, or may think they, a bit more time before they bite the bullet. I would far prefer the sovereign bond market determined the need for bullet-biting than Ireland threatening some sort of default.

The primary question that has now emerged is how to persuade our European partners of the case that Martin Wolf and others make. Why not link renegotiation of the bailout to German proposals for fiscal consolidation at the March summit. The new government would publicly declare that it would not ratify any changes to governance in the Eurozone, even those they agree with, until there is renegotiation. Chancellor Merkel needs Irish backing for her proposals, which is what gives the new government leverage. This form of leverage is also very consistent with theories of bargaining as outlined by nobel prize winner Tom Schelling and others– it is easier to promise to withhold something that the other side wants than to proactively do something that would hurt them.

@Colm McCarthy you write: ‘Is it not interesing that the FT, an un-spinnable newspaper, so far as I know, through its editorials and columnists, appears to get the Irish picture so consistently? Is it possible that the EU Commission and the ECB might be missing something?’

Yes it is interesting. Here’s what’s going on. This is good old-fashioned British class. The FT was founded by an Irishman – not that that makes any difference but it merely shows the conjoined nature of our islands. The FT would regard it as an absolute minimum standard of their journalistic and financial literacy that they must get Ireland right. They see us as brothers and friends – we are their blood. The EU Commission? Now where did I put that pamphlet on European regional solidarity.

@Paul Hunt: I don’t get your enthusiasm for selling off state assets. What reason is there to believe that the private sector would be any more efficient than the existing semi-states? The eircom debacle suggests that any sale of strategic assets would likely make Ireland in general less competitive rather than more.

Furthermore, selling off the semi-states in order to pay the bondholders of AIB and BOI really just looks like throwing good money after bad.

“I would far prefer the sovereign bond market determined the need for bullet-biting than Ireland threatening some sort of default.”

+1, for a change.

But if our friends refuse to allow the bond market to do its righteous job ….

@Paul Hunt

Your synthesis is well thought out, and appealing as it suggests that there is a mutually beneficial solution to the current crisis where all aspects of taxation can be fruitfully discussed and some arrangement come to on the sharing of costs from the banking crisis.

We still differ is on whether saying things privately, calmly but firmly will offer enough incentive to the EU’s current ruling bloc to effect changes that reverse our current course to growing inequality, impoverishment and social injustice.

If you have a look at Bini-Smaghi’s most recent performance on the FT I think you might also agree that quiet diplomacy seems to have been abandoned by at least one side of this argument already. He plays the ECB’s vocal bad cop to Trichet’s quiet stern cop while we publicly genuflect and make noises privately, plaintively and pathetically about how unseemly the whole matter is to our EU partners. Don’t they know how this looks at home?

We need an alternate strategy, a strategy that can run in tandem with the diplomatic manoeuvrings which pass for democracy in the EU and a strategy not entirely dependent on maintaining the good will of all parties or the non appearance of another global financial shock.

I would rather rely on the power of preparation than that of prayer.

@ All,

Great comments by all. It appears the fog is starting to clear post 2008 guarantee. I remember Defense Secetary Robert S. McNamara talking about the “Fog of War”, trying to make sense of a confusing unclear situation. Ireland appears to be in the same fog, except as time progresses the Fog is slowly starting to clear.

Caught between a rock and a hard place is Ireland. However the Irish are very good at diplomacy, tact, overcoming differences etc. It’s part of our nature, we can emphatise, bargain, wheel & deal, and by God is Ireland going to need these attributes.

In my humble opinion this is the time when the Irish really need to start boxing clever, thinking strategic (Long term) as well as tactical (short term) about how to resolve this mess.

Senior Irish civil servants and various ministers really should start thinking outside the box. There are other countries in trouble, Portugal, potentially Spain, perhaps even Italy. Greece is in a serious life or death struggle with the communists who wish to take total control and wrench Greece out of the EU.

I don’t believe Ireland can stand up against the core of Europe on its own. But (& there is always a “but”), collectivelly if Ireland were to build strong bridges with other peripheral EU countries then maybe, just maybe the outer rim can influence the correct decison to be made by the inner EU.

Serious power broking and very high stakes!!


Okay, I’m apologising in advance for verbiage. Strategic thinking has been mentioned a few times, and I’m trying to lay out the substrate for my own. You can call me an idiot but there’s no point telling me I’m OT.

@Dominique Jean-Raymond

Your analysis is based on ‘France’, ‘Germany’, ‘Ireland’ etc. All are pluralist societies with many interests, objectives, ideologies and so on, so rather more real are ‘French’, ‘Germans’ and ‘Irish’.

@Yields or Bust

I could probably learn from your concision, but I’m afraid your message is lost on me.

@Paul Quigley

China has stolen our lines just as Holland did to Spain, Spain to the Arabs, the Arabs to the Byzantines and so on.



@Gavin Kostick

Umm, I’ve lived in one of those estates for years and I work across a number of them. … You over-egg the pudding, and express the anxiety of the middle classes over perceived downward mobility.

You’re correct of course. I painted a picture for effect. The disappearance of opportunity is still a fact, though, and in my experience class snobbery is more prevalent now, even among the traditionally leftist chattering classes, than at any time since I was born.

Also real is the chaos that results from shattering communities, deliberate policy in this country for decades as evidenced by Sherriff St, ‘Mondo’ (night town in Ulysses) and so on. Rather than constructing social housing in the midst of private developments, the poor were intentionally crammed in together in an unholy blending together of progressive and regressive policies.

I’ve worked and lived in these areas as well (and even know a couple of people from Sherrif St, though they don’t know each other afaik) and know there’s no difference between the ‘bad’ and ‘good’ parts except that thugs know there’s safety in numbers and congregate at specific spots.

That crime is concentrated in such areas is a fact, and most victims of crime are poor. The anxiety suffered by residents hurts academic and employment performance, and not just in obvious ways. The immediacy of anxiety limits perspective, though this is hardly confined to the economically marginalised.

The moral special pleading I admittedly did engage in was for illustrative purposes: to demonstrate that meritocracy is not a self-perpetuating and self-generating phenomenon, but something that needs political support to become a reality.

“It’s been said of Britain and the US that the baby boomers are pulling the ladder up behind them.”

By whom? Do you mean David Willetts? I wouldn’t have thought there’s any reason to take him seriously.

£9,000 tuition fees will be beyond many. Demographic factors that enabled the baby boomers to alter society in their own favour in their youth are now permitting them to do so again in reverse, all to protect retirement provisions that may not be realistic or even solvent.

This factor doesn’t apply to Ireland, but these political debates generate currents that tend to sweep the country along.

Don’t know if the quote originated with Willetts and don’t remember where I heard it. It would be odd if the one pulling up the ladder were to be the one pointing it out though…

“In fact Thatcher, whose zeal was driven by a sincere if consciously antagonistic sense that her Britain was a land where opportunity was shared by all”

I thought her zeal was driven by whisky and a desire to impress her father. I expect lots of people have lots of ideas about that. Maybe you should ask her. She never owned Britain either.

My belief is that the greatest mistake of the left in recent decades, something of an epoch-defining error, was the dismissal of the ‘Reagan democrats’ and their British counterparts as nothing more than self-interested ingrates.

Of course the Tory party of the 80s was a very mixed bag (to be polite about it), but the old land and business interests of the grandees did not energise the Thatcher revolution. That resulted from the zeal of those who believed in the opportunity mantra, often lower middle class or working class, and those who believed in a transformation of British industry via the power of the stockmarket and in liberating what they saw as the democratising power of shareholders.

The stockmarket part flew but the shareholder part didn’t, a fact that seems lost on the Shane Rosses of this world that don’t see any contradiction between their campaigning against corporate elites and insiders on the one hand and the fact that shareholder oversight mechanisms simply don’t work on the other.

To my mind, that the Tory party remained the party of money doesn’t alter the fact that this zeal is what distinguished the party of Thatcher from the party of Heath. In trying to combat the Tories, Labour was tilting at a phantom enemy. It’s refusal to understand its opponent lead to defeat after defeat until Blair finally won victories that were, in the end, pointless. Both Blair and Clinton explicitly adopted the small-state, liberation-from-government mantra.

“All this matters because the state power that permitted fascism and communism to emerge also facilitated social democracy”

Tricky. I think you mean right ‘bad’ , left ‘bad’ , ‘good’ in the middle. Aristotle smiles (but not too much) being rarely praised on this website. I appreciate that you’re attempting to articulate difficult things, but the word ‘permitted’ may the problem here. ‘Permitted’ may be too passive a verb.

Agreed about ‘permitted’. I didn’t mean left/right bad middle good exactly, or even to engage in advocacy as such. It was observation rather than prescription — that state power in the 20th century had transformative potential it lacks today due to the fact that government, local everywhere, is dominated by the global financial markets.

While I’m not big on state power, in a world where other forms of power exist that may be even worse it’s alarming that the potential of democratic institutions has been allowed to ebb away almost without people noticing.

Market power is more subtle and seductive than political power — it causes politicians to imagine ideas are their own that in reality follow from the logic of cheap money on the financial markets. They make a virtue of necessity, resulting from insights that are correct to a degree, but limited.

Mention of Aristotle is a coincidence — the other week I happened to catch a few minutes of a BBC4 show covering his political ideas about the polis etc. My knowledge of this is delightfully vague, but the bit I heard did set off some speculation in my mind. In particular I started wondering if many cognitive biases, dismissed in an individualist culture as simply incorrect (i.e. defying economic rationality), result instead from innate psychological forces that form societies.

The idea of the polis certainly has a longer and more carefully analysed history than the radical individualism of the modern era. There’s nothing wrong with individuality as an outcome; as an objective it is futile. A briton or german who got his conscription papers in the post in 1939 would be unlikely ever again to accept meekly that he in turn had no right to make demands on the state.

“Advertisers dream more vividly than we do and do so with tremendous dedication.”

Simple rebuttal. They do not. As ever with these argument, to which ‘we’ do you refer?

I often use ‘we’ in this context as I’ve noticed the more precise ‘you’ generates inexplicable levels of anger (j/k).

Seriously, I doubt the impact of advertising can be avoided these days. It isn’t just the ads themselves, its how they permeate society, coming back at people from unexpected angles.

Goebbels had some devious propaganda techniques. There wasn’t just the propaganda of the loud man at a lectern. Classes in schools or workplaces would be obliged to listen to speeches, for instance, and analyse them under official supervision later; each individual would thus be presented with a picture of apparently voluntary acceptance of orthodoxy.

Even more insidious were the low-level party functionaries that were occasionally sent out on campaigns. They’d be given anecdotes to tell and carefully constructed jokes that they’d relate loudly in public places. The viral nature of the material gave it legs, and its seemingly spontaneous origins credibility. Implicit in all the messages, but often very subtly, was propaganda.

The kristallnacht is usually taught as being emblematic of nazi brutality and this is correct but misses an important part of the charade. The violence was carefully orchestrated to appear spontaneous and popular in origin then, after letting it run for a few days, Hitler stepped in in the guise of a moderating influence, that being his persona for the week — that of the statesman exercising restraint on a restive and righteously anti-semitic population.

The message was simultaneously intended for foreign (‘Hitler is a man we can deal with — the rest are worse’) and domestic (‘Well everybody in the country seems to believe in this Jewish conspiracy so…’) consumption.

Other techniques they used I’ll only mention included the power of the editor and the oblique message.

I bring all this up because I’ve my thoughts on ‘advertising’ of this sort are a bit more organised. I do know we’re the agents of advertising as well as its object, though, consciously or unconsciously propagating its messages in innumerable ways.

Also advertisers have expanded people’s imaginations in quite strange ways, inventing needs and desires we never previously knew we had and turning us in to bizarre and alien creatures from the point of view of people in poorer or more rural surroundings. One example comes to mind is the eircom phonewatch ad that ran for years. ‘Imagine you’re in a clearing in the forest. You scream but there’s nobody there to hear’. Uh, no thanks eircom, I’d rather not.

Just like the character in the brilliant satire How to Get Ahead in Advertising marketed zits so he could sell spot cream, eircom was selling fear in order to sell its alarm services in tandem.

In answer to you’re question, by ‘we’ I mean everybody in industrialised society, obviously including myself. It’s too ubiquitous and defines us and our society too completely to be totally evaded.

“Angela Merkel and Nicholas Sarkozy are working as hard as they can to preserve the consumerist fantasies of their countrymen”

I have a regard for Angela Merkal. She and Colm McCarthy would get on fine…

I have to disagree. She’s right about the primacy of politics but in advancing her (ultimately not that unreasonable) objectives, she’s dangerously misrepresented the nature of the crisis, concealing the degree to which Germany is itself embroiled in it. Axel Weber’s sophistry about public access to stress test results just underscores the effort to pull the wool over German voters’ eyes.

The CDU’s prescription is for a different disease than the one ailing the patient, and leads me to believe Helmut Schmidt may be correct in stating she doesn’t understand the modern economy.

I find, the last two paragraphs are a bit confusing… Last time I looked technological progress promised immortality, but sadly not for a few generations yet.

Well the few generations part is the problem but admittedly things may not be static forever.

Technological progress hasn’t halted completely, nor is all potential exhausted. Emerging technologies with transformative potential fall into two categories, each awkward.

The category first includes fusion power and takes decades to roll out even after the technology has been perfected (as it hasn’t been in this case).

The second category includes advances in medicine and carries the disadvantage that the potential for economic application is restricted by the limited potential for automation. Such technologies never get cheaper and, relying on the work of ever greater numbers of ever more skilled personnel, are the preserve of a small minority.

Credible people are starting to talk about life-extending therapies in the not very distant future, but their effect on society might be not as expected if individually tailored treatments are required that are extravagantly priced.

The point about fantasy is something I could expand on at length (as you might guess…).

Hunger wasn’t uncommon during the depression and neither was exposure to the elements. Nowadays, everybody dances perpetually around the top of the Maslow pyramid; because the fundamental economic needs are met as far as is practicable, people’s concerns, and therefore their interpersonal relations, have started to malfunction.

The shared hardship that used to bind people together no longer exists. Quite the opposite, not having storms to awe us or wolves to frighten us we’re suffering from delusions of omnipotence on the one hand and fears of other people (people having taken over that little module in our brains devoted to scary creatures because the proper stimulus does not exist in our world) on the other.

The fantasies about the future are the product of life at the pinnacle of the hierarchy of needs. The BRICs etc are unlikely to be heartbroken if we lose 5-15% of GDP, say, but to rob people of their dreams is a dangerous thing. The ramble off into the topic of oppressive stasis was an effort to flesh out a feeling that people, who want to be a part of something bigger than themselves and to find meaning in life, are likely to find this new world depressing given that

Innumerable societies have gone into absolute decline historically. Maybe someone will pull a rabbit out of a hat and growth will continue or maybe it won’t. The assumption of growth, which had solid foundations in the 1950s, does not have a basis in economics. Like I said, maybe, maybe not. There are powerful headwinds, e.g. surging commodity prices, notably energy prices, driven by a global demand explosion.

I always thought machinery was a modern invention until relatively recently. It turns out I was wrong.

What held back industrialisation was want of power. Mechanised industries existed since ancient times but were confined to the hills due to the need for water power. As the food growing regions were remote from power sources and transportation was restricted by lack of, er…, power, the scale of these powered industries was limited. The association of hill country with early industrialisation partly explains Switzerland’s peculiar history.

If you want an example of a mechanised industry of the renaissance period, try and find an illustration of a contemporary paper mill — the process was a regular production line of powered machinery. There’s an excellent pic of one in ‘Worldly Goods’ by Lisa Jardine. As the Antikithera mechanism demonstrates, precision engineering and computation were also known of in the ancient world, as was steam power (in the form of toys). What was not known was the technology for the economical mining of deep coal seams.

@Kevin Walsh,

The Eircom gambit doesn’t really work any more. It assumes no potential to learn. You might believe that, but it really gets mileage only on the unreconstructed left.


I will only refer to Ireland’s favourite Englishman: “Put your trust in the Lord and keep your powder dry.


I’m not noted for my brevity, but you take the biscuit 🙂

The troika demand that senior bondholders are kept whole is close to being exposed as an ideology rather than a logical policy as the debt is not only beyond the capacity of the parties the bond-holders contracted with, but is approaching the ability the taxpayers to cover. “Hope is not a policy” applies to the troika also.

We do not have the luxury of unilateral action, and will have to work the programme we are in – until it becomes clear that it wont work. At that point we will be offered another programme, which will have debt restructured to a level which is “fair” in the sense that we will be able to afford it, but wont be fair in the sense that they debts we are repaying are clearly due us. The “cant pay vs wont pay” distinction will not arise for us – it seems clear that we will be on the hook for our ability to pay. We will only be permitted to rectify “The Mistake”, as CMcC deems it, to the extent we are unable to foot the bill.

@Paul Hunt
I dont understand the continual references to the semi-state sector. How much do you reckon the semi-states would raise and would it make a difference to our situation?
What is your preference for timing of the sales? I would suggest it makes sense to delay selling until the outcome of the current programme is known. If we raise cash now it is likely to be directed into bank recap at the behest of the IMF rather than the discretionary programmes envisaged by FG. Generating cash to set-off against the obligations we are currently burdened with is not in our interests if the burden might move back to either where it belongs or to others capable of servicing it.

An interesting contribution from today’s (London) Times by Anatole Kaletsky

The Times Opinion

Anatole Kaletsky
February 23 2011 12:01AM

Guaranteeing Dublin’s bank losses is far cheaper for Europe than letting them bring the whole system down

Three years ago when all the banks in Iceland collapsed, destroying most of that tiny country’s businesses and household savings and trapping its Government in a condition of permanent debt servitude to the British and Dutch Treasuries, financial traders in the City of London quickly came up with a new line in gallows humour: what is the difference between Iceland and Ireland? One letter and six months.

As Ireland prepares for its general election on Friday, its voters would do well to glance again across the North Atlantic. Last Sunday, the President of Iceland, Olafur Grimsson, refused to sign into law an international agreement that would have obliged his country to pay the Dutch and British governments between 1.3 and 5 per cent of national income every year from 2016 until 2046 as compensation for the losses of their depositors in Icelandic banks. Instead, he insisted that the deal be put to a referendum.

Considering that the sums involved would be equivalent, in a British context, to annual payments of up to £2,000 per family per year and would be roughly similar in relation to national income to the reparations imposed on Germany after the First World War, Mr Grimsson’s insistence on a popular vote seems reasonable. And it would also be reasonable for Icelandic citizens to reject this deal, just as they overwhelmingly rejected in a referendum last year the even more onerous reparations originally demanded by Britain.

Whatever the outcome of the Icelandic referendum, Irish voters and politicians can draw two lessons from their tiny neighbour’s defiance. The first is never to accept the first offer in an international negotiation. Iceland’s creditors responded to last year’s “no” vote by reducing the interest demand from 5.5 per cent to 3.3 per cent and stretching out repayments from eight years to thirty.

The second lesson is more surprising: small debtor countries can drive a hard bargain against big creditors. In fact, the smaller a debtor country, the stronger its negotiating power. This paradoxical conclusion follows from what economists call “cost-benefit analysis” of debt defaults.

This month, the European Central Bank produced such an analysis.. Its main conclusion, presented in a lecture at the London Business School by Lorenzo Bini Smaghi, an ECB executive director, was predictable enough. For every European country, the costs of defaulting — what Mr Bini Smaghi called “Plan B” — would far exceed the costs of imposing severe budgetary cutbacks and faithfully servicing all debts (Plan A).

This would be true in almost all circumstances for three main reasons: First, because European governments, in contrast to Mexico and Brazil, which defaulted in the 1980s, borrowed largely from their own citizens and banks. A government default would therefore inflict huge losses on domestic savers and banks.

Second, a default would invalidate government bank guarantees, triggering a run on domestic banking systems and a Lehman-style credit crisis. Third, default by any one country in the eurozone would cause contagion in other countries, causing enormous economic and political dislocations to the whole EU. And this euro-wide chaos would, in turn, rebound on domestic conditions in the defaulting country.

All these arguments make eminent sense, but raise a crucial question that the ECB, for obvious reasons, prefers not to answer. If debtor countries such as Ireland start to view the choice between default under plan B and belt-tightening under plan A as a strictly financial calculation, won’t creditor countries such as Germany carry out a similar analysis? Indeed, won’t the EU as whole work out the costs and benefits of allowing one member to default?

Applying cost-benefit logic at the pan-European level, it becomes clear that the cost for the EU as a whole of subsidising, or bribing, a small country such as Ireland to stick to Plan A, will always be much smaller than the cost of letting it default and disrupt the entire eurozone. The potential defaulter’s calculation becomes even more favourable if, as in Ireland, most of the national debt takes the form of bank guarantees that benefit bondholders in Germany, Britain and France.

As Irish banks operated across the whole of Europe, why shouldn’t their debts be guaranteed by Europe as a whole, instead of being loaded entirely on to Irish taxpayers? At present the Irish Government protects German and British bondholders against any losses they might suffer when they lend to banks that happen to be based in Dublin. Imagine what would happen if the US, the only other comparable economy with a single currency, had attempted a similar response to the financial crisis. Would anyone suggest that Bank of America’s liabilities be covered only by the citizens of North Carolina, where it is incorporated?

Germany, Britain and other big European countries would, of course, resist any demand for a pan-European bank guarantee but that is when the analysis comes into its own. Once a small country such as Ireland thoroughly understands this analysis, its bargaining power is transformed.

Ireland should realise that, when the chips are down, the EU as a whole and Germany in particular will agree to relieve its entire debt burden, which is small in relation to the EU and German economies, if the only alternative is a sovereign default that would trigger a pan-European crisis and a possible break-up of the euro. Ireland can therefore drive a hard bargain with Germany and Europe.

Paradoxically, larger debtor countries such as Italy or Spain are in a weaker bargaining position, as the cost to Europe and Germany of taking over their enormous liabilities would probably be bigger than the cost of suffering a financial crash.

Cost-benefit analysis therefore implies that Spain and Italy may need to impose harsher deflationary measures than Ireland or Greece, as they cannot expect EU help. The paradox that big debtor countries must fend for themselves, while small ones can expect bailout has broadly been confirmed by recent events. Spain and Italy have not faced anything like the market attacks against Greece and Ireland, but nonetheless they have slashed pay for public employees, reformed pension systems and aggressively raised taxes without much external pressure from the EU.

Ireland’s new government should realise that it has a stronger hand than Spain or Italy — and should exploit its position to escape debt servitude.

@ Paul Hunt

‘The Eircom gambit doesn’t really work any more. It assumes no potential to learn. You might believe that, but it really gets mileage only on the unreconstructed left’

I am all for learning. So please enlighten me.

What economic errors were committed by representatives of the state in the Eircom privatisation gambit ?
What features of our political system gave rise to them ?
Were the errors systematic and predictable ?
What was the ultimate cost of the exercise in terms of our development potential ?
What concrete, steps, regulatory, legislative or otherwise have been taken to ensure more transparency in the process this time around ?
What assurance can you offer that further privatisation of state assets will not result in looting and damage to infrastructure ?

@david l

Anatole Kaletsky’s argument is basically what you would use in proper negotiations. Ireland needs the capacity to convince its negotiation (partners) adversaries that it was prepared to accept the fallout from an immediate withdrawal of credit.

Its leaders – in the broadest sense – have never even bothered to present that option and see if the public could be persuaded to go along with it. A few have presented the idea that a cost free version of that was available – a good way to get cheap popularity – but Ireland has not indicated to the outside world that has analysts watching closely, any appetite for disruption of its established insiders.

Probably at the next election that vacuum of leadership will be debated properly. It should be happening now.

@David L

Ta for link.

@Anatole Kaletsky

I concur. I am not authorised to speak for incoming Irish Gov – I’m not voting for them.

I disagree on only one point, the ‘predictability’ of Lorenzo – whose various tomes at times would defeat deconstruction by the best thomist philosophers, logicians, and linguists presently alive on the Italian peninsula – or elsewhere for that matter.

For a classic Lorenzo Bini Smaghi piece of logic, which I expect to be included as an illustrative vignette in numerous macro, banking, financial, strategy, democracy, and civil society texts yet to be written – follow the link below:

p.s. Axel will not be amused – be lucky to get a footnote in edgeways in such texts …

@Anatole Kaletsky

EU corporate tax rates should be limited to certain range, says Merkel
IRELAND’S CORPORATE tax rate led to “misallocations” that helped cause the country’s banking crisis, German Chance-er-lor Angela Merkel said.
While European Union countries should set their own corporate taxes, the EU should agree to limit them to a certain range, she told an audience in Freiburg, last night.


Looks like Angela wants to iron-fasten her vignette in those text books as well? Love the timing of the vote – March 17. Thought it might be April 1 today but I’ve just checked the calender – never know, Lorenzo might have had it amended.

Surely sufficient empirics that Option [1] above a dead-duck. Why wait.


Option [2] above is the only sane option.

@The Germans

My sympathy for having such an incredible piece of propaganda spoken by one of your own in a place usually associated with logic, culture, civilization, and reason. Schelling wept, and Fichte was not far behind. Kant is speechless.

@ Eamonn Moran


No need for uppercase…not yet myopic and I was not referring to a rational state of affairs!

A referendum showing that the Irish want debt forgiveness would be far from a man bites dog story; the anti-Europe sentiment that it would unleash would likely make the situation of getting a resolution more difficult.

The new Dutch government is supported by a right-wing party and its stance out Germans the Germans.

Dutch Finance Minister Jan Kees de Jager has ruled out two of three main measures under consideration by Eurozone finance ministers to reduce Greece’s debt burden — a reduced interest rate and a debt buy-back.

De Jager says the Netherlands strongly opposes any proposal to lower the interest rate paid on loans to Greece and Ireland.

Maybe we will get what the anti-Lisbon Treaty folk wanted – – politicians following the people!

@ All

I referred to Pat Cox in my first comment on this thread; it’s good to see that he has become an adviser to Enda Kenny.

@ grumpy

Ireland needs the capacity to convince its negotiation (partners) adversaries that it was prepared to accept the fallout from an immediate withdrawal of credit.

True and on this thread of many words, no advocate of unilateral default has detailed a worst case scenario — which should be an essential aspect of consequential decision making – – be it for the aspiring entrepreneur or political leader.

It’s easy to be on the sidelines making proposals without having any responsibility.

“Ah shur, that would never happen” would be the typical excuse to avoid having to address what should be done if the “what if” materialised.

On Sept 29, 2008, it’s very likely that Brian Cowen did not consider the consequences of Anglo’s collapse because in his mind, such an eventuality would have been so GUBU that it would have been crazy to even worry about it.

A lot of people expect that Enda will kiss Angela’s ring and like in a Wagnerian Opera Ireland’s debts will vapourize and dreamily drift up to heaven. Back down on earth there is the matter of a fair and reasonable solution. In times of crisis there is always an excess of blame to go around. The solution as always since the days of gunboat diplomacy (last used by the British in Tripoli around 1922) is to spread the losses. We all know how competent and responsible the Irish Gov’t , Central Bank, Banks deposit taking and investment, and regulatory agencies were. Fair and reasonable would be for the Irish gov’t to absorb 1/3 of losses that high tranche bond holders incurred as well as secured debt held by our banks. Depositors would be backstopped 100% up to a high level with a token penalty 15% or so for deposits over Eur 100,000.

German, British and French gov’t and banks would be unhappy but they would also know that Ireland will implode when reality hits and at that point creditors would lose everything. It is blatantly obvious that agreements made by the previous gov’t cannot be honoured. There has to be more public protest to give the gov’t a stronger at the bargaining table and at the same time to provide them with the spur of fear and anxiety that improves performance.

@DGE and Paul Quigley,

We’ve been round the houses on this issue many times here in the past. This is not an attempt to fob you off, but it would be entirely speculative to discuss timing and process. We will simply have to wait for the report of the Colm McCarthy-chaired Review Group on State Assets and Liabilities.

I gather it has been completed, but it appears that it was decided not to publish it during the general election campaign. I can understand this, but it diminishes and undermines the democratic process. This is one area of structural reform specified in the EU/IMF deal where Ireland retains considerable sovereignty in implementation. The state asset analysis needs to be matched by an equally comprehensive analysis of the structural reforms required in the non-tradable, sheltered, private sectors – also specified in the EU/IMF deal. At the very least, this is required fro ‘political balance’.

If such an exercise had been performed in parallel to the work on state assets and liabilities, it might have been possible to publish both during the election campaign and to allow citizens to assess how the various political factions proposed to address these issues.

However, in the absence of the necessary analysis on one we are being deprived sight of the other. This is entirely unsatisfactory.

@ Paul Hunt

Re privitatisation

‘We’ve been round the houses on this issue many times here in the past’

Can you identify any of the threads where the above questions have been addressed ?
My admittedly limited understanding is that there has been zero accountability for the Eurcom debacle, so why would we expect any going forward ?

@Paul Hunt

The history of the past decade (including the last two years) has led me to believe that we’ve spent it unlearning how to run an economy, rather than learning how to do it better.

@ Paul Hunt

“However, in the absence of the necessary analysis on one we are being deprived sight of the other. This is entirely unsatisfactory.”

I agree. Which is why I am deeply uncomfortble with the notion that one vote confers complete legitmacy to all government decisions, saving those effecting the consitution (others?) for the next five years. See the UK where health reforms are being brought in that were never mentioned during the campaign, indeed poo-pooed at the time.

@ Adrian Kelleher

I read with interest, but too substantial to fully engage with now.

This is David Willet’s book which I mentioned.

On the manufacturing of wants that only products can provide for, I do find that interesting and it has been going on for some time. “The Ploughman’s Lunch” being a famous example:'s_lunch

I enjoy Elaine Showalter’s writing, she writes on similar issues in “Hysteria”

@paul quigley,

The last thread I think was this:
when the review group was established, but there were others prior to this that I haven’t tracked down.

I don’t think they answer your questions, but, not to be flippant, are you seriously looking for ‘accountability’ – in Ireland, for something that happened more than 10 years ago? 🙂

@Kevin Walsh,

In my view the double bubbles (property and fiscal), for a variety of reasons, were unavoidable – though their scale wasn’t. We are being taught some pretty brutal lessons, but I have my doubts about the extent to which they are being learned.

So Merkel is refining her propaganda line that it was all a fiscal problem by now identifying CT as the underlying driver for the fiscal problem. The disconnect between the story and the reality gets wider. I posted this comment late on another thread but I’ll reference it again here – it is a French view both on Merkel’s specific ‘story’ and how and why stories such as this are developed in general and how they can be dangerous. Seems apt given that Barthes and Foucault have already made an appearance on this thread.

Fending off the assault for now on CT should be relatively straightforward on the basis that tax rates are a matter of national competency under the Treaties; the government has no mandate to negotiate it away; and doing so would make the problem worse since it would hamper growth. At the March summit going for a deadlock/stalemate and preserving the status quo on CT will do.

Longer term I think the best bet is to wait for Greece to explode and then to take part in the measures that are put in place to address that. I am having a very hard time trying to figure out any credible “renegotiation” position given the three-way discussions involved (the ECB; inquisitor-nations (Germany, France, Holland); Kenny/Noonan), given that each country has a veto over the EFSF/ESM proposals, and the ECB has control over bank funding. Trying to trade off hitting the bondholders for a better EFSF deal is hard since the ECB doesn’t control the EFSF, and no amount of “competitive pact” cave-ins will cause the ECB to consider allowing private creditors to be hit. The amounts that would be saved by hitting the ever-shrinking pile of unguaranteed debt are too small to make a significant difference – even a 100% haircut would only be 10% of the expected debt mountain, so the eventual solution has to involve sovereign (and guaranteed bank) debt restructuring using the EFSF/ESM.

Ireland is still going to be in a “won’t pay” rather than a “can’t pay” condition for some time. It is only in 2013 or so that debt servicing costs really start to ramp up. Also Ireland is not Iceland in that it cannot retreat to a newly constructed small domestic banking system in defiance of outsiders – Icelandic residents literally have no other place to put their Krona, whereas Irish residents can put their Euro in RBS/Rabobank etc. I’d like to think Kaletsky is right, but I don’t see it right now.


“There are no circumstances in which Ireland as a sovereign nation should default.”

Michael Noonan, FINE Gael, right now, on RTE Radio 1 hosted by Patronising Pat, the arch in-sider.

‘Griftopia’ by Matt Taibi – recommended reading for all of you – then apply what’s been going and is going on to ‘the European Project’…………

@ Paul Hunt

Thanks for that reminder. We had a good argy bargy at the time.

I do live in hope of accountability, but I am a realist. There are deeply rooted vested interests, and the public still prefers fantasies about ‘wise leadership’. We will get accountability only when everything else has been tried.

I know, why don’t we stay in the euro and repay the bonds in silage? Or mud? Or magic beans?

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