17 replies on “Richard Portes: The Case for an Irish Default”
Prof. Portes’ is remarkably sanguine about the downsides.
Given the political sentiment in the core countries, is it realistic to expect leaders to just roll over?
Are academics more daring with such proposals because they seldom if ever have to make consequential decisions in their professional lives?
The Economist Intelligence Unit has published a special report on the debt crisis and I would go along with their scenario once the ESN kicks in from mid-2013, rather than triggereing a nuclear option now.
The economists say their baseline assumption is for agreed reductions in the debt of Greece by 42 percentage points, to 96% of GDP, and of Ireland by 23 percentage points, to 96% of GDP.
Am convinced that the only way that Ireland can be “saved” is to (a) separate its sovereign and bank debt, (b) default on the latter and (c) secure a rescue package of low/nominal interest loans from the EU/ECB. If this is done, Ireland should be able to trade out of its difficulties. If not done then Ireland is likely to default on all its debt with much more serious consequences for both Ireland and the EU.
Here are my specific suggestions:
1.
Secure a token interest rate of 1% for borrowings under the EU/IMF package. This would save about €2.7 billion a year.
2.
About €37 billion of bank bonds should be restructured. A 50% haircut would save almost €19 billion in repayments and about a billion euro in annual interest (based on 5.8% rate). Obviously, the interest saving would much less if a token interest rate applied but the future cashflow benefits would still be highly relevant. There might be some scope for a trade-off between securing a token rate and shaving some bondholders.
3.
In return for the foregoing support, Ireland should reaffirm its adherence to the terms of an updated MOU to reduce in Exchequer deficit and agree to make TEMPORARY changes to the Irish corporation profits tax regime.
Moore McDowell has a relevant letter in today’s (13 April) Irish Times.
Of course, the Emerald Isle could evade responsibility altogether by simply waiting for Greece to restructure its debt first, at which point there will be general confusion and markets will shun Ireland anyway. If that is the tacit strategy, there may not be long to wait.
I wonder if this is what the government is planning.
@ Rory
from Greece this morning…
07:29 13Apr11 RTRS-GREEK FINANCE MINISTER SAYS DEBT RESTRUCTURING WOULD SHUT GREECE OUT OF DEBT MARKETS FOR A LONG TIME -NEWSPAPER
07:30 13Apr11 RTRS-GREEK FINANCE MINISTER SAYS DEBT RESTRUCTURING WOULD ALSO TRIGGER POSSIBLE CONTAGION EFFECTS -NEWSPAPER
07:31 13Apr11 RTRS-GREEK FINANCE MINISTER SAYS COST OF A DEBT RESTRUCTURING WOULD ALSO IMPACT REAL ECONOMY -NEWSPAPER
07:36 13Apr11 RTRS-GREEK FINANCE MINISTER SAYS WON’T PARTICIPATE IN DEBATE OVER VOLUNTARY RESTRUCTURING OF DEBT WITH PRIVATE BONDHOLDERS -NEWSPAPER
07:41 13Apr11 RTRS-RPT-GREEK FINANCE MINISTER SAYS CAN IMAGINE RISK PREMIUMS WILL NORMALISE AFTER PORTUGUESE ELECTION IN JUNE -NEWSPAPER
07:41 13Apr11 RTRS-RPT-GREEK FINANCE MINISTER SAYS FULLY FINANCED FOR 2011, NEEDS TO ISSUE 25-30 BLN EUR IN BONDS IN 2012 -NEWSPAPER
07:44 13Apr11 RTRS-GREEK FINANCE MINISTER SAYS BUYING BACK ITS OWN DISCOUNTED BONDS WOULD BE INTERESTING IF IT HAD THE MONEY -NEWSPAPER
I love that last line…”if it had the money”…
‘The potential downside to renegotiating Ireland’s debt is tolerable—certainly no worse than the alternatives. A well-managed restructuring is not likely to bring about the worst of what skeptics have predicted: trade sanctions, long-term loss of market access, a significant increase in borrowing costs. The overall damage to Ireland’s reputation as a debtor should likewise be modest: The country did not get into its present situation because of fiscal profligacy’
It is a point worth noting, that by now it is well understood that our membership is mostly to blame. Brian Lenihans early austerity has underlined the issue that we want to sort the mess out.
It’s the poor old Ireland getting screwed over by forces outside her control (again), card.
When the bailout is up for renewal, the IMF will have to take a position on restructuring. It would unlikely compromise its credibility by hiding behind European politicians.
So patience in the meantime; reform and focus on developing a credible jobs strategy.
@Brian Flanagan
Shadow boxing is a nice exercise,but it is not the real thing.What makes you think that any of that is acceptable to Ireland creditors?
@ MH
that op-ed on Portugal is a bit odd imo.
“A lack of historical perspective is another explanation. Portuguese living standards increased greatly in the 25 years after the democratic revolution of April 1974. In the 1990s labor productivity increased rapidly, private enterprises deepened capital investment with help from the government, and parties from both the center-right and center-left supported increases in social spending. By the century’s end the country had one of Europe’s lowest unemployment rates.”
The alternative view is that the post-revolution government nationalised everything, and all the entrepreneurs and skilled managers fled to Brazil, thus leading to an incredibily inneficient public sector and relatively stagnant economy for the last 30 years. Despite benefitting from cheap credit and EU structural funds, there was never any “boom” in Portugal at any stage in the last 20 years.
“They are a national solvency problem, too—or at least they became one when the government decided to insure bank creditors in September 2008.”
Ah the ghost of David “show me your meddels” McWilliams continues to haunt us.
Unfortunately Davids largest medal has the following written on it. “Brain child of the worst economic idea to ever be implemented by any government, ever”
@Overseas
The alternative is sovereign default which IMHO should be avoided at all costs. Ireland Inc. is overgeared and over borrowed. The only option is to reduce interest charges and restructure borrowings in addition to applying the medicine in the MoU to reduce the Exchequer deficit.
From Portes
Trickier would be any restructuring of bank debt covered under the 2008 state guarantee. The legal consequences of reneging on that guarantee are unclear, but wide experience in similar restructurings elsewhere would give the government plenty to appeal to if it goes to court.
A free share in AIB to the person who spots the error.
@Frank
Surely all the Government needs to do is to establish a Good Bank and threaten to move all BOI and AIB deposits into it unless the ECB agrees with the idea of restructuring all existing bank bonds. Surely the threat would be enough to bring the EU/ECB to their senses. If bluff called, then a gradual process could be started to show seriousness of intent.
@ Frank
nothing’s covered by the 2008 guarantee anymore. Its the new 2009 ELG one which is in place. A common, common error.
The issue will need to be ‘forced’ ….. ‘or manufactured’ ……. the sensible_citizen_serf strategy that I agree with is Default – so we need a double_Irish_tactic (i) deficit (ii) trigger it.
17 replies on “Richard Portes: The Case for an Irish Default”
Prof. Portes’ is remarkably sanguine about the downsides.
Given the political sentiment in the core countries, is it realistic to expect leaders to just roll over?
Are academics more daring with such proposals because they seldom if ever have to make consequential decisions in their professional lives?
The Economist Intelligence Unit has published a special report on the debt crisis and I would go along with their scenario once the ESN kicks in from mid-2013, rather than triggereing a nuclear option now.
The economists say their baseline assumption is for agreed reductions in the debt of Greece by 42 percentage points, to 96% of GDP, and of Ireland by 23 percentage points, to 96% of GDP.
http://www.finfacts.ie/irishfinancenews/article_1022071.shtml
Am convinced that the only way that Ireland can be “saved” is to (a) separate its sovereign and bank debt, (b) default on the latter and (c) secure a rescue package of low/nominal interest loans from the EU/ECB. If this is done, Ireland should be able to trade out of its difficulties. If not done then Ireland is likely to default on all its debt with much more serious consequences for both Ireland and the EU.
Here are my specific suggestions:
1.
Secure a token interest rate of 1% for borrowings under the EU/IMF package. This would save about €2.7 billion a year.
2.
About €37 billion of bank bonds should be restructured. A 50% haircut would save almost €19 billion in repayments and about a billion euro in annual interest (based on 5.8% rate). Obviously, the interest saving would much less if a token interest rate applied but the future cashflow benefits would still be highly relevant. There might be some scope for a trade-off between securing a token rate and shaving some bondholders.
3.
In return for the foregoing support, Ireland should reaffirm its adherence to the terms of an updated MOU to reduce in Exchequer deficit and agree to make TEMPORARY changes to the Irish corporation profits tax regime.
More at http://www.planware.org/briansblog/2011/04/banking-crisis-help-us-or-we-default.html
Moore McDowell has a relevant letter in today’s (13 April) Irish Times.
Of course, the Emerald Isle could evade responsibility altogether by simply waiting for Greece to restructure its debt first, at which point there will be general confusion and markets will shun Ireland anyway. If that is the tacit strategy, there may not be long to wait.
I wonder if this is what the government is planning.
@ Rory
from Greece this morning…
07:29 13Apr11 RTRS-GREEK FINANCE MINISTER SAYS DEBT RESTRUCTURING WOULD SHUT GREECE OUT OF DEBT MARKETS FOR A LONG TIME -NEWSPAPER
07:30 13Apr11 RTRS-GREEK FINANCE MINISTER SAYS DEBT RESTRUCTURING WOULD ALSO TRIGGER POSSIBLE CONTAGION EFFECTS -NEWSPAPER
07:31 13Apr11 RTRS-GREEK FINANCE MINISTER SAYS COST OF A DEBT RESTRUCTURING WOULD ALSO IMPACT REAL ECONOMY -NEWSPAPER
07:36 13Apr11 RTRS-GREEK FINANCE MINISTER SAYS WON’T PARTICIPATE IN DEBATE OVER VOLUNTARY RESTRUCTURING OF DEBT WITH PRIVATE BONDHOLDERS -NEWSPAPER
07:41 13Apr11 RTRS-RPT-GREEK FINANCE MINISTER SAYS CAN IMAGINE RISK PREMIUMS WILL NORMALISE AFTER PORTUGUESE ELECTION IN JUNE -NEWSPAPER
07:41 13Apr11 RTRS-RPT-GREEK FINANCE MINISTER SAYS FULLY FINANCED FOR 2011, NEEDS TO ISSUE 25-30 BLN EUR IN BONDS IN 2012 -NEWSPAPER
07:44 13Apr11 RTRS-GREEK FINANCE MINISTER SAYS BUYING BACK ITS OWN DISCOUNTED BONDS WOULD BE INTERESTING IF IT HAD THE MONEY -NEWSPAPER
I love that last line…”if it had the money”…
‘The potential downside to renegotiating Ireland’s debt is tolerable—certainly no worse than the alternatives. A well-managed restructuring is not likely to bring about the worst of what skeptics have predicted: trade sanctions, long-term loss of market access, a significant increase in borrowing costs. The overall damage to Ireland’s reputation as a debtor should likewise be modest: The country did not get into its present situation because of fiscal profligacy’
It is a point worth noting, that by now it is well understood that our membership is mostly to blame. Brian Lenihans early austerity has underlined the issue that we want to sort the mess out.
It’s the poor old Ireland getting screwed over by forces outside her control (again), card.
Interesting op-ed piece in the NYT:
Portugal’s Unnecessary Bailout
http://nyti.ms/ic1BjQ
When the bailout is up for renewal, the IMF will have to take a position on restructuring. It would unlikely compromise its credibility by hiding behind European politicians.
So patience in the meantime; reform and focus on developing a credible jobs strategy.
@Brian Flanagan
Shadow boxing is a nice exercise,but it is not the real thing.What makes you think that any of that is acceptable to Ireland creditors?
@ MH
that op-ed on Portugal is a bit odd imo.
“A lack of historical perspective is another explanation. Portuguese living standards increased greatly in the 25 years after the democratic revolution of April 1974. In the 1990s labor productivity increased rapidly, private enterprises deepened capital investment with help from the government, and parties from both the center-right and center-left supported increases in social spending. By the century’s end the country had one of Europe’s lowest unemployment rates.”
The alternative view is that the post-revolution government nationalised everything, and all the entrepreneurs and skilled managers fled to Brazil, thus leading to an incredibily inneficient public sector and relatively stagnant economy for the last 30 years. Despite benefitting from cheap credit and EU structural funds, there was never any “boom” in Portugal at any stage in the last 20 years.
“They are a national solvency problem, too—or at least they became one when the government decided to insure bank creditors in September 2008.”
Ah the ghost of David “show me your meddels” McWilliams continues to haunt us.
Unfortunately Davids largest medal has the following written on it. “Brain child of the worst economic idea to ever be implemented by any government, ever”
@Overseas
The alternative is sovereign default which IMHO should be avoided at all costs. Ireland Inc. is overgeared and over borrowed. The only option is to reduce interest charges and restructure borrowings in addition to applying the medicine in the MoU to reduce the Exchequer deficit.
From Portes
Trickier would be any restructuring of bank debt covered under the 2008 state guarantee. The legal consequences of reneging on that guarantee are unclear, but wide experience in similar restructurings elsewhere would give the government plenty to appeal to if it goes to court.
A free share in AIB to the person who spots the error.
@Frank
Surely all the Government needs to do is to establish a Good Bank and threaten to move all BOI and AIB deposits into it unless the ECB agrees with the idea of restructuring all existing bank bonds. Surely the threat would be enough to bring the EU/ECB to their senses. If bluff called, then a gradual process could be started to show seriousness of intent.
@ Frank
nothing’s covered by the 2008 guarantee anymore. Its the new 2009 ELG one which is in place. A common, common error.
@all
The case for default is very strong …………..
but EZ_Political is to drag to 2013 …………..
even for Greece Megan Greene today ………
http://eiueuroareadebtcrisis.wordpress.com/2011/04/13/voluntary-greek-debt-restructuring-unlikely/
The issue will need to be ‘forced’ ….. ‘or manufactured’ ……. the sensible_citizen_serf strategy that I agree with is Default – so we need a double_Irish_tactic (i) deficit (ii) trigger it.
@ NAMA might be of some use in this regard ….
http://www.irisheconomy.ie/index.php/2011/04/12/nama-to-provide-finance/#comment-139773
@ DO’D
🙂
Pity Alan Quinlan is retiring, just the man for that job in NAMA
@ previous
Just can’t get my head around why they keep coming up with inflexible, undeliverable deals and structures.