In the Eolas piece I looked at Ireland’s policy options taking the European bailout/bail-in regime as exogenous (albeit uncertain). Of course, a different question is what we would want that regime to be, one now being hotly debated given Greece’s new difficulties.
A central focus in the recent debate is the proper extent of early private sector involvement (PSI) in bail-ins. Looked at from an Irish perspective, a range of considerations come into this calculation: (i) the reputational damage in a debt restructuring/default; (ii) the ultimate reduction achieved through a restructuring in the net resource transfer; (iii) the risks associated with increased dependence on official creditors and their domestic politics; (iv) the risks of domestic and international contagion; and (v) the implications for future market access of a weakening of the implicit guarantee given to private creditors.
I think the last of these points deserves additional discussion. At the moment we seem to be between two stools. Early PSI is ruled out; but PSI is central to the post-2013 ESM regime, substantially weakening the implicit guarantee and scaring off potential new creditors. Thus there is a certain incoherence at the heart of European policy. It also is a particularly bad combination given the trade-off involved with any resolution regime: it is good to be able to share losses with private creditors ex post; but a regime with easier loss sharing will weaken the implicit guarantee and make you less creditworthy ex ante.
We need European policy makers to move one way or the other, either allowing early PSI before a substantial amount of private debt is paid back, or providing clarity on the nature of the implicit guarantee that gives a feasible route back to the markets for countries that follow through on their adjustment programmes. The ECB seems to be calling for a full guarantee by effectively ruling out defaults. This seems neither likely nor desirable. However, further clarity on the way PSI will be applied in the future, with a reasonable path to avoiding it, would give a country a chance of regaining market access and not having to resort to default. It is probably unfortunate for us that policy precedents are being set in this area based on the quite different Greek situation.