The ECB’s position of “no default” has come in for much derision here, and indeed the Schauble letter makes clear that such an uncompromising stance is not credible. I believe, however, that Ireland gains from a distinct leaning towards a “default-as-last-resort” position, which is why any Greek precedent is so important.
A useful approach is to view the possibility of default as a valuable option, with an orderly, officially supported “restructuring” at the more valuable end of the spectrum. However, the very existence of such an option makes it harder to regain market access. Potential investors will be repelled by the likelihood of getting caught up in a later restructuring.
We thus have a trade-off in the design of the bail-out/bail-in regime, with the optimal point along the trade-off being quite different for Greece and Ireland. A good regime for Ireland, in my view, is still one that offers additional funding on reasonable terms to countries meeting their ex ante conditions without a requirement of restructuring; in other words, a reliable, though certainly not unconditional, lender of last resort (LOLR). Potential investors need to know that funding will be there even in a bad state of the world. Under such arrangements, belief in the country’s capacity to meet pre-specified conditions should be sufficient for renewed market access (assuming of course the LOLR is seen as having the financial capacity to meet its commitment). For all its communication faults, the ECB does push policy in this direction, and I think is more of a friend in the European policy debate than we realise.
The Irish Times’ Cantillon reports the government is increasingly shifting its focus to the design of the ESM. This is the right focus. While I hope that an interest-rate cut is not completely off the table, the reliability of the LOLR function is the most critical factor in resolving the Irish creditworthiness crisis.