To those who advocate default...

Einhard

I know there are a lot of people genuinely convinced that we should burn the bondholders and renege on the guarantees. The following is a transcript of a post (It's 2am; I'm being efficent!) outlining my views on the issue, and I'd like to know what those who hold contrary positions think in light of the points I make. I'm no expert, and am open to persuasion here, so if anyone can explain the merits behind the default option I'm all ears...

What option, having made the decisions that delivered us into this crisis, did Cowen et al have but to accept the terms proferred by the EU/ECB, which involved a commitment to honouring the guarantees given to senior bondholders? For understandable reasons, Europe want the commitments honoured or else banks in France, the UK, and Germany will take an almighty hit. For equally good reason, it would be brilliant if Ireland could renege on the guarantee. However, the fact is that we require massive assistance from the EU, and not just to cover the bank bailouts as some have disingenuously asserted. A full €50 billion from the loan announced tonight is going to finance our budgetary shortcomings. Since the EU/Eurozone is proividing those funds, I don't think it's unreasonable that they protect their interests while doing so. To do otherwise is equivalent to me giving you a loan under the conditions of which you commit to smashing the windows in my home. The alternative of course, is to tell the Europeans to take a running jump, and resolve to sort things out without outside assistance. Which would basically mean that our banking system, without access to capital, would collapse within days, and any money that we have squirreled away would run out within months. What then? No money in the ATMs. No money for credit cards. No salaries for teachers. Or guards. Or nurses. Because that would be the impact of a default that went against the reasonable (from their perspective) wishes of the EU.

I'm open to correction in all of this. I could well be wrong. But I don't think I am. And I do think that those proposing default are emphasising the undoubted positives of such a move, whilst ignoring the massive negative consequences.

kaiser sauze

I truly believe that if we had said to The EU that we could not afford to guarantee the banks any longer and that if you want to save them, go right ahead. If they are that interested in preventing contagion they would have (ECB) started QE and pumped money into the banks to capitalise them.

Then we would only have our deficit to deal with and we could have approached the IMF directly for that, at a much better rate than the EU, too.

loldog

If this thing spreads to Portugal and Spain, then we can default on the bank guarantees, scrap that part of the bailout.

.

Red Alert

I think OP your post doesn't differentiate between debts of banks, and debts of the country.

I would have withdrawn the guarantee to senior and subordinated bank bondholders, whilst depositors are still protected by the deposit guarantee scheme. If the ECB want to save them, then go ahead. If not, then don't. The government will, in the worst case, only be hit for the bank deposits.

Like another poster has suggested, then the IMF could deal with the debt problem faced by the country if necessary.

What's happened is that the FF politicians have got into a "moralistic" mindset that they can't damage our "friends" in Europe. In these types of negotiations, the deal should be done on a cutthroat basis. Leave any EU moralizing at the door. The deal is not in the best interests of Ireland, and it would appear that the Irish government had Europe's wider interests closer to heart.

Einhard

kaiser sauze wrote: »

I truly believe that if we had said to The EU that we could not afford to guarantee the banks any longer and that if you want to save them, go right ahead. If they are that interested in preventing contagion they would have (ECB) started QE and pumped money into the banks to capitalise them.

I'm not sure they would have really. If Ireland were to say no, and the ECB step in, then what would stop any other country from doing the same thing, and demand that the ECB prop up their own banks? The ECB doesn't have a bottomless pit of funds afterall. Also, this again fails to deal with the negative consequences. We would be pariahs in Europe. We'be benefitted hugely from our membership of the Union, and we would rightly be ostracised for failing to live up to commitments that WE made. I'm not sure that Ireland would ever be able to regain the trust of our European colleagues. Now, you might say that this is a small price to pay, but the fact is we're living in an inter-connected world. If our closest neighbours and allies want nothing to do with us, then I don't see how anyone could claim that the consequences would be anything other than dire.

Also, were the ECB to say no, we're not going to meet your self-made commitments, then our banking system would collapse overnight. The ECB have provided approx €160 billion in liquidity to Irish banks over the past few months. If they remove this, as is envisaged in this loan facility, then it's all over for the Irish banks. And the Irish economy.

I'm not so much advocating for the loan facility here, as trying to see if there are genuinely better options. And so far, as far as I can see, all those advocating for default are doing so without acknowledging the massive damage that such an eventuality would cause. The complete destruction of Ireland's reputation, Ireland's banking system, and Ireland's economy does not seem to me an outcome that anyone would want, and yet they are all very possible under the default scenario.

Then we would only have our deficit to deal with and we could have approached the IMF directly for that, at a much better rate than the EU, too.

The IMF have a responsibility to its shareholders. AFAIK it's not a fully autonomous body. The European nations provide a huge proportion of its funding, and I'd hazard a guess that they would do everything in their power to thwart any such bailout for Ireland.

All in all, I think those advocating default are seriously overestimating the strength of Ireland's position, and some of the talk even has the feel of cutting of one's nose to spite one's face about it.

kmick

It seems to me the Irish taxpayer is being charged an extortionate/extraordinary rate of 5.83% to bail out private bond holders in banks. Its simply a transfer of money from the public to private purse which does not take into account the fact that bondholders price risk into the coupon rate they charge.

I dont know what the alternative was (listening to Cowen there was none)but its a horrible deal for Ireland. All economists agree that any rate over the 5% is punitive and does not take into account the fact that Ireland has already taken and will take appropriate measures to correct our budget deficit.

Not only is 5.8% punitive but I think its safe to say it just delays an inevitable problem later on.

senordingdong

kaiser sauze wrote: »

I truly believe that if we had said to The EU that we could not afford to guarantee the banks any longer and that if you want to save them, go right ahead. If they are that interested in preventing contagion they would have (ECB) started QE and pumped money into the banks to capitalise them.

Then we would only have our deficit to deal with and we could have approached the IMF directly for that, at a much better rate than the EU, too.

Not sure if these organisations would have the remit to operate in this country like that.

Laminations

Einhard wrote: »

I know there are a lot of people genuinely convinced that we should burn the bondholders and renege on the guarantees. The following is a transcript of a post (It's 2am; I'm being efficent!) outlining my views on the issue, and I'd like to know what those who hold contrary positions think in light of the points I make. I'm no expert, and am open to persuasion here, so if anyone can explain the merits behind the default option I'm all ears...

I don't think it's unreasonable that they protect their interests while doing so. To do otherwise is equivalent to me giving you a loan under the conditions of which you commit to smashing the windows in my home.

But if you are giving a loan in order to protect your own windows then you should give reasonable rates to those who are protecting your windows. You should not give rates which will likely cripple those who are sticking their necks out for you. This government put the people of Ireland second for the interests of Europe (supposedly), now Europe screws us with 5.8%. Nobody forced European banks to lend to Anglo, they did so because they wanted a piece of boom-pie. They wanted a cut of Irelands wealth and they lent recklessly, end of. Senior bondholders get a lower rate of interest because they are amongst the first to be paid back, but their investment is not risk free. Abramovich was getting a 13% return on his Anglo investment because of the high risk profile. Senior bondholders got far less because the risk was less than one percent possibly - but there was still risk. If this scenario does not represent that one percent, then under what circumstances do they lose their money? How can a situation be worse than this? If this is not 00 on the roulette wheel then what is?

Again, no one is suggesting a sovereign default, they are suggesting that for the banks, the bondholders share in the losses. A bit of pain for them will not kill them and they deserve it for lending to Anglo anyway. A haircut for bondholders of private bank debt should not reflect badly on the state.
The advocates of this bailout and the payment of bondholders are painting such doomsday consequences that the premise of their argument best not be tested.

If you dont believe in god, you'll burn in hell. Best believe in god so. The purported consequences of even thinking about doing otherwise are too dire.

And reputation isn't worth everything. In trying to maintain your 'nice guy' image, you shouldn't let yourself be used as a doormat. This deal is pressuring us to bail out foreign banks - if you dont give me head, I'll tell everyone you're a slut

Drumpot

Einhard wrote: »

I'm not sure they would have really. If Ireland were to say no, and the ECB step in, then what would stop any other country from doing the same thing, and demand that the ECB prop up their own banks? The ECB doesn't have a bottomless pit of funds afterall. Also, this again fails to deal with the negative consequences. We would be pariahs in Europe. We'be benefitted hugely from our membership of the Union, and we would rightly be ostracised for failing to live up to commitments that WE made. I'm not sure that Ireland would ever be able to regain the trust of our European colleagues. Now, you might say that this is a small price to pay, but the fact is we're living in an inter-connected world. If our closest neighbours and allies want nothing to do with us, then I don't see how anyone could claim that the consequences would be anything other than dire.

Also, were the ECB to say no, we're not going to meet your self-made commitments, then our banking system would collapse overnight. The ECB have provided approx €160 billion in liquidity to Irish banks over the past few months. If they remove this, as is envisaged in this loan facility, then it's all over for the Irish banks. And the Irish economy.

I'm not so much advocating for the loan facility here, as trying to see if there are genuinely better options. And so far, as far as I can see, all those advocating for default are doing so without acknowledging the massive damage that such an eventuality would cause. The complete destruction of Ireland's reputation, Ireland's banking system, and Ireland's economy does not seem to me an outcome that anyone would want, and yet they are all very possible under the default scenario.




The IMF have a responsibility to its shareholders. AFAIK it's not a fully autonomous body. The European nations provide a huge proportion of its funding, and I'd hazard a guess that they would do everything in their power to thwart any such bailout for Ireland.

All in all, I think those advocating default are seriously overestimating the strength of Ireland's position, and some of the talk even has the feel of cutting of one's nose to spite one's face about it.

You see, this is where the problem becomes more complicated for me . .

I still cannot understand why its a reasonable statement to say that we would become ostracised for not taking on private debt. I understand why we might be ostracised (because it fks things up for other big nations), but we have no moral obligation to take on this debt as we, the Irish People did not screw anybody (or provide the funding).

Making Private debt, soverign debt is ONLY about protecting the interests of those who invested in Irish banks.

The Greek's got a bailout simply because they lied through their teeth to get into the EU and are not capable of running a prudent economy. Ireland is in it because many piggybacked onto our property bubble and tried to benefit out of it. We will reel in our budget deficit to approrpiate measures and as such I dont see why we should feel any moral obligation to take on private debt to please our European neighbours.

If our state were bailing out the banks mainly for Irish Investors/pensioners/depositors I would have more of an understanding and be better willing to accept this policy, but this is more about the EU and european partners banks/investors then about us and as such I dont think what being part of the EU has done for us, is a fair point to use. Considering the UK and the US are our main business partners/investors (jobs for economy) I dont see why burning european investors (who will move on and forget about it in 10 years like all investors do) is not worth saving us 10s of billions that we will struggle to payback in 30 years let alone a couple!.

I will stand corrected , but its very difficult to know who is telling the truth and who is pushing their own political beliefs or simply towing the conventional wisdom that many prescribe to in times of crisis. Lack of vision and credible, in debth, debate leaves me sceptical of anything the EU has proposed and has left far more questions then answers. I personally think that other countries (germany in particular) should of been pushed to supply some of the support for nothing, considering the benefits its own banks/bondholders get out of the deal!). I think if we called their bluff and said we were prepared the let the banks just go under, we would of gotten a much better deal.

Wolfe Tone

I honestly don't understand why we cannot demand a lower rate. Effectively Ireland is of "systemic importance" If we go down we will drag half of Europe with us. The EU can't let that happen.

So are we not in a VERY strong position to in effect, force a lower rate? "We won't accept the bail out unless the rate is x%"

I know it is hardly a fair way to go about things, but I do not care tbh.

Scofflaw

Sigh - the EU/ECB only insists on protecting senior bondholders and depositors. The insistence on guaranteeing the debts of junior/subordinated debt was purely Irish - it got EU approval because there's nothing the EU can do to prevent it.

The ECB insistence on "no bank left behind" is, again, aimed at ensuring that depositors are protected, not that risk-taking lenders are protected. Senior bondholders are on the same rung of the ladder of credit protection as depositors, so protecting depositors goes hand in hand with protecting senior bondholders. The EU guarantee Directive for banks, for example, specifically excludes 'professional market actors':

Deposit Guarantee Schemes will protect all deposits held by individuals and small, medium-sized and large businesses. However, deposits of financial institutions and public authorities will not be covered. The former do not need protection since they are professional market actors and the latter would have easy access to other sources of financing.

and opposes blanket/unlimited guarantees:

But an unlimited higher coverage in general would jeopardise financial stability. When the crisis deteriorated, account holders shifted deposits to banks in Member States whose coverage was higher. This led to banks being stripped of liquidity in times of stress and made the crisis worse as it led to a near-liquidity crunch. Moreover, one scheme offering general unlimited coverage needed state aid because of the demands made on it.

The reason for not burning the senior bondholders is pretty simple - you'll never be able to borrow at that rate again. 'Senior' debt is low-rate because it is supposed to be first in line for money in the event of liquidation.

As to how this is our issue - its our issue because the government bought the banks. The government bought the banks because they didn't have assets anywhere near what they were supposed to have in order to have the amounts on loan they have. The reason they didn't was because a large part of their asset base was Irish property, valued at the bubble prices everyone was helping stoke - and when the bubble collapsed, the asset bases of the banks shrank along with those prices. Unfortunately, government revenues shrank at the same time, because a large part of the tax base had been shifted from income taxes to property-related and consumption taxes - that having stoked the bubble themselves by operating pro-cyclic policies during the boom, the government had also shifted taxation to a pro-cyclic base which gave them a stake in allowing the banks to use inflated asset values as a base.

That meant that in effect the government bought the last couple of elections by taxing the effects of the bubble - which is to say, effectively allowing the electorate to pay their taxes out of borrowings from Irish and foreign banks rather than their incomes. I don't know whether they had a plan to get through the inevitable bursting of the bubble, but since everything they did was structured to make things worse in that case, I somehow doubt it.

Nor would it have made any real difference if we'd not been in the euro - the Irish Central Bank had already stated that it had no power to restrain lending back in 1997:

There seems to be a perception that the Central Bank can exercise some legal authority in restricting credit. It has no such authority.

The Central Bank certainly wrote to the Irish banks asking them to exercise more caution:

He said the Bank had warned financial institutions repeatedly of the dangers inherent in high rates of credit growth and any relaxation of lending standards.

In the following years, as Finance Minister Charlie McCreevy stoked the property boom with income and capital tax cuts coupled with a massive expansion of property tax incentives, the annual reports of the Central Bank chronicled the letters that were sent by the governor to the financial institutions, pleading for prudence.

The bankers must have been laughing up their sleeves!

In April 1999, the governor had issued a letter stating that an analysis of practices had shown that some lenders had no evidence as to how borrowers came by the balance of their money. The governor criticised what he called, the particularly disturbing practice of allowing large amounts of the borrowers after tax income to go towards paying off a mortgage.

The 1999 annual report notes: "Institutions were...advised that it remains vitally important for them to take a medium term perspective and to reckon with the potential consequences of rising interest rates and a return to lower rates of growth in the economy. All institutions gave assurances that there would be no slackening in prudential lending standards."

In April 2000, the US magazine BusinessWeek, quoted the governor: ''There's no monetary policy prescription for the problems of the Irish economy.''

For all the good that did.

Default is being touted as an easy way out of the crisis - and there isn't any such thing. It's being backed by inaccurate claims that we're bailing out the banks on behalf of German, UK, and French banks owed hundreds of billions of euro by Irish banks - but those figures are also mythical.

We're bailing out the banks because they had huge loan books largely on Irish property, and an asset base that was also largely Irish property. The Irish banks lent recklessly to Irish people and Irish businesses, and the government encouraged them to do so because the property bubble that reckless lending fuelled allowed them to cut income taxes while maintaining social and infrastructural spending at high levels. The hole in the banks is home-grown, and consists to a fair extent of the income taxes we didn't pay, the vastly over-inflated house prices we were willing to pay, and the extra money, services, and infrastructure we got from the state that was paid for by our own borrowing. If we default because we're unwilling to fill that hole, the damage to our reputation will be very long-lasting - people don't mind so much that you've been flahoola with money if you're willing to pay it back afterwards, but burning the money on high living and then defaulting on the debt is a different story.

Finally, we're not really in a strong position when it comes to bargaining, because the state is running a high deficit, and currently it looks like we've no chance of the bond markets settling down to a lower rate than we're getting from the bailout. That's why 75% of the bailout money (€50bn of €67bn) is for state spending - because we're not expected to be able to borrow that money on the open market.

cordially,
Scofflaw

later12

That was a really excellent post by Scofflaw. One cautionary note would be not to draw such a direct correlation between our current financing difficulties and tax and/ or banking policy going back 10 years or more.

In actual fact, taxation policy back in 2000 was, in hindsight, correct. The time to rein in on income tax (for example) was a few years later up to 2004.
Equally, central bank warnings on lending going back to 1997 are not particularly useful, since the economy was inherently healthy and remained so until late 2001, when the issue of the property bubble economy arises.

There tends to be a universal judgement applied to the Government's time in office, which suggests that everything that was done in bank regulation and fiscal administration between 1997 - 2007 was incorrect. In fact, only about half of it was.

It was in the second term of the Fianna Fail Government that the serious mistakes were made which have resulted in this financial meltdown, not necessarily before that. The first term of office of the Fianna Fail government was actually a roaring success.

Laminations

Scofflaw wrote: »

The reason for not burning the senior bondholders is pretty simple - you'll never be able to borrow at that rate again. 'Senior' debt is low-rate because it is supposed to be first in line for money in the event of liquidation.

Firstly who is 'you'? I couldn't give a fiddlers if Anglo can't borrow at any rate again. It is private debt, very distinct from public sovereign debt. I once lent Tom the gambler who lives down the road a tenner. He never paid me back, the defaulting bastard. Come to think of it, Tom was nigerian. Well I'm never lending to a Nigerian again :rolleyes: Specific instances of bad behaviour and individual bad experiences cannot be allowed to colour ones feelings/approach to an entire race/nation/gender. People get banned for such blatant generalisations and discrimination on here, yet you'll accept it from the bondholders? They'll of course lend to Ireland again and our banks, once they are well regulated.

As to how this is our issue - its our issue because the government bought the banks.

The banks lied. Also the people had no say in taking on the debts of Anglo and the opposition were against it. If we got a lunatic government who made a deal with Russia that we'd sell them our first norms would you be queuing up at the port to honour that, saying 'ah now lads we have to. The government promised'.

Senior bondholders have hugely reduced risk and so get lower rates, but they do have risk and if this ain't an instance where that risk has come to be then you may as well say senior bonds are unrepudiatable and risk free.

later12

Firstly who is 'you'? I couldn't give a fiddlers if Anglo can't borrow at any rate again.

You means you. The state owns the banks, banks upon which we depend for our personal and commercial finances. This has nothing to do with Anglo, they won't be borrowing again.

It is private debt, very distinct from public sovereign debt. I once lent Tom the gambler who lives down the road a tenner. He never paid me back, the defaulting bastard. Come to think of it, Tom was nigerian.

But Tom is a private individual. If Tom was Minister for Finance, then he couldn't have afforded to default.

Well I'm never lending to a Nigerian again :rolleyes: Specific instances of bad behaviour and individual bad experiences cannot be allowed to colour ones feelings/approach to an entire race/nation/gender.

This is the bond markets we're talking about, not the UNCHR. Of course it matters.

Senior bondholders have hugely reduced risk and so get lower rates, but they do have risk

Their risk is assumed roughly equal with actual hard cash; if we default on that then we're Argentina, or worse.

If it makes anyone feel better, the agreement between Sarkozy and Merkel does now make defaulting more 'credible' an opportunity in that it appends "collective action clauses" to all future issues of Sovereign Debt and allows the regulator to impose restructuring on bank debt.
However, it doesn't make defaulting any more attractive or likely.

kaiser sauze

Einhard wrote: »

I'm not sure they would have really. If Ireland were to say no, and the ECB step in, then what would stop any other country from doing the same thing, and demand that the ECB prop up their own banks? The ECB doesn't have a bottomless pit of funds afterall. Also, this again fails to deal with the negative consequences. We would be pariahs in Europe. We'be benefitted hugely from our membership of the Union, and we would rightly be ostracised for failing to live up to commitments that WE made. I'm not sure that Ireland would ever be able to regain the trust of our European colleagues. Now, you might say that this is a small price to pay, but the fact is we're living in an inter-connected world. If our closest neighbours and allies want nothing to do with us, then I don't see how anyone could claim that the consequences would be anything other than dire.

Also, were the ECB to say no, we're not going to meet your self-made commitments, then our banking system would collapse overnight. The ECB have provided approx €160 billion in liquidity to Irish banks over the past few months. If they remove this, as is envisaged in this loan facility, then it's all over for the Irish banks. And the Irish economy.

I'm not so much advocating for the loan facility here, as trying to see if there are genuinely better options. And so far, as far as I can see, all those advocating for default are doing so without acknowledging the massive damage that such an eventuality would cause. The complete destruction of Ireland's reputation, Ireland's banking system, and Ireland's economy does not seem to me an outcome that anyone would want, and yet they are all very possible under the default scenario.




The IMF have a responsibility to its shareholders. AFAIK it's not a fully autonomous body. The European nations provide a huge proportion of its funding, and I'd hazard a guess that they would do everything in their power to thwart any such bailout for Ireland.

All in all, I think those advocating default are seriously overestimating the strength of Ireland's position, and some of the talk even has the feel of cutting of one's nose to spite one's face about it.

At present, Ireland has genuine reasons for expecting help, many other countries do not.

Who is this "WE", I do not recall being consulted for my opinions on making every liability in the bank a sovereign debt?

senordingdong wrote: »

Not sure if these organisations would have the remit to operate in this country like that.

If things need to be organised quickly to enable the politicians to remain in control, you'd be surprised at how efficient our bureaucrats would be.

The would be no impediment whatsoever with us dealing with The IMF direct. In fact, if we were not strangled by the guarantee on bank bondholders we may not even need to seek IMF assistance.

skelliser

imo this deal and the austerity measures which will be introduced will further depress the economy and further destroy the tax base.
Better imo to default/restructure now for short term pain but long term growth.

Either way the bailout has failed with spreads on portugal and spain widening.

I fully expect an EU wide bank restructuring plan to be introduced by the middle of next year to finally deal with the bondholders. They wont be completly burnt, i reckon debt for equity will be the way forward.

The market knows full well that this cannot continue indefinitly. A time will come when market interests will realise thats its in their interest to get a resolution.

robbyvibes

Insanity: doing the same thing over and over again and expecting different results. - Albert Einstein

Putting more money into the insolvent banks is only postponing the inevitable default.

Waste of time.. just saddling the Irish people with more debt.

FF government are criminals of the highest degree, nothing else.

Ireland will still be in the same position 3 years from now except with much more debt and many more problems...shame on those who support this bailout.

gimme5minutes

Can someone explain how a default will affect the average joe public in this country?

Am I right in thinking that if we defaulted the country would be out of money in months if not weeks and we would not be able to borrow from anywhere....leading to no money for wages, essential services, atms, etc...which would lead to absolute anarchy.

Is this correct or not? If it is I dont see how we have any other choice than to go with the bailout...

skelliser

gimme5minutes wrote: »

Can someone explain how a default will affect the average joe public in this country?

Am I right in thinking that if we defaulted the country would be out of money in months if not weeks and we would not be able to borrow from anywhere....leading to no money for wages, essential services, atms, etc...which would lead to absolute anarchy.

Is this correct or not? If it is I dont see how we have any other choice than to go with the bailout...

No, Iceland effectivly defaulted.
iirc their atm's stopped working for 10seconds and then switched over or sometime to that effect. The idea tha there would be no money in atms is a myth.

There are two types of default, an orderly and a disorderly.
What we dont want is a disorderly default. See russia in the years after the fall of communisn. Not good. But i doubt that would happen here.

The main issue i beleive with a default is hyperinflation but since we are in the euro this effects wont be as bad as say ARGENTINA.

I think the whole Euro zone will have to enter into some sort of default/resolution within the next 6 months. Bondholders will have to share some pain. Its inevatible at this stage imo.

As i said above the current path will just destroy the tax base further so its time to take the short term pain of a default.

Watch how they start to say "resolution mechanism" now, politicians wont use the word default. Its to dirty.

waffleman

I have a question. Lets say we do default and bondholders get burned. Does our governments deposit guarantee really hold up in a default situation when the tax take cant pay back the loans? Won't those who lent us the cash we wasted want their share?

After all most profits / savings made in Ireland in the last 10 years can be linked back to borrowings from outside the country in some way... banks, construction, public sector, subsidised low corporation tax etc. all propped up by a false economy

ednwireland

skelliser wrote: »

No, Iceland effectivly defaulted.
iirc their atm's stopped working for 10seconds and then switched over or sometime to that effect. The idea tha there would be no money in atms is a myth.

There are two types of default, an orderly and a disorderly.
What we dont want is a disorderly default. See russia in the years after the fall of communisn. Not good. But i doubt that would happen here.

The main issue i beleive with a default is hyperinflation but since we are in the euro this effects wont be as bad as say ARGENTINA.

I think the whole Euro zone will have to enter into some sort of default/resolution within the next 6 months. Bondholders will have to share some pain. Its inevatible at this stage imo.

As i said above the current path will just destroy the tax base further so its time to take the short term pain of a default.

Watch how they start to say "resolution mechanism" now, politicians wont use the word default. Its to dirty.

+1 default will happen ( but its more likely to be a quiet writedown of the bondholders debt) a you say a resolution mechanism

Scofflaw

If we default on the bank senior debt, the man in the street is unlikely to see any immediate effect. On the other hand, we've effectively kissed goodbye to any chance of the Irish banks becoming ordinary banks again, and we've raised our borrowing rates for a very long time - the rates offered by the bailout facility would come to look extremely attractive by comparison, much as they do at the moment on just the possibility of default.

Out of interest, does anybody know how much 'senior debt' we're actually talking about?

cordially,
Scofflaw

Sponge Bob

Around €80bn comprised of Bonds and Swaps and Commercial Paper ...lets call them all Bonds for simplicity.

The only thing that has changed in 2010 is that the world is quite clear that Ireland shorn of the bank guarantee is solvent, quite comfortably so.

You are wrong Scofflaw in saying that we were not leaned on by EU/ECB to protect their investors in Irish issued Bonds back in 2008. I think drumpot summed matters up very well.

However our Finance lot, in their supreme arrogance, thought that they could reinflate the property bubble or stabilise around 2008 values and went along with being leaned on.

The Irish banks were technically insolvent in 2004/5 but our finest accountants ( auditors) and lawyers connived in concealing that fact. I am not talking that shyster Lynn here but top four legal and accountancy firms.

Once the resolution is tackled and completed then the probity and competence of the entire accountancy sector becomes questionable and that is the real long term damage.

We know we had a pair of senile gobdaws running regulation, Neary and Hurley.

ei.sdraob

Einhard wrote: »

The ECB doesn't have a bottomless pit of funds afterall.

Yes they do, they control the printing presses

Amhran Nua

kmick wrote: »

It seems to me the Irish taxpayer is being charged an extortionate/extraordinary rate of 5.83% to bail out private bond holders in banks.

...

Not only is 5.8% punitive but I think its safe to say it just delays an inevitable problem later on.

This is a very important point. As far as I know this debt is being purchased just above 2% and sold back to us at an average of 5.8%. There is no reason for such a huge margin.

Scofflaw wrote: »

Default is being touted as an easy way out of the crisis - and there isn't any such thing. It's being backed by inaccurate claims that we're bailing out the banks on behalf of German, UK, and French banks owed hundreds of billions of euro by Irish banks - but those figures are also mythical.

Its not being touted as an easy way out of the crisis, its being touted as a way to ease the crisis for Ireland, not for France, the UK or Germany. Economic commentators such as O'Rourke and Eichengreen don't usually base their analysis on myth.

Scofflaw

Amhran Nua wrote: »

This is a very important point. As far as I know this debt is being purchased just above 2% and sold back to us at an average of 5.8%. There is no reason for such a huge margin.

The margins are explicitly part of the EFSF setup - the IMF are also charging a very similar margin.

fixed-rate loans are based upon the rates corresponding to swap rates for the relevant maturities. In addition there is a charge of 300 basis points for maturities up to three years and an extra 100 basis points per year for loans longer than three years. A one time service fee of 50 basis points is charged to cover operational costs.

Amhran Nua wrote: »

Its not being touted as an easy way out of the crisis, its being touted as a way to ease the crisis for Ireland, not for France, the UK or Germany. Economic commentators such as O'Rourke and Eichengreen don't usually base their analysis on myth.

Nor do people lending you money fail to take account of your likelihood of default. Has it occurred to you that the interest rates charged to us by the IMF and EU might perhaps take into account these calls for, and the likelihood of, a default? After all, these are not loans to a country without problems - they're emergency loans to a country which is struggling to fund itself, and many of whose citizens believe that the government should default.

Which brings me back to the point about default again - it's not really a way of "easing the crisis" for Ireland by turning it into a short period of acute pain which we then sail out of debt-free and happy - it's a way of prolonging the agony for a decade or more by permanently increasing our borrowing rates, on top of the short period of acute pain.

If we can restructure some of the debt without too much in the way of long-term penalties - sure, let's do it. But there's no way of telling what the long-term penalties will actually be without trying it, so it only makes sense to do it very very gradually and very very quietly.

cordially,
Scofflaw

liammur

ei.sdraob wrote: »

Yes they do, they control the printing presses

They won't print much, if any. Germans are against that and quite correctly imo.

The day we guaranteed Anglo's liabilities, was the day we hit the buffers.

However, the real crisis began when bertie ahern was heading to manchester etc for the 'whip-arounds'

Sand

Einhard wrote: »

I know there are a lot of people genuinely convinced that we should burn the bondholders and renege on the guarantees...I'm no expert, and am open to persuasion here, so if anyone can explain the merits behind the default option I'm all ears...

What option, having made the decisions that delivered us into this crisis, did Cowen et al have but to accept the terms proferred by the EU/ECB, which involved a commitment to honouring the guarantees given to senior bondholders? For understandable reasons, Europe want the commitments honoured or else banks in France, the UK, and Germany will take an almighty hit. For equally good reason, it would be brilliant if Ireland could renege on the guarantee. However, the fact is that we require massive assistance from the EU, and not just to cover the bank bailouts as some have disingenuously asserted. A full €50 billion from the loan announced tonight is going to finance our budgetary shortcomings. Since the EU/Eurozone is proividing those funds, I don't think it's unreasonable that they protect their interests while doing so. To do otherwise is equivalent to me giving you a loan under the conditions of which you commit to smashing the windows in my home. The alternative of course, is to tell the Europeans to take a running jump, and resolve to sort things out without outside assistance. Which would basically mean that our banking system, without access to capital, would collapse within days, and any money that we have squirreled away would run out within months. What then? No money in the ATMs. No money for credit cards. No salaries for teachers. Or guards. Or nurses. Because that would be the impact of a default that went against the reasonable (from their perspective) wishes of the EU.

I'm open to correction in all of this. I could well be wrong. But I don't think I am. And I do think that those proposing default are emphasising the undoubted positives of such a move, whilst ignoring the massive negative consequences.

I think we need to address the case for default by looking at the current path of the "Avoid default at all costs!" strategy. Remember, we started in Sept 2008 with many private banks who owed money to private bondholders facing the prospect of default.

All policies embarked upon since under the rule of "Avoid default at all costs!" have resulted in the current position where default by the Irish sovereign on its debts to the ECB and its EU partners are *inevitable*. That has been the result of all attempts to avoid any default, at all, anywhere. People have been so terrorised by the consequences of a private bank defaulting that they have been herded into a sovereign default. And now they are so terrorised by the consequences of a sovereign default that they are being herded into a truly stupid deal that will not and has not changed the dynamics of default at all, only making the final fallout much worse.

This is the essential truth - a lot of money was invested very, very, very badly over the past 10 years. A lot of people lost a lot of money. There are a lot of debts that cannot be repaid.

People arent arguing for default - theyre arguing for a recognition of reality, and dealing with that reality. This is problematic because the decision makers really dont want to deal with the reality that they and their friends have lost an awful lot of money.

The "bailout" is a great solution if youre dealing with a liquidity crisis. Ireland would get over the "blip", payoff the loans easily with its 8% annual growth forever. Everyone would get their money back. Great victory.

But the problem is, Ireland is borrowing money at 5.8% ( "bailout" rates...:rolleyes: ) and growth at 2.75% is hopelessly optimistic in an economy that deleveraging after a decade of overconsumption. If youre borrowing money at 5.8% and investing it in a project that offers a return of 2.75% then youre in a spot of bother. And the problem is growth wont even be 2.75%, it will be more like 1%.

So the "bailout" is not credible. Ireland is left as an economy that owes a lot of money but cant pay anyone back and when the EU/IMF/ECB roll into town to sort out the mess, all they deliver is a deal which gives a bankrupt a credit card. Why do people act surprised then when "the markets" arent impressed and decide that Portugal and Spain must also be bad bets.

So in an economy like Ireland which has balance sheet problem theres 4 solutions:

1 - Grow like a Celtic Tiger on steroids so youre debt shrinks relatively.
2 - Print money like its 1921 so youre fixed debt shrinks relative to the inflation in your economy.
3 - Ask a friend to bailout you out by paying your debts off for you
4 - Default.

Option 1 isnt going to happen given we have to go on a series of austerity budgets and everyone is deleveraging. Option 2 isnt going to happen because the Germans are terrified that if even a modest bit of inflation occurs, Berlin will end up occupied and in ruins again. Option 3 wont happen if the terms of our European friends "bailout" are anything to go by.

So we end up with option 4 by a process of elimination. We can struggle on for a few more months or years, loading more and more debt on to ourselves, desperately insisting "I'll pay ya back, promise Sir, I'll pay ya back". But eventually reality will come racing over the horison when people come looking for their money back and we wont have it.

So we need to stop being childish and start being adults and start making adult decisions about how were going to confront this reality. And that means were going to have to start planning for a strategic default. We owe ourselves that at the very least. Default wont be painless, but lets face it the "Avoid default at any cost!!!!!" crowd have made a series of utterly stupid decisions which have not solved the private default of Irish banks, but have instead escalated it into a sovereign default with resulting implications for the Euro project. The root cause is denial, denial, denial. I chose my current signature back in the summer of 2010 when official opinion was that Ireland was over the worst. Of course it wasnt, because the essential truth remained unchanged: a lot of money had been lost by a lot of people and this had still not been confronted. Reading a book on the German campaign in France 1940 at this time I was struck by the similar tone of denial amongst the French command as they also refused to acknowledge reality.

At some point we have to call time on the madness. If we dont, someone else will do it at a time that suits them on terms that suit them. I'm happy for Ireland to be a teamplayer in Europe, but being a doormat isnt in our interests. Accepting this "bailout" is utterly stupid - in a couple of years we are going to up in a situation where 8 billion a year is being extracted out of a dying economy to bailout people who stupidly bought into the Anglo-Irish dream of no risk, high profits. Thats the future promised by the "Avoid default at any cost!" strategy: a declining economy, mass emigration, heavy debt burdens and despair for a decade or more.

Assuming the "Avoid default at any cost!" team can find an answer for mass mortgage defaults in negative equity as unemployment and wage cuts prevent people from being able to repay their mortgages to the Irish banks/the Irish state.

later12

Sand wrote: »

So in an economy like Ireland which has balance sheet problem theres 4 solutions:

1 - Grow like a Celtic Tiger on steroids so youre debt shrinks relatively.
2 - Print money like its 1921 so youre fixed debt shrinks relative to the inflation in your economy.
3 - Ask a friend to bailout you out by paying your debts off for you
4 - Default.

Option 1 isnt going to happen given we have to go on a series of austerity budgets and everyone is deleveraging. Option 2 isnt going to happen because the Germans are terrified that if even a modest bit of inflation occurs, Berlin will end up occupied and in ruins again. Option 3 wont happen if the terms of our European friends "bailout" are anything to go by.

So we end up with option 4 by a process of elimination. We can struggle on for a few more months or years, loading more and more debt on to ourselves, desperately insisting "I'll pay ya back, promise Sir, I'll pay ya back". But eventually reality will come racing over the horison when people come looking for their money back and we wont have it.

Part of the problem here is that people use the terms 'default' and 'restructure' quite interchangeably in Ireland. Because you do not mention restructuring at all on your post suggests that you are actually using default when you mean restructuring, or at least I would hope so.

Ireland will have its EFSF, EFSMech and IMF debt written down, that much is pretty certain. Corporate debentures will be restructured to reflect the emerging repayment problems; that, now, must also be certain.

Restructuring in terms of progressive debt write down when it allows domestic EU markets to build up capital cushions and to offload bond packages, is not as troublesome as defaulting and has precedent in the Latin American debt crisis from 20 years ago.

If people think the rules about corporate or sovereign defaulting is being re-written in 2010, they are wrong, they were written 20 years ago.

We should follow a Brady Bond formula in writing down our debt, and it does now appear that that is the unpublished intention of the authorities given the recent Franco-German agreement on the introduction of new legal instruments to deal with emerging policy on sovereign and corporate European debt.

Default and Restructuring should be seperated into their two distinct camps; one is chaotic and fiscally lethal, the other is potentially far less chaotic and may be much more efficacious in restoring confidence in Ireland and the Eurozone.

Accepting this "bailout" is utterly stupid - in a couple of years we are going to up in a situation where 8 billion a year is being extracted out of a dying economy to bailout people who stupidly bought into the Anglo-Irish dream of no risk, high profits.

What is your alternative to accepting the deal, what do you want, in practical terms, exactly?

Sand

Part of the problem here is that people use the terms 'default' and 'restructure' quite interchangeably in Ireland. Because you do not mention restructuring at all on your post suggests that you are actually using default when you mean restructuring, or at least I would hope so.

Its semantics essentially. "Restructuring" is just a nice word for "default". We entered into contracts where would pay back X, in Y years, at Z interest. Now we are saying we wont. Call it default or restructuring but it winds up in the same place: our creditors will be unhappy.

Ireland will have its EFSF, EFSMech and IMF debt written down, that much is pretty certain. Corporate debentures will be restructured to reflect the emerging repayment problems; that, now, must also be certain.

Is it? Everything up to this point has demonstrated that absolutely everything will be done to avoid any write off, at all, anywhere, to anyone. Anyone who has raised the possibility of defaults has been denounced as a maniac who wants the seas to rise up and drown Ireland.

Apparently someone on the Irish negotiating team summoned up the courage to dare query the possibility of debt write offs in a trembling and timid voice, and the EU/ECB team apparently hit the roof. So I dont see the grounds for hope that suddenly the EU/ECB will reverse course in 2013 and decide they dont mind covering our debts then, when they apparently needed to be peeled off the ceilings the last time the subject was timidly raised.

Restructuring in terms of progressive debt write down when it allows domestic EU markets to build up capital cushions and to offload bond packages, is not as troublesome as defaulting and has precedent in the Latin American debt crisis from 20 years ago.

Progressive debt write downs? Seriously? We need to rehabilitate Ireland as soon as possible and show it to be a good bet to lend to as soon as possible. A short, sharp shock will contribute to that far more than a series of mini-defaults which always promise another default a few months down the tracks. Progressive debt write downs merely extend the period over which Ireland will be viewed as a basket case debt blackhole who cannot be relied upon to honour their debts. If we are going to write off our debt, its best we do it once and draw a line under it, not revisiting it every few months like the DoFs calculations of how much their ineptitude with the banks will cost us.

Default and Restructuring should be seperated into their two distinct camps; one is chaotic and fiscally lethal, the other is potentially far less chaotic and may be much more efficacious in restoring confidence in Ireland and the Eurozone.

Yeah, one is nasty, brutish and short. The other is nasty, brutish and long.

What is your alternative to accepting the deal, what do you want, in practical terms, exactly?

Well, Id have picked any of options 1-3, but they have all been ruled out by our European friends, so we are forced into Option 4. How thats managed is arguable but the overall theme would be to revoke the guarantee on the grounds of the deceit by the bankers. Id reverse NAMA by cancelling the NAMA bonds but passing ownership of NAMA to the banks in proportion to the value of their share of the loans. I'd call the ECB and tell them the situation and let them worry about not letting any banks fail or Euro contagion problems.

And then Id concentrate on restoring Ireland to a sustainable budget (assuming 1% growth, not 2.75%) and liberalising the economy to promote growth by selling off the state monopolies and confronting the sheltered sectors and the vested interests.

later12

Sand wrote: »

Its semantics essentially. "Restructuring" is just a nice word for "default". We entered into contracts where would pay back X, in Y years, at Z interest. Now we are saying we wont. Call it default or restructuring but it winds up in the same place: our creditors will be unhappy

You are quite correct here, our creditors will end up unhappy. And restructuring is a nicer word than default. However, when most people speak of defaulting they tend to mean a widespread and significant refusal to pay or, even worse, a more total cancellation of debt on behalf of the debtor. That, of course, is a catastrophic event.

Restructuring then, should be seen as a seperate development. Market investors recognise, as every reasonable person now does, that the Irish debentures are unpayable. Default or Restructuring will happen.

By combining a Brady Bond payment system of progressive debt write down over a number of years from 2013 onwards, allowing the offloading of bond packages by vulnerable Euroepan parties and financial institutions, meanwhile allowing them to build capital cushions in being allowed to foresee the write downs, we are doing something which is the lesser evil than 'debt cancellation' or refusing to pay vast sums right away, or what some people might tend to refer to as 'defaulting'. The two events are seperate, and I sincerely hope you would not be so unreasonable as to prefer the latter.

Everything up to this point has demonstrated that absolutely everything will be done to avoid any write off, at all, anywhere, to anyone.

Ah now that is just unrealistic. Yes, if you believe that what Governments and European leaders are saying at face value, and you think that this is the same as what is being said behind closed doors, then yes, go ahead and believe the above.
As John Arthurs commented in The Long View, The ongoing dialogue is all going to make for one hell of a wikileaks article one day. Everybody knows that debenture alterations are a question fo when, and not if.

Apparently someone on the Irish negotiating team summoned up the courage to dare query the possibility of debt write offs in a trembling and timid voice, and the EU/ECB team apparently hit the roof. So I dont see the grounds for hope that suddenly the EU/ECB will reverse course in 2013 and decide they dont mind covering our debts then, when they apparently needed to be peeled off the ceilings the last time the subject was timidly raised.

I presume you are basing that on the Sindo article that it first appeared in? Firstly, I stopped believeing what I read in the Sindo long ago. Secondly, that is a question of defaulting and I am talking about restructuring - which seems to be the unpublished intention of the Europeans who have been not used the terms default and restructure interchangeably. It was Merkel whoself who said, after all, that bondholders must carry a burden here.

Progressive debt write downs? Seriously? We need to rehabilitate Ireland as soon as possible and show it to be a good bet to lend to as soon as possible. A short, sharp shock will contribute to that far more than a series of mini-defaults which always promise another default a few months down the tracks.

A short sharp shock? I'd love to know who on earth was responsible for introducing this phrase into bus stop parlance, presumably intending to base Irish economic policy on little more than alliteration technique. I honestly wish that people didn't fall for this rather bravo-sounding approach so foolishly.

Lets get one thing clear - there is nothing 'precise', nor 'sharp' about a short, sharp, shock. It is the equivalent of going to the Central Bank with a baseball bat and demolishing all records of debt owed, then hoping that everyone outside will just forget about it soon.

Progressive write down and the issuing of a Brady Bond type debenture, possibly with annual revision, is the most logical, 'sharp' and precise way of dealing with the money owed to senior bondholders - a debt, after all - which must be largely repaid.

the overall theme would be to revoke the guarantee on the grounds of the deceit by the bankers. Id reverse NAMA by cancelling the NAMA bonds but passing ownership of NAMA to the banks in proportion to the value of their share of the loans. I'd call the ECB and tell them the situation and let them worry about not letting any banks fail or Euro contagion problems.

And then Id concentrate on restoring Ireland to a sustainable budget (assuming 1% growth, not 2.75%) and liberalising the economy to promote growth by selling off the state monopolies and confronting the sheltered sectors and the vested interests.

I would have thought that the first question you should have answered here was very obvious - how would you fund the state in the immediate future? You seem to think we can do what we want to do, and get IMF and EU funding regardless.

Sand

You are quite correct here, our creditors will end up unhappy. And restructuring is a nicer word than default. However, when most people speak of defaulting they tend to mean a widespread and significant refusal to pay or, even worse, a more total cancellation of debt on behalf of the debtor. That, of course, is a catastrophic event.

Restructuring then, should be seen as a seperate development. Market investors recognise, as every reasonable person now does, that the Irish debentures are unpayable. Default or Restructuring will happen.

Look I'm not going to get into semantics. End of the day, we are going to unilaterally (if necessary) break the terms of the deal we entered into to repay a certain amount of money. The implications are going to be similar - We will pay back what we can, not what we were supposed to. The people who we owe money too are going to feel put out regardless. Their feelings are not our concern - what is best for the Irish taxpayer ought to be.

By combining a Brady Bond payment system of progressive debt write down over a number of years from 2013 onwards, allowing the offloading of bond packages by vulnerable Euroepan parties and financial institutions, meanwhile allowing them to build capital cushions in being allowed to foresee the write downs, we are doing something which is the lesser evil than 'debt cancellation' or refusing to pay vast sums right away, or what some people might tend to refer to as 'defaulting'. The two events are seperate, and I sincerely hope you would not be so unreasonable as to prefer the latter.

Ah yes, kick the can down the road and hope, pray that something happens to save us from reality. In the meantime, the bond markets lock up and the economy goes into hibernation whilst it waits for the hammer of inevitable debt defaults to come down. Ireland ends up in a massive debt trap with decreasing economic activity and rapidly climbing debts relative to our GNP.

Thats the plan offered by the "Avoid default at all costs!!!" strategy.

Ah now that is just unrealistic. Yes, if you believe that what Governments and European leaders are saying at face value, and you think that this is the same as what is being said behind closed doors, then yes, go ahead and believe the above.
As John Arthurs commented in The Long View, The ongoing dialogue is all going to make for one hell of a wikileaks article one day.

Not just everything theyre saying - everything theyre doing. Even in the latest deal, the Irish Times leaked a story that debt writeoffs would be included in the final deal. No debt write offs were included in the final deal. When questioned on this Lenihan stated this had been raised but ruled out. The less diplomatic description was the EU/ECb team "hitting the roof" when it was mooted.

The Irish government has explicitly insisted there will be no default/restructuring and have engaged on a completely stupid plan to prevent any default/restructuring. The EU/ECB team rolled into town and delivered a stupid, pointless deal that offered no default/restructuring. So its not a matter of believing what theyre saying - just look at their solutions.

Everybody knows that debenture alterations are a question fo when, and not if.

Which is why Ireland is locked out of the debt markets, and why Ireland will remain locked out of the debt markets until Ireland, and the EU, grow up and make some adult decisions about the situation they are in.

A short sharp shock? I'd love to know who on earth was responsible for introducing this phrase into bus stop parlance, presumably intending to base Irish economic policy on little more than alliteration technique. I honestly wish that people didn't fall for this rather bravo-sounding approach so foolishly.

And what should Irish economic policy be based on? Phrases like:

"There is no alternative"
"NAMA will get credit flowing"
"We are where we are"
"We have turned a corner"
"Iceland!!!!"
"The situation is manageable"

As you say yourself, default is inevitable and Ireland will remain locked out of the bond markets until that inevitablity is confronted. Borrowing at 5.8% to fund growth of 1% is just piling more and more and more bad debt, making the final confrontation all the more terrible.

Look, 2 years ago we would have been dealing with a bank failure. Now we're dealing with a sovereign default. And the possible breakup of the Euro, and the poisoning of the EU project - thats where the "kick the can down the road" team have led us with their scaremongering. To a series of escalating disasters.

Progressive write down and the issuing of a Brady Bond type debenture, possibly with annual revision, is the most logical, 'sharp' and precise way of dealing with the money owed to senior bondholders - a debt, after all - which must be largely repaid.

And in the meantime, Ireland remains locked out of the bond markets with its economy in a nosedive as a wave of mortgage defaults hit the banks.

I would have thought that the first question you should have answered here was very obvious - how would you fund the state in the immediate future? You seem to think we can do what we want to do, and get IMF and EU funding regardless.

Heres the thing - I dont consider it possible for Ireland to enter into the bond markets to fund a deficit for the considerable future. Maybe short term emergency funding, but borrowing at 5.8% to get a return of 1% is just stupid.

We have a small and decreasing cash reserve which we can use to tide us over for a couple of months whilst we adjust but I would deliver the mother of all austerity budgets: Croke Park would be the first thing to go. No doubt of course, the "Avoid default at all costs!!!" will want to run down that cash cushion on the current path so as to ensure the final default is done when Ireland is totally at the mercy of the markets.

The advantage of my approach is that we would save 8 billion per year on interest payments, so whilst the adjustment would be harsh, it would be less harsh in terms of public sector services than the "Avoid default at all costs!!!!" strategy would be. Because the "Avoid default at all costs" strategy involves cutting public services so much that not only can our revenue stream pay for it, but that it can also cover 8 billion in interest per annumn as well.

later12

Sand wrote: »

The people who we owe money too are going to feel put out regardless. Their feelings are not our concern - what is best for the Irish taxpayer ought to be.

The people we owe money to are wealth investors. If you think that their feelings, or that of the wider market is not our concern, then that is a level of opinion that is so wildly removed from reality that it cannot be altered with logic. So stick to that opinion and I'll stick to mine.

Ah yes, kick the can down the road and hope, pray that something happens to save us from reality. In the meantime, the bond markets lock up and the economy goes into hibernation whilst it waits for the hammer of inevitable debt defaults to come down.

In refuting some of your opinions, I wasn't perhaps fully forward in presenting mine. I'm not saying allow the bond markets to lock up any more than I am saying "avoid default at all costs!!!!!".

My idea is two fold

• Gradual restructuring of bonds, the issue of a Brady Bond type write down which sees much of the debenture renumerated to senior bondholders
• The establishment of a sovereign European bond to replace the EFSF and EFSMech facilities, corresponding with greater European fiscal integration.

The above would allow a progressive write down of bond values pending negotiations with senior bondholders, while allowing us to secure a sustainable level of interest on our bond purchases through the European model.

Not just everything theyre saying - everything theyre doing. Even in the latest deal, the Irish Times leaked a story that debt writeoffs would be included in the final deal. No debt write offs were included in the final deal. When questioned on this Lenihan stated this had been raised but ruled out. The less diplomatic description was the EU/ECb team "hitting the roof" when it was mooted.

The Franco-German accord accomodates very explicitly a write down by virtue of its common action clauses and added authority of the regulator twoards renumeration of senior bond holders in future or emergeing crises. The Irish Times and the irish Government are, no offence to either, insignificant in Europe in this respect. It iis broadly seen to be the European policy on future debt policy to offer senior bondholder haircuts from 2013 onwards. I'm not sure if you will find an economist or anyone semi interested in this crisis who would disagree with that opinion quite frankly...

Heres the thing - I dont consider it possible for Ireland to enter into the bond markets to fund a deficit for the considerable future. Maybe short term emergency funding, but borrowing at 5.8% to get a return of 1% is just stupid.

I'm not sure what you mean here, you think Ireland can re enter bond markets or not? 5.8% is a lot less than the current market offer of 8.2% so I'm not sure what youre actually trying to say. Why would we not just borrow 'emergency funding' at 5.8%? Lets be clear, do you want to kick out the IMF and refuse the EFSF money?

We have a small and decreasing cash reserve which we can use to tide us over for a couple of months whilst we adjust but I would deliver the mother of all austerity budgets:

Along with the idea of 'short, sharp pains', this is another popular fallacy. Markets, I'm sorry, are simply not big on such significant levels of austerity, or at least not when it begins to impact negatively on GDP.

Sponge Bob

The markets have decided. We shall default. Many commentators in the FT and elsewhere have decoupled the solvent sovereign from the morass that is the banking system.

It is only a matter of when, hopefully before we drawdown and bankrupt sovereign as well as the banks.

Sand

@Later10

The people we owe money to are wealth investors. If you think that their feelings, or that of the wider market is not our concern, then that is a level of opinion that is so wildly removed from reality that it cannot be altered with logic. So stick to that opinion and I'll stick to mine.

Later, if you think you can stiff people for money their owed and still get invited over for drinks at Christmas your deluding yourself. We're not going to get out of this situation with smiles and sunshine. We are in survival mode where we need to put our interests, the interests of the Irish taxpayer, first.

In refuting some of your opinions, I wasn't perhaps fully forward in presenting mine. I'm not saying allow the bond markets to lock up any more than I am saying "avoid default at all costs!!!!!".

My idea is two fold

* Gradual restructuring of bonds, the issue of a Brady Bond type write down which sees much of the debenture renumerated to senior bondholders
* The establishment of a sovereign European bond to replace the EFSF and EFSMech facilities, corresponding with greater European fiscal integration.

The above would allow a progressive write down of bond values pending negotiations with senior bondholders, while allowing us to secure a sustainable level of interest on our bond purchases through the European model.

Which is essentially kicking the can down the road and hoping something comes up. Default now, or borrow more now and default later. Youre assuming two things - that there is widespread support in the EU to bailout the peripheral economies: There isnt. And that the markets will somehow ignore the plan to stiff them down the road. They wont.

The Franco-German accord accomodates very explicitly a write down by virtue of its common action clauses and added authority of the regulator twoards renumeration of senior bond holders in future or emergeing crises. The Irish Times and the irish Government are, no offence to either, insignificant in Europe in this respect. It iis broadly seen to be the European policy on future debt policy to offer senior bondholder haircuts from 2013 onwards. I'm not sure if you will find an economist or anyone semi interested in this crisis who would disagree with that opinion quite frankly...

Heres the thing - we are not going to make it to 2013 on the current trajectory, and theres no guarantee that there will be an EU rescue waiting for us. Again, youre assuming the EU is ready and willing to ride over the horison to save us. If they were going to support us, theyd have delivered a deal that was helpful - instead they delivered a deal that failed to bailout Ireland, and failed to prevent contagion to Spain and Portugal. The cavalry rolled in and they delivered a solution for a liquidity crisis, which is the completely wrong answer to our current strife. Public opinion in Germany wouldnt allow them to seriously address the real problem - Irelands balance sheet.

I'm not sure what you mean here, you think Ireland can re enter bond markets or not? 5.8% is a lot less than the current market offer of 8.2% so I'm not sure what youre actually trying to say. Why would we not just borrow 'emergency funding' at 5.8%? Lets be clear, do you want to kick out the IMF and refuse the EFSF money?

No, Ireland wont be able to re-enter the markets until the unpayable debt is confronted. Yes, if we have to borrow at 5.8% I would reject the EFSF money as it only increases our unpayable debt problem. Its laughable when 5.8% is described as a "bailout". Only a few months ago the Irish government stepped out of the bond markets because rates were in the 5.8% ballpark. Now its a "bailout". :rolleyes:

I wouldnt kick out the IMF - they seem to be more realistic than our European friends - but I wouldnt kick anyone out. I would simply refuse to access credit at loan shark rates when we cant pay back the money we have already borrowed. You dont help a bankrupt by giving them a credit card to pay off their debts.

Along with the idea of 'short, sharp pains', this is another popular fallacy. Markets, I'm sorry, are simply not big on such significant levels of austerity, or at least not when it begins to impact negatively on GDP.

Heres the unfortunate reality - we cant borrow to inflate a bubble this time around. Borrowing at 5.8% to get a return of 1% is stupid. Really, really, really stupid.

later12

Sand wrote: »

Youre assuming two things - that there is widespread support in the EU to bailout the peripheral economies: There isnt. And that the markets will somehow ignore the plan to stiff them down the road. They wont.

Firstly, as it stands, it is in nobody's interest to leave the Eurozone. Angela Merkel might have lost it with Sarkozy on the telephone, she might have threatened to leave the Euro, and so might anybody else. But here's the thing, they won't.

So assuming we are starting from a point whereby everybody wants to stay in the Eurozone, they have several options

1. Find a way of evicting the peripherals
2. Increase the Euro Rescue Fund to accomodate emergant problem states
3. Greater Fiscal Union
4. The establishment of Eurobonds

1. and 2. are, as it stands, unavailable. It is unclear where further money would come from, and there is no way of eviciting member states (crazy, yes).
This leaves options 3. and 4; which in all probability will be the next resort. The last option would provide us with lower costs of borrowing than EFSF, EFSMech, and bilateral borrowing at current levels. It would also establish a greater sense of solidarity within the SEC zone.

So firstly, no; I do not assume 'widespread' support for the peripherals, but I do assume widespread support for the survival of the Eurozone amongst the core economies.
So until they find a way of kicking us out, then their support for the Eurozone must be directly proportional to their support for the peripherals.

Secondly, I do not think the markets will forget that investors debentures will be re-assessed. But nobody realistically expects it to be any other way and I do think they would be happier receiving 70% of their investment (possibly with interest) than 30%, or worse, none whatever.
Furthermore, the effect overall would be lost on the Eurobond due to the size of our domestic debentures in relation to the whole Eurozone. It isn't quite a drop in the ocean, but it isn't enough to bring down the Euro either.

If they were going to support us, theyd have delivered a deal that was helpful

Personally, I think they have. If we are expecting a remedy that will be in place immediately, we are deluding ourselves. There is no silver bullet. In my opinion, the EU policy of gradual restructuring, capital cushioning and the potential introduction of Eurobonds would be the best, most available, simplest and healthiest remedy.

It is not an ideal solution, but then that doesn't exist.

The cavalry rolled in and they delivered a solution for a liquidity crisis

Wait wait you're suggesting they provided what exactly, liquidity? Explain? I don't read the published ramblings of ginger haired economists or Morgan Kelly for that matter, so you're going to have to explain that one if you don't mind. Bearing in mind the stark difference between admittedly worrying and ongoing ECB liquidity lending and the IMF-EU deal.

No, Ireland wont be able to re-enter the markets until the unpayable debt is confronted.

Or until the development of Eurobonds.

I wouldnt kick out the IMF - they seem to be more realistic than our European friends - but I wouldnt kick anyone out. I would simply refuse to access credit at loan shark rates when we cant pay back the money we have already borrowed. You dont help a bankrupt by giving them a credit card to pay off their debts.

Firstly I would just ask you to bear in mind the fact that IMF funding is routinely written down and written off. It's pretty safe to say that repayments to Europe, equally, are not going to be a prime concern to the economy, to put it lightly.

However, if you're refusing to borrow IMF and EFSF funding at the rates offered, then you're talking about borrowing at the current rate of 8.20% or incomprehensibly abolishing aspects of public infrastructure and expenditure. Hmmmm.

Heres the unfortunate reality - we cant borrow to inflate a bubble this time around. Borrowing at 5.8% to get a return of 1% is stupid. Really, really, really stupid.

I'm not a believer in the 2.75% figure, but I don't actually buy the 1% figure either. Where are you getting it from?

I've just left a job where about 40% of my day was spent collecting information for the analysis of future income and I can tell you that nobody listens to risk analysts nor monetary forecasters anymore, at least not during the current Eurozone crisis. I wonder why you keep repeating this figure of 1%?

irish_g

Has anyone looked at the Icelandic model?
They refused to back the private banks and allowed them to crash.
At this time the national debt is in the region of 4% of GDP, and economists report that their economy is growing and should be copasetic by 2014.

I'm a tax paying citizen of Ireland, as I'm sure we all are on this thread.
I already pay bank fees, interest on my mortgage etc. This is the limit of what they are allowed to take from me.
The blanket guarantee and the subsequent extension of the same, was the equivalent of insertion a little at a time and ultimately our financial suicide as a Nation. Cowen, Lenihan, Anglo, and gang, were trying to protect their interests in the short-term. The net result of their ineptitude and self seeking greed was our conversion from a relatively sovereign nation (See Nice/Lisbon Treaty) to that of a debt servicing nation.
30% of our tax take by 2014 will be used to pay for the projected Debt. That is accepted as a relatively optimistic view. The projected growth by the FF Government and their highly skilled economists :rolleyes: is considered by the dogs on the street to be wildly enthusiastic.

I don't care if the bondholders in Germany, France, Japan, China etc. lose their money. They invested/risked their cash. It's the nature of the investment business. You win some you lose some...
If they want risk free there is always the old biscuit box under the bed.

A point to note, the ECB/IMF is borrowing the money from the same loan Sharks that we have to pay it back too.

I say default on the banks debt and let them twist in the wind.
As a nation we’d be better off. :mad:

Sand

Firstly, as it stands, it is in nobody's interest to leave the Eurozone. Angela Merkel might have lost it with Sarkozy on the telephone, she might have threatened to leave the Euro, and so might anybody else. But here's the thing, they won't.

Actually we dont know that.

What we do know is the concept of Germany having to bail out the periphery is *wildly* unpopular in Germany. We know that Germany is one of the few Eurozone members that could plan to leave the Euro openly and see an influx of capital and deposits (supporting its own banks) as everyone else tries to get the hell out of PIIGS euros. We also know that Germans would be relieved to return to the Deutschmark.

Now against that, a strong Deutschmark would hamper Germanys exports, but I'm guessing theyll cope.

So assuming we are starting from a point whereby everybody wants to stay in the Eurozone, they have several options

1. Find a way of evicting the peripherals
2. Increase the Euro Rescue Fund to accomodate emergant problem states
3. Greater Fiscal Union
4. The establishment of Eurobonds

1. and 2. are, as it stands, unavailable. It is unclear where further money would come from, and there is no way of eviciting member states (crazy, yes).
This leaves options 3. and 4; which in all probability will be the next resort. The last option would provide us with lower costs of borrowing than EFSF, EFSMech, and bilateral borrowing at current levels. It would also establish a greater sense of solidarity within the SEC zone.

Which we cant assume.

1 and 2 are unavailable. 3 is politically impossible (Both in Germany and in the periphery for different, opposing reasons). 4. has been ruled out, as expected, by Merkel just today.

The Germans simply dont want to be saddled with the debts and if Merkel doesnt represent that, then she will be outflanked by a politician who will. Theres no political dividend in it - especially with the Greeks making Nazi slurs and the Irish moaning about Germans taking over the country. There has always been an assumption previously that Germany could be guilt-tripped into paying for Europe: the German horse and the French rider. Germany isnt that guilt ridden country anymore. Theyre not going to bail us out because theyre such nice guys and were such loveable rogues.

Theyll happily leave us to drown in our debt so long as it doesnt disturb them. German politicians arent going to be more concerned for Irelands problems than Irish politicians are. They will happily leave us to devolve into Albania-On-The-Sea, so relying on them to make decisions for us in our interests is not going to yield much.

So firstly, no; I do not assume 'widespread' support for the peripherals, but I do assume widespread support for the survival of the Eurozone amongst the core economies.
So until they find a way of kicking us out, then their support for the Eurozone must be directly proportional to their support for the peripherals.

Again, Germany doesnt have to kick us out. They can simply exit the Euro, and probably do so whilst attracting massive capital flows as anyone who can gets out of the PIIGS and tries to preserve their wealth in New Deutschmarks.

We and the rest of the PIIGS can happily remain in the Euro, completely undisturbed - only without the support of the German economy and fiscal credibility. Mass capital flight.

Personally, I think they have. If we are expecting a remedy that will be in place immediately, we are deluding ourselves. There is no silver bullet. In my opinion, the EU policy of gradual restructuring, capital cushioning and the potential introduction of Eurobonds would be the best, most available, simplest and healthiest remedy.

It is not an ideal solution, but then that doesn't exist.

Were not talking about immediately, like this problem was only discovered in November 2010.

We talking about 3 years since August 2007. We are talking 2 years since Sept 2008 guarantee. We are talking the best part of the year since the sheer scale of the black hole in Irish banks became apparent. And over 6 months since the Greece crisis.

I would be dissapointed if this deal was some sort of flying by the seat of their pants last minute thing which was only conceived and prepared in the week the IMF arrived.

Lets not forget - you are asking us to not take public pronouncments by the EU/ECB seriously, to believe that behind the scenes they are working away at the solution. So given theyve had 2-3 years to understand and respond to the problem in Greece and Ireland, even despite all their public pronouncements that Ireland was fine - surely they must have been planning for the possibility of a EU/ECB response to Ireland being locked out of the bond markets?

And yet, despite the problem being Irelands balance sheet, they provide a solution for a liquidity crisis which will only increase Irelands insolvency. They havent even begun to recognise the problem 2-3 years in, let alone provide useful solutions.

Wait wait you're suggesting they provided what exactly, liquidity? Explain? I don't read the published ramblings of ginger haired economists or Morgan Kelly for that matter, so you're going to have to explain that one if you don't mind. Bearing in mind the stark difference between admittedly worrying and ongoing ECB liquidity lending and the IMF-EU deal.

What do you think they provided? Debt writeoffs? All they gave us was a credit card - a completely useless answer to a situation where we cant repay the debts we already have.

Whats your understanding of the term "liquidity", because Im not going to get tied up in knots over trying to split hairs like that "default"/"restructuring" nonsense.

Or until the development of Eurobonds.

Which has been mooted, and immediately ruled out by Merkel.

Firstly I would just ask you to bear in mind the fact that IMF funding is routinely written down and written off. It's pretty safe to say that repayments to Europe, equally, are not going to be a prime concern to the economy, to put it lightly.

Oh I see, we're hoping that the man who lent us all the money will forget?

However, if you're refusing to borrow IMF and EFSF funding at the rates offered, then you're talking about borrowing at the current rate of 8.20% or incomprehensibly abolishing aspects of public infrastructure and expenditure. Hmmmm.

I think yes, were going to have to abolish aspects of public infrastructure and expenditure.

Shockingly enough, were going to have to drastically reduce expenditure to meet revenue, which will mean identifying priorities and exercising some fiscal discipline.

It'll be tough, but it'll save us 8 billion per year in interest payments, and quite simply, borrowing at 5.8% or 8.5% or 25% to get a return of 1% is just stupid. Presenting that as some sort of responsible path to economic recovery and growth is laughable. Ireland is locked out of the bond markets. We have to deal with that like adults.

I'm not a believer in the 2.75% figure, but I don't actually buy the 1% figure either. Where are you getting it from?

I've just left a job where about 40% of my day was spent collecting information for the analysis of future income and I can tell you that nobody listens to risk analysts nor monetary forecasters anymore, at least not during the current Eurozone crisis. I wonder why you keep repeating this figure of 1%?

I'm trying to be optimistic by predicting growth in an enviroment where interest rates are high, credit is non existent as banks attempt to rebuild their balance sheets, the government and the consumers are pulling their horns in and reducing spending in fear of ever increasing taxes and ever reducing paypackets. It could easily be less.

Nobody knows what growth theres going to be, but your analysts of future income would want to be shoving most of Colombias GDP up their nose to seriously believe the economy and the states revenues will grow faster than borrowing at 5.8%

K-9

Default just isn't a political option atm, it never was. The chaos that would ensue, not just on an Irish perspective isn't palatable to Governments or indeed, oppositions.

The thing will just totter along until there are very little other options and then it becomes a question of whether default or a break up of the Euro is the political answer.

later12

Sand wrote: »

What we do know is the concept of Germany having to bail out the periphery is *wildly* unpopular in Germany. We know that Germany is one of the few Eurozone members that could plan to leave the Euro openly and see an influx of capital and deposits (supporting its own banks) as everyone else tries to get the hell out of PIIGS euros. We also know that Germans would be relieved to return to the Deutschmark.

Now against that, a strong Deutschmark would hamper Germanys exports, but I'm guessing theyll cope.

Firstly, i am not entirely dismissing the prospect of germany quitting the Eurozone. Even the most conservative of old school Europhillic economists have been tittering about this since last Christmas. I have said many times that the Eurozone will suffer a split in the coming years, but the bottom line is that I do not consider it all likely, in fact nor does any serious economist I have heard about consider it likely.

I must say I find your idea about Germany's banking industry benefitting from the development bewildering. It would be far more likely, in a jenga sort of fashion, to instigate a German banking crisis. But actually what i find far more intriguing is the rather blasé comment "i'm guessing they'll cope" as though Germany's loss of competitiveness were some sort of minor matter of little incidence! Ha! Disengagement would, as you note quite rightly, cause the DM to soar and immediately render them un competitive. That means rising unemployment - something which has, after all of the post-unificatory labour reforms and relative austerity, finally made Germany competitive again. The IFO has risen at its highest level in 20 years. Last year everyone was talking about the possibility of 1.5% growth for Germany. Now we are bickering about a 4% figure or whether it will be higher!

The modern day German, thankfully, is not in the business of electing idiots. they are aware that a competitive export driven economy is what has finally got them so high and so dry. They are not about to turn around and destroy that, leave the euro, and start again at page one and trawl through the mire for another twenty years - this time focusing on a banking industry, presumably.

4. has been ruled out, as expected, by Merkel just today.

Actually, she said (and i am open to correction here because I am in transit and only caught the news slightly) that the current Treaties disallow such bonds, not that she has some sort of policy issue with them in themselves. If you ask me, treaties were made to be broken. The german finance minister has a far more promising interview in todays FT where, although ruling out the bonds in the short term, he does say that it or greater fiscal union may be something the German Parliament consider in a number of months.

The Germans simply dont want to be saddled with the debts

But they are being saddled with debts already. The Eurobond scheme actually takes away responsibility from the core economies and places it distinctly in the hands of the peripherals.

Lets not forget - you are asking us to not take public pronouncments by the EU/ECB seriously, to believe that behind the scenes they are working away at the solution. So given theyve had 2-3 years to understand and respond to the problem in Greece and Ireland, even despite all their public pronouncements that Ireland was fine - surely they must have been planning for the possibility of a EU/ECB response to Ireland being locked out of the bond markets?

Hang on explain that again? You think that just because I'm saying that they are not being completely upfront about economic truths right now, that therefore they have always been lying? Eh, no. I'm not saying that. I don't honestly think they foresaw the eurozone crisis in its current form.

Oh I see, we're hoping that the man who lent us all the money will forget?

OK, look, IMF debt is routinely written down or written off if you are denying that basic fact then I'm not going to try push it.

It'll be tough, but it'll save us 8 billion per year in interest payments, and quite simply, borrowing at 5.8% or 8.5% or 25% to get a return of 1% is just stupid. Presenting that as some sort of responsible path to economic recovery and growth is laughable. Ireland is locked out of the bond markets. We have to deal with that like adults.

Have you worked out any figures on the impact of such austerity onto the GDP, or is that something that didn't fit on the back of your envelope?

Because words are pretty easy. It's very easy to say **MAJOR AUSTERITY** when you don't actually offer anything statistical in terms of practical ramifications of major public spending cuts on future economic growth.

I'm trying to be optimistic by predicting growth in an enviroment where interest rates are high, credit is non existent as banks attempt to rebuild their balance sheets, the government and the consumers are pulling their horns in and reducing spending in fear of ever increasing taxes and ever reducing paypackets. It could easily be less.

Nobody knows what growth theres going to be

Yeah but you must, surely, have based the 1% figure on something, so what was it, or is it something that 'sounds correct' that actually was picked out of thin air?

By the way I'm not saying i believe 2.75% or 5.8% or 1%, I don't see how anyone could actually put a figure on it while we are mid crisis.

Sand

I must say I find your idea about Germany's banking industry benefitting from the development bewildering. It would be far more likely, in a jenga sort of fashion, to instigate a German banking crisis.

Let say Germany announces on the weekend that theyre going to relaunch the DM in 2012, and German banks begin to open DM denominated accounts. Everyone who holds Euro deominated assets will be cashing in and rushing to German banks to get into DM, fearing (rightly so) a massive decline in the value of the Euro.

But actually what i find far more intriguing is the rather blasé comment "i'm guessing they'll cope" as though Germany's loss of competitiveness were some sort of minor matter of little incidence! Ha! Disengagement would, as you note quite rightly, cause the DM to soar and immediately render them un competitive. That means rising unemployment - something which has, after all of the post-unificatory labour reforms and relative austerity, finally made Germany competitive again. The IFO has risen at its highest level in 20 years. Last year everyone was talking about the possibility of 1.5% growth for Germany. Now we are bickering about a 4% figure or whether it will be higher!

The thing is Germany's economic strength is not based upon devaluing everytime theres a problem. Its based on producing high quality goods that people want to buy. A rising DM will hinder them to some degree, but there are trade offs involved - raw materials imported from abroad will be relatively cheaper, especially USD denominated oil which is increasing in cost as the euro devalues.

Like I said, they'll cope.

The modern day German, thankfully, is not in the business of electing idiots. they are aware that a competitive export driven economy is what has finally got them so high and so dry. They are not about to turn around and destroy that, leave the euro, and start again at page one and trawl through the mire for another twenty years - this time focusing on a banking industry, presumably.

Have you worked out any figures on the impact of such austerity onto the GDP, or is that something that didn't fit on the back of your envelope?

Because words are pretty easy. It's very easy to say **MAJOR AUSTERITY** when you don't actually offer anything statistical in terms of practical ramifications of major public spending cuts on future economic growth.

Again, if Merkel doesnt represent the genuine anger in Germany at bailing out feckless periphery countries then she will be outflanked by someone who will. Look at your comments when I mentioned austerity below. You attacked austerity on the basis that it would hinder Irelands economic growth to cut back spending to something we can sustain on our revenue.

How do you think that will play in Germany, when they read they have to bail out the Irish who refuse to institute cutbacks because their worried it will hinder their own economic growth? Do you think the Germans will consider it justified that they work and save, and the Irish play and spend? We expect them to be adults and mature, whilst we can continue to be childish and feckless

I think theyll be furious to think that on the one hand you think they ought to bail us out, yet on the other you refuse to accept the case for the Irish to get our own fiscal house in order as a priority.

Rightly so too.

Actually, she said (and i am open to correction here because I am in transit and only caught the news slightly) that the current Treaties disallow such bonds, not that she has some sort of policy issue with them in themselves. If you ask me, treaties were made to be broken. The german finance minister has a far more promising interview in todays FT where, although ruling out the bonds in the short term, he does say that it or greater fiscal union may be something the German Parliament consider in a number of months.

Current treaties disallow such bonds...correct. Given the mania that broke out over an inoffensive Treaty like Lisbon, the relief with which the EU got it through finally after a decade of effort and swore "Never again!", given all that:

How likely do you think it is that a Treaty which requires fiscal union and invasive budget oversight is going to get through a Europe which is more and more backpeddling on the whole federal Europe concept? Or getting it past the German constitutional courts?

The Germans ruled it out.

Hang on explain that again? You think that just because I'm saying that they are not being completely upfront about economic truths right now, that therefore they have always been lying? Eh, no. I'm not saying that. I don't honestly think they foresaw the eurozone crisis in its current form.

No, Im saying that this "bailout" came 2 years into the Irish crisis. They had 2 years to think about the Irish problem and deliver a solution. They delivered a credit card, when what we need is to confront the debt we cant pay back - the debt which has locked us out of the bond markets, where we will remain until that debt is confronted.

The idea that this deal is actually a rushed bid to buy time for the real and cunning rescue which will come later is a little hard to credit - we are talking 2 years in, where for much of the time the crisis was well known to be coming down the tracks.

I think we have to remember here that the EU/ECB have done *everything* to avoid debt writeoffs - so your view that we just need to hang on a little longer, like the little boy with his finger in the dyke and that the Germans will come racing over the horizon any second now with bags of free cash if we can just. hold. on....

Im sorry, its just not credible. We are going to be forced to default - now we can either do so at a time when it suits us, on terms that suit us, or we can do so on a timetable that suits others, on terms that suits others.

I can understand the EU/ECB fighting for their own corner. I would just hope that the Irish government would fight our corner too.

OK, look, IMF debt is routinely written down or written off if you are denying that basic fact then I'm not going to try push it.

Yeah, they wrote off a minor amount to Haiti in the aftermath of a devastating earthquake (about 1.2 billion USD total) and about 3 billion to the Ivory coast - a third world state devastated by civil war.

I dont think an Ireland where we pay ourselves so incredibly highly and refuse to cut spending for fear it'll hurt GDP growth is going to be considered in the same ballpark for debt forgiveness of the scale of 50-60 billion euro.

Yeah but you must, surely, have based the 1% figure on something, so what was it, or is it something that 'sounds correct' that actually was picked out of thin air?

By the way I'm not saying i believe 2.75% or 5.8% or 1%, I don't see how anyone could actually put a figure on it while we are mid crisis.

Ive seen it used in two different sources as a conservative/optimistic measure of what Ireland could expect. The DoF is predicting 2.75%, based on a 0.25% yearly increase in growth theyve picked for no real reason, and given they are hopelessly overoptimistic it seems reasonable to take their estimate of growth and halve it to get a more realistic appraisal which winds up at close enough to 1% to make no difference.

I dont particularly agree or disagree with it - it could be 0.5%, it could be 1.5%

But it wont be 5.8% or more, and thats the important factor.

mistermouse

We haven't been seen as 'good' Europeans for some time. There is not a hope in hell germany etc would let us off at the expense of their banks.

They really took issue at the time we brought in the bank guarantee and now must be so delighted they didn't know what was involved at the time either.

I understand countries looking after their taxpayer, just as our government did not, but its hard to see how we can be expected to pay for the reckless lending of our or their banks.

Its ironic that people on minimum wage, who could not afford rediculious credit in the boom are now being hit. I doubt they can really be blamed for buying houses and second properties at €8.65 and hour. Are they REALLY responsible for us living beyond their means.

Amhran Nua

Scofflaw wrote: »

The margins are explicitly part of the EFSF setup - the IMF are also charging a very similar margin.

My understanding is that they were originally pushing for something in the 3% area, as well as a seperation of state debt from private debt, as Prof. Eichengreen says:

For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. This would have been particularly easy in the Irish case. A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other. The third representing the debts of the Irish banking system could have been restructured. Bondholders could have been offered 20 cents on the euro, assuming that the Irish banks still have some residual economic value. If those banks are insolvent, the bondholders could – and should – have been wiped out.


Irish public debt would then have topped out at maybe 100% of GDP. And the Irish program would have had a hope of working. As it is, the program will have to be revisited, perhaps as soon as next year. Investors know this, which is why Irish spreads have barely budged.


In fact, this is exactly what the IMF, which at least knows how to add, has been pushing for over the last week. But the Fund was unable to overcome the objections of the Commission, the ECB and the German government.

Scofflaw wrote: »

Nor do people lending you money fail to take account of your likelihood of default. Has it occurred to you that the interest rates charged to us by the IMF and EU might perhaps take into account these calls for, and the likelihood of, a default?

It didn't occur to me because that would be insane. Why would you willingly increase the chance of default for a loan? Its not like the ECB is stuck for cash and needs the margin, although it might make it more attractive to other countries, at the cost of any diplomatic advantage in terms of "friendship". Unless you wanted the country receiving the loan to default, for some unfathomable reason. The only thinking I can come up with to explain it is as a warning to other countries on the margin, and sorry, its not going to be my head on a pike, or that of the citizens of Ireland.

Scofflaw wrote: »

Which brings me back to the point about default again - it's not really a way of "easing the crisis" for Ireland by turning it into a short period of acute pain which we then sail out of debt-free and happy - it's a way of prolonging the agony for a decade or more

That sounds like an accurate description of drawing down and then attempting to repay the loan, which many prominent economists feel is inevitable. To be honest we need to focus on real growth in the economy, which if successful should reduce the need for an ongoing deficit significantly.

Scofflaw wrote: »

If we can restructure some of the debt without too much in the way of long-term penalties - sure, let's do it. But there's no way of telling what the long-term penalties will actually be without trying it, so it only makes sense to do it very very gradually and very very quietly.

Agreed, but its long overdue that we weaned ourselves away from the vagaries of the market as much as possible in any case.

later10 wrote: »

We should follow a Brady Bond formula in writing down our debt, and it does now appear that that is the unpublished intention of the authorities given the recent Franco-German agreement on the introduction of new legal instruments to deal with emerging policy on sovereign and corporate European debt.

No, it does not appear so, and the last time you claimed as much we found your source, the Financial Times, in fact said the exact opposite. Is there a more current source?

karlth

skelliser wrote: »

No, Iceland effectivly defaulted.

Iceland didn't default. We "just" let the private banks go bankrupt.

When the banks were about to go under the government created new domestic banks and moved all the domestic deposits into them along with domestic loans.

later12

Sand wrote: »

Let say Germany announces on the weekend that theyre going to relaunch the DM in 2012, and German banks begin to open DM denominated accounts. Everyone who holds Euro deominated assets will be cashing in and rushing to German banks to get into DM, fearing (rightly so) a massive decline in the value of the Euro.

Well firstly that opinion presumes that a Eurozone bank would even survive such an announcement - remember German industry is also heavily reliant on the ECB and 2012 would not be a realistic option. But I do take your point and it is valid.

The problem is that banking does not exist in a vacuum and as competitiveness and unemployment would inevitably rise in a DM oriented post Euro Germany, the economy would, like water, merely 'find its level', it would not continue to soar as it currently does. The Eurozone has an insulating effect upon the German economy, without the ECB and the machinery of the European state, Germany is not a particularly attractive place to invest. After a certain point when the non competitive nature of the economy began to express itself, wealth would just flow into crisis havens like gold and US Treasury bonds. It would not be surprising if the scenario which you envisage even led to the downgrading of the German Bund, thus partly why I say it would actually be in danger of creating a domestic banking crisis in Germany.

Its based on producing high quality goods that people want to buy. A rising DM will hinder them to some degree, but there are trade offs involved

Honestly, I have really expressed my opinion on this already, if you do not want to refute that aspect of German competitiveness which i have presented, that's perfectly fine, but the above argument is profoundly abnormal and i don't think it can really be countered with logic.

In any event, it is of questionalble relevance. I believe we got onto this issue by way of disagreement over how likely or unlikely the adaptation of the Eurobond.
My particular interest is not really in the politics of whether or not the Eurobond will be adapted by Germany, though I do think it is to their ultimate benefit and I would be surprised if, based upon yesterday's interview, Wolfgang Schäuble does not see that.
However, what I am saying is that regardless of political positions, it is the best economic position for Germany to assume. The idea of issuing a Eurozone community-sovereign bond combined, essentially, with a Brady bond formula for restructuring debt, is the strongest, least hazardous, and most promising economic policy that is available in the current crisis.

In terms of policies, I would rate it a much stronger one than simply providing muddy and ambiguous sound bytes like *major austerity*, which, frankly isn't really clear or helpful. As far as I'm concerned, major austerity alone is more of a jingle than an economic theory.

i would just like to add the caveat that all of these theories are exactly that, however - theories. I am always very wary of people who issue dead certs on anything - especially in economics. So your rather assured judgement of Germany's loss of competitiveness by simply saying "they'll cope" is somewhat surprising based apparently, on no factual or statistical evidence; but rather perhaps a gut feeling like, it would seem, the 1% growth figure.

Look at your comments when I mentioned austerity below. You attacked austerity on the basis that it would hinder Irelands economic growth to cut back spending to something we can sustain on our revenue.

No I am completely in favour of Irish austerity - bot austerity that can be coped with, not going at Government spending with a billhook as I am guessing you suggest (though unclear). From what I am seeing of the current budget, for example, I am flabbergasted at what the Irish taxpayer has actually gotten away with. Even the term relative austerity seems a bit far fetched here.

They delivered a credit card, when what we need is to confront the debt we cant pay back - the debt which has locked us out of the bond markets, where we will remain until that debt is confronted.

Perhaps don't get debts mixed up here. The debt that you want to default on is not what has, in itself, kept us out of bond markets. If all the senior and even subordinated bondholders were to be renumerated immediately, by some economic miracle, they personally would probably take their money and run. Having said that, it would calm the sovereign bond market considerably. But it would not solve the core problem.

The debt we need to confront has very little to do with the IMF bailout money - that is mortgage and development debt. This has more to do with NAMA than the IMF or bond markets. While they are strongly related, I just don't think that such debts should be actively likened.

Yeah, they wrote off a minor amount to Haiti in the aftermath of a devastating earthquake (about 1.2 billion USD total) and about 3 billion to the Ivory coast - a third world state devastated by civil war.

I dont think an Ireland where we pay ourselves so incredibly highly and refuse to cut spending for fear it'll hurt GDP growth is going to be considered in the same ballpark for debt forgiveness of the scale of 50-60 billion euro.

Firstly I'm not talking about Haiti, it is a repeated pattern of IMF debenture. They and the World Bank have written off something like 50 billion euro of African debt so far as far as i recall - I am open to correction on that, but it is telling that if they can afford to write off such enormous debts from nations of little consequence, then I am quite certain they can write down potentially smaller debts from what is, combined, the world's biggest, wealthiest and most important economy.
And secondly we have not borrowed anything in that ball park from the IMF it is considerably less than half that figure, about 22.5 billion, most of which will be repaid, but some, like the EU funding, will never be.

later12

Amhran Nua wrote: »

Originally Posted by later10
We should follow a Brady Bond formula in writing down our debt, and it does now appear that that is the unpublished intention of the authorities given the recent Franco-German agreement on the introduction of new legal instruments to deal with emerging policy on sovereign and corporate European debt.

No, it does not appear so, and the last time you claimed as much we found your source, the Financial Times, in fact said the exact opposite. Is there a more current source?

Jesus Christ give it a rest! Respond to the thread you're referring to if you have a gripe about something. As I said, it does seem to be their intention, based on the appendage of the collective action clauses, and the Berlin Debt Resolution Regime. The notion that restructuring is not be considered likely, frankly, is pretty wild. Or are you the last person left on the island of Ireland still expecting them to pay all of the bondholders?

LovelyHurling

Sand wrote: »

Germany's economic strength is not based upon devaluing everytime theres a problem. Its based on producing high quality goods that people want to buy.

If Germany quit the euro they would be surrounded by a swathe of vastly cheaper states and eventually they would be faced with a devaluation.