After any Default.....?

Going Forward

Am I right in thinking that in the event of any type default/ debt writedown scenario, the country, i.e the taxpayers are still going to be no better or even worse off?

Any taxes (property, septic tank etc. etc.), cuts (health, education etc.) that have been already put in place or are being planned will hardly be reversed.

Are we (the Irish citizens,) in something of a no win situation no matter what happens, or is this too simple an analysis?

It appears that we been brought to a level of austerity that is going to be the norm now regardless of any other improvements in the economy for the foreseeable future.

Any thoughts?

kippy

Going Forward wrote: »

Am I right in thinking that in the event of any type default/ debt writedown scenario, the country, i.e the taxpayers are still going to be no better or even worse off?

Any taxes (property, septic tank etc. etc.), cuts (health, education etc.) that have been already put in place or are being planned will hardly be reversed.

Are we (the Irish citizens,) in something of a no win situation no matter what happens, or is this too simple an analysis?

It appears that we been brought to a level of austerity that is going to be the norm now regardless of any other improvements in the economy for the foreseeable future.

Any thoughts?

It depends on how you look at it - well on reflection, it doesn't.
We have a major fiscal deficit - whatever happens, this has to be bridged and that is where the budgets of the next and last few years come in.
So the pain will still need to go on and be felt.
However, we may end up with an over all debt (due to a partial default) which is less than what it is now.

There are however multiple cavaets and scenarios depending on what debts are written down however ultimately to run a country the income must be close to the expenditure and that wont change any time soon without the austerity.

It was interesting to see a few Irish politicians almost rubbing their hands with glee today as the crisis threatens to engulf Italy. They are looking at the small picture in that we will probably get a better interest rate if the crisis gets worse, forgetting the fact that the euro is on the edge of a cliff.

Thats my take on the whole thing, could be completely wrong.

At this stage, when it comes to the Euro, all bets are off. However its hard to know what will come next.

ei.sdraob

In event of default the budget would still have to be balanced (rather quickly) since in theory no one will lend to us

but then on other hand no need to spend billions on servicing old debt (depending on how much is defaulted)

kippy wrote: »

It was interesting to see a few Irish politicians almost rubbing their hands with glee today as the crisis threatens to engulf Italy. They are looking at the small picture in that we will probably get a better interest rate if the crisis gets worse, forgetting the fact that the euro is on the edge of a cliff.
.

There is a silver lining to todays events, its focusing the minds of euro politicians and giving them no wiggle room.

Going Forward

kippy wrote: »

There are however multiple cavaets and scenarios depending on what debts are written down however ultimately to run a country the income must be close to the expenditure and that wont change any time soon without the austerity.

It was interesting to see a few Irish politicians almost rubbing their hands with glee today as the crisis threatens to engulf Italy. They are looking at the small picture in that we will probably get a better interest rate if the crisis gets worse, forgetting the fact that the euro is on the edge of a cliff.

Very true, and even if Mr. Noonan pulls off a 50% interest rate cut, I believe we're still left with a E4.5 Billion interest charge!!

kippy

Going Forward wrote: »

Very true, and even if Mr. Noonan pulls off a 50% interest rate cut, I believe we're still left with a E4.5 Billion interest charge!!

Yep, and I cant see a major interest rate cut at all - otherwise it would be cheaper for countries such as Spain and Italy to get funding from the EU/IMF than the markets - which wouldn't, in my opinion, be very good advertisement for managing your own finances.

If there is a writedown in bank debt (depending on maturity dates of the debts) the eventual total debt the country will "own" will be less however.

Godge

Going Forward wrote: »

Am I right in thinking that in the event of any type default/ debt writedown scenario, the country, i.e the taxpayers are still going to be no better or even worse off?

Any taxes (property, septic tank etc. etc.), cuts (health, education etc.) that have been already put in place or are being planned will hardly be reversed.

Are we (the Irish citizens,) in something of a no win situation no matter what happens, or is this too simple an analysis?

It appears that we been brought to a level of austerity that is going to be the norm now regardless of any other improvements in the economy for the foreseeable future.

Any thoughts?

In the event of any default, yes, taxpayers will be worse off.

If we default we will not be able to borrow on international markets so we will need to balance our budget immediately, maybe not overnight but within a couple of weeks as cash runs out. That will mean more public service pay cuts (as much as can be managed without a strike - probably 10%) as well as drastic cuts in social welfare (a strike by the unemployed doesn't count so that could be 20%) but it will also mean higher taxation.

As well as that, the country will be an international pariah and trade will be affected reducing the economy by up to 10% putting further pressure on tax revenues. This horrible scenario, beloved of the ULA and Sinn Fein, is a recipe for disaster.

Our only sensible course of action is to continue along the current path of IMF/EU bailout in the hope that one of two things happen:

(1) Our efforts prove successful and the economy grows on the back of exports despite the cuts thereby reducing the debt as a % of GDP and allowing normal public service and taxation levels to be resumed; or
(2) A bigger number of EU countries - at least Italy, Spain and Belgium - find themselves in similar trouble putting pressure on the ECB to engage in quantitative easing leading to the EU inflating out of the debt problem.

The more likely case is something in between those two scenarios. That makes the outcome uncertain. Will we grow enough to get out? Will it get serious enough for the the ECB to lower interest rates and engage in quantitative easing? It is the uncertainty that the markets hate especially when, at least in the case of Ireland, a wide range of outcomes is possible.

thebman

If we default, we won't be able to go in the markets for a while although we already can't but we will need a much sharper adjustment to pay for day to day spending as we will still be running a massive deficit but with nobody willing to lend to us once the IMF program ends.

Going Forward

thebman wrote: »

If we default, we won't be able to go in the markets for a while although we already can't but we will need a much sharper adjustment to pay for day to day spending as we will still be running a massive deficit but with nobody willing to lend to us once the IMF program ends.

"Paddy's" prospects don't look too encouraging whatever happens so!

Crazy Horse 6

Going Forward wrote: »

Am I right in thinking that in the event of any type default/ debt writedown scenario, the country, i.e the taxpayers are still going to be no better or even worse off?

Any taxes (property, septic tank etc. etc.), cuts (health, education etc.) that have been already put in place or are being planned will hardly be reversed.

Are we (the Irish citizens,) in something of a no win situation no matter what happens, or is this too simple an analysis?

It appears that we been brought to a level of austerity that is going to be the norm now regardless of any other improvements in the economy for the foreseeable future.

Any thoughts?

Short term way worse off as a nation, long term way better off as a nation.

View

We have a massive fiscal deficit on our current account spending (i.e. the day-to-day stuff, not the banks). Out of every 5 Euro we spend, our domestic taxes pay 3 Euro of that spend and the remaining 2 Euro are being borrowed from the IMF/EU.

To rephrase that another way, the "3 Euro" we spend on services cover the state's services up to roughly mid-July every year, the "2 Euro" borrowed from the IMF/EU pay for the state's services from roughly now on until December 31st.

Default and no one is going to loan us "2 Euro" for a long while to come which means we have a grand total of "0 Euro" to pay for all the state's services until the end of the year.

That means, "0 Euro" to pay the OAP, Dole, Schools, run the hospitals, prisons etc.

So, would default make matters worse? Yes, it would...

thebman

Crazy Horse 6 wrote: »

Short term way worse off as a nation, long term way better off as a nation.

Depends on definition of short term.

Probably 5-10 years before you could enter the markets again assuming we actually got our act together in that time to regain market confidence which given our past two governments is unlikely to happen as it isn't actually the governments that are the problem, it is the political system and the top civil servants along with influential lobby groups such as unions, even charities that are causing the problem as they all lobby for extra, unsustainable spending for their individual areas and are given air time by RTE/media because they supposedly represent a large section of society which is debatable.

later12

View wrote: »

We have a massive fiscal deficit on our current account spending (i.e. the day-to-day stuff, not the banks). Out of every 5 Euro we spend, our domestic taxes pay 3 Euro of that spend and the remaining 2 Euro are being borrowed from the IMF/EU.

To rephrase that another way, the "3 Euro" we spend on services cover the state's services up to roughly mid-July every year, the "2 Euro" borrowed from the IMF/EU pay for the state's services from roughly now on until December 31st.

Default and no one is going to loan us "2 Euro" for a long while to come which means we have a grand total of "0 Euro" to pay for all the state's services until the end of the year.

That means, "0 Euro" to pay the OAP, Dole, Schools, run the hospitals, prisons etc.

So, would default make matters worse? Yes, it would...

Research has shown that in latin America, in the 1980s, heavily indebted countries which had not defaulted were met with the same sovereign yields as those heavily indebted countries which had defaulted.

I'm not saying that I agree with the idea of not discharging our commitments as a matter of principle, but that what we know from economic history differs from your apparent understanding of the ramifications of a default.

Nijmegen

Short-mid term people in Ireland would be screwed. I point again to the poverty rate in Argentina, not much higher than in Ireland pre-default, climbed to 60% and 30% for extreme poverty, and has taken a decade to come back down under 10%

We'd become competitive, but the cost to individuals and society would be a massive leap backwards.

Scofflaw

Are we not in danger, as so often, of confusing 'default' with 'debt repudiation'? The latter is very rare - the usual course for a 'defaulting' country is to put off paying back the debt, not to repudiate it entirely - and one needs to be careful about applying conclusions relevant to the former with the latter.

cordially,
Scofflaw

later12

Definitely agree with the above. As far as I know the only country to have repudiated all of its debt in recent history, without ever revisiting the issue and leaving its creditors completely hanging, was North Korea, 1984.

I think default should be taken to mean restructuring in our case.

View

later10 wrote: »

Research has shown that in latin America, in the 1980s, heavily indebted countries which had not defaulted were met with the same sovereign yields as those heavily indebted countries which had defaulted.

I'm not saying that I agree with the idea of not discharging our commitments as a matter of principle, but that what we know from economic history differs from your apparent understanding of the ramifications of a default.

Well, I am ready to admit my understanding may be faulty. It isn't credible suggest though that we could default on Friday and expect to be able to borrow again on Monday morning. Obviously, if we default on the IMF/EU loans they aren't going to be rushing to help us. And should the financial markets decide they'll adopt a "wait and see" attitude to see whether we can get (or start to get) our finances in order before they loan to us again, we are in for a very rough time.

Needless to say, they are somethings it would be nice to be wrong on but I see no scenario - whether we default or not - in which the current account deficit can be just wished away and the timescale for correcting it is going to have to be a lot shorter in the aftermath of a default.

Debtocracy

The only way to service exponentially growing debt is by exponentially growing the money supply through central banks printing money. The Fed in the U.S. has effectively doubled the monetary base in the past few years but it still is not printing fast enough to keep up with the growing debt. The same will have to happen in the Euro if we want to avoid default. No physical economy can actually grow itself out of exponentially increasing virtual debt (especially at debt satuaration point). You can only fight virtual debt with virtual money. If in 2013, the EU decides to borrow money rather than print it, the entire Eurozone will become crippled servicing interest payments. To conclude, the only way the Eurozone can avoid large-scale defaults is through money printing. It will severely devalue the currency but this will be the price to keep the Euro project alive.

later12

View wrote: »

Well, I am ready to admit my understanding may be faulty. It isn't credible suggest though that we could default on Friday and expect to be able to borrow again on Monday morning.

Well a high market yield does not imply that a sovereign can not borrow. It means that a sovereign can borrow, but expensively. What was observed in the past was that where defaulters had failed to meet their obligations, they were not treated all that differently to the debtors who had met their obligations, but who were themselves heavily indebted. There is a famous paper on this by Lindert & Morton (1989)

http://www.nber.org/chapters/c8987.pdf

Yet surprisingly few debtors have been punished since the 1920s,
either with direct discriminatory sanctions or with denial of future
credit. A correct reading of the relevant history is that the majority of
nonrepayers “escaped” punishment during global crises. In the 1930s,
debtors may have seemed to suffer cutoffs and trade retaliation, but
the impression misleads. In that crisis and its early-postwar aftermath,
the United States and other creditors were indiscriminate in their denial
of fresh credits: Almost no governments in less developed countries
got fresh loans, whether they were repaying old ones or not.

In the 1980s, too, the signs of discrimination against problem debtors remain weak, at least among developing countries. Bond lending has
virtually dried up, and the revival of bank lending has been very meager,
for countries who have repaid faithfully as well as for those demanding
repeated rescheduling. Whatever the private wisdom of the pervasiveness
of creditor pessimism, the external cost of repayments breakdown
seems as evident in the 1980s as in the 1930s: Some faithful repayers
(e.g., Colombia, Egypt) have suffered credit contraction along with
problem debtors.

A similar finding was made in a 1989 Harvard paper by Jorgenson and Sachs, which I cannot find outside of JSTOR.



So I think that even if Ireland did somehow not restructure its debts, it would be unlikely to be met with any greater inclusion in the markets than those of our colleagues who did restructure.

There are strong grounds for oppsing any restructuring, but we shouldn't lose the run of ourselves in resisting it either. There are possible advantages to not restructuring, but it has gone so far at this stage that I really question whether market inclusion is still one of them.

View

later10 wrote: »

Well a high market yield does not imply that a sovereign can not borrow. It means that a sovereign can borrow, but expensively.

Well, that's a good point and I can readily accept it.

It would seriously undermine much of the point of defaulting though as - I would presume - the expensive cost of borrowing (post-default) would be a fair bit higher than the cost of borrowing from the IMF/EU (pre-default).

Ending up borrowing at 8-9% because you refuse - on principle - to pay borrowings with an interest rate of 5-6% would seem a bit of a pointless exercise. If we can't afford to pay at low rates, we clearly couldn't even contemplate having to pay at higher rates...

later12

Absolutely, the notion of defaulting unilaterally with respect to the EU institutions does not bear thinking about. If (when) Ireland restructures part of its debt, it must do so in co-ordination with its European colleagues, and thereafter cling as tenaciously as possible to the European project.

Going Forward

Going Forward wrote: »

Am I right in thinking that in the event of any type default/ debt writedown scenario, the country, i.e the taxpayers are still going to be no better or even worse off?

Any taxes (property, septic tank etc. etc.), cuts (health, education etc.) that have been already put in place or are being planned will hardly be reversed.

Are we (the Irish citizens,) in something of a no win situation no matter what happens, or is this too simple an analysis?

It appears that we been brought to a level of austerity that is going to be the norm now regardless of any other improvements in the economy for the foreseeable future.

Any thoughts?

What a timely post!

And according to Minister Noonan, after our loan adjustment we're still in deep.
http://businessetc.thejournal.ie/noonan-warns-bailout-rate-change-wont-ease-budget-cuts-184586-Jul2011/


And it's easy to forget that "the banks" are not our only problem, ie the e50Billion spend and the e30Billion income..

I' ll buy a new hairshirt.
Heres to the future....