Alternative to bailout

Hi,

I'm looking for someone to explain to me - someone with a rudimentary comprehension of economics - what would have happened had the Irish government decided not to bail out the banks, allowing them to fail and for bondholders to lose their money. So far, all I have heard are optimistic comparisons with Iceland and apocalyptic doomsday scenarios, so I'm looking for an objective analysis.

Apologies if this has been posted before.

andrew

Moved to the irish economy forum

Slozer

The Iceland scenario was real and I guess that a default by Ireland would be something along those lines. A lot of people would loose their savings, go out and smash the banks up and everybody would learn from the experience. Life would soon get back to normal and we would have a fresh start.
There is a major difference between Ireland and Iceland however and that is we are tied to the Euro, so from that perspective it is difficult to say what the outcome would be. We are however in a unique position in that we can watch what happens to a country when it defaults within the Euro. Keep an eye on Greece. Compare what happened in Iceland and what is happening in Greece and you will have 2 real life comparisons of a default and a bailout.
In the end they both amount to default.

Chucky the tree

Iceland got a bailout so I don't think they are a valid comparison. Because Ireland was in the EU it could either take a bailout(and for the deficit and banks) or else it could simply walk. I think the bailout was the best course of action. I can't imagine what would have happened to the country if we had to make a adjustment of €20bn over night all while the EU collapses which makes recovery 100 times harder.

Godge

The problem arises on the night of 30 September 2008. The banks went to Lenihan and Cowen and said that if you don't guarantee the banks, Anglo will go bust in the morning and panic will set in the markets.

Cowen and Lenihan, believing that Anglo was a systemic bank made the stupid decision to guarantee all the depositers and the bondholders. Once that decision was made, if anything went wrong we were in trouble. The difference with say Denmark where a bank or two was allowed go bust is that the Danish banks were small while it was believed that the size of Anglo going bust meant that any failure would bring the whole system down and lead to the nationalisaiton of all the banks.

The alternative (or one anyway) at the time was to say let Anglo and irish Nationwide go bust (they already knew about the Quinn situation) and we will nationalise BOI and AIB. We more or less did that anyway later and we would have been spared the cost of Anglo.

amacachi

Slozer wrote: »

Life would soon get back to normal and we would have a fresh start.

We would also likely have had to make up the 30%ish budget deficit in one fell swoop.