What the likelyhood of us having to default.

Time Magazine · 07-07-2009 11:17AM

Hasschu wrote: »

I see an Argentina type scenario unfolding in the next two years. Unrest on the streets, unstable governments, exit the Euro and depreciate the currency 66.6%. This guarantees that the gov't will default on its obligations both domestically and internationally. The outcome 25 years of subsistence living similar to the period 1922-1973 but shorter because we are smarter now.

25 years of subsistence living eh?

I bet you €100 that our national income will not fall below 2000 levels.

Purple Gorilla · 07-07-2009 02:48PM

Hasschu wrote: »

There are a number of troublesome issues that affect whether Ireland will default. One is the fact that the gov't is treating the electorate as if we are mentally defective 3 year olds. The gov't is paralysed until after the Lisbon referendum because they do not want to do anything that might upset the electorate. In the meantime economic conditions deteriorate daily. Social cohesion is becoming more threadbare by the day, everyone wants a bigger piece of a pie that gets smaller daily. Violent crime is now at levels that puts us on the crime scale where we were on the economic scale at the height of the boom. As income and benefits are cut and unemployment climbs, will the gov't be able to maintain control or will they cater to the mob. So far the gov't has catered to a different mob the banks and developers. There is no reason to believe that there is enough backbone in the Dail to ensure the country is governed responsibly. I see an Argentina type scenario unfolding in the next two years. Unrest on the streets, unstable governments, exit the Euro and depreciate the currency 66.6%. This guarantees that the gov't will default on its obligations both domestically and internationally. The outcome 25 years of subsistence living similar to the period 1922-1973 but shorter because we are smarter now.

Is this an excerpt from some fiction novel or something?

Besides the rest of the nonsense in that post, do you honestly think that Ireland would ever leave the Euro?

Hasschu · 07-07-2009 09:18PM

Do I think that Ireland will leave the Euro? I think that Ireland has already demonstrated at least twice in large numbers that their attachment to Europe is one of fair weather friend. The gov't is demonstrating its lack of faith in the electorate by delaying necessary action to combat the economic slide we are in because "it does not want to get the electorate so upset with the gov't that they would vote down Lisbon at the first opportunity". We are talking about the Ireland that royally screwed it up from 1922 to 1973 give or take a couple of years. Improvement from 1973 on with the exception of the 1987 fiasco which was unavoidable. Long after it was obvious to bank economists in Frankfurt, Zurich, Basel, Toronto and elsewhere that Ireland would implode because of its dependence on low corporate taxes and internal consumption based on indebtedness the Irish gov't continued to apply the bellows to the flames. I had one very instructive conversation about 2005 with a Frankfurt economist who asked me what I thought of his Irish colleague who was building a 350 sq. metre house on the Galway coast a long way from Galway city. The Frankfurt economist could not see an economy in the area that would support that kind of expenditure. I told him that in my opinion he would be lucky to get half of what he spent when the time came to divest. The lack of property taxes on private residences and the tax benefits of financing they saw as inflating the bubble that would inevitably burst. The story of Ireland and how its gov't lived in cloud cuckoo land for over five years and then pretended there is just a little problem and the adjustments can wait because we cannot upset the naive little darlings or they will get us booted out of the Euro nest if they vote no in the referendum. Facts are stranger than fiction in Ireland. There will be some good books on Irish politics, the behaviour of its voters and how the economy responded to the machinations of the two. The most excitement is yet to come. Membership in the EU and the EMU is our only salvation but there are obviously many people who are deluded enough to think otherwise.

amacca · 07-07-2009 09:49PM

Hasschu wrote: »

Facts are stranger than fiction in Ireland. There will be some good books on Irish politics, the behaviour of its voters and how the economy responded to the machinations of the two. The most excitement is yet to come. Membership in the EU and the EMU is our only salvation but there are obviously many people who are deluded enough to think otherwise.

I sincerely hope there are not as many people as you seem to think there are that would even briefly contemplate leaving the euro.

I know there is an argument that if we could devalue our currency we could be more competitive but surely the many downsides imo outweigh this upside and most people aren't deluded enough to believe otherwise?

Do you have any sources/opinion polls/anything that would back up this idea that significant amounts of people, our politicians, public figures, opinion leaders etc want to actually leave the euro?

Out of curiosity what would happen to peoples savings etc currently denominated in euro if ireland did leave the euro, wouldnt the process be signalled well in advance and wouldnt anyone (large institutional investors etc included) with even an ounce of sense withdraw all of their holdings from this fair green isle immediately to the relative safety of an account where there funds are denominated in euros to avoid being the proud owner of 40 million oirish punts which could buy you half a cooked chicken and a pint of guinness?

Do a significant amount of people not think this way?

Yours fearfully.

eamonnm79 · 07-07-2009 10:39PM

I dont think any of the major political parties would even contemplate leaving the euro.
However If we were to default on loans that were given to us by the european central bank (indirectly) and we continue to run large deificits the euro may leave us.
So the default question is more immediate than the euro question.
The reason for default will not be due to leaving the euro but it may be a consiquence of default.
Default is more likely to occour due to a level of insolvency that is unsustainable even for for an independent nation (very very insolvent)

amacca · 07-07-2009 11:15PM

eamonnm79 wrote: »

If we were to default on loans that were given to us by the european central bank (indirectly) and we continue to run large deificits the euro may leave us.

The reason for default will not be due to leaving the euro but it may be a consiquence of default.
Default is more likely to occour due to a level of insolvency that is unsustainable even for for an independent nation (very very insolvent)

You're not helping ease my fears here. I may have to go to a 24hr pharmacy to get something to help me sleep.

1)

O.K. and this is genuine curiosity on my part, is it true that in the event of the Irish govt defaulting (which I also believe is a possibility) we would be kicked out or stand a good chance of being kicked out of the euro? Is there a historical precedent for this either inside or outside of a monetary union?

2)

In the event of good old Ireland being kicked out of the euro, what happens to a persons deposits in a deposit account in an Irish owned bank and a deposit account in a foreign owned/controlled bank say BOI and HALIFAX for the sake of argument.

3)

Is something like this likely to happen overnight giving ordinary depositors no chance to get their cash out before it becomes much riskier irish punts or do you think something like this would take weeks from initial announcement to implement and would have been signaled for a much longer time before this?

4)

Can you suggest a good mild sedative?:eek:

Time Magazine · 07-07-2009 11:54PM

This is the Economics forum. If this thread doesn't stop being about politics verrrry quickly it won't continue.

Purple Gorilla · 08-07-2009 12:00AM

Now I'm no economist, so this is all open to correction by The Economist, but

amacca wrote: »

1)

O.K. and this is genuine curiosity on my part, is it true that in the event of the Irish govt defaulting (which I also believe is a possibility) we would be kicked out or stand a good chance of being kicked out of the euro? Is there a historical precedent for this either inside or outside of a monetary union?

No we would not be kicked out of the Euro. There hasn't been a case where a Eurozone country has defaulted and been kicked out of the Euro. If a Eurozone country defaulted, it would be a disaster for the Euro as a whole so that is why Ireland wouldn't be allowed to default on it's sovereign debt. The ECB would step in before that happens and give us a loan, much like the IMF would.

amacca wrote: »

2)

In the event of good old Ireland being kicked out of the euro, what happens to a persons deposits in a deposit account in an Irish owned bank and a deposit account in a foreign owned/controlled bank say BOI and HALIFAX for the sake of argument.

I'm not too sure. I mean in reality, the Irish banks would probably collapse because all their Euro-based debt would be worth a lot more IRL£. The person would most likely lose their deposit and the government would be unable to honour their €100,000 deposit guarantee. Once it is announced, people would withdraw their money and deposit it in foreign banks as money in a foreign bank would be unaffected I would think.

amacca wrote: »

3)

Is something like this likely to happen overnight giving ordinary depositors no chance to get their cash out before it becomes much riskier irish punts or do you think something like this would take weeks from initial announcement to implement and would have been signaled for a much longer time before this?

Well that's complicated. I mean it would take aaaggggeeesss to implement a new currency, print it etc. and get it into circulation. Immediately I would imagine that Investors would pull out of Ireland. Share prices of Irish banks, companies etc. would plummet and there would be a run on banks. I'd imagine an Argentina (I think? or Venzuela or one of those countries) type scenario would happen where banks limit weekly withdrawals to a certain amount like €500 for example.

But honestly, there is more a chance of boards.ie getting into government than Ireland withdrawing from the Euro or being kicked out. The president of the ECB himselft said back in January that any state leaving the Eurozone or being kicked out because it cannot service it's debt is not an option. The downsides of leaving the Eurozone far outweigh the benefits. The cost to service our debt would shoot up which would be pretty counter-productive. The biggest obstacle is reintroducing the new currency..Every single contract the government has (Wages, bonds, taxes, deposits etc.) would have to be re-denominated in the currency. Every bank would also have to do this and a lot of money would be spent printing the money and then getting it into circulation

Basically, consider it near-impossible

Hasschu · 08-07-2009 01:13AM

Amacca- Currency devaluation is a short term tactic used by weak gov'ts to give the illusion they are doing something useful. Italy before it joined the EMU used devaluations of the Lira frequently because there is a short lived benefit followed by more pain than before the devaluation. A good analogy would be a country addicted to the devaluation drug, its bad for us but we can't stand the pain so lets have another shot of devaluation. The Irish electorate have voted no to two treaty changes and there is no guarantee that they will not do it again. Ireland was a party to all phases of the treaty negotiation, the gov't approved it and yet we vote it down. This behaviour is not going unnoticed in Europe, they are starting to look at Ireland as an impediment to progress. At some point if we do not show a willingness to play the game we will be offered associate status on a take it or leave it basis. Since EMU membership is contingent on EU membership we would be out of the EMU on the day we are out of the EU.
I am not aware of any sane person in a position of authority in Ireland who wants out of the EMU. I do see political turmoil months down the road and politicians grasping for straws, jingoism and nationalism are the cards that will be played. Currency devaluation with no notice whatsoever is not out of the question. In 2002 Argentina which had a currency tied to the US dollar devalued over night from $1 US = $1 Arg Peso to $1 US = $3 Arg Pesos. A 66.6% devaluation in an instant. They closed the banks for 72 hours and restricted withdrawals to 5% to 20% per year depending on amount deposited. In the case of the Irish Euro the notes are identifiably Irish and any deposits in domestic or foreign bank branches in Ireland would be devalued. Also anything liquid such as bonds, GIC etc would be devalued. The one thing you can rely on is there will be no notice. It will happen in seconds with an announcement that Irish issued Euros will now be worth 0.33 of a normal Euros. I still think that Ireland can negotiate with the ECB and get its affairs back on track. The electorate has to cooperate and if they do not the worst case scenario is a 66.6% devaluation. A very popular figure that has stood the test of time.

Purple Gorilla · 08-07-2009 01:36AM

Hasschu wrote: »

Amacca- Currency devaluation is a short term tactic used by weak gov'ts to give the illusion they are doing something useful. Italy before it joined the EMU used devaluations of the Lira frequently because there is a short lived benefit followed by more pain than before the devaluation. A good analogy would be a country addicted to the devaluation drug, its bad for us but we can't stand the pain so lets have another shot of devaluation. The Irish electorate have voted no to two treaty changes and there is no guarantee that they will not do it again. Ireland was a party to all phases of the treaty negotiation, the gov't approved it and yet we vote it down. This behaviour is not going unnoticed in Europe, they are starting to look at Ireland as an impediment to progress. At some point if we do not show a willingness to play the game we will be offered associate status on a take it or leave it basis. Since EMU membership is contingent on EU membership we would be out of the EMU on the day we are out of the EU.
I am not aware of any sane person in a position of authority in Ireland who wants out of the EMU. I do see political turmoil months down the road and politicians grasping for straws, jingoism and nationalism are the cards that will be played. Currency devaluation with no notice whatsoever is not out of the question. In 2002 Argentina which had a currency tied to the US dollar devalued over night from $1 US = $1 Arg Peso to $1 US = $3 Arg Pesos. A 66.6% devaluation in an instant. They closed the banks for 72 hours and restricted withdrawals to 5% to 20% per year depending on amount deposited. In the case of the Irish Euro the notes are identifiably Irish and any deposits in domestic or foreign bank branches in Ireland would be devalued. Also anything liquid such as bonds, GIC etc would be devalued. The one thing you can rely on is there will be no notice. It will happen in seconds with an announcement that Irish issued Euros will now be worth 0.33 of a normal Euros. I still think that Ireland can negotiate with the ECB and get its affairs back on track. The electorate has to cooperate and if they do not the worst case scenario is a 66.6% devaluation. A very popular figure that has stood the test of time.

Do you even know what you're talking about? Irish euros are no different to any other Euro. The only difference is the design on the back which is spread throughout Europe. You can't devalue one part of a currency. It would be like the US devaluing California's Dollar. Ireland will not be leaving the EU any time soon and leaving the EU isn't an overnight thing. Infact, until the Lisbon Treaty passes, there is no procedure at all for a country leaving the EU.

But as The Economist said, this is a political discussion in an Economic forum so lets stay on-topic

What the likelyhood of us having to default.

Comments