Then perhaps Ireland really should default.
In a wider policy debate, debt restructuring would be considered as a possible pre-emptive option rather than a disorderly inevitability; thought would be given to the possibility of the weakest Euro-zone members taking a type of sabbatical from the club and rejoining on a stronger and more sustainable basis.
We really are getting to the point that it\’s not whether there will be a default/restructuring/haircuts all round. But what type we\’re going to get.
Ireland isn’t among the weakest European economies, quite the opposite. Its own national debt is 32% of GNP whereas ours is 62%. All they would need to default on would be not fully bailing out the banking sector. Let the banks put an administraor in charge & arrange a debt for equity swop.
The problem is Ireland did guarantee the banks. To break that promise calls every other promise into question. At the very least the risk premium demand on Irish bonds would go through the roof, assuming they could even sell any.
Defaulting on a debt because it’s inconveniently expensive is not a good way to convince people you will honour your other debts.
When the banking crisis arrived, several finance bloggers – eg Wm Buiter – explained a sensible goodbank-badbank system whereby a banking system would be preserved but not necessarily the old banks – and the costs would be met by the providers of risk capital: first the shareholders and then, in due order, the various classes of bondholders. The taxpayers would provide nothing more than any unavoidable, trivial expenses arising from the banks being nationalised for a few days while the sorting out was effected. Their, or his, proposals had the great merit than no arbitrary valuations would have to be attributed to illiquid investments. But I suppose I know why such a sensible scheme was not adopted here, or in Oireland.
“Incentives matter.”
The bank guarantees in Ireland, Germany and elsewhere (presumably including the UK) have time limits on them that keep getting moved back with the permission of the European Commission.
It is a terrible way to run a continent really. Every six months or so Governments courting Brussels for the Man from Del Monte to say yay or nay. The EC is always going to say yes because they are unaccountable, it is not their money and Governments would stop running to them like children in need of parental approval once the EC says no once.