And what precisely are the costs of leaving the euro?
The main argument to date is that the debts are euro denominated but since you advocate default that problem goes away.

Ireland can’t default (without permission). By joining the Euro they signed up to rules and lost a bit of sovereignty.

Also being in the Euro means they can’t devalue. Neither can they engage in QE or more openly monetise their debts. The central bank controls these monetary levers and the central bank is in Frankfurt.

On the broader point I agree both Ireland and Greece would be benefit from a partial default. When Ireland is looking at a one year deficit of 30% of GDP when you combine the fiscal deficit and bank bailout then they would ordinarily have no other choice. Iceland after all did default. It still owes us and others money which we will likely never get back. Such is life.

Now for the narrow partisan points. Osborne has no choice (though he doesn’t say that) because of the exposure of RBS/Lloyds to Ireland. Darling understood this which is why he signed the UK up for bailouts just after the GE. It is also good to see an article explaining the consequences of debt on lefty blog. Debt is not a free lunch.

First of all – devaluing does not work as a way of getting you out of an economic mess. Britain’s tried it again and again, to the point where the currency markets know the pound’s a one way bet. If it worked we’d have the most successful economy in Europe. We don’t. The Germans, who have avoided using the devaluation route all along, do. We should learn from this. One great advantage of membership of the euro is that it would stop the insane tinkering with interest and exchange rates that every British government has gone in for.

Secondly – if you let the banks go down they will come for everyone’s house while at the same time freezing accounts so we can’t even pay off our mortgages if we can afford to. The result would be an absolute nightmare for every single person.

We do need to address an education system and a political system that puts people on as low an intellectual plane as that inhabited by Carswell into positions of political influence.

Polly Toynbee says Ireland shouldn’t get a penny until it gives up its tax piracy – true, but that’s a moot point.

But Polly is right. The Irish crisis is consequent on the current financial structures have been allowed to develop since the 80s. Ireland was allowed to become a conduit for vast sums of tax avoidance money that was unrelated to the Irish economy. The Irish bubble piggybacked on this financial froth. If it hadn’t been Ireland, it would have been another country in the race to attract capital by lowering taxes and regulation.

The solution can only be for governments to restore their tax base and re-regulate the financial sector. Otherwise we are just waiting for the next crisis.

Well the discussion reached this point on the other thread last night.

But Ireland can’t default without leaving the Euro. This isn’t a left-right thing it’s just the way it is. There certainly is a case for Ireland leaving the Euro and defaulting – it will save the population from years of austerity.

However I am not sure you have really thought through the potential ramifications. Someone, somewhere will ultimately have to wear the hundreds of billions of euros of losses. It’s all very well just saying that the bondholders will have to accept them. What if this plunges RBS and a host of other large financial institutions into insolvency? We the UK taxpayer will have to stand behind them and pick up the tab.

It is also good to see an article explaining the consequences of debt on lefty blog. Debt is not a free lunch.

That’s not really accurate is it. It was ‘lefty’ economists who were warning about the consequences of debt years ago whilst the IMF and the consesnsus of conventional thinking were telling us that the UK and Irish economies were expereincing an economic miracle.

http://www.amazon.co.uk/Coming-First-World-Debt-Crisis/dp/0230007856/ref=sr_1_1?ie=UTF8&qid=1290591035&sr=8-1-spell

It would be possible for Irish society to leave the Euro for all practicable purposes at relatively low cost by switching to Sterling for most transactions. There’s already a substantial dual-currency aspect to the economies in the both the Republic of Ireland and Northern Ireland, particularly around the border.

Extending this by swapping Euro denominated salaries and mortgages for Sterling denominated ones at their current near-parity nominal rates would have a great deal of the supposed benefits of exiting the Euro at a fraction of the cost.

Assuming Sterling inflation is likely to inflate against the Euro over the medium term this would reduce the domestic real value of the debts.

Arguing that leaving the Euro would allow Ireland to monetise it’s debt or engage in QE or similar is nonsense though – Ireland has never had a currency which would allow it to do that. Since independence it has always been pegged to the Pound (until 1979) or in the ERM on a floating peg with the Mark (after 1979).

@1.

Big costs to leaving Euro.

Ireland should not have joined, UK was right not to. But getting out is harder.

Say Ireland withdraws and issues New Irish Pound (NIP). NIP devalues by, say, 30% agains the Euro. Cue export boom.

But what happens to all those mortgages, government bonds, corporate bonds all ready issued? Are they foricably revalued to NIP (a massive effective default to any foriegn holders, bigger than Sunny (or myself) is advocating. Or are they left in euros, in whihc case the debt burden just increased by 30%!

What happens as Ireland prepares to issue the NIP? Depositors in Ireland start withdrawing deposits and switching them into Euro area banks, hoping to gain from the 30% windfall on devaulation. Bank run on an epic scale.

Leaving the Euro is very, very tricky.

Not impossible but would require capital controls, restrictions on deposit withdrawls and a willingness to really anger other countries.

I wrote a big note on this in Feb 2009 whilst at old job:

http://senhousecapital.co.uk/docs/4.%20Euro%20ten%20years%20on%20-%20Growing%20pains,%20not%20the%20final%20nail%20(Feb%202009).pdf

There is support from this on the Tory right too

Yes there is, I completely agree with this article except the part where you bang on about Iceland yet again. Iceland is predicted to recover from next year, they suffered a short, sharp shock and were able to devalue. The euro didn’t cause the financial crisis by itself but it is certainly making it much, much worse.

I have a great deal of sympathy for this.

But what else would it entail? I think I’ve read somewhere that UK banks own Eu150bn of Irish debt. Whatever the true figure is, default on Irish debt will impose losses on the shareholders of UK banks (meaning, to great extent, the British tax payer) and if the losses exceed the capital cushion, it could bring on more bank failures and bailouts. Plus I suppose if you believe the story that banks don’t lend when they are having to deleverage / increase capital cushion, then default will set back that process.

Another thing to think about are the consequences for Ireland’s ability to borrow in the future.

However, the above are just some entries to the “costs” column, when it comes to summing up the costs and benefits of default, they don’t amount to an argument that Ireland should not default (by which I mean, repay less than borrowed, not repay nothing).

its a good job Mister G Brown (remember him, whatever happened to that guy) kept us out of the Euro.

Very good article – I agree with Sunny.
As Duncan Weldon points out, leaving the Euro is tricky – but can be done. The idea of Ireland switching to sterling is interesting but I’m not sure if the UK would allow it.
No-one’s really arguing that leaving the Euro and defaulting is an easy option – it’s just somewhat less catastrophic than staying in the Euro and not defaulting.

I think events in the markets may well force Ireland’s hand into doing something like this anyway… the bailout has so far failed to convince the markets.

If the crisis in Ireland, potential crises elsewhere in the eurozone and potential defaults are going to keep the euro weak and make it weaker, isn’t it going to derail the coalition’s plans for export-driven recovery? I wonder if Tories doing their best to do in the euro are aware of how they could be sabotaging their own chancellor.

On the subject of moral hazard, by the way, doesn’t defaulting also create moral hazard for governments in setting ‘piratical’ tax rates?

How much sovereignty has Ireland given up on defaulting? There no chance it can just say “yah boo we’re defaulting, kick us out the Euro or deal with it”?

Blimey, Sunny agreeing with me.

As I pointed out 10 days ago, yes, Ireland probably should default. If you’re bankrupt (which they are and no, it’s not their corporation tax….they get 2.9% of GDP in revenues, around EU average, Germany only gets 1.1% of GDP from their corporation tax…..it’s not even their property boom and crash. It’s the absolutely insane decision for the State to stand behind each and every liability of all the banks. ) then it’s best to put your hands up and declare bankruptcy.

I think we’ll see the real proof of this in a few years time. I thjink Iceland is going to do much better than Ireland in the years to come/.

[small point: Iceland is going to do well because it's a small economy sitting on two valuable tradeable natural endowments, (well managed) fisheries and geothermal power. So if Iceland does do well, it's going to separate out that from the merits of defaulting]

” The idea of Ireland switching to sterling is interesting but I’m not sure if the UK would allow it.”

In the unlikely event that the Irish wanted to do so I doubt there would be anything the UK could do about it. Just think of all those random countries using the dollar as their hard currency in preference to the almost valueless local coinage.

(um, if the Irish adopted the £, wouldn’t they run into similar monetary policy problems, say if the BoE raises the interest rate during a UK recovery whilst Ireland is still in the dumps?)

correction to 15 – should read “it’s going to be hard to separate that out”

@ Sunny

First: Bondholders loaned money to the Irish government in good faith. Why is it THEIR fault? Especially given that most of those bonds will be held by pension funds…..banks hold some of it, but it will mostly be pensioners who suffer in a default.

Second: Irish debt is not 1000% of GDP…..check your facts.

Third: You are mixing up loaning money to banks and to the Irish Soveriegn….only after the latter backed the former 100% has this mess really imploded.

Fourth: Russia defaulted on $40bn of debt, which they eventually paid back in full. Argentina also made ammends for much of its default. You can’t expect those evil bondholders to buy bonds if they aren’t likely to get their moeny back.

Other points;

The 7bn which the UK is forced to commit to the bailout via the IMF/EFSF was signed up to by the Labour government in May – Darling’s last act. The only choice the coalition have is to offer more. Historical revisionism is pretty poor as an argumental tool.

Iceland didn’t have low interest rates – I used to trade them. I was also involved in the abortive bank bailout of Iceland. Iceland was essentially a massive hedge fund though, and did all their borrowing in Euro at super low interest rates. The double whammy of their assets depreciating and the ISK devaluing meant they couldn’t pay their EUR loans, and so were forced to default. It’s actually another story of access to far too low interest rates. Then the ISK totally blew up post default.

The UK had the benfit of the GBP, allowing what is in effect a competative devaluation.

The question remains though;

On one hand Sunny (and Duncan Weldon yesterday) argues Ireland should be deficit spending to get out of recession – which requires raising debt through captial markets. Which requires investors to become those bondholders Sunny so despises……but on the other hand, who would lend money if there was a good chance you aren’t going to get it back? You can’t have both? Doubt Sunny can answer it though…..

Or is this part of the socialist plan – all assets belong to the state??

Tyler

everybody did everything in “good faith” except perhaps the bankers themselves – why do innocent Irish citizens deserve to suffer the losses more than bond investors? Next time they may learn the value of doing some “due diligence”. You get higher interest rates in return for taking default risk – how do you justify that if defaults never happen?

but Tyler does raise a good point about the contradiction between advocating default and advocating fiscal expansion

@7 Duncan Weldon

Erm….part of the problem is that there has been a massive switch of deposits to Euro area banks from Irish ones – thats what has caused part of the current problem.

If the NIP appears and the debt is redenominated in it bondholders effectively take a haircut, but at least the yields will probably spike u, Ireland can set its own interest rates and inflation will shoot up. So over time they bondholders might recoup some of their losses through the higher yields.

If they stay in Euros they get pummelled, much like Latvia, Lithuania, Iceland, Hungary…..you get the picture.

I agree that Ireland should default but for different reasons. Firstly they should declare much of their debt to be “odious”. – George Monbiot recently proposed the UK should do this although he specifically focusses on the sordid issue of PFI but his argument applies equally to the debts shouldered by national governments in UK and Ireland to prevent banks collapsing.

Secondly, it should be observed that you can’t solve a problem with the same thinking that created it (hat-tip to Einstein). The neoliberal economic system is demonstrably irrational and dysfunctional and needs replacing. That’s quite a challenge and not one I expect to see either government man up too but its true and I feel I had to point it out because people keep discussing this problem as if its not the case. Wether the governments act or not is academic because the system won’t last long anyway because of my third point:

According to a couple of reports produced by the Pentagon- an institution noted for its highly conservative ideology- there will be a severe, global shortage of oil starting from around 2012 and lasting until at least 2015. The consequences of this for the neoliberal economic model, dependence upon which has fucked our economy into the gutter, are bleak. That model is based upon the conviction that perpetual economic growth is not only possible but good. Besides the obvious conflict with those pesky little laws of thermodynamics, various rational voices have argued that this is clearly not the case.

In summary, the Irish should throw caution to the wind, tell the banks, the EU and the IMF to go fuck themselves and start building windfarms.

@20 Luis

Most bondholders ARE innocent Irish citizens, through their pensions.

Never argued that defaults should never happen though – but I do say that banks are arguably going to be hurt the least in any default, as only a very small % of the total of Irish debt will be held by banks.

Which requires investors to become those bondholders Sunny so despises……but on the other hand, who would lend money if there was a good chance you aren’t going to get it back?

My God you’re going to make me defend Sunny Hundal. It’s irrelevant whether the bondholders are nasty or nice or whether we despise them. The hard economic fact is that they are holding worthless paper. All debt is based on confidence and until Ireland wipes the slate clean there can be no confidence in her future cash flows.

bruno,

I think you’re right, I was wrong to say Tyler raised a good point. fiscal expansion would not be any easier if Ireland does not default, so long as it’s still expected to, and new borrowing costs might fall once it has got it out the way.

Tyler

if most Irish government debt was owned by Irish citizens, which I don’t think is true, then they’d be paying high taxes to run a surplus just to repay their own pensions. Better to take a loss on the pensions and be spared the higher taxes. That’s not an argument against default.

Poor bondholders, why should they be punishing for investing in worthless crap in the first place? Eh Tyler??

but on the other hand, who would lend money if there was a good chance you aren’t going to get it back? You can’t have both? Doubt Sunny can answer it though…..

I agree – you either default or you spend more. I’m not saying both should be done at the same time.

I got the 1000% figure from the BBC Peston article linked above.

GG – I’m not saying Polly is wrong, I’m just saying that even then, lending the 7billion to them is a waste of money. Over the medium term, yes, absolutely..

reland can’t default (without permission). By joining the Euro they signed up to rules and lost a bit of sovereignty.

I know, and I wouldn’t be surprised if Germany and France support this. Angela Merkel has already floated this idea (cackhandedly).

just read the excellent Martin Wolf on this – not sure I understood it all at first pass. He says this: “[Ireland] should surely convert unsecured bank debt into equity rather than force its citizens to bail out all the improvident lenders”

so that amounts to rescinding the guarantee of bank creditors? If that’s still a possibility, the left should definitely be advocating for that.

the FT has a ton of good articles on this:

http://www.ft.com/indepth/ireland-fiscal-crisis

Until we stop the bankers and bond holders from turning private debt into public debt this fraud will continue.

Go to your building society or bank and tell them that you can no longer pay back your mortgage, and as a result you are handing it over to the govt to pay for it. But you will keep your house.

Good luck trying this out in court.

@25 Sunny

“You either default or you spend more”

Possibly the stupidest thing you’ve said – and you’ve got real form.

You are totally missing the point – you CAN’T do both at the same time.

If you want to run a deficit, you HAVE to borrow. If you default you CAN’T borrow.

So you are basically telling me people should be happy to lend to a government, but not complain if they lose their money? Not sure how basic economics works in Sunny-land, but here in the real world Greece and Ireland can’t raise any debt through normal channels because no-one is dumb enough to lend to them…..which makes deficit spending impossible. The only way they are managing is thanks to bailouts and the ECB buying their bonds – basically living off European taxpayers.

Not sure where in the Peston article the 1000% appears….last time I checked Irish debt/GDP was around 70% (excluding banks). Total debt inc private and corporate was somewhere over the 300% mark – not too dissimilar to the UK.

And that 7bn comes from an agreement signed in May by Darling/Labour. I find it funny you never seem to mention that.

Frankly there is little point trying to argue a point with you – you seem unable to answer simple and direct questions. Maybe its somethhing to do with the answers you’ll be forced to give?

@24 Luis

Most government debt, not just Irish, is held by pension funds. In the UK the figure is about 90%. Banks hold as little as possible as it sits on their balance sheets – the minimum is held for captial adequacy requirements.

@ Sally

ugh. It was the Irish GOVERNMENT that turned PRIVATE debt into PUBLIC debt.

Not the other way around.

Tyler

learn some manners and stop making such a fool of yourself.

Sunny said “either / or” and you interpret him as saying “both” then call him stupid?

and when people talk about banks turning private debts into public debts, they mean when private banks borrow money, make losses with it, then the government is forced to borrow money to repay the bank’s creditors. What did you think, that banks had some way of turning private debt into public debt without the government’s intervention?

Sunny,

on the parenthetical question you end the OP with, Krugman provides half of what you’re looking for :
http://krugman.blogs.nytimes.com/2010/11/24/devaluing-history/
the other half – costs of leaving the Euro – I don’t think anybody has ‘data’ on that!

Tyler – god that’s some real reading comprehension failure. I agreed with you on that point you dimwit – I’m not advocating a fiscal stimulus at the same time as default FFS.

Luis – but I’m sceptical Ireland can recover via a export led boom. Most of those countries, UK being the exception, were developing countries with lots of resources to export (or in the case of South Korea a very strong manufacturing sector).

Sunny

why do you think Sweden or Argentina has “more resources” to export (per capita) than Ireland?* If we’re talking about devaluation, then manufacturing in Ireland would be cheap too, as would (even more) call centres and other exportable services.

First: Bondholders loaned money to the Irish government in good faith. Why is it THEIR fault?

Because they bought an 8% bond rather than a 3% AAA bond and expected it to be iron clad.

Luis,

Thanks for that Martin Wolf article–it is excellent.

Sunny,

As a small European economy, Ireland’s chances of recovering via exports are surely better than most–just look at the unit labour cost graph in Wolf’s article.

I never thought the day would come when I agreed with Sunny!

More widely, the euro will not work. The exchange rate will always be geared to the success of Germany, as will interest rates. As a consequence, those countries with very little economic strength – the PIIGS – can only get by and balance their budgets by imposing pverty on their people. How can Ireland ever succeed? It doesn’t really make anything of consequence; it has no natural resources (not counting peat); and its attempts to become a financial power are in ruins. The same can be said of Greece. It’s not exactly famouse for making BMWs. And both countries will have ruinous interest to pay for their loans. What’s Ireland’s tax take? £30 billion? And they have set up an £85 billion facility? Doomed!

As an example, think about the NE of England where I was born. It now has nothing apart from government jobs, people on the dole and the heritage industry. I went back recently and it’s a wasteland. The NE has a common currency with the SE, which is presently the engine of our economy. Unsurprisingly, the SE is subsidising the NE through taxes. How long will Germany be prepared to shell out to support the PIIGS? About as long as it takes for Mrs Merkel to get voted out, I would say.

Count me in on one of the people who thinks they should never have joined. However, as others have said leaving is far from straight forward. Moreover, it is unclear at this stage whether the benefits of leaving would not be outweighed by the costs. A country can’t even discuss leaving or they would be subjected to a cataclysmic capital flight. They would literally have to do it in secret and announce it as complete on a Sunday night. The sovereign debt is denominated in euros and you can’t just redenominate it to local currency without triggering a credit event. That would trigger all the cds sold on the sovereign debt. Moreover, the Irish domestic pension funds would suffer significant losses. So Ireland will stay where it is in the euro until the costs clearly outweigh the benefits. There are no good choices.

The most glaring error in ‘ just default on the debts ‘ logic is the law. Have you considered the legal implications of just not paying creditors who lent in good faith. Senior bondholders have equal seniority to depositors in Irish law. Those creditor institutions have the best accountants and legal brains that money can buy. Break the law and the Irish government will be pursued through the courts and they will lose.

It is an easy thing to say just default on an abstract concept like a bondholder. However, behind the abstract concept especially if you are speaking about the sovereign debt is a portfolio manager and behind them is the savings and pensions of genuinely innocent workers who saved in good faith. However, to save money for the people who did benefit from the bondholders lending. We should impose losses on the entirely innocent because that is, er, moral and ethical. There are no innocent parties in Ireland. Even someone in receipt of benefits was receiving the most generous welfare payments in Europe. So how can you consider them any more innocent than the pension funds you want to impose losses on.

Restructuring some of the bank bondholders is another matter. However, you can’t do it by fiat. It must be done by consent because they have the law on their side.

Richard W

you’re right, but I don’t see the relevance of the good faith arguments. as I’ve written already, those who will be paying higher taxes for no reason other than to pay off debts incurred to ensure bond holders don’t take a loss didn’t act in bad faith either. even if everybody acted in good faith, the question remains over where the losses ought to fall and partially on the creditors seems like a good answer to me.

It depends whether Sunny is talking about the bank bondholders or Irish sovereign debt. I don’t see why the sov holders should take a haircut. Some of the bank unsecured subordinated debt holders have already taken haircuts and accepted 20 cents in the euro. However, the senior debt holders will not take a haircut and it would be illegal to impose it. Debt for equity swaps are good ways to go about reducing debt burdens and that is what the British banks have been doing with indebted firms. However, you can only do restructuring of debt by consent as it can’t be imposed the way Sunny is talking about. No matter how much of a mess Ireland are in they still have to comply with domestic and European law.

Ireland actually have the lowest proportion of their sovereign debt domestically owned at 15% of the total stock. Relying on overseas investors to fund the state is why their sovereign yield went so high when they guaranteed the bank liabilities. It is much easier to restructure when it is domestically owned but with 85% abroad it is not a realistic proposition. On the other hand, imposing losses on foreigners by outright default is often tempting for indebted governments. However, the ECB are the single biggest overseas holder of Irish sovereign debt So any outright default would be imposing losses on their euro zone partners taxpayers to save Irish taxpayers. Difficult to see how they could remain in the EMU after doing that. No good choices.

We are not “helping a friend” or “bailing out Irish banks”

British banks hold less than £10 billion worth of Irish government bonds. But they hold something like £130 billion worth of other Irish debt – property loans, business loans etc. made during the “Celtic Tiger” years.

We are bailing out British banks again, giving the lie to the ConDems narrative that the cuts are due to public sector excess not the banks bailout.

The British right’s attitude to the Irish economy over the past five years has had more twists and turns than Blackpool’s Big Dipper.

First, it was a miracle economy because of its ultra-low corporation tax rates that the UK should emulate.

Then the cuts and austerity programme were lauded as something that would bring swift economic recovery.

Finally, when this recovery fails to materialise and the Irish economy tanks again it’s all the fault of the Euro and the EU.

Yet during it’s boom years the Brtish right were among the biggest cheerleaders of Ireland’s “economic miracle” despite it’s membership of the Euro.

And these are the clowns who are supposed to be now leading us to an economic recovery through savage, ideological spending cuts.

It would be laughable were it not so tragic.

http://danieljmitchell.files.wordpress.com/2010/11/irish-tax-and-spending.png

Closing the gap between the blue line and red is their big challenge. As receipts collapse state spending keeps growing even though it was not profligate before 2007. Although it was based on transient revenues.

For anybody still interested in this, here is a good article by Simon Johnston and Peter Boone on the subject of solving Euro debt problems by allowing defaults.

another article throwing some blame Germany’s way. If the end of this story lies with money printing and Euro devaluation and a German boom, it would be nice if Germany could transfer some of the resultant wealth to Euro fringe economies.

another one on this topic:

http://baselinescenario.com/2010/11/25/will-ireland-default-ask-belgium

not happy reading. also with data on who holds Irish sovereign debt.

It is not wonder that so much is being solitary from the Irish banks. Going back to the connection holders what were links secured again. For example there are Mortgage Debentures, which were meant to be secured against property, definitely they saw this coming. There are also unsecured loan stocks, which come after mortgage debentures, but before share holders. There is a hierarchy of debt, and repayment of debt.