February 2011 Archives

Prevent a National Default

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The "worst case" scenario confronting Ireland is default on sovereign or bank bonds (effectively the same thing with no thanks to the 2008 guarantee). IMHO, the chance of default within the next few years is 50/50 if:

  • The EU fails to address the Irish situation immediately;
  • Interest rates rise;
  • There is limited international growth;
  • There are further bank shocks or extensive home mortgage defaults;
  • There is any civil unrest;
  • The new Government makes some initial mistakes or delays decisions;
  • The 2012 Budget is as severe as the 2011 one:
  • National growth fails to return (very quickly) to the levels expected last November.

This is a lot of "ifs" and ducks to line up - bear in mind that Ireland's 10-year bonds are still close to 9%, notwithstanding the National Recovery Plan, and that Ireland's growth projections are being revised downwards rather than upwards. Only a few of these "ifs" need to happen for default to become inevitable. 
Given the distinct possibility of default, who is considering the implications and preparing the contingency plans? It is most certainly not the Irish political parties in the midst of an election. Surely, the EU/ECB/IMF, having taken control of the economy, have a responsibily to head off any possibility of default rather than cope with it when it happens?

Bear in mind that the Irish people did not cause the bust. Sure, some of us enjoyed it while it lasted but the culprits were regulators (Irish and EU), Irish Government and EU Commission, Irish and International banks, ECB and a small group of Irish-based developers who ignored virtually every business rule about leveraging and demand cycles.

For a detailed and generally accurate assessment of the "Irish bust", you might lke to read this lengthy article in Vanity Fair entitled When Irish Eyes are Crying by MIchael Lewis (author of Liar's Poker and The Big Short). See also Iceland Shows Ireland Did 'Wrong Things' Saving Banks. There are loads of similar articles including some by Nobel Prize winners (Paul Krugman and Joseph Stiglitz) that can be easily found on the 'Net.

The only way Ireland can prevent a national default is to separate sovereign from bank debt and default on the latter. If this is not done then there is a high chance that Ireland will default on all its debt (for reasons given above) with much more serious consequences for both Ireland and the EU.

Some of my other views are at Saving Ireland and Vote Against IMF/ECB/EU Bailout.

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