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What If Ireland Defaults?

What indeed if Ireland defaults?  Would it be the end of the world?  And even more to the point, what precisely would Ireland be defaulting on?

Nobody has yet provided me with a convincing reason to accept that the debt accumulated by the banks had anything whatever to do with Ireland as a state.  Private investors took a gamble on all the banks, their investment went tits up and in line with the usual rules of the free market, they, eh, well they were ok, because a certain form of socialism became acceptable.

Socialism, which remains anathema when it involves spending millions on poor people, suddenly became perfectly fine when it required us to spend thousands of millions on wealthy foreign investors.  Not only did it become good and worthy, but we had to endure a succession of government backbenchers who had only a passing acquaintance with the Leaving Cert, lecturing the entire nation on economics as if they had made a lifelong study of the area.

In September 2008, democracy in Ireland was undermined when a small bunch of well-connected businessmen gained access to the office of our prime minister late at night and put a metaphorical gun to his head.  We have a cash-flow problem, they lied, and if you don’t bail us out, the ATMs will dry up.

Our prime minister and his finance minister duly buckled, like all good Irish forelock-tugging gobshites, and issued a guarantee, which they then extended to a couple of fake banks: Anglo and Irish Nationwide, neither of which mattered in the least to the broader economy.  Both Anglo and Nationwide could easily have been allowed to collapse in the morning without the slightest impact on the Irish economy but, for various reasons, both Cowen and Lenihan decided to support them, even though that decision might well turn out to be fatal to the survival of Ireland as an independent state.

The reasons why Fianna Fáíl chose to put Ireland at risk to save the pyramid schemes operated by Fitz and Fingers are still to be explored but that decision was described in the Dáil as treason, and that is not a description I could easily disagree with.  Whatever way you look at it, the bank guarantee scheme is the thing that led directly to the economic collapse which in turn led to the Troika bail-out.  Without the banking debt, Ireland would be able to survive its sovereign debt crisis, albeit with difficulty.

So much for the free market.  Only a few years earlier,  when Aer Lingus decided to abandon Shannon Airport, they told us that this is how the free market operates.  Private companies, they told us,  have no obligation to the general public.  Fair enough.  In that case, why, suddenly, did the general public owe a duty of care to private companies like Anglo Irish Bank and Irish Nationwide?  All of an instant, we accepted collective responsibility kicked in and relieved the billionaire investors of their burdens, and wasn’t that nice of us?

You can’t have it every way.  Either there’s mutual responsibility or there isn’t.

A new book, What If Ireland Defaults?  examines these issues and many more besides.  Edited by Brian Lucey (an occasional contributor here), Charles Larkin and Constantin Gurdgiev, this is a book of essays by people as diverse as Joseph Stiglitz and Declan Ganley,  all of whom explore how we got here and how we can get out of it.   One contributor even argues that we might be better off for being materially poorer.  Everyone agrees that no matter what we do, resolving the debt crisis will be painful.  We’ve been saddled with the insane decisions taken by Cowen and Lenihan, decisions that now, it seems, are at variance with EU thinking, which is leaning towards burning the senior bondholders.  Too late for Ireland which followed the instructions of its European puppet-masters and paid them off.

You won’t agree with every essay in this book, but you might learn something from many of them, as I did.  Sean Barrett discusses the crisis from the point of view of a parliamentarian but goes on to argue that Ireland needs a complete overhaul of governance, both public and private.  Good luck with that.  Discussing the infamous September 2008 intervention by the top bankers, Barrett introduces the concept of “capture”, the idea that an entire government could be taken over by vested interest, as our government was, resulting in the complete crushing of an economy.  In my personal view, not the view expressed by Barrett, this amounts to little more than treason, but there you are.  Maybe I have an extreme streak in me.  Still, how can a government be captured if it doesn’t want to be?  If it walks like a coup and talks like a coup …  Evoking the eerie concept of an overnight incorporeal cabinet meeting, Barrett suggests that the decisions taken not only lacked adequate checks and balances, but may well have been illegal.  Barrett illustrates the absence of oversight in Irish public affairs, pointing out that, unlike most of our European neighbours, our whip system is so rigid that honest dissent is crushed and therefore it is impossible for a government backbencher to express misgivings about public policy.  As Charlie McCreevy remarked when he sat on those back benches, I might as well send my shoes up to the Dáil.  Maybe it would have been as well for Ireland had McCreevy followed through on that thought.

Not only are our parliamentarians muzzled, but we have an under-qualified department of finance.  Only one in fourteen of its staff has a Masters in economics, and yet this is the cadre from which successive governors of the Central Bank were drawn.  We saw the result: paralysis and incompetence in the face of chicanery from the slick operators in the sharp suits.  Bumbling incompetence at every level, combined with hubris: a fatal combination.

But of course, this isn’t new.  Diarmuid Ferriter, for one, has argued trenchantly that our newly independent state fell into the hands of vested interests from the outset.  You might even argue that the very nature of our republic is cronyism and elitism,   Looking at what has happened, this is a point of view that I would find hard to dispute.

Joseph Stiglitz’s views have already been discussed here.  In his opinion, NAMA is criminal, so we already have a good idea what he thinks but this essay, co-authored with Anzhela and Diana Knyazeva, goes far beyond such considerations, taking a detached kinematic view of how domestic crises develop and how financial contagion spreads internationally.  This is a true academic study of an observable phenomenon, and I must admit it took me quite a while to absorb it.  As an analysis untouched by local rage, this essay is hard to match.

It feels like Constantin Gurdgiev has been hammering away at the same unavoidable conclusion since I was about four years old, and he’s right.  He was on the radio the other day with Brian Hayes who, I thought, sank to new ad-hominem lows by accusing him of being on the show only to sell his books.  I thought this was a despicable attack on a man who does his best to provide a dispassionate analysis of the situation as he finds it.  Gurdgiev is simply stating the obvious: Irish debt is unsustainable and will eventually have to be restructured, as polite people say, or defaulted on as the rest of us put it.  He has lots of graphs to support this but I didn’t look at them because he’s probably right.  (He even has some linear regression which I always thought was a bit of a dodgy trick, but who am I to say?)

Gurdgiev, characteristically, gives the politicians no room to squirm out of reality.  He points out that Russia, within a few months of forcing foreign investors to write down debts, began to recover. Within six to eight months of stiffing foreign bondholders, the economy rebounded, producing a huge number of charismatic soccer-club owners.  Essentially, what Gurdgiev argues, is that the markets have no memory.  All they care about is future profits, not past losses and this is something successive Irish governments have failed to grasp.

Could this be due to the ingrained sense of cultural guilt among Irish people, transferred onto the government?  Perhaps.

Seamus Coffey has a piece about Ireland’s public debt.  Seamus is a lecturer in UCC and he contributes an article that seeks to identify the various components of public debt.  It’s a somewhat technical article, but beneath the figures and the graphs, there’s a wisdom accessible to the general reader.

As countries rarely repay public debt the decisive issue is not the size of the debt but the amount of government revenue that goes to pay the interest on the debt.

Thus, the Japanese government is able to sustain a debt at 220% of GDP, even though the definition of unstainability is 120%, and that’s simply because the Japanese central bank can produce money at will, unlike Ireland’s.  Our burden to pay back the Anglo promissory notes would be meaningless in Japan where no external agency such as the ECB is on hand to forbid us from writing off that debt, and in many ways this is why Japan, with a huge debt, is in a stronger position than Ireland, whose debt is just 107% of GDP.    What’s more, Ireland is currently enjoying favourable interest rates and only a 1% rise would impose a crippling additional burden on the country.

Stephen Kinsella looks at the effect an Irish default might have on the European economy.  He points out that Ireland had an old-fashioned crash based on an old-fashioned bubble.  He paints a depressing picture in which the gains of fifteen years growth were burned away in a four-year bout of insanity, causing our current debt problem — provided you accept that the debt is ours, and not that of the banks that caused the collapse in the first place.

Taking the commonly-accepted assumption that Ireland’s debts are simply unsustainable, Kinsella sets out various default choices:

1.  The nuclear option.  Default on everything, as China did in 1949, Czechoslovakia in 1952 and Cuba in 1960.

2.  Partial default, as Russia did in 1998.

3.  Soft default.   Pay the debt back over a longer time.  Restructuring.

Perhaps because the book was written some time ago, Kinsella talks about recouping losses on promissory notes.  He  argues that the Eurozone won’t tremble at  restructuring of debts owed only to ourselves, but after last week’s developments , spun as good news by the government, he’ll need to think again, since we are now in the process of turning soft promissory notes into hard government debt.  More stupidity.

Megan Greene has a terrifying piece on the Eurozone Titanic, but argues that, finding ourselves where we are, there is no option but to stick with the programme and protect our relationship with the EU by remaining in close connection to the Eurozone.  Greene argues that departing the Eurozone does not necessarily mean leaving the EU, and points to the success of the non-Euro countries, emphasising the common market, as opposed to the common currency.

Iceland could easily be the anti-Ireland, for many reasons, not all of them to do with Ireland.  Iceland, for one thing, seems to be a country that possesses a sense of civic communality, unlike us, and Iceland came out as one man and one woman to reject what was being done in the name of their crooked bankers.

Elaine Byrne and Huginn Thorsteinstennson explore this in their essay, entitled Iceland: The Accidental Hero.  As Brian Lucey pointed out in an earlier article here, politicians have been fond of mouthing the meme that Ireland is not Iceland, and yet Iceland is now out of the IMF programme, having met all its objectives.  But of course, Iceland did not carry the cost of the banking losses, unlike Ireland which remains burdened by Brian Lenihan’s delusional  “cheapest bailout in the world”.

What’s the difference between Ireland and Iceland?  Three years ago, the joke was on them.  Who is it on now?

Tony Phillips takes us through the Argentinean default, pointing out that while Iceland was able to endure  a hard default, Argentina was not.  In a thorough study of the South American experience, Phillips points out that Argentina found itself shut out of the money markets and concludes that ireland would be better trying to survive without default.  As he puts it No-one in Argentina would say that they wish to experience such a default ever again.

Sam Roberts tells us about the New York fiscal crisis which ultimately led to the downfall of President Ford.  Why?  Because New York’s citizens reacted to the failure of the Federal government to rescue their city from bankruptcy and in consequence voted against the presidential candidate.  It wouldn’t be hard to draw comparisons with the relationship between Ireland and Frankfurt, with the obvious difference that European politicians have no need to rely on Irish voters for re-election, a theme taken up later in the book by Declan Ganley.  Nevertheless, this is a story worth studying.  Continuing the theme, Marc Tomljanovich warns of an impending financial disaster as US municipal authorities default on their bonds, although to my mind,. the essay seems a little out of place in the context of European and more specificallly Irish debt.

Peter Brown is a trader in the markets and his analysis of the current situation is not encouraging.  Leaving aside his revealing insight into the inanity and goldfish memory of the market, as pointed out by David McWilliams, Brown’s warnings become more disturbing.  In his view, the Euro was not good for small countries like Ireland, but having accepted the single currency, there is only one way the Euro can survive, and that’s by submitting to permanent oversight from Germany.  In other words, we will be governed by Berlin, forever.

It’s up to you whether you think this is a good thing.  At least it won’t be Fianna Fáil.

Karl Deeter is a mortgage broker and therefore, arguably, a figure of fun, but don’t quote me on that.  I’ll only say this much: over the last fifteen years or so of the Irish financial disaster, many of the people who caused the whole debacle called themselves brokers of one sort or another, and that makes me personally suspicious of such folk.  Nevertheless, Karl was one of the people calling bullshit when bullshit was taking place, and by virtue of his track record deserves his place in this book, especially for his interesting concept of tiered-interest loans which would make defaults far less painless for borrowers and for lenders.  Very interesting.

Gary O Callaghan is professor of economics at Dubrovnik international university, a fact which, in itself is enough to fill me with insane jealousy.  He speaks of the dreaded sovereign default, a term that has terrified successive Irish governments.  He provides a fascinating essay ranging through moral hazard to the effects of globalisation, while at the same time presenting the IMF as a more benign entity than we have been given to understand.  This essay provides an insight into IMF thinking that reveals, in many ways, a more sympathetic approach to Irish economic problems than the one espoused  by those we believed to be our allies, namely the EU and the ECB.

Besides the worthies I have mentioned, we also have Peter Mathews, a splendid fellow who really ought not to be a Fine Gael TD.  Mathews has been arguing both on and off-air that Ireland’s mortgage debt needs to be restructured.  Households are drowning, he says,  and the debt is crushing our economy.  By all measures of indebtedness, Mathews says, government, household and business, Ireland is damaged.

He quotes a paper presented to a recent central bankers’ conference, which sets thresholds of indebtedness as a percentage of national income  beyond which growth is impaired.  I’ll give both figures here to illustrate how severe our problem is.

Government 100%  Actual: 137%

Household 85%  Actual: 147%

Business 90%  Actual 210%

This adds up to 494% of national income, the worst in the world, ahead, even, of Japan.  These are terrifying numbers: our debt levels are almost twice those of Greece which is widely seen as a basket case.    Austerity is ultimately self-defeating, killing economic growth and forcing more people into default.  Mathews sees no alternative but to reduce our debt and the means of achieving it is simple: remove the ECB’s collateral on the €100 billion it lent to the Irish banks.  Set up a new bank, write down the mortgage loans and force the ECB to share the burden currently sitting on the Irish people’s shoulders as a consequence of paying off the European institutions that stood to lose their shirt following the collapse of the bad banking businesses.  Ultimately, that debt exists solely because the ECB wished to save investors, not because there was any pressing need to save banks, and in any case, both Anglo and INBS are now dead.

The prescription for recovery?  Set up a new bank and provide the financial stimulus that is not possible under the current arrangement. Stand up to the ECB and call their bluff.  It’s a compelling argument, although there are many, including Karl Deeter, who might say that this is a charter for opportunists, and no doubt there would be quite a few, but so what?  If it solves the problem, so what?

I hope John Walsh, editor of Business and Finance, doesn’t find himself in a dark alleyway with Constantin Gurdgiev and Peter Mathews unless he can be sure they’ve read his entire article and not just the opening paragraph, where he says that people advocating default are no more than snake-oil salesmen.    In his second paragraph he puts the opposite view that we must default or face social disaster, and goes on to develop both sides of the debate without opting for either one himself.  This essay is about the role of the media in the public discussion, and Walsh doesn’t spare anyone — not even himself.  There was a lack of objectivity, he admits.  Journalists and business people were too intimate, and even he himself soon lost the detachment he had gained during his years in London, once he found himself back in Dublin.  Of course, not everyone was inside the tent.  Walsh cites the example of Richard Curran, who was vilified for presenting a Futureshock programme that called the whole property boom a house of cards.  We all remember Bertie Ahern castigating people for talking down the economy, and Morgan Kelly was pilloried for writing the truth in his Irish Times articles.  We also remember the gushing, embarrassing nouveau-riche inanities pumped out by RTE and others as we followed young couples buying ex-Council houses for only half a million euros and pretending they had just bought a loft apartment on the Upper East Side, when in reality if you looked out the the window, you could see a skanger on a horse shooting up in the bus shelter.  But not to worry.  At least you had the latest Poggenpohl luxury kitchen, made in Germany and paid for out of a forty-year mortgage.

The media in Ireland has been largely passive, and in some cases almost a mouthpiece of government or business, but of course there are some outstanding and honourable exceptions including Vincent Brown and Fintan O Toole.  Whether the Irish media can face the coming challenges is a question Walsh leaves open.

Michael Dowling presents a behavioural economist’s perspective on debt and default, arriving at a more positive conclusion in the face of all the depressing figures.  We might have lost material comfort, he says, but maybe we’ve recovered some of the values that used to motivate us.  The idea that neighbours come together to support each other in times of need.  What we lost in money terms we may have regained in social capital.  It would be nice to think that we’ll become less crass now that we don’t have the money to buy the latest Finnish-designed lampshade for the broom cupboard, but a part of me suspects this is a nostalgic and mistaken view.  After all, in the worst days of Irish poverty,  the poor were truly wretched, and were allowed to remain so by the comfortable classes.  This was a heartless country, happy to consign misfortunates to lunatic asylums, magdalene laundries and industrial schools.  At best, I could imagine a new solidarity arising among people who find themselves in a common predicament, but I wouldn’t be as optimistic as Dowling about true social change.  Maybe I’m wrong.  I’d certainly like to think he’s right.

Declan Ganley’s concluding article seems curiously out of place among all the others.  He always sounds as if he’s standing with one foot on the ramparts, pointing towards the horizon, and this article isn’t an exception.  Beginning with the celebrated action in Manhattan when Alexander Hamilton engaged the might of the Royal Navy from his little gun emplacement at what is now Battery Park, Ganley takes us on to Hamilton’s later years as he steered the nascent United States through its first perilous fiscal storms.  He draws unfavourable parallels between Hamilton’s wise shepherding of the new states and the overbearing treatment meted out to the likes of Ireland by the ECB.  Painting a chilling picture of a new Balkan conflict on a gigantic European scale, Ganley argues that only by democratising the institutions of a new federal Europe will we be able to escape collapse and possible Armageddon.  I agreed with some of what he said, but much of it was obscured by the sound of thunder.

All in all, this book is a solid, informative read for the average punter who lacks any deep knowledge of economics but would still like to be a little more informed.  People like you and me, in other words.  Orpen Press are the publishers and you can order it here if you feel so inclined.



Also on Bock: All posts about the economy














23 replies on “What If Ireland Defaults?”

Thanks for the review – comprehensive and even-handed. On a housekeeping note, I think “Þorsteinsson” would translate to “Thorsteinsson” in ordinary Latin, or so the early drafts suggest.

Great review but alas the all knowing teachers and solicitors that run our country still have their heads in the sand.

Looks like the Book should be compulsory reading in every Household…..and Schools.
My only quibble…..and it isn’t a quibble is with ” You can’t have it every way. Either there is mutual responsibility or there isn’t ” There isn’t and there won’t be either.

I was fortunate enough to be taught finance by Lucey and Gurdgiev and I’m looking forward to getting stuck into this book. Probably wouldn’t be a bad idea to hand a few copies out in the Dail.

A little off point but I think perhaps of relevance.
During a telephone conversation I recently had with an employee of Revenue on their 1800-201106 line, I connected with what I can truthfully describe as a most inept, uninformed and possibly, stupid person.
I discovered that the office involved had nothng whatsoever to do with me, my money, my legal entitlements or in any manner whatever were they doing anything that would or could impact on my personal financial metters or concerns.
It’s what I was told.
I had to ask, putting it as simply as I could, why that office had copies of all my personal earnings, tax and liability records given they effectively had nothing to do with me or anything relating to me and my earnings.
The person on the telephone was quite confused and could not tell me why my records were there on file with them.

And you think it’s something to do with a lack of a masters degrees?

If only that were all that was lacking in Finance.

Journeyman, revenue aren’t part of finance. But the same issue: the removal of highly trained specialists and their replacement by generalists, that’s across the board

This review set the book up well. I will be purchasing it. It looks like it will be an immediate resource for current conversation. The passive media is a constant and contenious issue as well.

Thanks for the kind comments folks. The point is to get a wider conversation going. Knowledge is power and all that….
take the arguments and most of all bring them, on all sides, to politicians of all stripes and none.

“The idea that neighbours come together to support each other in times of need. ”

I think this is slowly starting to happen, but I find Medium to Large Companies have become most unpleasant to deal with.

I have started a one man crusade to boycott heavy handed organisations who impose any penalty for missed payments or who ask for deposits to prevent anyone ever getting one over on them.

I have experienced this with Oil, telecoms, and Insurance companies in the past 6 months, and I have changed all of the Companies, only 1 left to get one over on.

Must pick up a copy of the book, the reality of how it translates to the man on the street day to day, is interesting and requires a bigger conversation to help correct the unfair charges, and legalised bullying.

I think this is one I will definitely buy, soon. Thanks for the info Bock.

Brian, RE: “take the arguments and most of all bring them, on all sides, to politicians of all stripes and none”. The only politicians I’ve been lucky enough to encounter have been perverts and morons. :)

What I sometimes wonder is why don’t the politicians consult the likes of the authors of this book? I like Noonan and all.. his analogies are great – he feels like a mechanic under a car trying to get a banger going and Enda is in the driver’s seat.. haw haw, but is he qualified for the job? The recent shuffling abouts with the promissory note payment, seems to indicate he’s not.

Great Article!

Ireland needs to default but this cannot happen without withdrawing from the EMU (which it needs to do also). What we’re seeing in the EU & US is what an Irish politician recently described as “Communism for the Elite and raw capitalism for the rest”. It represents the largest transfer of wealth from the public domain in human history and it’s far from over!

Around the western world interest rates are at near zero levels, interest rates and bond prices have an inverse relationship, as interest rates go up, bond prices go down (and vice versa). Well there’s only one direction that interest rates can go from zero so what we’re facing is a monumental bond crisis in most major economies.

This will of course lead to massive problems for the banks which are standing behind these bonds and if the banks were “too big to fail” in 2008 when the derivatives market was around $500 Trillion what do you think they’re going to be now that the derivatives market is over $700 Trillion??

Ever wonder why the US Federal Reserve Bank (Which isn’t Federal, has no Reserves and isn’t a Bank) is willing to loan a limitless amount of money to the IMF to be injected into the EMU? The US knows that if things really kick off in the EU it will highlight the untenable situation over here!

From your website:

“The purpose of the PARADIMESHIFT.ORG project is to help inform and educate on the new realities (paradimes) that we are seeing spring to life and evolve in the Global Financial Markets practically every day which affect the hard earned cash you have in your pockets right now!”

Looks more like a spelling mistake to me and makes it hard to take you seriously.


Dime derives from the Latin ‘Decime’ meaning one tenth or a tenth part, used in reference to a tithe scripturally. A dime in US currency is 10 cents or 1/10 of a dollar.

Digm derives from the Greek ‘deiknumi’ meaning to show or prove.

Dime and Digm are homonyms which I’m sure you are aware are words that sound the same but have completely different meanings.

Homonyms are the most common structure for word play, I’m sorry that it went over your head but I can assure you that it is most certainly intentional. As our organization focuses exclusively on matters of economics we have coined the phrase “PARADIME” which can be defined as a Basic Economic Assumption with a “PARADIME SHIFT” referring to a change in said Basic Economic Assumptions. : )

Typical. Only a matter of time before all threads eventually end up off topic. On a lighter note, I have just finished reading this book and I found it a great source of information, comment and opinion.

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