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Will It Work? No. What Can Ireland Do? Remove The Bank Guarantee And Default

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http://www.irishtimes.com/newspaper/opinion/2010/1202/1224284564382.html

I would advise the following course of action.

First, Ireland should revoke the full guarantee of the banking system, and convert senior and subordinate bondholders into equity holders.

I am aware that this would create second-level problems, in pension funds, in other banks, but it would be less costly, and more equitable, to deal with those specific problems on a case by case basis, than to dump the entire cost on the taxpayer.

The Government should then assess its own solvency position on the basis of an estimate of nominal growth of no more than 1 per cent per year for the rest of the decade. That may well be too pessimistic an assumption, but at this juncture it would be more prudent to err on the side of caution than optimism. Given the scale of the financial crisis, and its direct impact on growth, and everything we know from the history of financial crises, the case for a cautious forecast is overwhelming.

Without the load of the banking sector, such an analysis may well conclude that the Irish State is solvent. The result would depend to a very large extent on the success and extent of any bail-in programme, and the ability to contain any fall-out from such action.

If the analysis concludes that Ireland is insolvent, the Government should waste no time, and restructure the debt. Massive pressure from the EU will be brought on Ireland not to do so. But the right answer to insolvency is default – not liquidity support. Let the German government pay for the German banks, and for the recapitalisation of the European Central Bank, which may need to be refinanced under such a scenario as well.

A default would cause havoc, no doubt, and would cut Ireland off from the capital markets for a while. But I would suspect that the shock would only be temporary. With a more sustainable level of debt, and the benefit of a real devaluation, Ireland should be able to pull through this. Once the market recognises that solvency is assured, I would bet international investors would once again be willing to lend. Even Argentina was able to gain funding from investors a few years after its default.

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The full bank guarantee was insane. Passing up numerous opportunities to end it was insane. Thinking the ECB has any long term stable future is insane. Thinking that servicing a 6% interest rate on a IMF bailout against nominal 1% GDP growth in a deflating economy is insane. Banking on long term continuation of the 12.5% corporation tax to fuel growth is insane - no corp in Ireland will be planning for that long term and they will start to lose the multi-nationals. Relying on a stable skills base is insane - they are haemorrhaging talented people and the education system is descending into under-funded chaos (I'll follow up with a nice anecdote on that at some point).

The debt is going to grow. The economy is going to shrink further. They have lost the ability to attract new multi-nationals with the 12.5% corp tax retention being the most hollow of victories. Restructuring of the debt is the only realistic option. The sooner the better.

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Go ahead and default. The lenders will get their money back with interest from Ireland over the next few decades - governments (Irish, banks and businesses) cannot survive without new borrowing. They will be made to pay a premium in future.

And Ireland will still get more bad results from the defaulting than keeping their heads down and just paying it all off.

There is no easy way out.

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Go ahead and default. The lenders will get their money back with interest from Ireland over the next few decades - governments (Irish, banks and businesses) cannot survive without new borrowing. They will be made to pay a premium in future.

And Ireland will still get more bad results from the defaulting than keeping their heads down and just paying it all off.

There is no easy way out.

the current players can be busted and the managers and bondholders consigned to the bin though.

the debt MUST be defaulted or paid...if they cant pay, then they have no choice.

all these articles talk about restructuring....not sure how you restructure a debt from unpayable to payable when its already IO.

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There'll be a new Irish government soon, one that hasn't nailed its colours to the bank bail-out mast. A negotiated haircut (so a slightly more civilised version of default) will surely be on the cards then.

The people of Ireland must be looking at defaulting Iceland and wondering why Iceland is doing so much better than they are.

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The Government should then assess its own solvency position on the basis of an estimate of nominal growth of no more than 1 per cent per year for the rest of the decade. That may well be too pessimistic an assumption...

Is he serious or what?

To think that Ireland will grow at all in the next 10 years sounds highly optomistic to me.

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This is one plan, but no alternatives will be entertained until the Irish people come out into the streets and wrench control of their government away from the crooks.

Edited by Toto deVeer

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Is he serious or what?

To think that Ireland will grow at all in the next 10 years sounds highly optomistic to me.

growth is easy...they just spend more borrowed money ( Government)...this is the problem with using GDP as a measure of growth.

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No they won't. Over the next few years 'the lenders' will be struggling to survive, most concerned about their own situation, and ultimately they too will fail.

Everyone and their cat has already, is about to, or will in the near future, default (or print, which amounts to the same thing). In this situation, only the patsy continues to play the humble serf and continues to pay.

Peter, Ireland will default. If it takes a peoples revolution or an opportunist political party to do it, Ireland will default. Whether you like it or not, this will happen.

ed. sp

Who do you think the 'lenders' are?

They are, basically you and me. Ireland defaults then the several times GDP its lent to other countries is lost as well. Irish pensioners lose their pension. Which means that money - many times GDP - is lost to .. Ireland. Pensioners who spend money and employing people. Pensioners who will now need state payments to compensate them for the lost pension. paid for by taxing the working.

Correct, there is no easy way out. But I'd rather not my children and children's children keep paying ad infinitum, while the rest default.

Oh, but your grandchildren will pay for a default. Argenitina is still paying for its past defaults and it will take two generations,forty years, before the risk of a default is fully wiped out. Until that happens, a defaulters children will be made to pay. Argentina and Iceland have taken a 75% currency devaluation after default (although Iceland offical exchange rate is fixed at a mear 50% fall). Add on a 50% house price crash to a 75% currency devaluation and thats some loss of 'wealth'.

BTW, in Iceland the default worked like this. No company can deal with overseas buinsesses, you cannot make payments is ISK. Everything has to go through the government who convert ISK to Euros at the 'official' rate. Anyone who requires real currency apllies for a daily stiped when travelling abroad. Foreign currency accounts are seized.

Credit cards stop working . International money transfres stopped between Irish acconts. Irish Euros' rejected. The easy with which is was done to Iceland was surprising.

This is the sort of thing you would get with a default.

Edited by Peter Hun

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Ireland will default. Whether you like it or not.

Default or die.

(It should be inflate or die, but they can't)

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Ireland will default. Whether you like it or not.

I really hope it does. I got lot of 'enlightenment' reading about the consequences in Iceland and Argentina. Not having one penny of pension, a mortgage or anything but (soon to be inflated away) debt and living at the very far side of the EU in growing economy I have nothing to lose.

However, even if you change government i can guarantee you Ireland will not default, you will get the excuses about the consequences would be worse etc. etc.

Edited by Peter Hun

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Who do you think the 'lenders' are?

There's a list of banks that are creditors including RBS and Lloyds

We need default to collapse these institutions and jail their executives guilty of fraud

New unimpaired banks with taxpayer capital can take their place

A lifelong ban on any bankers associated with poor lending decisions running these new banks

If the new banks choose not to lend to Irish banks, or lend at a premium, be that as it may. The decision will be based on business and profitability

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Ireland will default. Whether you like it or not.

You are not a thick_mick at all, just pretending to be.

Ireland will default, as you point out. The mystery is, why the EU wont let it default now? Why lend it even more money that it cannot repay?

The only way to relieve the debt pressure is for the PIGS to run budget surplusses, and pay back some money. They wont do that if they are continually bailed out.

Moral Hazard, it isnt just a line from Wall Street 2.

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You are not a thick_mick at all, just pretending to be.

Ireland will default, as you point out. The mystery is, why the EU wont let it default now? Why lend it even more money that it cannot repay?

The only way to relieve the debt pressure is for the PIGS to run budget surplusses, and pay back some money. They wont do that if they are continually bailed out.

Moral Hazard, it isnt just a line from Wall Street 2.

why? becuase they believe the bullshine that there will be tanks on the streets if a bank is allowed to BUST.

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And you're not a leicestersq - I know, I've been there and it wasn't you :D

Because it would herald the official collapse of the EU. They're not ready yet.

Its not going to happen. The Euro will survive thats 100% certain, every tax payer in the west will pay for it and they will have no choice, they won't riot, just winge.

I wouldn't personally be too affected by a collapse of the money system in UK and Europe. I have access to legal guns and food straight from the farm. However, anybody who thinks that default is a good idea is off their head. You - everyone - will be drastically and serverly affected for decades to come.

If ireland want to do it, let them, the ECB/IMF/US would bail out UK and Europe. Ireland would sink, but as the example of Argentina and Iceland are obviously not prominant enough, I think we could do with another even closer to home to see the effect.

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Its not going to happen. The Euro will survive thats 100% certain, every tax payer in the west will pay for it and they will have no choice, they won't riot, just winge.

I wouldn't personally be too affected by a collapse of the money system in UK and Europe. I have access to legal guns and food straight from the farm. However, anybody who thinks that default is a good idea is off their head. You - everyone - will be drastically and serverly affected for decades to come.

If ireland want to do it, let them, the ECB/IMF/US would bail out UK and Europe. Ireland would sink, but as the example of Argentina and Iceland are obviously not prominant enough, I think we could do with another even closer to home to see the effect.

I think it is a good idea, at the risk of being off my head.

The idea of bankruptcy is that you cant pay, the lender has to take a loss. This seems right, after all the lender has a responsibility for themselves or whoever's money was lent, to be sure that the borrower can repay. If they get that decision wrong, they have to suffer the consequences.

Now what is happenign is when A cannot pay B, C is being robbed to make good on the commitment to repay. Is that better than default? Of course it isnt, A and B should suffer the consequences.

Now there may be a resultant chain of defaults throughout the financial system, I say let it happen. Central banks can deal with this. You simply take the insolvent financial institution, wipe out the equity holders, and turn a portion of bondholders stakes into equity, and voila, you have a standing bank once again, who can get on with forwarding credit.

Sure, there are going to be those who are going to take huge losses, and the worst problems will be in pension funds. I believe that the law should be changed so that all pension scheme members have their entitlements cut equally, irrespective of whether they have retired or not. That means those who are retired will see a reduction in their benefits, as they will be sharing the pain equally with scheme members still working.

But we have to do this. You cant just tax those who had nothing to do with these contracts. If you do that, the moral hazard problem becomes uncontained. You just have a free mechanism to allow bankers to take whatever risks they like, with the consequences falling on others. They will just take those risks, until the currency on which transactions are made, blows up.

The threat bankers make of blowing up the system, has to be faced down.

Edited by leicestersq

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The full bank guarantee was insane. Passing up numerous opportunities to end it was insane. Thinking the ECB has any long term stable future is insane. Thinking that servicing a 6% interest rate on a IMF bailout against nominal 1% GDP growth in a deflating economy is insane. Banking on long term continuation of the 12.5% corporation tax to fuel growth is insane - no corp in Ireland will be planning for that long term and they will start to lose the multi-nationals. Relying on a stable skills base is insane - they are haemorrhaging talented people and the education system is descending into under-funded chaos (I'll follow up with a nice anecdote on that at some point).

So, do you approve of the Irish Government or not? :lol:

(Fully agree, they should either have done a full default or dropped Euro membership, and the banks should have gone down)

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I think it is a good idea, at the risk of being off my head.

The idea of bankruptcy is that you cant pay, the lender has to take a loss. This seems right, after all the lender has a responsibility for themselves or whoever's money was lent, to be sure that the borrower can repay. If they get that decision wrong, they have to suffer the consequences.

Now what is happenign is when A cannot pay B, C is being robbed to make good on the commitment to repay. Is that better than default? Of course it isnt, A and B should suffer the consequences.

Now there may be a resultant chain of defaults throughout the financial system, I say let it happen. Central banks can deal with this. You simply take the insolvent financial institution, wipe out the equity holders, and turn a portion of bondholders stakes into equity, and voila, you have a standing bank once again, who can get on with forwarding credit.

Sure, there are going to be those who are going to take huge losses, and the worst problems will be in pension funds. I believe that the law should be changed so that all pension scheme members have their entitlements cut equally, irrespective of whether they have retired or not. That means those who are retired will see a reduction in their benefits, as they will be sharing the pain equally with scheme members still working.

But we have to do this. You cant just tax those who had nothing to do with these contracts. If you do that, the moral hazard problem becomes uncontained. You just have a free mechanism to allow bankers to take whatever risks they like, with the consequences falling on others. They will just take those risks, until the currency on which transactions are made, blows up.

The threat bankers make of blowing up the system, has to be faced down.

Sounds nice in theory but not what actually happens. (Iceland as an example). I'm certain default would mean instant rejection from the Euro. Irish bank accounts would be void outside ireland. The Irish paper notes would be rejected at banks around Europe; if they can spot forgeries then an Irish serial number would be easy. Everything Ireland imports would have to be paid in hard currency; therefore exports would have to hand over currency to the central bank. Ireland is luckey it has an balance of trade surplus. So it could use this to pay back its debtors until its had a valid currency again. Meanwhile economic stagnation, inflation, no money, no credit cards.

Plus God knows what other side effects, no new investment from overseas and a good chance corporates would move from Ireland as their would be capital controls prevent export of income. Hopefully the EU doesn't collapse as other countries could then add import tarrifs to the tax free companies in ireland..

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Even Krugman thinks that default is the logical approach for Ireland ....

"Bankrupting yourself to recovery" seems to be the first step towards admitting that you have a problem and dealing with it.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aYq2N_r7cIU8&pos=6

Iceland is betting its decision two years ago to force bondholders to pay for the banking system’s collapse may help it rebound faster than Ireland.

Iceland’s taxpayers face a smaller debt burden than their Irish counterparts, where the government’s guarantee of the financial system in 2008 backfired this year when the banks came close to insolvency. Iceland’s budget deficit will be 6.3 percent of gross domestic product this year and will vanish by 2012, compared with the 32 percent shortfall in Ireland, the European Commission estimates.

While analysts expect Iceland’s recession to extend into next year, the nation’s exporters are benefiting from a 28 percent drop in the krona against the dollar since September 2008. The decline may help the nation of 320,000 people rebalance its economy faster than Ireland, whose euro membership rules out a currency devaluation. With Iceland’s OMX share index up 17 percent this year, the third-biggest gain in Europe after Denmark and Sweden, Nobel Prize-winning economist Paul Krugman says Iceland may be an example of “bankrupting yourself to recovery.”

“The difference is that in Iceland we allowed the banks to fail,” Iceland President Olafur R. Grimsson said in a Nov. 26 interview with Bloomberg Television’s Mark Barton. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”

‘Burning’ Question

The island’s bank debt remains with the failed lenders, whose creditors have yet to recoup $85 billion. Deciding who should bear the cost of banking failures is becoming a “burning” question in Europe, Grimsson said.

“Senior bondholders in some countries must accept that they may have to take haircuts or participate in restructurings,” said Michael Derks, the London-based chief strategist at FXPro Financial Services Ltd., in an interview. “It just doesn’t add up otherwise; senior bondholders will need to participate. There is no avoiding it.”

Ireland and Iceland boasted growth rates in excess of 5 percent from 2005 to 2007 as they opened their economies to international investment. Both then succumbed to an overheated financial industry that outgrew their economies.

Iceland’s recession will be deeper this year than Ireland’s, though the Atlantic island will overtake the euro member in 2012, the Organization for Economic Cooperation and Development said in a report published Nov. 18.

One Letter, Six Months

In 2009, the joke was: What’s the difference between Iceland and Ireland. Answer: One letter and about six months. “Almost two years on, the joke is on the jokers,” Krugman said in a Nov. 24 column published in the New York Times. “At this point, Iceland actually looks a bit better than Ireland.”

Ireland’s 85 billion-euro ($111 billion) rescue package came after weeks of negotiations during which German Chancellor Angela Merkel was forced to water down demands that bondholders bear part of the cost of future bailouts, instead of heaping the full burden on taxpayers.

Irish banks’ senior bonds rose Nov. 29, the day after the country’s rescue was announced, as investors were spared the prospect of sharing losses with taxpayers. Bank of Ireland Plc’s 1.47 billion euros of senior floating-rate notes due September 2011 gained almost 10 percent to 90 cents. Bondholders of Iceland’s Kaupthing Bank hf, by contrast, will get back about 26 cents per euro, according to brokerage H.F. Verdref hf.

‘Heterodoxy Is Working’

While Irish bank bonds rose, the euro fell as much as 1.3 percent against the dollar, its lowest value since Sept. 21. Speculation that the European Central Bank may delay an exit from emergency funding supported the euro today. The single currency gained 0.4 percent against the dollar to trade at 1.3197 at 10:47 a.m. in London.

Krugman says Ireland’s “orthodox” response -- pushing through austerity measures and guaranteeing bank liabilities to stay in the euro -- contrasts with Iceland’s “heterodox” solution -- devaluing the currency, restructuring bank debt and putting capital restrictions in place. “Heterodoxy is working a whole lot better than orthodoxy,” according to Krugman.

Iceland’s budget will be in surplus by 2012, compared with Ireland’s deficit of 9.1 percent of GDP, the European Commission estimates. Unemployment in the euro member will stay at 13.6 percent this year and next, compared with a 2011 peak of 8.1 percent in Iceland, OECD data show.

‘Tremendous Burden’

Iceland, which started EU accession talks this year, is experiencing a “durable recovery” that is “forecast to pick up steam” next year, the IMF said in an October report. Iceland’s government says it had no choice but to let the lenders fail. Before their collapse, the banks had debts equal to 10 times Iceland’s $12 billion GDP.

“Trying to rescue a banking system that is too big is a tremendous burden,” Finance Minister Steingrimur Sigfusson said in an interview in Oslo. “There was not a question that we would rescue the banks; they were far too big.”

An Irish bank failure would plunge much of the rest of the euro region into crisis, said Valdimar Armann, an economist at Reykjavik-based asset management company GAMMA. “The banks are too entangled in the European web of banks,” he said.

European banks had $509 billion in claims against Ireland at the end of June, Bank for International Settlements data show. Euro-region governments will assess how far investors should bear potential write-offs on a case-by-case basis starting in 2013, finance ministers said on Nov. 28.

Kaupthing, Landsbanki Islands hf and Glitnir Bank hf failed two years ago after they were unable to secure short-term funding. Kaupthing’s so-called winding-up committee said Nov. 26 that it’s dealing with 28,167 claims filed by creditors across 119 countries totaling $63 billion.

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I can see it now.

1. Ireland defaults.

2. Everyone suddenly realises that this isn't such a great 'solution'.

3. Much moaning and wailing with the majority claiming that they never wanted Ireland to default. :rolleyes:

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Sounds nice in theory but not what actually happens. (Iceland as an example). I'm certain default would mean instant rejection from the Euro. Irish bank accounts would be void outside ireland. The Irish paper notes would be rejected at banks around Europe; if they can spot forgeries then an Irish serial number would be easy. Everything Ireland imports would have to be paid in hard currency; therefore exports would have to hand over currency to the central bank. Ireland is luckey it has an balance of trade surplus. So it could use this to pay back its debtors until its had a valid currency again. Meanwhile economic stagnation, inflation, no money, no credit cards.

Plus God knows what other side effects, no new investment from overseas and a good chance corporates would move from Ireland as their would be capital controls prevent export of income. Hopefully the EU doesn't collapse as other countries could then add import tarrifs to the tax free companies in ireland..

I'm not so sure this would happen. Ejecting Ireland from the Euro would immediately render the loans (Euro denominated) from German and UK banks completely worthless. At least within the Eurozone there could be some level of recovery.

Kind of a problem for the EU, which puts Ireland in a strong negotiating position, if they would just realize it.

Edited by Toto deVeer

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  • 284 Brexit, House prices and Summer 2020

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      • down 5% +
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