I’m not entirely convinced that the “strongest argument against a State default has disappeared” completely, but in the Irish Times Dan O’Brien provides the rationale behind the argument against a default in the short-term
It is no longer in Ireland’s narrow national interest to prevent senior bondholders from suffering the consequences of their own bad judgement.
But this is very unlikely to happen, in the short term at any rate. That is so because a consensus exists among European policymakers regarding the extremely weak and fragile state of the Continent’s financial system.
It has been based on a view that the system might not survive the direct and indirect effects of a default shock – the direct effect would be tens of billions of losses distributed across the system and the indirect effect would be panic as other bondholders realised that their government-backed protection had been removed.
This consensus is also informed by how, in hindsight, the US authorities grossly underestimated the effects of allowing Lehman Brothers to default 26 months ago; by how Europe’s financial system continues to function owing only to massive government support; and by the fear that there may not be enough additional government resources to keep the system standing in the event of another shock.
This view underpins the policy of preventing both banks and countries in the euro zone from defaulting on their debts since the crisis erupted.
It must be stressed that nobody can know for sure if this consensus is correct in general, and in particular what would happen in the event of a default on Irish senior bank debt.
But they are real risks, and policymakers are very much in the risk-management business now. They must consider the probability of an event happening and the impact it would have if it did happen. As the risk associated with large-scale default is high and the impact potentially massive, Europe is taking a cautious, if very costly, approach.
But as the BBC’s Gavin Hewitt pointed out
Bail-outs focus on the short-term.
They are firefighting. They buy time. They help countries to manage their debts in the here and now.
They can keep at bay the harsh verdicts or judgements of the financial markets.
What they don’t do is address the basic problems of any particular economy or the fundamental flaws in the single currency.
And there are fundamental problems in the eurozone still to be resolved.