Tell us honestly, Fine Gael and Labour. Are you in favour of default?

Is there an alternative strategy after all? Might the euro’s continuing adversity become Ireland’s opportunity? The first thing to notice is that the Irish government rejected the Financial Times’ stern advice and succumbed to overwhelming pressure.

Ireland is readying itself to sign the dotted line of a rescue package foisted on it by Europe. It should not accept before securing terms that avert a bail-out of European lenders paid for by Irish taxpayers thrown into debt bondage.

Although we won’t know the full details of how the bailout will operate until next week to coincide with the budget, it seems clear that the big European bondholders have escaped this time. Why did the Irish team allow that to happen? And why have the opposition in the Dail, who look likely to vote against the budget,  nevertheless balked at a radical critique of the whole plan, concentrating their fire mainly on what amounts to the liquidation of the national pension fund? The short answer surely lies in a single sentence in Dan O’Brien’s Irish Times analysis today

The most important aspect of last evening’s announcement was that the European Central Bank (ECB) will continue providing short-term funding at 1 per cent to the Irish banking system.

But he goes on to argue

The future of the euro is now in real question. The coming week may well determine what that future will be.

Although no independent comment today speaks out in favour of the deal, there’s no sign of any significant section of the political class demanding a radical rethink. Criticism is largely retrospective, like this analysis from banking analyst  Peter Matthews

We have been used by a European banking system that was flush with cash and needed someone to lend to. It operated recklessly and with dereliction of a duty of care. First, what Ireland’s negotiators had a duty to clearly demonstrate to the ECB/EU/IMF team was that the ECB had been 50 per cent culpable in its failure in regulation and supervision of Irish banks for four years up to 2007-2008 in which the banks had conducted reckless lending

Second, Ireland’s negotiators should have emphasised the ECB had knowingly advanced loans to the banks which specifically enabled the banks to redeem in full senior bondholders when it was obvious that emerging loan losses at the banks clearly showed they were headed into insolvency

The alternatives look mighty unpopular from the standpoint of Europe. On paper, there is a choice between David McWilliam’s disorderly default ( in a column written before the bailout ) and Frank Barry’s orderly default in the Irish Economy blog. Both involve the ECB inflating out of the debt by adopting the Bank of England’s prevailing measure,  quantitative easing – pumping euros into the system – combined with a debt equity swap for the bust Irish Banks by the ECB.  But planned inflation remains anathema to the Germans.

What would inflating our way out of the debt entail? It can be seen as a type of orderly default. Assume for the sake of argument that the ECB is the owner of all Irish bank bonds; the Irish taxpayer currently owes these funds to the ECB. The ECB could accept a debt for equity swap, which would mean a substantial haircut, so that it – rather than the Irish taxpayer – now owns the banks. It recapitalises them by printing money and then sells them on. The downside is higher European inflation (it will have to take similar steps all across Europe because many banking debts are in fact to other banks, meaning that many will require recapitalisation) and a higher risk premium on all European debt. The risk premium could be moderated though by a pan-European regulatory system which would tackle one of the design flaws in the entire single-currency project.

David McWilliams favours the nuclear option of a unilateral default -because he knows it won’t happen?

This is our trump card and we must have the courage to play it. The deal is simple. If they don’t do the deal willingly, we need to default and see what happens. And do you know what will happen? They will find a mechanism to take the shares of Irish banks onto their balance sheet. And the crisis will be over, because they will not risk the euro and all that political capital to teach the Irish a lesson.

This is great for stand-up in the Everyman Theatre, Cork. The revisionists have the critical advantage today.  Stand by for the counterblast from Frankfurt and Berlin.