What a southern default would mean

Following the thread the other day, just a link to something I wrote elsewhere, but here’s the gist:

There are two broad schools of thought on a default. One says it will result in savings being decimated, cash machines freezing-up and capital flight. The other says it will be less painful and quicker than the current situation, if performed in an orderly fashion.

The evidence appears to favour the latter. [Newswhip.ie]

  • Itwas SammyMcNally whatdoneit

    Jason,

    as I mentioned on the other thread – any word on which political parties line up in favour of default. I think there is an asumption SF will – but what about Labour?

  • andnowwhat

    Naive as I am, I would love to see this a chance for Irteland to return to all that was so good about it befoo=re it stuck it’s head up it’s bum hole.

    Frriends mine from GB and beyond are too afraid to ;pop their heads over the border for fear of the apauling expense.

    Tourism was a massive industry but they truely ruined it.

  • Itwas SammyMcNally whatdoneit, SF is against. Labour was against the guarantee in the first place. However, as it’s likely to go into gov’t with Fine Gael it may have to change its tune. Fine Gael is against it insofar as it says Fianna Fáil has wrecked the country etc., but rather more quiet on the specifics of what it will do. I expect more information will emerge from FG soon (and all parties) as the budget is due next week.

    If one was inclined to be cynical then one might say it’s easy to let it pass into policy and then say “we had no choice, it was that last shower that did it and the EU won’t let us change policy.”

    andnowwhat, I sincerely hope Ireland doesn’t return to the old days. Picturesque it may have been, but it was lacking basic communications infrastructure. At least we now have motorways, though we could do with more and some high-speed rail, too.

  • Glencoppagagh

    Jason
    The default option is appealing to those who have convinced themselves that foreigners are to blame as much as domestic actors. A lot depends on exactly which liabilities are defaulted upon. If Ireland remains in the Eurozone, any default on government bonds would surely be reflected in a higher cost of borrowing in the future when Ireland regained access to capital markets. In turn, that would ensure a prolonged period of relative austerity with only limited government borrowing.
    All of which leads me to ask if the Irish government is fully exploiting domestic savings by issuing bonds that would appeal to domestic private investors.

  • Glencoppagagh, while I accept there is a cod-nationalist argument floating around out there, surely the main point is this: this is not national debt, it’s private debt. If the banks lent recklessly, let them deal with the consequences. Such free-wheeling capitalists surely wont want state aid, anyway…

    “If Ireland remains in the Eurozone, any default on government bonds would surely be reflected in a higher cost of borrowing in the future when Ireland regained access to capital markets.”

    Every analyst I’ve spoken to has said future costs will be higher, no matter what happens.

    What strikes me about all this, as I wrote the other day, is that anyone with an actual political outlook is against the bailout and for defaulting. I’ve spoken to self-identified social democrats, (right-) libertarians, conservatives, socialists, Marxists and a libertarian Marxist. None of them support the bailout.

  • Jason,

    Never mind the question of whether Ireland actually does ‘burn the bondholders’, how far would a purposeful conversation about this at the time of the negotiations have resulted in a better offer to Ireland?

  • Itwas SammyMcNally whatdoneit

    Jason,

    “What strikes me about all this, as I wrote the other day, is that anyone with an actual political outlook is against the bailout and for defaulting”

    ..but that excludes FG/FG and probably will exclude Labour (as you indicate). What is puzzling is the disconnect between the political parties and ‘anyone with an actual political outlook’.

    Presumably this will change in coming days/weeks and as soon as it does the price of Irish bonds will go through the roof.

  • ulsterfan

    When was the last time a sovereign Government decided to default and what were the consequences.
    Does a State always act in its own interests without any regard to the morality which under lies its decisions.
    If Ireland puts its two fingers up to the world and financial Institutions the its back to the stone age.

  • sammy,

    “What is puzzling is the disconnect between the political parties and ‘anyone with an actual political outlook’.”

    But FF and FG are unpolitical political machines. No ideology, no ideas.

  • ulsterfan,

    Iceland. This year.

    Paul,

    “How far would a purposeful conversation about this at the time of the negotiations have resulted in a better offer to Ireland?”

    I don’t know. I have a feeling would have made no difference, due to the nature of Irish “governance”. But that’s no reason to not have it.

  • Greenflag

    ‘The default option is appealing to those who have convinced themselves that foreigners are to blame as much as domestic actors. ‘

    Blame estimations

    1) USA via export of worthless paper and sub prime mortgage collapse 30%

    2) ECB for turning a blind eye to German and other banks contracting investment deals in DUblin which were illegal in Germany 30%

    3) Irish Government , bankers and property developers and people for larding up on the gravy train and not paying attention 40%

    So let the haircut for the bondholders (Goldman Sachs , Rotschilds etc etc ) be 60% and the Irish will just have to pay off the 40% with most of that being paid off by the reckless banks and politicians and top civil servants and property developers via asset sales and special taxes on future earnings until the debt is paid .

    Sounds fair to me .

  • Mack

    Is a unilateral default feasible?

    I take it you it spoke to Brian Lucey and Constantin Gurdgiev about this. My question is – if we attempted to do this in the face of ECB and German resistance the ECB could withdraw the special liquidity functions that are keeping the Irish banks afloat. Just as they are burning one set of bond holders the banks would presumably have to issue new bonds in order to keep functioning? Presumably the EFSF & IMF funds would also be withdrawn – so the state would have to borrow any money to fund the banks on the open market (if the banks couldn’t fund themselves). Is this possible? Or do we need to persuade the Europeans that debt needs to be restructured?

    Is the ‘nuclear’ option – that the state refuses to support the banks – that the bond holders get burned via the normal methods of capitalism – but we are left with a non-functioning banking system (at least temporarily)?

  • Mack

    Greenflag –

    Not sure the bond holders are Goldman Sachs and the Rothchild’s – Royal Bank Of Scotland is one of the largest if memory serves me right..

  • Alias

    The Irish don’t have a clue that Ireland, Europe’s only former colony, has been enslaved by their new colonial masters in the EU in exactly the same way that post-colonial Third World countries have been enslaved by the West after they too have achieved nominal independence from their former masters, i.e. through financial instruments that create a perpetual debt via compound interest and that are designed to keep the people in servitude to foreign institutions. The Irish always thought they were ‘special’ and that they punched above their weight within the EU regime by being charming and obedient to their masters, and that that special status would mean that those to whom they surrendered their sovereignty would always look after them and promote their national interest. Worse as far as they are concerned in that their government sold them out to their new owners just like an African strongman sells out his people. It’s all quite pitiful, really. That sort of thing was only supposed to happen to blacks…

    The constitutional reality, however, that we have exchanged our national interest for the EU’s interest. We have indisputably exchanged our currency for the EU’s currency, and traded all that goes with a sovereign currency, e.g. banking regulation, monetary policy, a central bank, etc. The central bank, of course, is the lender of last resort to troubled banks in a sovereign currency so that role now defaults to the central bank of the sovereign currency, i.e. the ECB. That rather obviously negates any sovereign power that the local government in regard to decisions about the lender of last resort. So it isn’t possible for your right leg to go in a direction other than as directed by your sovereign left leg if you’re not particular keen on falling over. To move in a direction of your own choosing requires that you have sovereignty over both legs, i.e. exit the EU.

    Contrary to popular myth, Ireland doesn’t have a national interest in the currency it uses. It renounced that particular national interest when it ratified the Maastricht Treaty. The “common good” here is now the common good of the EU as a whole, and not the common good of the Irish people. Therefore, it is constitutionally obligated to put the EU’s interest before the redundant national interest. It must act to protect the EuroZone because that is clearly its constitutional duty, even if that duty is carried out at the direct expense of the Irish people. Constitutional law is binding on the state, and it is not an à la carte menu.

    Tp properly understand this point you need to read Article 6, s. 1 of the Irish Constitution and then read the late Supreme Court judge Séamus Henchy’s explanation of how it applies to the Single European Act, and to understand that the state is bound by the Maastricht Treaty in economic policy in exactly the same way as the SEA treaty bound the state in its foreign policy:

    “All powers of government, legislative, executive and judicial, derive, under God, from the people, whose right it is to designate the rulers of the State and, in final appeal, to decide all questions of national policy, according to the requirements of the common good.” (Article 6, s. 1)

    78. It follows that the common good of the Irish people is the ultimate standard by which the constitutional validity of the conduct of foreign affairs by the Government is to be judged. In this and in a number of other respects throughout the Constitution the central position of the common good of the Irish people is stressed as one of the most fundamental characteristics of Ireland as a sovereign, independent, democratic state.

    79. A perusal of Title III of the SEA satisfies me that each ratifying Member State will be bound to surrender part of its sovereignty in .the conduct of foreign relations. That is to happen as part of a process designed to formulate and implement a European foreign policy. The freedom of action of each state is to be curtailed in the interests of the common good of the Member States as a whole. Thus, for example, in regard to Ireland, while under the Constitution the point of reference for the determination of a final position on any issue of foreign relations is the common good of the Irish people, under Title III the point of reference is required to be the common position determined by Member States. It is to be said that such a common position cannot be reached without Ireland’s consent, but Title III is not framed in a manner which would allow Ireland to refuse to reach a common position on the ground of its obligations under the Irish Constitution. There is no provision in the Treaty for a derogation by Ireland where its constitutional obligations so require. On the contrary, Title III expressly provides:-

    “In adopting its positions and in its national measures [which presumably would include Acts of the Oireachtas] each High Contracting Party shall take full account of the positions of the other partners and shall give due consideration to the desirability of adopting and implementing common European positions.”

    80. Thus, if the other Member States were to take up a common position on an issue of external relations, Ireland, in adopting its own position and in its national measures, would be bound by Title III to “take full account” of the common position of the other Member States. To be bound by a solemn international treaty to act thus is, in my opinion, inconsistent with the obligation of the Government to conduct its foreign relations according to the common good of the Irish people. In this and in other respects Title III amounts to a diminution of Ireland’s sovereignty which is declared in unqualified terms in the Irish Constitution.

    81. It is urged on behalf of the Government that the changes in existing inter-state relations effected by Title III are slight, that it does little more than formalise existing practices and procedures by converting them into binding obligations. This, I fear, is to underestimate the true nature in international law of a treaty as distinct from a mere practice or procedure, and to misinterpret the commitments for the future involved in Title III. As a treaty, Title III is not designed in static terms. It not alone envisages changes in inter-state relations, but also postulates and requires those changes. And the purpose of those changes is to erode national independence in the conduct of external relations in the interests of European political cohesion in foreign relations. As I have pointed out, the treaty marks the transformation of the European Communities from an organisation which has so far been essentially economic to one that is to be political also. It goes beyond existing arrangements and practices, in that it establishes within the framework of the Communities new institutions and offices (such as European Political Cooperation, the Political Director and the Political Committee) and charts a route of co-ordination, by means such as working parties, a secretariat and regular meetings, so as to give impetus to the drive for European unity.

    82. All this means that if Ireland were to ratify the Treaty it would be bound in international law to engage actively in a programme which would trench progressively on Ireland’s independence and sovereignty in the conduct of foreign relations. Ireland would therefore become bound to act in a way that would be inconsistent with the Constitution. The Government’s constitutional mandate requires it to act in accordance with the Constitution. In proposing to ratify this treaty it is in effect seeking to evade that obligation and to substitute for it an obligation, or a series of obligations, in international law which cannot be reconciled with the constitutional obligations.

  • Alias

    “A perusal of Title III of the SEA satisfies me that each ratifying Member State will be bound to surrender part of its sovereignty in the conduct of foreign relations. That is to happen as part of a process designed to formulate and implement a European foreign policy. The freedom of action of each state is to be curtailed in the interests of the common good of the Member States as a whole. Thus, for example, in regard to Ireland, while under the Constitution the point of reference for the determination of a final position on any issue of foreign relations is the common good of the Irish people, under Title III the point of reference is required to be the common position determined by Member States.”

    Just to add that that interpretation of the Supreme Court forms the law in this state, so that is how the government must act thereafter according to the constitution.

    That is, if the Irish people ratified the amendment to that constitution. Remember that case was taken to the Supreme Court by the late Raymond Crotty because the government acted to give away the sovereign powers of the Irish people to the EU without the consent of the Irish people.

    As the Court declared in accordance with Article 5 of the Constitution: “The State’s organs cannot contract to exercise in a particular procedure their policy-making roles or in any way to fetter powers bestowed unfettered by the Constitution. They are the guardians of these powers – not the disposers of them.”

    But later the Irish people duly gave their consent to the government via a referendum to dispose of their own sovereign powers and, as the Court pointed out, to compel the government to “act in a way that would be inconsistent with the Constitution.”

    “The Government’s constitutional mandate requires it to act in accordance with the Constitution. In proposing to ratify this treaty it is in effect seeking to evade that obligation and to substitute for it an obligation, or a series of obligations, in international law which cannot be reconciled with the constitutional obligations.”

    So what occurs is that the requirement on the government to act in the common good of the Irish people in respect of the “powers bestowed unfettered by the Constitution” is removed from the government and the government is free thereafter to act in a way that is not in the common good of the Irish people but rather in a way that serves “the common good of the Member States as a whole.”

    In other words, the EU’s interest takes precedence over the redundant national interest. Therefore, we are constitutionally obligated to sacrifice ourselves as a nation for the common good of the EU in respect “to exercise in a particular procedure [the] policy-making roles” that were formerly exercised under the Constitution to promote the common good of the Irish people.

    If the government did not place the common good of the EU before the common good of the Irish people as it is now constitutionally obligated to do then it would be acting unconstitutionally and its laws would have no legal effect. That’s what happens when you incorporate EU treaties into your constitution.

  • Alias

    One last point here. When Cowen tells the Irish public that he is acting on the advice of the Irish Central Bank, he is relying on their ignorance of what they signed up to assume that the ‘Irish’ Central Bank is promoting the Irish redudant national interest when in reality is it constitutionally obligated to promote the EU’s interest. The Maastricht Treaty, therefore, should be read as part of the Irish constitution since it is part of the Irish constitution. Patrick Honohan is promoting the ECB/EU’s interest, so folks should be very wary of the europhile Irish media touting this man as the voice of reason.

    Here is Article 14.3 of the Maastricht Treaty: “The national central banks are an integral part of the ESCB and shall act in accordance with the guidelines and instructions of the ECB. The Governing Council shall take the necessary steps to ensure compliance with the guidelines and instructions of the ECB, and shall require that any necessary information be given to it.”

  • STG

    Oh BTW here is a list of former European Colonies:

    Europe
    Austria

    Austrian Netherlands
    Britain

    Corsica (the Anglo-Corsican Kingdom was a protectorate or in personal union with Britain)
    Cyprus
    Heligoland
    Ionian islands
    Ireland (first as the Lordship of Ireland, later not a colony but an integral part of the United Kingdom of Great Britain and Ireland)
    Malta
    Minorca
    Denmark

    Danish Estonia
    Iceland
    Greece

    Magna Graecia
    Italy

    See also: Colonia (Roman)
    Albania
    Dodecanese
    Sazan Island
    Norway

    See also: Viking expansion
    Faroe Islands
    Hebrides
    Iceland
    Isle of Man
    Orkney
    Shetland
    Russia

    Finland
    Spain

    Spanish Netherlands
    Sweden

    Main article: Dominions of Sweden
    Swedish Estonia
    Swedish Ingria
    Swedish Livonia
    Swedish Pomerania

  • drumlins rock

    surely its is a question when not if Ireland defaults?

  • Glencoppagagh

    Greenflag
    1) USA via export of worthless paper and sub prime mortgage collapse 30%.
    How much of this did Irish banks hold?

    2) ECB for turning a blind eye to German and other banks contracting investment deals in DUblin which were illegal in Germany 30%.
    You’ll have to clarify this a bit and show how it adversely affected Irish banks.

    3) Irish Government , bankers and property developers and people for larding up on the gravy train and not paying attention 40%.
    Can’t argue with that at all but I’d put it at 70% at least.

  • Johnny Boy

    Would ROI need to leave the EU completely before it could choose it’s own path?

  • Mack

    Drumlins Rock –

    Exactly – the most pertinent question is how?

    Will be it a sovereign default in 2013 once the EU mechanisms governing this are put in place (along with the other PIIGS) – or will it be the more ethical, correct & proper bank default today?

    It’s different bond holders that will get burned. In the former it’s holders of Irish sovereign debt, who were not gambling on the Irish property bubble – in the later it’s the European banks who were..

  • Mack

    Dan O’Brien sums things up very nicely –

    http://www.irishtimes.com/newspaper/opinion/2010/1203/1224284678673.html

    A battle between ‘impatient purgists’ and ‘cautious gradualists’. That does at least hold some hope for fairness at a later date (with the ‘cautious gradulists’ focused on the Euro’s survival rather than fairness for now). And the ECB does appear to be intervening in the bond markets at the moment.

  • Mack

    Also Donal Donovan argues we need a co-ordinated approach, not a unilateral one –

    http://www.irishtimes.com/newspaper/finance/2010/1203/1224284677053.html

  • Greenflag

    Mack ,

    A good article by Dan O’Brien which as you say sums up the current state of the game . Two points there are 82 million Germans not 90 . Also it’s not in Germany’s national interest to see the euro ‘disappear’. If they were to return to the Mark under present circumstances it would be revalued upward thus bringing to an end Germany’s export led growth . At least for the short to medium term it would be case of shooting oneself in the foot ,

  • Alias

    “Would ROI need to leave the EU completely before it could choose it’s own path?”

    Yes. It doesn’t have the level of sovereignty that would be required to operate outside of the EuroZone if it was still inside the EU. Unlike other member states who are inside the EU but outside the EuroZone, once you enter it you can’t leave it since those other states don’t require the sovereignty to avert panic measures that are not applicable to them, e.g. redenomination of debt from euros to punts, defaulting on debt, measures to prevent capital flight, restrictions on trade, etc.

    As the euromuppets who blame a failure of Irish central bank regulation for the failure of the EU monetary system curiously don’t like to note, the Irish central bank is part of the ECB and “shall act in accordance with the guidelines and instructions of the ECB.”

  • Alias

    “And the ECB does appear to be intervening in the bond markets at the moment.”

    Actually, it has been doing that since May. Another curiously overlooked fact in this debate is that the ECB is in no financial position to be engaging in de facto quantitative easing and that this reckless behaviour is simply adding to the sovereign debts of the member states that are shareholders in the ECB (since these debts will default to the shareholders when the ECB collapes).

    The most recent consolidated financial statement of the ECB reveals that it is dangerously overleveraged, and in no position to bail-out anyone when it will soon be in need of a bail-out itself.

    It has liabilities of 1,878,979 million euro and capital reserves of 78,191 million euro (a whopping great leverage ratio of 24).

    http://sdw.ecb.europa.eu/reports.do?node=100000129

  • Alias

    Incidentally, the UK is a 14% shareholder in the ECB so it’s taxpayers will be presented with a sovereign bill of 263 billion when the ECB collapses.

  • Davros

    Irish default is a 100% certainty. Debt that can’t be paid, won’t be paid.

  • Greenflag

    Mack,

    The Great Vampire Squid ( Goldman Sachs ) has it’s tentacles everywhere 🙁 Other smaller squids don’t baulk at selling out and undermining the very democracy that has allowed them to accumulate vast wealth . Selling the USA to ‘undemocratic ‘ regimes and Russian gangsters is okay under the ‘no ‘rules of anarchic capitalism

    Here’s the 5 pager excerpt http://www.rollingstone.com/politics/news/17390/222206

    short excerpt ,


    Matt Taibbi’s unsparing and authoritative reporting on the financial crisis has produced a series of memorable Rolling Stone features. He showed us how Goldman Sachs, that “great vampire squid”, played a central role in creating not only the housing bubble but four other big speculative booms that filled its coffers while wrecking the American economy. He explained how Wall Street banks cooked up schemes that helped decimate municipal budgets and cost countless jobs, and how Wall Street lobbying led to a financial reform bill that won’t prevent another meltdown. Taibbi builds on that eye-opening work in his new book, Griftopia: Bubble Machines, Vampire Squids, and the Long Con That is Breaking America, due out from Spiegel & Grau on November 2. In this exclusive excerpt, he describes how our cash-strapped country is auctioning off its highways, ports and even parking meters at fire sale prices — and finding eager buyers in the unregulated sovereign wealth funds of oil-rich Middle Eastern countries.’

    Goldman Sachs & Bank of America & Citi Group are now bigger than they were back at the time they were considered ‘too big to fail ‘

    As the unemployment numbers continue to increase in the USA and as the Republicans are more focused on ‘deficit reduction ‘ while maintaining two wars and possibly another one or two overseas (North Korea & Iran ) we should manage to reach the economic abyss of the 1930’s long before we reach 2020 🙁

    The economic policy makers are LOST between trickle down insanity and Keynesian assumptions which are not finding traction in a globalised -open market and more particularly very open international bond market . The drive for ‘capital ‘ efficiency in terms of a return is leading to a western world of capital (in the broadest sense ) redundancy .

  • Greenflag

    Question ,

    What has happened to the facility whereby you could reply to a comment -directly under said comment to address a specific point or add on some fact which was missed out ? Now you have to reply to a specific comment twenty posts further back which then interrupts other posters later comments ?

    Is it just me who finds this irritating or is there a way out ?
    Normally I reply to every post directed at Greenflag but I may have missed some in the past few days due to this new ‘format’ ?

    And why at the top of the page am I given the ‘tweet’ ‘facebook’ , I think options of ‘Gefaellt mir’ (like it) Einer Person gefaellt das (one person likes it ).

    Now I realise we have issues with the Eurozone -ECB at the moment but is the German add in on slugger one of the conditions laid down by Frankfurt or Berlin .

    If so might I remind the ‘authorities’ we serve neither king nor kaiser or at least that was the whole point of the exercise ;)?

  • Mack

    If you are seeing it in German, Facebook thinks you are German for some reason. Are you using a German ISP? Or connecting via proxy, VPN in Germany? Also check your browser settings..

    Agree about the lack of reply to function..

  • pippakin

    Greenflag & Admin

    I have been wondering about the lack of a reply option. The old numbering system at least had the advantage of allowing people to quote the number of the comment as well as the name of the commenter if they chose.

  • Greenflag

    Mack & Pipp

    Thanks for the replies . As far as I’m aware I’m not German and have no desire to be one either 🙂 Am not using a German isp nor is any VPN monitoring my posts from the ECB I trust or maybe I should’nt . Must’nt start to get paranoid 🙁 I sometimes use German TV news websites to get the ‘original ‘ news on some topic or other but then I also use other EU websites as well – .

    I hope the admin on slugger have a look see at the lack of a reply option . I can’t imagine any benefit from dropping it ? Perhaps it’s only available to those who are no longer anonymous ?

    BTW – Griftopia – Matt Taibbi’s new book is a scary read . A bot late for Halloween but may be just the job for anybody who needs no cheering up this Christmas 😉

  • Alias

    The financial problems created for EU member states by the ECB and its single currency experiment and the difficulties that the ECB now finds itself in have nothing to do with Goldman Sachs. In fact, the problems wouldn’t exist at all if the ECB and the EC did not exist.

    The ECB promoted expansionist monetary policies for the express purpose of stimulating economic growth by increasing the amount of money in circulation. This increase in the money supply was to come from financial institutions leveraging their assets, and the EC duly relaxed the applicable regulation via the European Capital Requirements Directive to allow the financial institutions to leverage to insanely high levels. The public were encouraged by the ECB to borrow this leveraged capital and to squander it on goods and services by the simple expedient of the ECB setting the policy rate at a nominal 1%. In other words, the EU deliberately flooded consumers with cheap credit in order to boost the output of countries such as Germany (which supply the bulk of the EU’s funding).

    That created a mountain of debt within the EU, with EU countries now claiming 15 of the top 20 places on the world’s most indebted countries list (and with those 15 EU countries now having a combined external debt of 40 trillion US dollars). In contrast, most of the world’s 193 countries that did not pursue reckless expansionist monetary policies now enjoy modest levels of external debt and growth prospects that are not limited by the need to divert income from consumer spending into servicing debt accumulated by previous consumer spending and the availability of cheap consumer credit.

    And the massively overleveraged ECB debt problems are substantial. Its assets, with the exception of its metal reserves, are worthless junk bonds and loans to the ESCB that will all default when it collapses. Even its metal reserves are subject to mark-to-market valuations so they will decrease dramatically in value when liquidised. The debts of this failed political project will all default to its shareholders (the member states) as sovereign debt, and will be added to the debt problems that the policies of said failed political project have already created for those states. In fact, this is already occurring with the ECB looking to offload its junk bonds to the EFSF.