“The problem is much more a pragmatic rather than a moral one”

In the Irish Times, former deputy director of the International Monetary Fund, Donal Donovan, provides a timely, and useful, analysis of the various parties’ positions on the €85 billion IMF/EU bail-out ahead of the Irish general election.  Here’s what he has to say on “burning the bondholders”.  From the Irish Times article

A major element in all parties’ programmes is the call to renegotiate the debt owed to bondholders. Implicit in the tone of the Fine Gael and Labour (and even more so Sinn Féin) positions is the idea that the MoU can be adjusted so as to achieve this objective.

There are two aspects to this. First, as Fianna Fáil has rightly argued, because Ireland is in a currency union, the matter could only be addressed jointly with our euro partners. Those suggesting that this be approached with some caution have been inaccurately and unfairly portrayed as wanting simply to protect the interests of “greedy banks”. In fact, restructuring has quite often been a component of the resolution of debt problems in the past with the full involvement of the IMF (Mexico in the early 1980s is a good example).

The problem is much more a pragmatic rather than a moral one – to try to determine whether and when a solution can be identified, within a euro-zone-wide context, that strengthens the stability of the overall financial system and encourages associated existing and future flows of credit. The latter matters crucially for countries like Ireland and Greece who will be contemplating a return to the market at some stage. Various possible approaches are being explored currently. Rather than seeing this as primarily a matter of negotiation between Ireland and the EU, the most effective role for the new Irish government would be to contribute constructively to the debate on how to meet these common objectives.

Sinn Féin’s approach, however, is different in that it advocates a unilateral default, à la Argentina or Russia. However, these countries were not members of a currency union. After having been shut out of international financial markets following the default, they could – and did – print their own money to finance any emerging budget deficit. It can certainly be argued that a logical consequence of the Sinn Féin position is abandonment of the co-operative approach and even of the euro itself.

A second aspect (not touched upon by any of the parties) concerns how much could the budgetary savings from a bond restructuring operation actually turn out to be. Both the Central Bank and the European Central Bank have provided massive financing to Irish banks and some of this funding was lent to enable banks to repay not only deposits but maturing bonds. Thus some of the bond holders may have escaped a possible restructuring net. [added emphasis throughout]

Read the whole thing.

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