Time for a Default?

“There is no reason why Ireland should trigger an IMF or EU-type bailout”, Irish Minister of State for Europe, Dick Roche, told the Today program on BBC Radio 4 this morning. But despite such government protestations, the scale of Ireland’s sovereign debt crisis is such that it seems only a matter of when, not if, the country requests a bail out. Indeed it could happen as early as 5pm this evening.

But is a bail-out such a bad thing? Not if it leads to much needed debt restructuring – or even a full default – it isn’t.

Last week German chancellor Angela Merkel said that bondholders to troubled countries would need to share the pain. Remarkably Irish premier Brian Cowen called Merkel’s comments ‘‘not helpful’’ – but the reality is that Ireland should accept its debts cannot be repaid in full and take the opportunity to make a strong deal for debt restructuring from a position of at least reasonable strength.

And Britain should do the same.

Currently our banks are exposed to zero risk, as the state is using the tax payer to insure against any risk. This is a morally – and economically – wrong situation.

Why reward those who lent recklessly to our banks? Why cripple a country with generations worth of debt?

As more and more people lose their jobs, fall into arrears in their mortgages and begin to repudiate their personal debt the social stigma around defaulting on debts seems certain to change. Many of these bad loans were made in bad faith, and it is the huge cost of shoring up the financial markets – in the UK, Europe and around the world – that has provided the economic (if not the ideological) rationale for austerity.

So what’s the answer? Well fair debt restructuring would be a start, negotiating a reasonable pay off with creditors rather than maintaining the fallacy that all creditors will be paid off in full.

Indeed there is even a strong case to be made for – whisper it – repuditating sovereign debt completely. Look at Iceland, as Irish economist David McWilliams did in a newspaper column a few weeks back. Here our troubled Nordic neighbour defaulted on its debts, closed its banks, and allowed its currency to fall. The result? Lower bond rates than Ireland and a serious increase in quality of life for ordinary Icelanders.

Maybe the difference between Iceland and Ireland really is one letter and six months after all.

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