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More default considerations

From Elaine Byrne in today’s Guardian:

So, is default the answer?

The repayment on the 5.8% interest of the €85bn bailout alone will amount to 20% of annual tax revenues. The severe fiscal austerity measures, including the contentious €1 reduction in the minimum wage, will never be enough within a framework of a fixed exchange rate.

This method of internal devaluation, or the attempt to “buy more time” has merely kicked the issue of default down the road. As Paul Krugman suggested: “It’s hard to escape the sense European policymakers are just completely out of their depth.”

The problems caused by an incredible transfer of privately accumulated debt into public hands is most acute in Ireland, but it is now a European concern. Yet, when the Irish delegation negotiating with the EU-IMF raised this issue, “the Europeans went completely mad”, according to a senior government source quoted by the Sunday Independent. Sovereign default is not been considered by government as a policy option. The reputational damage from such an event, as in the case of Argentina, may last for decades in the international markets.

On RTÉ radio’s Morning Ireland, Ajai Chopra, the head of the IMF mission to Ireland, left the door open to senior bondholders taking a significant hit. “We have to see how this programme evolves. Various options will need to be kept on the table and we just have to see how things go.”

Irish people have a deep and traditional sense of moral duty when it comes to repaying debts. That sense of obligation may not hold, however, when the responsibility for prolonged austerity is due to poor policy decisions, such as the Irish government’s September 2008 blanket guarantee, the straitjacket of euro membership and a political unwillingness to burn senior bondholders.

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