The Debt Default Option

It is one of the ironies of the current crisis that some of the most radical proposed responses are coming from relatively mainstream economists – both Irish and international. By Andy Storey

David McWilliams, for example, has explicitly called for a default on Irish debt in the following terms:


"We are witnessing a monumental struggle between the innocent average Irish person and the guilty creditors of the bust Irish banks. [R]ather than force the ECB to account for its own monumental culpability in allowing out-of-control German and French banks to lend recklessly to Irish banks, the Irish negotiators turned sides and acted as debt collecting agents of foreign banks. So the very banks that should be punished for their failures are being bailed out by the Irish citizens and, worse still, they will get paid more interest from us in the loans they are now extending to us, to save themselves."

Wolfgang Munchau, a columnist with the Financial Times, calls on Ireland to revoke the full extent of the bank guarantee (depositors would still be protected) and to oblige all bondholders to convert their claims into equity stakes in the banks. Munchau then calls for the debt to be restructured on the basis of reasonable economic growth projections – and if this means that European banks and the ECB end up with some losses then "Let the German government pay for the German banks, and for the recapitalisation of the European Central Bank." Munchau acknowledges that that this could pose problems for institutions such as pension funds on which ordinary citizens depend (this is discussed further below), but argues that such problems are preferable to dumping the entire 'bailout' cost on the Irish people:

"A default would cause havoc, no doubt, and would cut Ireland off from the capital markets for a while. But I would suspect that the shock would only be temporary. With a more sustainable level of debt, and the benefit of a real devaluation, Ireland should be able to pull through this. Once the market recognises that solvency is assured, I would bet international investors would once again be willing to lend. Even Argentina was able to gain funding from investors a few years after its default."

This is also the position adopted by Trinity College economist Constantin Gurdgiev:

"Morally, the idea of underwriting banks' debts with taxpayers' money is simply an antithesis of a civilised functioning democratic society. But forget morality. Economically and financially, the proposition that the levels of debt – well in excess of 150 per cent of our national economy as measured by GNP – can be sustained in the medium term is so out of touch with reality that those espousing it betray deeply rooted ignorance of simple principles of finance. [We need to push] an 'erase' button on our unsustainable debts. Far from triggering a panic in the markets – a panic that is currently already running like a wildfire due to the unwillingness of this Government to deal resolutely with the debt crisis – the orderly restructuring will most likely lead to a gradual, but fast-paced restoration in our own and markets' confidence in the future of this country."

Why then, in the face of such compelling arguments, is the default option not seriously on the political agenda? Three reasons can be adduced.

1. Ireland would be isolated from international markets

The first is that Ireland would be isolated from international financial markets and be unable to raise the funds to keep basic state services running. Thus, Minister of State at the Department of Finance Martin Mansergh claims that any diminution of bondholder claims would generate "unpredictable and cataclysmic consequences." Donal Donovan claims that Argentina was only able to 'get away' with default because it had an independent currency that could be devalued and because the primary commodity exports on which it depended fortuitously rose in value in the wake of the default.


The possibility of Ireland leaving the eurozone, re-establishing an independent currency and devaluing it against the euro should not be dismissed, and the idea of a 'progressive exit' from the eurozone has in fact been proposed as a response to the crises in Greece, Portugal and Spain.

And Ireland, like Argentina, could also enjoy a boom in primary commodity exports if action was taken to ensure that the state had a proper stake in the Corrib gas field and other natural resources – estimated to be worth in excess of €400 billion – coming on stream off the west and south coasts of the country. In any event, the idea that the markets would 'punish' Ireland for a partial default is undermined by the fact they are currently punishing Ireland (through exceptionally high rates being charged on Irish bonds) for trying to service an unsustainable debt.

2. It would be unjust to lenders for Ireland to default

A second argument against default is that it would be in some sense unjust – the debt now owed is largely owed to agents who lent to Ireland (and its banks) after the bank guarantee was issued, while the bondholders of Anglo Irish Bank and others at the time of the guarantee have already been paid off. For example, it has been claimed that a €7.9 billion payment was made on the 30th of September 2010 to Anglo Irish Bank's senior bondholders using an ECB loan.


If it is true that this payment was made to Anglo Irish Bank bondholders – and it is a scandal if it is – then a simple solution suggests itself: the bondholders at the time the guarantee was issued should be identified and levied to the amount that they would (and should) have lost out on had a proper debt restructuring then taken place. The think tank TASC has already proposed that the ECB should tax European banks as part of the alternative to the Irish 'bailout'.

3. Irish People would suffer as a result of a default

A third argument against default is that Irish people would suffer as a result because at least some of the bond holders who would get 'burned' are Irish banks, pension and insurance funds. Economist Antoin Murphy asks the question: "Does the Irish public wish for such a result that would shift the problem to their pensions invested with the pension funds and insurance companies?"


Part of the answer must be: yes, why should those who had the money to invest in private pensions, for example, be protected while people receiving social welfare are pushed into penury? But part of the answer here must also be another question: which Irish pension funds are we talking about and how much money is at issue? The answer to that latter question is, remarkably, that we don't know. Donal Donovan notes that "details on the institutional composition of the bondholder category have not been made available publicly, probably because of data problems and confidentiality reasons". This is nonsense – we need to know who this money is owed to and the terms on which it was lent (for example, was it before or after the bank guarantee was issued?)

A first step in a default should be the establishment of a debt audit to determine the precise sums and actors involved – and until that audit is completed, all debt repayments should be suspended (which itself would be an incentive for the creditors to co-operate with the audit). The Irish state, we are assured, is fully funded until the middle of next year so we have plenty of time to do this. This initiative would mirror comprehensive debt audits that have been carried out throughout the 'Global South', including the official debt audit commission established by Ecuador in 2007 to assess the legitimacy (or lack of it) of historical lending to that country.

Thus, the stated reasons for opposing a debt default do not stand up to scrutiny. But the real reasons are very different to the stated reasons. As Lapavitsas et al have observed in relation to the Greek 'bailout' of May 2010:

"Although the rhetoric of European leaders was about saving the European Monetary Union by rescuing peripheral countries, the real problem was the parlous state of the banks of the core. The intervention was less concerned with the unfolding disaster in Athens and more worried about European (mainly German and French) banks facing a wave of losses and further funding difficulties."

Greece's debt burden is as unsustainable as Ireland's. A recent report by Citigroup plausibly argues that at the end of Greece's three-year 'adjustment' period, debt restructuring will still have to take place – but that, by then, at least half the debt will be owed to the EU and the ECB.

In other words, the private institutions will have gotten off the hook to a significant extent and the write-downs will be largely borne by the public sector. This is the same logic driving the Irish 'bailout' – the privatisation of profits and the socialisation of losses. It is a logic that must be resisted – radical opposition to the EU-IMF intervention, and to the government's cutbacks, must demand a debt default and not just a reorganisation of which sectors of society should bear the cost of debt repayments. In the words of the Italian playwright Dario Fo, we need to insist that we "can't pay, won't pay" – and shouldn't pay.