Tuesday, March 15, 2011

Ireland threatens default

The new Irish minister of European Affairs, Lucinda Creighton, has hinted that unless Brussels helps to make the debt burden bearable for the Irish people, the Republic may default. 

This is one of those cases where owing a lot is "beneficial" for the borrower because surely Greece or Portugal, with much smaller foreign debts than Ireland, do not hold any similarly strong bargaining position. Ireland owes (to German and British banks mostly) almost as much as Spain, even if it is 10 times smaller in terms of population and almost the same proportion by GDP, what is really a big problem but not only for the Irish (after all, the indebted banks were mostly foreign-owned).

While a conjectural collapse in Spain would cause much more damage to the European real economy (as this is described, even if only approximately, by GDP) than a collapse in Ireland, a default by Ireland would be quite as bad for EU finances (virtual economy) as a hypothetical default by Spain. 

Of course, the creditor states may want to send the thugs (a military intervention of some sort) but that's not any realistic option, as it would only make things worse. It's no doubt a lot cheaper to devalue the euro and to allow the ECB to directly lend to the states, so they can maneuver with greater flexibility than they have now under the stringent euro policies.

However, as some commenters at the ultimate source of this news for me, Naked Capitalism, say, the ultra-low Irish tax policies are perceived by other EU states as dumping and certainly not helping at all to pay off the debt. It is not easy to demand comprehension when you are not even taxing business properly.

But it is clear that Ireland did not need to assume the private debts of toxic banks (it should have never done that: if you nationalize a toxic company, do always after bankruptcy is declared, not before, so creditors have to put up with their willfully assumed risks and not the public) and that therefore the EU should be offering credit to the Republic at the same rate that it does to private banks (i.e. near 0%) and not at an abusive 5% rate, which is a total scandal.

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