I get a nose bleed trying to understand the whole bond market thing, but there seem to be certain realities behind everything which need to be understood:
1. Everything is connected. Of course we should tell the bank bond holders to get stuffed. They took a calculated commercial risk, and came a cropper. It’s called capitalism. Get used to it. But the problem seems to be that if we do that, we may do a Lehmann Bros on them and bring them down, which could bring down other banks (who they owe money to) across the EU and elsewhere. The truth is, we don’t actually seem to know what will happen, and so are basically doing a Micheal Caine at the end of The Italian Job. Hang on lads, nobody move, I’ve got an idea.
2. It’s all about money. We’re borrowing to stabilise the banks, as above. But we are also borrowing money to fund our services in excess of our own tax revenue. That’s what I find odd about the “F**k the EU/IMF” crowd. They’re very vague about what we do after giving them the finger. They say tax the rich, but the rich (and the middle classes with savings) have already moved their money offshore. So what do you get? Confiscate their houses? To do what with them? Add them to the National House Mountain? Where do we get the money to pay nurses salaries when our borrowed funds run out in June 2011?
3. We probably will default on the banks eventually, and it won’t be anywhere near as big a deal as we think, because by then our public finances and economy should be hopefully on the mend, although it still threatens other non-Irish banks. People seem to think that we default and refuse to pay anything, but that’s not true. We’ll restructure our debt, that is, renegotiate what we are willing to pay (something businesses do all the time) do a bit of a haircut, and carry on. The only thing about defaulting is that it may become harder to borrow money, but given that the markets have priced themselves out of our price range anyway, is that such a big deal? It will lead to a fall in our standard of living, as we have to finally live within our (and the IMF/EU) means, but that’s just a giant big slice of reality pie, and not necessarily a bad thing. It’s important to remember that there is a distinction between sovereign debt raised by the state, which we probably won’t default on, and bank debt which we did not raise in the first place, and the markets will eventually have to recognise that, even though we made bank debt sovereign.
4. The Euro is a high but worthwhile price for stability. There’s a lot of talk of us leaving the Euro, or the Euro breaking up. This is the frontline, and we need to realise that this is where we decide what happens to the next decade of life in Ireland. The pros of leaving are that we could devalue, but that would be matched by an equally seismic leap in the cost of living and manufacturing costs caused by our import purchasing power dropping, and the possible need for high interest rates to stabilise the New Punt. In the long term, could we survive it? Possibly. But the bigger issue is the danger of the Euro breaking up, with a new Deutschmark soaring, and everyone else plummeting, and the German export-driven economy, the engine of Europe, being crippled in the process. Germany would suck in imports, which would be good for us, but would its inability to export bring demands for protectionism to protect German jobs? Would we be, in fact, just be exchanging one set of problems for another? It’s just not worth the risk.