Tuesday 10 December 2019

Default is not a magic bullet -- we still have to deal with pain

Emmet Oliver

No political conference, economic workshop or trade union annual gathering is now complete without a conversation about sovereign default over the coffee cups.

This week Jack O'Connor, the ICTU chief, gave an exhibition of acrobatics by telling his members ICTU was not in "favour'' of a default, but it may come to a fork in the road where it would "support'' a default.

It seemed a strange comment in the sense that a default will happen regardless of whether Mr O'Connor favours it or not. The financial logic will either support a default on sovereign debt or not, nobody can call such an event into being, apart from maybe the European Central Bank.

As the annual budget process gets under way, the plans by Michael Noonan to take €4bn out of the economy are already starting to scare the public and the vested interests.

The argument voiced in opposition is increasingly, let us default and let us default now.

It is a slogan for our apprehensive age, but increasingly it means that all other debate (like the mix between tax and expenditure in what the Government is doing or the future of the banking system) is regarded as irrelevant. You are either a defaulter or a non-defaulter and your views on the economy are defined in these stark, but ultimately meaningless, terms.

Defaulting tomorrow, proactively and unilaterally, does nothing to deal with Ireland's €18bn gap between taxation and expenditure.

Of course once a default happens, all lending would be cut off, making a balanced budget an overnight necessity, but is anyone really promoting this dramatic form of overnight frontloading of all the pain? Certainly not anybody dependent on public services or public assistance.

Ireland is going to run a budget deficit by year end of 10pc of GDP, the Government tells us. This will be higher than Greece, Spain, Portugal and, yes, Britain. It will be more than double the eurozone average. The reason it is so large is a hollowed-out tax base and public expenditure numbers which are entirely out of kilter for an economy of this size.

A default doesn't impact on these core imbalances. Yes, the stock of debt gets cut back -- by up to 50pc suggests Citi -- in a default scenario, meaning that more borrowing can be taken on to fund this deficit, but nobody wants to default just to allow them to borrow more money to fund continued unsustainable spending.

The bond market will simply look at Ireland post-default and point out, quite rightly, that the country is still heading in an unsustainable direction due to a budget deficit that is out of control.

While nobody "supports'' a default, in the sense that they want to see such an event happen tomorrow, the only reason to take such a step is re-enter the credit markets at affordable rates and cast off the IMF/EU lenders. That still won't be possible if the core imbalances Noonan is trying to tackle are not addressed this December and beyond.

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