| 11.2°C Dublin

Sovereign debt default would lead to 'financial armageddon', says author

A DEFAULT by Ireland would be a disaster for mortgage holders and those with deposits in the banks, a new book points out.

A default -- where the country unilaterally fails to pay its sovereign debts -- would mean a run on the banks, and the end of tracker mortgages.

It would also likely lead to higher charges for all banking services, the close-down of all lending, and Government-imposed restrictions on taking money out of banks and moving funds outside the country, according to a chapter by Karl Deeter in 'What if Ireland Defaults?'.

The book, edited by Trinity College academics, has sold out in some Dublin bookshops and on Amazon just a day after its launch.

In a chapter looking at what would happen for consumers if Ireland walked away from repaying its debts and returned to the punt, the mortgage market would be all-but defunct.

A credit contraction would occur that would make the 95pc drop-off in mortgage lending seem tame by comparison, Mr Deeter writes.

"If we default, mortgage credit evaporates," he writes. "In the meantime expect to pay more for less, with higher charges on all aspect of finance."

Irish property prices would fall again, despite one of the worst property collapses the world has seen. The property plunge would lead to "total household wealth destruction for a lot of people," he wrote. Deposits would fly out of banks, creating a second banking crisis.

The 400,000 people on trackers would lose their sweet deals, and standard variable rates would rise even more in this "financial armageddon" situation.

"A sudden spike in these (tracker) rates would be crushing; banks have the legal right to de-peg trackers from the ECB base rate if it is no longer an acceptable reference rate," according to the book.

All of this would lead to a situation from which many people would never bounce back. "Simply put, if devaluation and default were as attractive in practice as they are on paper everybody would be doing it," according to one chapter.

'What if Ireland Defaults', is published by Orpen Press.

Indo Business