Tuesday, 19 October 2010
Reassuring the markets
Slí Eile: ever wonder who we are consoling on world markets? There is a school of thought which claims that we should so shock the markets with such a larger than expected or demanded fiscal contraction that we can turn the corner. This sounds like WW1 'last push and we are there lads' approach. We will be home by Christmas. Well here is a guide to the Turkeys here. I cannot vouch for the accuracy of this. Readers and bloggers might advise.
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The reason put forward for not imposing at least a haircut on the bondholders is that they would then be less likely to invest in the Irish economy.
Leaving aside the reaction of a debt ratings agency to such an imposition (which obviously would have a bearing), I would tend to disagree. Investment bankers are not like school children which, if you offend then, "aren't going to be your friend anymore". Rather, each investment decision is taken at an extreme (and cold) level of rationality. High interest rates incorporate a premium for high risk of default. Is an investment in Irish sovereign debt after such a haircut more or less safe? Surely the answer is more safe, as on a financial basis, you're less encumbered, and therefore less likely to default again.
A problem with this is that it has never, to my knowledge, truly been tested. Outside of overall sovereign default (which is not as uncommon as one might think), I don't know of a government guaranteed financial institution which has held a creditors meeting.
Any prolonged advance discussion is obviously going to increase the risk premium in anticipation of a default, therefore is to be avoided. Any such creditors meeting needs to be definitive.
Lance the boil.
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