Bust Is Better Than a Bailout, Iceland Is Better Off Than Ireland [Updated]

Here are some reports and opinions about why Ireland (and Greece, and all the other countries lining for IMF/EU/etc. bailout) should default instead of mortgage their country and the next generations.

Bust Is Better Than a Bailout for Irish Patient: Matthew Lynn
Nov. 23 (Bloomberg) -- It’s not too late. The request for aid may have been made. The negotiations may have started. But Irish Prime Minister Brian Cowen can still refuse a bailout from the European Union and the International Monetary Fund.

[...] But the decision the Irish make in the next few days will shape the future of their nation for a generation.

Ireland would be better off going bust than taking a loan. The conditions attached to a rescue aren’t worth it: Once it takes EU money, it will never get off the hook. And the Irish banks aren’t worth saving anyway. Defaulting on your debts is a far less scary prospect than usually portrayed.

The real question is whether Ireland’s politicians have the courage to take that step.

Last weekend, the Irish surrendered to pressure to accept an EU- and IMF-led package, similar to the deal hammered out for Greece earlier this year.
True, that would cause chaos in the bond markets. Trading in Portuguese, Spanish and Italian debt wouldn’t be a pretty sight for the few days after rescue talks collapsed. But the Irish should still say no.
Even if it isn’t explicitly part of the rescue deal, Ireland will come under pressure over the next few years to raise its corporate taxes, which take companies, government revenue and jobs from Ireland’s neighbors. [...] Low taxes and an open business culture are what made Ireland successful. You don’t cure a sick patient by taking out a lung.

Second, the EU-IMF rescue looks like financial methadone. It numbs the pain and gets you off drugs, but it’s addictive. The cure can be worse than the disease. Months have passed since the Greek bailout, and there isn’t much sign of Greece accessing the capital markets. The yield on Greek bonds remains more than 11 percent. It’s a “Hotel California” package: You can check out anytime you like, but you can never leave.

Third, this is mostly about rescuing EU financial institutions. It is the Irish banks that are in trouble, and if they go down, it will cause massive losses at other European lenders. But why should the Irish people worry about that? If French, German or British banks suffer big write-downs, let their governments deal with them. Ireland could just close its banks -- such a small country doesn’t need its own finance industry any more than it needs its own carmakers.
Fourth, Ireland risks tipping into an economic spiral. A key to the Irish economic revival of the last 20 years was reversing emigration. For a century, young Irish people went abroad to make their careers. When they started staying at home, it was a boon to the economy. If a generation is saddled with these debts, why not move to London or New York where the prospects are better? It’s already happening: Emigration is exceeding immigration for the first time since 1995. It will be the most highly skilled, energetic people who leave. How exactly is that going to help the nation recover?

Five, going bust isn’t so bad. Russia and Argentina defaulted on their debts. It wasn’t the end of the world. The financial markets portray it as a catastrophe, but that is mainly because bankers and bond investors stand to lose a lot of money. So long as it is done in an orderly, structured way, a default is often the best solution to a financial mess.
If it defaults on its debts, Ireland can bounce back fairly quickly. If it accepts an EU bailout, it will be stuck in recession for a generation.
Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a forthcoming book on the Greek debt crisis. The opinions expressed are his own.

Iceland Is No Ireland as State Kept Free of Bank Debt
Nov. 26 (Bloomberg) -- Iceland’s President Olafur R. Grimsson [...] said “The difference is that in Iceland we allowed the banks to fail,” [...] “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”
As a consequence, “Iceland is faring much better than anybody expected,” Grimsson said. The Icelandic state’s liability on foreign depositor claims stemming from Icesave accounts at failed Landsbanki Islands hf should be put to a national referendum, he said.

“How far can we ask ordinary people -- farmers and fishermen and teachers and doctors and nurses -- to shoulder the responsibility of failed private banks,” said Grimsson. “That question, which has been at the core of the Icesave issue, will now be the burning issue in many European countries.”

[...] Iceland is relying on a $4.6 billion IMF-led loan to rebuild its economy. Grimsson said today the government may not need the entire amount.

[...] “The taxpayer has no realistic prospect of being able to save their banks, such is the magnitude of their bad loans and their extraordinary dependence on central bank support,” wrote Michael Derks, chief strategist in London at foreign-exchange firm FXPro. “Both junior and senior bondholders in these insolvent banks need to suffer huge haircuts,” he said.

Forcing bond holders to “share the burden,” may help the euro region remain intact, Derks wrote.
Kaupthing Bank hf, Landsbanki and Glitnir Bank hf failed within weeks of each other in October 2008 after they were unable to secure short-term funding. The banking crisis led to an 80 percent slump in the krona against the euro offshore, until the slump was stemmed by the introduction of capital controls at the end of 2008.

Kaupthing’s winding-up committee today said it finished dealing with claims lodged against it. The bank is dealing with a total of 28,167 claims filed by creditors across 119 countries totaling 7.32 trillion kronur ($63 billion), it said in a statement today.
Iceland Bankruptcy-to-Rebound Reveals Models Ireland Won't Take
(Bloomberg, 2nd of Dec) Iceland is betting its decision two years ago to force bondholders to pay for the banking system’s collapse may help it rebound faster than Ireland.

Iceland’s taxpayers face a smaller debt burden than their Irish counterparts, where the government’s guarantee of the financial system in 2008 backfired this year when the banks came close to insolvency. Iceland’s budget deficit will be 6.3 percent of gross domestic product this year and will vanish by 2012, compared with the 32 percent shortfall in Ireland, the European Commission estimates.
In 2009, the joke was: What’s the difference between Iceland and Ireland. Answer: One letter and about six months. “Almost two years on, the joke is on the jokers,” Krugman said in a Nov. 24 column published in the New York Times. “At this point, Iceland actually looks a bit better than Ireland.”
Iceland, which started EU accession talks this year, is experiencing a “durable recovery” that is “forecast to pick up steam” next year, the IMF said in an October report. Iceland’s government says it had no choice but to let the lenders fail. Before their collapse, the banks had debts equal to 10 times Iceland’s $12 billion GDP.
European banks had $509 billion in claims against Ireland at the end of June, Bank for International Settlements data show. 
Irish Debt Default Would Be Far From Armageddon: Kevin Hassett
Dec. 13 (Bloomberg) -- The world’s economic policy makers have talked up a zero-tolerance attitude toward sovereign-debt defaults. For every troubled national borrower, there seem to be a dozen central bankers ready to hand out cash, always to avoid Armageddon.

Earth would be a better place if these bankers were forced to take a remedial course in Christian theology. Then they would stop obsessing over Armageddon, at least until a Messiah appears.

Debtors have failed to make good on their obligations throughout history, and we’re still here. Defaults by financial institutions are, of course, too numerous to count, but governments crash as well. We have a long record to see just how they play out.

According to “This Time Is Different: Eight Centuries of Financial Folly,” the 2009 book by Carmen M. Reinhart and Kenneth Rogoff, there were 238 external debt defaults or reschedulings from 1800 to 2008. Spain tops the list with 13 occurrences in its history, though none since the 19th century.

Today we are supposed to believe that if one small country such as Ireland goes down, the rest of us will too. Yes, the world is more interconnected now than 200 years ago. That doesn’t make every cough a sure sign of pneumonia.

At the risk of understatement, throwing money at a country teetering at the brink of default isn’t how things used to be done.

In 1902, European nations responded to a Venezuelan government debt default with military force. German, Italian and British gunboats blockaded ports, seized customs houses and bombarded a Venezuelan fort. Venezuela caved, agreeing to restructure and pay its debts.

These days, when European leaders see Greece and Ireland on the brink of default, they don’t send gunboats -- they send money. The word “restructure” is taboo. Somewhere along the line it became unacceptable to take 80 cents on the dollar from a debtor nation, but acceptable to give that same nation 20 cents to keep its payments on schedule.

The problem is, once you do that, everyone wants 20 cents.

The theory of bailouts is intricately related to the fear of Armageddon. If investors see Greece go down, the story goes, they might panic and stop lending to other nations, even ones that should be considered healthy. In this view, default spreads like influenza in 1918.

[...] We seem to have become a world in which we assume a panic is around every corner. When markets are irrational, it’s impossible to say what might set them off, and fear of disaster becomes a powerful excuse for policy makers to do whatever they choose.

Economist Vincent Reinhart reviews the legacy of the 2008 Bear Stearns bailout in an article to be published in the Journal of Economic Perspectives. As he points out, the U.S. government, in its wisdom, wiped out equity holders but saved bondholders, and investors began to expect this policy.

Reinhart writes, “This expectation made it profitable to identify the next financial firm to be resolved and then to sell its stock short and use the proceeds to purchase its unsecured debt. If the candidate firm was identified correctly, the debt would appreciate in value and its stock collapse.”

[...] It’s just as bad for countries. Central bank interventions become an excuse to avoid tough choices.
And stop whining about Armageddon.
Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain in the 2008 presidential election. The opinions expressed are his own.

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