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Column The Irish default debate will be long – but we have to start it now

Economist Constantin Gurdgiev describes his work on a new book asking the question: What would happen if Ireland walked away from its debts?

DECADES FROM NOW, historians will take over from the economists arguing the merits and costs associated with the policy decisions that the Irish government has pursued since summer 2007, when the first waves of the global financial and economic crises hit the shores of the Emerald Isle.

From the economics point of view today, there are significant points of agreement on both the causes of the economic collapse and the likely consequences of it. No economic analyst in this country or beyond its borders would suggest that the costs of simultaneously bailing out the banking system, carrying out a rebalancing of public finances, sustaining private households and deleveraging banks – while dealing simultaneously with a global and domestic recession – will be easily bearable or short-lived.

The exact path that the country is going to take in achieving these tasks is, however, a matter of significant debate. This debate spans the economics profession, politicians, and society overall. It also covers a wide range of topics. Yet none are as contentious and as consequential as the issue of the national default.

What if Ireland Defaults is a volume of collected essays that is the first attempt to systematically collate different views on the situation we find ourselves in today and the likelihood of the need for some restructuring of the Government and non-State debts in the future. The essays, written by 22 authors, map various economic and political aspects of the default, and historical experiences with sovereign and local authority defaults in various countries, as well evidence on whether Irish default is an inevitable reality we should be preparing for, or an avoidable and undesirable construct of some ‘trigger-happy’ economic commentators.

‘Neither one of us thinks that Ireland’s recovery is going to be painless’

The book was designed to reflect both the intellectual diversity of views, and the emotional range of the analysis that characterises this debate in the real world.

To me as the editor and the author, our editorial approach to presenting the debate is exemplified by the juxtaposition of my own argument (presented in the chapter Debt Restructuring in Ireland: Orderly, Selective and Unavoidable) and an excellent contribution by Seamus Coffey of UCC (titled Ireland’s Public Debt – Tell Me a Story We Have Not Heard Yet).

Both of us largely agree on the path to the current situation taken by Ireland, as well as on hard numbers describing the predicament we face as the nation. We use differing methodologies in painting the portrait of the nation in severe debt overhang, but neither one of us thinks that Ireland’s recovery is going to be painless.

From the readers’ perspective, I hope, this should both enrich the understanding of the debate and provide a stronger factual base to deciphering the real differences in the way national and private finances and economic parameters can be presented and interpreted.

We distinguish between sovereign, national and private defaults – a matter that causes much of confusion in the general media, but that is vital to this debate. A sovereign default is, by and large, a default on state-issued debts, such as Government bonds. A national default is a default on those instruments that are issued by the state-owned and / or guaranteed by the Government. Private default is an event of restructuring private companies’ or banks’ debts or the debts of households.

‘This is not a silly parlour game’

In addition, we also de-alienate broadly defined default scenarios, ranging from an abrupt, unstructured, non-cooperative default to a structured, negotiated restructuring event that is coordinated with other interested parties, such as for example the European Union and its member states.

We agree that both an unstructured and a structured sovereign default are undesirable and avoidable in the case of Ireland. Where we differ significantly is in the exact outcome of the debt restructuring that should take place in the banking and household sector, if Ireland were to be in the driving seat of history enabling it to structure own debt resolution measures. We also differ on whether debt restructuring in the private sector, especially the sector linked closely to the Government, namely the banking, is inevitable.

This is not a silly parlour game of academics removed from reality. Economics and finance are not exact disciplines where an experiment carried out in a controlled lab environment can be replicated repeatedly to yield the same outcome time and time again. Social sciences are full of ambiguity, driven by uncertainty and ultimately have to deal with the infinitely varied and unpredictable world we shape individually, socially, culturally, and institutionally.

For this reason alone, there always will be debates about the big issues surrounding this historically unique crisis. Decades after the pain of this crisis is left behind our children’s lives, in years to come after Ireland recovers and gets back to growth and prosperity – and these times will come – the debate about the default will continue, no matter whether the default will take place and no matter what form it might take. In What if Ireland Defaults we stake the first claim to that debate, fully knowing that more will come in our authors’ footsteps.

Constantin Gurdgiev is one of the editors of What If Ireland Defaults, published by Orpen Press, along with Brian Lucey and Charles Larkin. He is a lecturer in finance at Trinity College Dublin.

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