What happens if we default

[Marcos the black]

Hi
I asked this in the thread about the "leaked" 6.7% interest rate as per 9 o clock news for the bailout. I think everyone is in agreement that we, as a nation, simply cannot afford this. We simply do not have the money, and my instant reaction, along with many others was to say "default, default, default" but in all honesty I don't know what would happen if we did.
I got one reply about Germany in 1922/23 but I was wondering what would the likely impact of a default would be on us, the Irish people in the following areas:
Wages, taxes, imports, exports, available services, healthcare, education, etc, in general how would a default impact us on our day to day lives.

 

[Skin]

If we default, effectively we are out of the euro. If the Irish government tries to repay anyone with a euro cheque, it will bounce - therefore we must pay with something else i.e. An Punt Nua.
All monies held in Irish banks will change from € to IR£ nua. So if you have €10,000 in the bank it will become IR£10,000. When you go to the exchanges you will find a massive discount on the value of your new money. I'm no expert, but 50% sounds reasonable. So if €1 gets you £0.84stg today, tomorrow, IR£1 will get you £0.42 stg.
Interest rates will rocket, as bond markets will be hesitiant to lend and inflation will rocket, rising the cost of imports.
The silver lining is that exports will grow as it will be cheap to buy here, but the devil in that detail is, will mulitnationals want to stay when they see there profits are of the IR£ intead of € ? In the medium term, the answer is no.

 

[sonnet]

Well, from my understanding is not anymore a question of "what if", rather then "when" we will default.
Irish banks' ratings downgraded by S&P - Business - World business - msnbc.com
Standard & Poors's downgrades Irish banks ratings

What are we risking now? Are our deposit safe?

 

[jmayo]

If we default, effectively we are out of the euro. If the Irish government tries to repay anyone with a euro cheque, it will bounce - therefore we must pay with something else i.e. An Punt Nua.
All monies held in Irish banks will change from € to IR£ nua. So if you have €10,000 in the bank it will become IR£10,000. When you go to the exchanges you will find a massive discount on the value of your new money. I'm no expert, but 50% sounds reasonable. So if €1 gets you £0.84stg today, tomorrow, IR£1 will get you £0.42 stg.
Interest rates will rocket, as bond markets will be hesitiant to lend and inflation will rocket, rising the cost of imports.
The silver lining is that exports will grow as it will be cheap to buy here, but the devil in that detail is, will mulitnationals want to stay when they see there profits are of the IR£ intead of € ? In the medium term, the answer is no.

Except there is no mechanism to kick a country out of the Euro and no2. if any country within the Eurozone goes down it takes the Euro with it.

So what really happens is unknown as it has never really happend like this before.
But I have a feeling we are going to soon find out.

 

[Clanrickard]

Except there is no mechanism to kick a country out of the Euro and no2. if any country within the Eurozone goes down it takes the Euro with it.
.

Precisely. You cannot kick a country out of the euro

 

[MPB]

It is more interesting to look at what happens if we do not default. On the Bank debt that is.

After WW1, all of the victorious countries were broke, after borrowing heavily to sustain their War effort. They decided that the losers would have to pay the bill.

The War reparations enforced on Germany, Austerity measures, led to the rise of fascism.

The Nazi Party were not a party who said they would murder 6 million Jews. They were a party that said that they would refuse to repay the reparations and would not honour the terms of the Versailles Treaty.

An early default and acceptance of this default, by more sensible people would have prevented the rise of Fascism.

People do not take austerity on behalf of rich Bankers very well.

Let me remind everybody that the hatred of Jews was not because of the religion but because of their perceived predominance in the banking profession.

Banks and Bankers have always been the problem.

 

[Marcos the black]

If we default, effectively we are out of the euro. If the Irish government tries to repay anyone with a euro cheque, it will bounce - therefore we must pay with something else i.e. An Punt Nua.
All monies held in Irish banks will change from € to IR£ nua. So if you have €10,000 in the bank it will become IR£10,000. When you go to the exchanges you will find a massive discount on the value of your new money. I'm no expert, but 50% sounds reasonable. So if €1 gets you £0.84stg today, tomorrow, IR£1 will get you £0.42 stg.
Interest rates will rocket, as bond markets will be hesitiant to lend and inflation will rocket, rising the cost of imports.
The silver lining is that exports will grow as it will be cheap to buy here, but the devil in that detail is, will mulitnationals want to stay when they see there profits are of the IR£ intead of € ? In the medium term, the answer is no.

So even though our deposits are safe (if you believe the hype) they could be worth a fraction of their current value... Ok, so that's encouraging...

 

[Clanrickard]

So even though our deposits are safe (if you believe the hype) they could be worth a fraction of their current value... Ok, so that's encouraging...

Any news currency could be pegged to the euro or sterling.

 

[Padraigin]

A default is more a currency crisis than anything else. Basically, as a private person, you do not want to be holding too much currency when a default occurs, as your currency could lose most or all of its value.

The good news is that worst of a default is over in a matter of weeks or months. Once the new currency stabilizes in value, things get back to normal pretty quickly.

What you should do is be prepared if a default is looming. If you have significant savings in currency - like a big balance in a bank account - take your money out of the bank and invest it in something tangible. Buy something that can be resold later so that you can recover your money with value intact. It is not that the banks are the problem in a default - the problem is the currency. The value of currency can drop like a rock during a default. If you own something tangible instead, its value can be be maintained during a default. Once the new currency stabilizes, you can sell the thing and put your money (in new currency) back into your old bank account. In other words, you lose liquidity for a while, but you can preserve the value of your savings if you plan ahead.

Another bit of practical advise if a default is looming: Buy staples and non-perishables so that your need to shop and buy things becomes minimized in the immediate aftermath of a default. Prices in the old currency will rise dramatically (briefly) and there can be a currency shortage while the currency is converted from old to new. Barter systems will flourish while the value of currency remains unstable.

Good governments will impose a temporary price freeze when a default occurs so the basic necessities - food, fuel, etc. - can be purchased with "old" currency at "old" prices while things transition to the new currency. The real monetary crisis will take place in the international money markets as Ireland's new currency reaches stable value in reference to other currencies. While this is going on, it is sometimes possible to minimize the impact inside the country with price controls, but some monetary instability is inevitable. It is best to be prepared.

The good news is that the worst is over usually in a matter of weeks or months. After the initial rough period, things settle and recovery begins. A number of countries have gone through a default in recent years and come out of it stronger economically than they were before - Iceland is the most recent. Argentina did it in 2002, and by 2003 they were worried about their economy overheating again due to too-rapid growth.

 

[Squire Allworthy]

Any news currency could be pegged to the euro or sterling.

Initially it will to facilitate converting everyone's saving, but in all probability it will either sink like a lead weight or the interest rates will be very high to support it. Having savings in a falling currency is not clever.

 

[Oscar Wilde]

what's the chances of defaulting, followed by the new currency settling after a few weeks, in time for the general election, and ireland votes FF back into power ..

 

[Padraigin]

what's the chances of defaulting, followed by the new currency settling after a few weeks, in time for the general election, and ireland votes FF back into power ..

If FF pulls that off, they deserve to get reelected.

 

[Right is right]

When we try to borrow the 20bn or so that we need to pay our day to day spending in this country we will politely be told to **** off....Everyone says taking 4-6bn out of the economy will cause us major problems....imaging taking 20bn out and the impact that will have...

 

[Padraigin]

Actually, with a default, the Irish govenrment will not need to borrow 20 bn. A whole lot of that borrowring at the moment is to service the debt incurred by the bank guarantee.

A default eliminates all pre-existing debt.

The only thing needed after default would be whatever it actually costs to maintain government services. Since the government has some financial reserves at the momemt, a default now instead of later would be best. That way essential services could continue while the government issues new bonds to be repaid in new currency.

If you were an international investor, which would you rather buy - (1) bonds issued by the Irish government encumbered by debt in the range of 80 - 120 billion euros with an ever-shrinking economy that is grinding to a halt under the weight of this kind of debt; or (2) bonds issued by the Irish government free of debt with a new currency now stabilized and an Irish economy still strong and poised to become even stronger?

In other words, the Irish govenrment's ability to finance its services long term would be enhanced by a default now.

 

[GDPR]

If we default, effectively we are out of the euro. If the Irish government tries to repay anyone with a euro cheque, it will bounce - therefore we must pay with something else i.e. An Punt Nua.

Why will it bounce if the government has euro but just didnt give it to bondholders ?

All monies held in Irish banks will change from € to IR£ nua. So if you have €10,000 in the bank it will become IR£10,000. When you go to the exchanges you will find a massive discount on the value of your new money. I'm no expert, but 50% sounds reasonable. So if €1 gets you £0.84stg today, tomorrow, IR£1 will get you £0.42 stg.

Why does this have to happen ? Surely the government allowing the people to keep their euros protects the wealth of the nation if you consider their punt nua will collapse in value in relation to the euro ? Is this the government confiscating euro for its own coffers and printing punts to give to the people ?

will mulitnationals want to stay when they see there profits are of the IR£ intead of € ? In the medium term, the answer is no.

Given that our multinationals exist for export purposes as our home market is small; the profits from the remaining Eurozone will be in Euro as the consumer of the exports across the Eurozone will be purchasing in Euro and profits from elsewhere will originate in the currency of the market the goods are sold in.
As long as we remain in the common market of the EU I dont see the problem. Could we be kicked out of the EU ? Also could bondholders take legal action against us in foreign countries to confiscate Irish assets held abroad ?

 

[Dredger]

Screw the EU. Default is the only real option. If Scum slaves us for the next 100 years then I will slaughter them myself.

 

[Skin]

Precisely. You cannot kick a country out of the euro

This is not about being kicked out of the euro. There is no mechanism for 'kicking' anybody out. This is about having no option but to leave the euro. If we dont have euro's to pay with then we must pay by some other form i.e. we leave the euro by default.

The Brits did it when they left the ERM. It became untenable for Stg to be tied to the ERM and interest rates began to spiral out of control. They had to leave the ERM by default.

 

[Interista]

The Brits did it when they left the ERM.

Yes, but leaving a currency arrangement is not at all the same thing as leaving an actual currency. It's easy to say "Ireland should just leave the Euro" but in practice doing so would be very difficult, as this article makes clear:

BBC News - Leaving the euro: how would it work?

 

[Skin]

Why will it bounce if the government has euro but just didnt give it to bondholders ?




Why does this have to happen ? Surely the government allowing the people to keep their euros protects the wealth of the nation if you consider their punt nua will collapse in value in relation to the euro ? Is this the government confiscating euro for its own coffers and printing punts to give to the people ?




Given that our multinationals exist for export purposes as our home market is small; the profits from the remaining Eurozone will be in Euro as the consumer of the exports across the Eurozone will be purchasing in Euro and profits from elsewhere will originate in the currency of the market the goods are sold in.
As long as we remain in the common market of the EU I dont see the problem. Could we be kicked out of the EU ? Also could bondholders take legal action against us in foreign countries to confiscate Irish assets held abroad ?

1.It will bounce because we have no euros left. If we default on the bondholders, do you think they will lend further euros to us? They wont, and whatever funds we have will dry up quickly, and then by default we must leave the euro as a cheque written by euros from an Irish bank or the irish government will be worthless.

2. see no.1

3. You may have a point about the multinationals, I'm not sure what will happen with them if we default. One thing is certain, our exports will become attractive but our imports will rocket in price. We cant be kicked out of the EU. The EU is a political entity, the Euro is a financial system based on basic principles of algebra - if the sums dont add up, we are out!

 

[Skin]

Yes, but leaving a currency arrangement is not at all the same thing as leaving an actual currency. It's easy to say "Ireland should just leave the Euro" but in practice doing so would be very difficult, as this article makes clear:

BBC News - Leaving the euro: how would it work?

Yes, I accept the premise of the article. But we are not "thinking" of leaving the euro. The political imperative of this state is to remain in the euro, hence the bailouts. What I am saying is that if it becomes untenable (i.e. our euro cheques bounce) then we have no option but to leave the euro. We are not being kicked out by other eurozone members, we are not leaving of our own free will, we are simply forced to use another way to pay our way in the world i.e. a new currency.