Belfast Telegraph

Ireland should go to back of class for economic sins

When I was in school, the class was fairly split between swots and messers. But the messers broke into two groups.

The first were the hardcore messers - these were the lads who would never rat on you. The second type of messers were more dangerous - they were the blokes who wanted to curry favour with the teacher and would squeal on you at the first hint of trouble.

The Irish establishment reminds me of these guys; they want to be with the 'goody-goodies' at the top of the class, but they lack the wherewithal.

Europe is split between the swots - the countries that owe nothing to anyone - and the messers, the countries who owe their shirts to everyone.

When faced with the division between debtor nations and creditor nations, the cleverest thing for the debtors - the messers - to do is form a coalition of delinquency to strengthen their hand in future negotiations.

If it was in doubt before, it is clear now that the endgame for Europe will involve a massive structured default, so we should decide what side we are on.

This month marks the first anniversary of the Greek bailout. Greek two-year interest rates are more than 20%. Greek government bonds are 11% above those of Germany. Remember last year's bailout was supposed to solve Europe's debt crisis.

Back then, even though Ireland was a financial delinquent, Dublin tried to behave like one of the swots. But having been so quick to condemn the Greeks and sneer at the Portuguese, the Republic found that it had few enough friends when it needed them last November.

Instead of seeking a debtors' alliance, having the self-confidence to admit that it was weak, and the defiance to point out that it was a mutual creditor and debtor problem, Ireland sought to curry favour.

Ireland displayed the age-old weakness of preferring to be loved rather than feared, to be pliant rather than defiant, to be malleable rather than awkward.

Well, this game has not worked. Last week - after billion-euro bailouts and capitalisations - the Republic's banks were still downgraded to junk status.

We know that Greece is on the verge of default. We also know that in capitalism the key concept in a bankruptcy is the idea of co-responsibility, where the creditors and the debtors are equally responsible.

According to the Bank of International Settlements, the debtors of European periphery owe the creditors €1.1 trillion, or €1,100bn. So it is clear this money will not be paid and will have to be restructured.

There are ways and means for creditor nations to deal with this. The first is to realise that the game is up and do a deal before the likes of the Greeks default and drag the rest of us down with them.

This would seem silly. The longer they wait, the more likely the anti-euro result of Finland's election will be repeated in the other creditor countries.

Finland's conversion to fiscal and monetary prudence is at odds with the Finland I first visited in the winter of 1994. Finland in 1993, having told the world it would not devalue, then devalued overnight by more than 4%, 'burning' all the foreign bondholders who had originally invested their 'hard currency'.

When I was there a year later, I was representing the people who were about to commit new money to Finland. And do you know what happened after Finland burned its bondholders? Was it turned into a pariah? No.

The international banks were back in - just a year later - lending again, so it is hard to take this new-found Finnish probity seriously.

The consequence of Finland breaking its international promises was actually inconsequential. Why was this? It was because everyone understood that Finland with a more competitive currency was a better bet.

Similarly now, everyone understands that the periphery of Europe with less debt will be a better bet. A balance sheet with less debt is a better balance sheet and less at risk of future default. Simple.

Now that Greece is on the brink and the Republic has been downgraded to junk-bond status, Spain looks next to go and Portugal is settling into an IMF bailout, 1,000 people a week are leaving Ireland and the rating agencies doubt even the US's ability to pay its debts, isn't it time to realise that the world has changed?

So what do we want, chaos or an organised solution? Maybe it's time the messers realised that the swots' solution hasn't worked.

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