Wednesday, 24 November 2010

Why shouldn't Ireland just default?

It always worries me when I find myself agreeing with something I read in The Guardian:

even a relatively small country like Ireland has options. Specifically, they could drop out of the euro and default on their debt. This is hardly a first best option, but if the alternative is an indefinite stint of double-digit unemployment, then leaving the euro and default look much more attractive.

The ECB and the IMF will insist that this is the road to disaster, but their credibility on this point is near zero. There is an obvious precedent. Back in the 2001, the IMF was pushing Argentina to pursue ever more stringent austerity measures. Like Ireland, Argentina had also been a poster child of the neoliberal crew before it ran into difficulties.

But the IMF can turn quickly. Its austerity programme lowered GDP by almost 10% and pushed the unemployment rate well into the double digits. By the end of the 2001, it was politically impossible for the Argentine government to agree to more austerity. As a result, it broke the supposedly unbreakable link between its currency and the dollar and defaulted on its debt.

The immediate effect was to make the economy worse, but by the second half of 2002, the economy was again growing. This was the start of five and a half years of solid growth, until the world economic crisis eventually took its toll in 2009.

To be sure, this insight came amidst the usual nonsense about unemployment as the Ultimate Evil, government spending as a means to boost the economy, and central banks as a positive force, but why shouldn't Ireland default?

Murray Rothbard set out the case for a US default in a June 1992 Chronicles article, Repudiating the National Debt.

Ever since I read that article, I've been wondering why we in the UK do not follow Rothbard's advice.

I can understand the reluctance of Guardian readers to honour the debts of the bankers. It is wrong. I am likewise reluctant to honour the far greater debts of socialist politicians.

Some argue that it would be unfair to innocent 'investors' in government debt, but our first duty should be to the slaves, not the slave-owners (witting or otherwise).

Others suggest that it would forever tarnish our national reputation, and make future borrowing more difficult and expensive. But history does not bear this out. As I wrote in August,
Sadly, as Argentina and other countries have found, it seems likely that people would lend to us again even if we were to default on our debt. We would need a strict constitution to forbid future governments from running up new debts, and eternal vigilance to avoid corruption of the constitution.
Attempts by the government to bind itself are always imperfect, but that doesn't mean they're worthless. A constitution can buy time in periods of stress, when the legislators would otherwise be swayed. A constitution provides an excuse for legislators to do what is right, even when it is unpopular.

Our constitution could outlaw government borrowing altogether. Or if more flexibility were required, it could insist that government cannot roll over debts for more than one year, so that any borrowing in 2011 would have to be repaid in 2012. The constitution could also stipulate that amendments require the approval of both Houses, followed by a national referendum.

The trouble with talk of constitutions at this juncture is that any constitution drafted by our current politicians would cement the statist, socialist principles that have impoverished and dehumanised our society.

Anyway, if anyone reading this knows a convincing reason why Ireland shouldn't default, and we shouldn't follow suit, please let me know. If I ever hear one elsewhere, I'll post an update.


Those considering the issue may be interested in the latest quarterly report from the DMO: Quarterly Review for Jul-Sep 2010, published October 2010.

I haven't yet gone through it in detail (and I'm not an expert in any case), but some key points stand out:
  • the nominal value of our debt ("the gilt and Treasury bill portfolio"), as of 30 September 2010, is £1,058.29bn
  • 20.4% of this debt is index linked: it can't be inflated away
  • 30% of gilts are held Overseas: defaulting on this portion of our debt would not directly impact UK citizens, but might prompt retaliatory action by foreign governments
  • 29% of our debt is held by Insurance companies and pension funds (as of 30 June 2010)

No comments:

Post a Comment