By: Dr. Mike Campbell
The cost to the Irish government of accepting the EU/IMF bailout was that it lost its mandate. The incoming government has had its hands tied in that it is bound by the terms and conditions that the outgoing government agreed to in securing the loan, but it is clearly probing possible avenues to ease the fiscal pain that Eire is feeling.
One possible avenue of approach is to heap some misery towards bank creditors (the investors who have bought bank bonds) who have been largely protected from the catastrophic investments made by the banks during the Irish property boom that caused so much pain when the bubble burst. This move would be popular with the tax payer, but is technically very close to a default in that the investor will not get the full returns promised when they put their money into the bonds in question. It was the spectre of a government default that forced Ireland and Greece into the EU/IMF bailout in the first place.
The solution being considered by the Irish at the moment is to give bond holders a “haircut”. In this “solution” creditors are required to accept lower returns than they were originally promised – hence the term haircut. The move would likely be limited to “senior” investors, but would require IMF and EU approval. Given that these investors stood to lose everything if the Irish had allowed the banks to fail, such a move would seem to be a viable possibility. It is likely to meet with some resistance since the idea that an investor will get the promised returns on a bond is central to the financial system – then again, any investment has an associated risk; just ask Moody’s or Standard and Poor’s.