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Theoretical Economists

Irish Economy’s Karl Whelan comments on a really interesting discussion on Sunday’s The Week in Politics which featured a discussion between the Minister for Finance, Brian Lenihan, and Fine Gael finance spokesman, Richard Bruton in relation to bank bond holders.

As Smart Taxes has commented on before, Fine Gael proposes that the government should announce the wholesale guarantee on bank liabilities will not be renewed beyond September 2010.

The Minister for Finance strongly disagrees with the Fine Gael proposal. On The Week in Politics he said the following:

“Richard casually mentioned there the idea that investors should take some of the sacrifices as well. I went around Europe and raised a lot of money for Ireland in the last few weeks, and investors would be horrified to know that the main opposition party in this country wants us to default on payments to them in Autumn 2010.”

Bruton replied that these investors were bank investors, not state investors. At this point the Minister made the following points:

“These professional investors are the same international investors who invest in our government bonds … We need a lot of government bonds this year … If the idea is out there that Ireland, or its banks, are going to default on international investors, we as a country will not be able to fund ourselves … There is a direct link between the senior debt which is raised by the government and the senior debt that’s raised by the banks. If you start defaulting on one, inevitably it becomes harder to raise the other and your interest rates will go up and up and up.”

The Minister has followed up on his comments on this important issue yesterday. On Newstalk he referred to Fine Gael’s plan for bondholders to lose out as “nonsense policy” and dismissed the idea as something thought up by “theoretical economists”.

Whelan agrees with Burton in that bonds issued by Irish banks are not the same thing as bonds issued by the Irish government. He argues that a default by an Irish bank does not in any way have to imply that the Irish state will also default on its debt. Ultimately, sovereign default risk will depend on the fiscal solvency of the state and this will be improved by implementing a solution to the banking crisis that minimises the cost to the taxpayer.

Smart Taxes has argued for some time that bond holders share the pain of the rescue and is pleased that attention and debate is turning both locally and internationally to those who carry most culpability for the financial crisis.

Read Karl Whelan’s article in its entirety here.

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