It looks as if the Irish Government has decided not to burn bondholders because so much has already been paid off by the previous Government (c. €50 Billion) that the saving on giving a haircut to the remainder would not outweigh the costs.

These costs are stated to include:

1. the ECB withrawing c. 150 Billion in short term liquidity loans to Irish Banks

2. the difficulty in funding the current Government deficit resulting in draconian tax increases or cuts in public services/employment

3. The "reputational damage" a default would create and result in higher sovereign debt market interest rates for the foreseeable future.

4. The "reputational damage" a default would create for Ireland within the EU

5. The prospect of reduced interest rates for being a "good European"

6. The "belief" that the Irish debt/GDP ration will peak at 120% (after austerity measures) and decline thereafter because of the inherent underlying strength of the Irish economy - the "Grow your way out of debt" strategy Mig says can't/doesn't happen.

7. The degree of integration between the Irish and EU economies and thus the need to remain "at the heart of the EU

These factors include a number of known unknowns.

i. The reaction of the EU big players to default or being a good European

ii. The reaction of the markets to default or being a good debtor

iii. the underlying resilience of the Irish economy in the face of continuing austerity

A Fine Gael led Government is not ideologically opposed to Austerity (many within the party welcome it) and imagines that its EPP partners in Europe will reward them for acting so responsibly.  We shall see.

Index of Frank's Diaries