Monday, February 20, 2012

Verbatim: "Can We Please Take a Haircut Now?"

Loose Lips Sink Ships by Arthur Doohan, former Irish banker: "As we teeter on the brink of a debt crisis, there is a lot of loose talk about the death of the Euro and about Ireland being thrown out of the Euro. Such talk is ill-informed, ignorant, and scaremongering. Money is … whatever people deem it to be (cowrie shells, temple vouchers, packs of cigarettes, bits of metal, etc.). Today, money is mainly electrons, some paper, and bits of base metal. We worked hard to re-denominate our money into the Euro, and now there is nothing, NOTHING, that can stop the Euro being our currency. Firstly, we are a partner in the Target2 clearing house for the Central Banks of the Euro-system. Further, neither the EU nor ECB can kick anyone out of the Euro under current treaties. With respect to the currency, there is, quite deliberately, no way of telling a Greek from an Irish from a French Euro. Secondly, when Argentina defaulted, it did not stop the USD being a valid currency in Japan or in the US. It did not stop the majority of Argentinian business being conducted in USD. It weakened the Argentinian peso and made the overall debt burden greater. But that can't happen to us because our debts are denominated in our own currency, the Euro. Even if Ireland decided to default on some of her sovereign obligations, it would make no difference to Irish usage of the Euro. Finally, the concept of 'leaving the Euro' is often referred to as a "solution". Nothing could be further from the truth. We would have to 1) print and distribute a new currency, 2) institute capital controls (to stop money leaving), 3) establish and defend a value in Euro terms for the new currency (interest rate volatility), and 4) institute import and export controls (extra costs and delays for business). Further, just who would be leaving the Euro? Probably just the state of Ireland in terms of redefining exactly what 'legal tender' would be for tax and contract purposes. But the State could not seize the Euros in your bank account and force them to be exchanged. So we would become like Argentina with a weak official currency for State and tax-related transactions (and civil service pay) - and an external currency (Euros) for 'real stuff'. And what would we get in exchange for all that trouble? Only the opportunity to say 'We can't pay you back everything we owe you'. I have in mind particularly suggestions that our ATMs would 'run dry' if there were to be a default. To suggest that anyone in Europe would even think of stopping Irish citizens from buying their daily bread in reaction to a problem created by Irish politicians is to display an ignorance of how such systems work. The Euro is not the problem. The Euro works, and works tremendously well. The problem is the level of debt some countries are carrying. This is an old problem, and the old answer was always a currency devaluation. Since we all have the same currency now we can't do that. But a debt 'haircut' amounts to the same thing. So, can we please take a haircut now before we all go bald?"