Europe’s economy - Bondholders can’t dodge the bullet

AS our policy-makers, guided by our guests from the IMF and the EU, walk a tightrope between austerity and chaos it is reassuring to know that the EU/IMF officials working in Dublin are considering how senior bondholders might be forced to pay some of the tremendous cost of rebuilding our beggared banks.

Anything that might reduce the life-changing burdens facing every household and institution in this country should be embraced with enthusiasm.

However, considering an issue is a very long way from reaching a decision on it. Significant legal and political barriers will have to be overcome before bondholders can be compelled to contribute to a resolution of the crisis they did so much to generate. They will not accept this position unless they are forced to.

This thorny issue has been deferred for too long and will have to be confronted as the scale of borrowing required to resolve our crisis may be so far beyond our capacity to repay that it would cripple the country for decades to come.

It is so great that it makes the prospect of a default very real. That would have consequences for the entire eurozone, not just Ireland. The prospect of a default has strengthened as the last barrier to it has been removed by the €85 billion bailout.

Neither is it in our specific national interest to continue to protect bondholders from accepting the losses caused by their gambling on Anglo Irish Bank. The only thing standing between them and that day of reckoning is the unity forced on European policy- makers by the critically weak condition of the EU’s financial system.

Simply, they are unsure if the system could survive the shock of a multi-billion euro default. That eventuality would provoke a crisis of an altogether different complexion — or at least that is the received wisdom of the day which has been, as ever, informed by hindsight.

European governments have learned from America’s unfortunate decision to allow Lehman Brothers to default just over two years ago. They realise that our financial systems exist only because of continuing taxpayer support which must be finite and might not have the capacity to withstand another shock.

It is impossible to understand how bondholders can expect to remain unscathed by the crisis. That they, and so many others who created it, have not is at the root of so much of the anger that has destroyed the confidence any society should be able to place in its political system. It gives a priority to their interests that is profoundly anti-social and is an instructive warning of how power disregards any interests other than its own.

Today’s demonstration in Dublin will be the first great public manifestation of that anger and irrespective of the turnout that anger must be assuaged by a commitment to equity as yet unapparent.

Securing a commitment from bondholders to face the reality of the crisis facing us all, bringing rogue bankers to book and challenging the ring-fenced mandarins at the very top of the public pay scale are the first three steps needed to create the sense of common purpose central to any recovery.