Did Geithner Block Better Deal for Irish People?

In Ireland the Irish Times columnist Morgan Kelly has caused a stir by suggesting that his country needs to break free of the terms of its bailout from the European Union and the International Monetary Fund if it is to thrive as a nation.

United States Treasury Secretary Timothy Geithner
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United States Treasury Secretary Timothy Geithner

“National survival requires that Ireland walk away from the bailout," Kelly wrote.

"This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately” he said over the weekend in an op-ed that has seen him described as Ireland’s Dr Doom and brought scorn from established politicians.

In the same article Kelly said that US Treasury Secretary Tim Geithner acted as a protagonist in the talks over Ireland’s bailout, demanding that plans to include a haircut in the deal for Irish bondholders be scrapped on fears over the knock-on effects in the credit default swaps market.

In a research note Brian Devine, the chief economist at NCB Stockbrokers in Dublin said the US could very well be worried about the impact of an Irish default of some sort on the CDS market, despite there being little more than 20 billion euros ($29 billion) worth of contracts trading against Irish debt.

“Ireland in itself may not cause problems to the US financial system via CDS, but if an event in Ireland led to widespread contagion in the euro area this would have the ability to cause substantial problems without there being any further defaults, as the sellers (writers) of CDS protection mark their positions to market and Euro area bondholders mark their positions,” Devine explained.

“It seems hard to believe that Ireland itself would cause much damage to the US financial system via CDS obligations, but it is possible that euro area contagion would be sufficient to cause significant mark-to-market losses in CDS and bonds given the size of these markets,” he added.

“Furthermore, it may have been judged that it was not worth the risk of allowing an Irish banking debt default derailing the recovery in the western world’s financial system because of the uncertainty surrounding the interrelatedness of CDS contracts, bonds, funding and the global banking systems,” Devine said.

The reasons that no haircuts where allowed, in Devine’s view, range from opposition from the European Central Bank, US opposition, a lack of legal framework for senior debt restructuring and the fact that UK law would need to be changed as senior bond holders where protected by UK legislation.

“Time is running out for Ireland to make any meaningful gains from senior bond savings. Come the end of November 2011 there will be just 6.6 billion euros worth of senior unsecured bonds in the pillar banks,” Devine said.