What a default would mean for the everyday worker
Economists, like the ubiquitous Morgan Kelly, have peered into our future and with predictions that our national debt could easily surpass €250 billion, there looks to be no way that we can pay back every last ceEconomistsnt of what we borrowed.
Default is the hot topic of conversation, and while many people are sick of placating to the European Union's interests, default will hit the working man's savings and force even more hardship on an already exacerbated situation.
In the recent past, several big countries have defaulted on their borrowings including Mexico, Liberia and the widely publicised default of Argentina. After years of having just as strong a currency as the US, Argentina saw the value of its peso nose-dive to just a quarter of its value when it couldn't pay back its loans in 2001.
So should Ireland take a "punt" and revert back to its old currency? If Ireland were to default on its loan agreement, there is a very real possibility that it could be asked to leave the single currency. Generally when nations default, they do so with their own currency and not as part of a common currency. We would then need to re-introduce the Irish pound but the likelihood is that its value would fall over time and we would be left with a currency catastrophe of Argentinean proportions.
Firstly, a default would be a disaster for any savings you may have. Not only would their value drop significantly, you may have a hard time getting your money back full stop. Kevin O' Doherty, director of Compliance Ireland, said that with the revival of the punt, money in accounts would revert to the punt.
"Because of the economic situation the country would be in, the value of the punt would plummet. The value of your savings would go down as the currency depreciated".
When Argentina defaulted, all accounts were frozen to stop conversion to a better currency and a maximum limit was put on how much could be withdrawn from the account. Billions of euros could leave the country, as people flock to mainland Europe to open accounts to protect their savings. We would also have some trouble in finding anyone willing to lend us money at any sort of reasonable rate, if we did default our loans. This is an extreme case but not beyond the realms of possibility.
Secondly, a default would be calamitous for anyone with a pension fund. Those already hit by the various levies on their pensions could see matters worsen if we revert back to the punt. Argentina converted all pension funds into government supported loans to manage their debt, a move Ireland may have to consider in the event of a default.
Thirdly, all those benefitting from a tracker mortgage, will see their luck run out if we default. If the interest rates were linked to a new Irish punt, those rates could sky rocket. When the punt devalued in 1993, mortgage rates rose to levels never seen before or since. Anyone with a mortgage here in Ireland will find it next or near to impossible to repay in punts, as their value would be highly diminished.
Any default would also affect all those in receipt of social welfare payments. Our government would not be able to plug the €18 billion gap in the finances needed to pay our unemployment benefit, child benefit pensions and public wages.
A default would be disastrous for our already high unemployment rate. Even more multinationals companies would pull out of Ireland, incurring further job losses. Any MNC looking at Ireland as a European base would rethink their plans and look elsewhere. Foreign Direct Investment (FDI) by MNC's into Ireland could be damaged irreparably and encourage companies to deal elsewhere.
Finally, a default will render credit card purchases obsolete. Similar to Argentina post-devaluation, our credit cards would become immediately unacceptable. This coupled with frozen bank accounts could lead us back temporarily to a barter/exchange system, albeit in a worst case scenario.
The black economy, which has already seen a sharp rise in the last three years, could easily explode on the back of a default, leading to even fewer takings for the Government in tax. This, in turn, will put untold strain on the already wafer thin public service budgets, leading to Draconian cuts and virtually leave us a third world economy.
As hard as it is to continue taking our medicine, we must. Ireland is not as bad as it is portrayed. Standard & Poor's devaluation of our credit statement has been universally derided. We are adhering to our EU-IMF agreement and are increasingly less likely to default. Many small businesses are thriving and we need to see more of this around the country.
The euro is flawed but the European Union itself is one giant social experiment. There will be problems. This is not the time to jump ship and revert inwards. We need to work together and encourage businesses to flourish. We now must believe that Europe and the euro can survive because taking a "punt" simply isn't feasible in the long run.
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