Once upon a time, a leprechaun found a cauldron full of gold coins in the woods. A troll explained to him that whoever found it was free to take the gold in it, but for each coin he spent, he would get a stone of the same weight in his backpack…
The leprechaun only listened halfway to this part and started spending like there was no tomorrow. It was a huge cauldron and he figured out he could be at spending it the rest of his life.
But of course, there was a catch, precisely in the part that he didn’t listen to. Very soon, although the cauldron still seemed intact, he started to buckle under the weight of the stones. He thought that if only he could get to the cauldron, he could take some more gold to pay somebody to carry the stones, but he just couldn’t budge under that weight. He finally buckled down. When he was about to be asphyxiated by the stones, the European Union came to the rescue.
They came with a lot of journalists and TV, lifted the stones, helped the leprechaun back to his feet, added a 6% interest of approximately a third of the stones, took 17,5 bn. from his wallet and put it with the stones. Then, hung the backpack back onto his squalid shoulders and they explained the press that they had saved the little guy.
He could barely hear them, his ears ringing with desperation, disappointment and panic, but he made out that the loan included the money out of his wallet and it seemed that he now owed himself 6% of what they took. Everything started turning around…
You see, he was a small leprechaun indeed: the weight of the stones was 75% of his own and with the added 6% it was bound to surpass him quickly. He couldn’t see how the EU’s intervention had helped him: he still couldn’t carry his load and not a single pebble had been removed.
So, who would you say the EU rescued: The leprechaun or the owners of the stones, who still want the leprechaun to move them around for them? Of course it’s just an idle question. It is only a matter of time until Ireland defaults. How much time?
Well, if the rescue package is enough to finance the country (government and banks) until it has primary surplus, then, that’s the moment it will default. When a country can survive without new financing, financial markets loose the stick with which they were enforcing discipline on it. Default becomes the policy that best serves its interests. Especially when its foreign debt is very large and it envisages a long period of austerity which will make unnecessary recourse to more debt.
Of course, there’s always the possibility that the package does not cover all the financing needs, at which point default will force itself on the agenda: the leprechaun will have fallen down again and this time it will be evident that putting that backpack on his back again might kill the little guy and cause the loss of ALL the stones. In this light, the owners of the stones (also called bond holders, presumably because of the way they bonded the leprechaun) might think it wise to throw half of the stones away to see if this will allow the leprechaun to save the rest.