A stitch in time would have saved nine €60 billion.

Debt-for-equity swaps only work if bond holders know that refusal to co-operate won't be rewarded with a taxpayer funded bail-out, and instead will end up with insolvency proceedings, which inevitably result in a debt-for-equity swap.

There's a lengthy article in The Irish Times* by Morgan Kelly, Professor of Economics at University College Dublin, who summarises thusly:

Until September, Ireland had the legal option of terminating the bank guarantee on the grounds that three of the guaranteed banks had withheld material information about their solvency, in direct breach of the 1971 Central Bank Act.

The way would then have been open to pass legislation along the lines of the UK’s Bank Resolution Regime, to turn the roughly €75 billion of outstanding bank debt into shares in those banks, and so end the banking crisis at a stroke.

With the €55 billion repaid, the possibility of resolving the bank crisis by sharing costs with the bondholders is now water under the bridge. Instead of the unpleasant showdown with the European Central Bank that a bank resolution would have entailed, everyone is a winner. Or everyone who matters, at least.

The German and French banks whose solvency is the overriding concern of the ECB get their money back. Senior Irish policymakers get to roll over and have their tummies tickled by their European overlords and be told what good sports they have been...

* Spotted by Drewster at HPC.