This weekend Irish economist Morgan Kelly, dubbed Ireland's "Dr Doom" suggested, in an opinion piece in the Irish Times, that Ireland's only means of survival would be walking away from the bail out.
He also suggested that US Treasury Secretary Tim Geithner was to blame for the fact that Ireland did not get a better deal.
CNBC has now reported Kelly’s comments leading to a further investigation of his claims
Morgan suggested that Geithner acted as a protagonist in talks over the bailout and pushed for Irish bondholders to be spared a haircut fearing the knock-on effects in the credit default swaps (CDS) market.
Brian Devine, the chief economist at NCB Stockbrokers in Dublin told CNBC that the reason was that the US was worried by the impact of an Irish default on the CDS market despite the fact there is little more than $29 billion of contracts trading against Irish debt.
In a research note Devine explained "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 [EUR=X 1.4189 -0.0215 (-1.49%) ] area bondholders mark their positions.”
He added “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.”
“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,”
In Devine's view the push for no haircuts came from the European Central Bank, US opposition, a lack of legal framework for senior debt restructuring and that fact that British law would need to be changed.
Devine continued "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.”
The Morgan Kelly article in the Irish Times which has caused worldwide debate suggested that Ireland need to break free from the terms of the bailout they received from the European Union and the International Monetary Fund.
He wrote "National survival requires that Ireland walk away from the bailout….This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.” The article has brought scorn form established politicians.
Ireland told to default by top economist who predicted crash