Brian Lenihan Jnr (Dublin West, Fianna Fail)

No, they are not risk-free because the sum payable on the bond - or coupon, as the markets call it - is a fixed sum. It is not risk-free in the sense that inflation and monetary changes can devalue the instrument, as has happened throughout history since bonds were invented. There is a risk in the purchase of the item, but it is free of the risk of default if it is senior, as distinct from subordinated, debt. In modern Europe and throughout this crisis, such debt is viewed as risk-free. Were we to go down the restructuring road in regard to a sovereign state or an individual bank institution, it would cease to be risk-free because the restructuring would mean that a reduction in the value of the instrument would be provided for.

I am outlining the objective political and banking factors that exist in Europe today and have existed in Europe throughout 2008 and 2009. Both the European Central Bank and the individual member states have set their faces strongly against the idea of a default on senior debt or sovereign default. It is reasonable to ask why. One reason is that the economic consequences of default are generally more catastrophic than the alternative of avoiding the default. For example, defaulting on senior bonds would have a major implication for the value of pensions, thus depriving workers of their pensions or of a substantial element of the return promised, depending on the discount applied. There are other implications in regard to enterprises that give employment which may have raised finance through bonds or obtained bonds in order to finance themselves.

All of these matters have led Governments to the conclusion that the consequences of default are more horrendous than the consequences of avoiding default. There is certainly scope for a great deal of argument on this subject. Not all economists agree with Governments in this regard, and opinions have been expressed by various commentators on the subject. I am simply drawing attention to the views I am hearing expressed strongly both within the European Central Bank and among other member states.

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