Default without defaulting..

Here is just a probably wacky idea, but I’d like to throw it up in the air, just to see how it falls back to the earth, for the sole benefit of my own wisdom.

How to default “in style”, in an employment-friendly way:

In short: Apply a haircut on bank bond holders (guaranteed senior or not), but compensate them if they create new jobs in Ireland.

In more details:
Apply a haircut on current nationalized bank bond holders, but offer them a transferable tax credit equal to at least the individual bond holder’s loss on the investment, if any. Or at most, equal to the haircut (full face value compensation). Or somewhere in between.
This tax credit would only be applicable after 2013.

This differs from David’s idea of swapping bank bonds for bank shares (most of them currently in state ownership), in that to an extent it would ultimately make the state take less tax (or the taxpayer “pay”) for bondholders losses, but Ireland would keep the ownership of the banks, with a view to privatize them later in any case.

In essence, it equates to forward-selling future (post-2013) tax take, provided jobs are created in between, thereby partially or fully offsetting the impact on future budgets, and giving employment a lift.

This tax credit would have to be transferable: Senior bond holders, like banks, pension funds and institutional investors cannot be expected to all have a sudden passion for directly creating employment in Ireland.
In order for the tax credit to be acquired and used by the most relevant parties, it would need to be freely traded on an OTC market, just like equity or a kind of “parallel” currency.

The seller would incur some loss selling the tax credit, as the buyer’s interest would be to buy the tax credit at a discount, and apply it against liabilities to the Irish State at full face value, thereby synthetically reducing his overall Irish taxation costs.
This in turn would make foreign direct investment and job creation in Ireland even more attractive:
Say if a corporation (willing to create jobs in Ireland) acquired such a tax credit at 50% discount, it could apply it against its corporation tax liability, halving it from 12.5% to 6.25%!

The Tax Credit would need to be
– At the minimum: equal to the individual bond holder’s loss on the investment if any
– At the maximum: equal to the difference between the bond’s face value and its haircut price.
– Applicable against any liability to the Republic of Ireland,
– Applicable after 2013: precise date to be determined, but obviously preferably after the EU/IMF budgetary targets are due to be fulfilled.
– Applicable only if the holder/acquirer of the tax credit has been a net job creator in Ireland over the past so many years — to be determined
– Applicable to the tune of x jobs per million of tax credit — ratio to be determined -so that the negative effect of tax credits on the budget is offset by the positive effect of additional jobs on the economy.

Let me know your thoughts!