"Because as part of the Eurozone your national bank and sovereign state has monetary and fiscal obligations to the ECB and Eurozone creditors."
But the point was that these were private bank debts, not debts of either the national bank or the state. Once they the state took on those debts, yes, there were obligations.
It's effectively the same under ECB's monetary policy mechanisms. Those bank debts are used as collateral for borrowing from the ECB or the Eurozone inter-national bank payment processing system (called TARGET2) or Eurozone creditors.
Imagine if Iceland could only issue debts, both public and private in US dollars. That, its interest rates were set by the Fed. That, its banks could tap short and medium unlimited liquidity against this collateral. That, its USD payments went first through a US-based payment processing system. But only if you never default on this collateral.
Then, you would have something similar to the situation Ireland faced.
It is true Ireland could have tried to hold out for an externally-led, Greek-style debt restructuring, though I suspect it would have been harder for them due to the private bank debt transfer. But even that still is not elective default to their own currency with full debt control. Therefore, not the same as Iceland.
"[Public & Private bank debt] effectively the same [under TARGET2]"
Interesting assertion, as it would mean there effectively are no private banks and "too big to fail" is enshrined in basic EU mechanisms, and independent of size -> automatic bailouts all the time.
Are you referring to Sinn's analysis? While that's an interesting read (intro: http://en.wikipedia.org/wiki/TARGET2), it doesn't seem to quite support such a staggering claim.
However, I do see that European politicians are acting this way, so that supports what you are saying, but they actually have to act to do so, which contradicts it.
Certainly the rest your text simply assumes the equivalence of public and private debt, rather than showing that this is the case.
"you never defaulted on this collateral" -> There are two different "you" in this case. So what happens if one of these two "you" does default?
You are implying that the default of one "you" automatically means the other "you" never gets money again (the bond vigilantes and all that), but as the fine article showed, the same was said for Iceland and it didn't happen.
I know you claim that there is only one "you", but I just don't see that in your analysis (or in what Sinn wrote).
"It is true Ireland could have tried to hold out for an externally-led, Greek-style debt restructuring" -> again, that only applies after taking on the bank debts.
But the point was that these were private bank debts, not debts of either the national bank or the state. Once they the state took on those debts, yes, there were obligations.