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Analysis Is the global economy resilient enough to handle its high levels of debt?

Economist Victor Duggan looks at the level of debt internationally and ask if the global economy can manage it.

THE IRISH, EUROPEAN and global economies have proved more resilient this year than many economists had feared.

Yes, stubbornly high inflation has sapped consumers’ spending power. Yes, economic activity has slowed in the face of higher interest rates and the lingering effects of the war in Ukraine.

Yes, there was a wobble in the banking sector on both sides of the Atlantic, and we still don’t know how that will affect credit availability. But, there is little sign of the feared recession. Yet.

Still haunted by our housing crash during the global financial crisis, Irish borrowers have spent much of the past decade paying down loans rather than taking on new debt. This at a time of historically low interest rates. But, Ireland was something of an outlier in this respect. Globally, households, businesses and governments have continued to rack up debt to historic highs. Even more than in the most advanced economies – which already had relatively high debt levels – the debt buildup has been most striking in emerging and developing countries.

No more easy money

Taking on debt is not a bad thing per se, particularly if it supports investment that supports long-term growth, and ultimately capacity for debt repayment. Even if borrowed money is being squandered, it may not be a big problem so long as interest rates are low, economies are growing, and there are enough lenders ready to refinance debts as they come due.

Again, this has been the case for most of the past decade. Even the pandemic hardly caused a missed beat.

Having learned lessons from the early stages of the global financial crisis, central bankers and other economic policymakers slashed interest rates and flooded economies with liquidity in early 2020. Debts continued to mount.

Famed investor Warren Buffett once quipped that “only when the tide goes out do you discover who’s been swimming naked.” Over the past year, the tide has gone out on easy money. Interest rates have been rising faster than at any time since the early 1980s. We could be about to see who has been swimming naked, racking up debts in the expectation of easy refinancing.

The last time interest rates increased this fast it led to a lost decade in the global south. Latin America and Africa were particularly hard hit, and some countries have never really recovered. IMF bailouts to make private lenders whole piled further debts on developing countries while imposing what Naomi Klein has called ‘shock therapy’. Bailouts came with strict conditions, including privatisation of state enterprises, fiscal austerity and opening up to foreign trade and investment.

Among the countries that have recently sought bailouts – or could be on the brink – are Bolivia, Chad, Ecuador, Egypt, El Salvador, Ghana, Laos, Lebanon, Malawi, Pakistan, Sri Lanka, Tunisia, Ukraine and Zambia. The IMF estimates that more than half of low-income countries are at risk of debt distress.

This is not merely an academic concern for faraway places. European countries with high debt burdens and weak economic growth are at risk of fiscal crises if interest rates go higher for longer than currently expected. Italy’s public debt is nearly one and a half times the size of its economy. In the two decades before the pandemic, its economy never once grew by more than 2%. It would not take much for future financial contagion to put Italy in the sights of bond vigilantes. Unlike Portugal, Greece and Ireland, Italy is too-big-to-fail. It could even be too-big-to-bailout.

The good news is that Irish households and businesses are not among the most exposed. As mentioned, we have not partaken in the private sector debt buildup. The public finances are in rude health, even with the caveat that a large and unknown share of surging corporation tax receipts could dry up in the years ahead. The bad news is that we are a small, open economy bobbing on the waves of global finance. We would not be immune to a global debt crisis.

What can be done?

First of all, central banks need to be very careful about further rate hikes. Having floored the accelerator during the pandemic, they have slammed on the breaks to try to tackle inflation. With ice on the road ahead, pressing ever harder on the brakes increases the risk of the economy careening out of control. Interest rates are already restrictive, while the full impact of the past year’s hikes has not yet even been felt.

Secondly, more needs to be done at a global level to make sure the system is ready for what’s coming. During the pandemic, bilateral debt repayments were suspended for the poorest countries. The G20 Common Framework for Debt Treatment was supposed to build on this arrangement, but it is ripe for reform to extend eligibility to middle income countries and to ensure participation of private creditors in debt relief and restructuring. Sometimes ‘burning the bondholders’ is the least bad option! Concerted efforts are also needed to engage China, now a leading lender to other emerging and developing countries. The Global Sovereign Debt Roundtable – chaired by the IMF, World Bank and India as G20 President – was established earlier this year to address some of these issues, but it is important it leads to concrete action and doesn’t just languish as a talking shop.

Thirdly, at EU-level Italy needs ratify reforms to the European Stability Mechanism so that it can fulfil its role as a backstop to failing banks and governments facing a fiscal crisis. But, the ESM needs to be made bigger and better. If a country like Italy were to get in trouble, it would not have anywhere near enough financial firepower to bail it out. And because the conditions attached to precautionary credit lines are so stringent, there is a risk that countries will not seek help until it is too late and a full-blown crisis can’t be avoided.

The ESM should also become a fully-fledged EU institution, making it accountable to the European Parliament. Even if it never has to be used, the existence of a credible backstop can boost financial market confidence and reduce the likelihood of a speculation-driven crisis. But, it needs to be made fit for purpose.

As for Ireland, we may not be among the most exposed countries this time around, but our bitter recent experience should inform our engagement in those organizations in which we are players, whether that be the ECB Governing Council, the IMF Board of Governors or the ESM Board of Governors, currently chaired by Paschal Donohue. We know what it was like to go through painful – and some would say excessive – austerity. We can bring lessons learned to the table to help avoid the repeat of past policy mistakes.

Victor Duggan is an economist.

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    Mute Kevin Higgins
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    Aug 22nd 2015, 12:41 PM

    Maybe they could hack into government systems so we could get the fennely report which is probably finished but won’t be released until after next election so fine gael won’t have to care.

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    Mute For Connolly
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    Aug 22nd 2015, 12:50 PM

    “This government is fully committed to keeping its promise of openness and transparency, and as such the Fennelly report will be publ……..QUICK LOOK OVER THERE, AN UNRELATED LEAKED STORY…..”

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    Mute von
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    Aug 22nd 2015, 4:08 PM

    That Kevin. I would love,

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    Mute Dr Grinspoon
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    Aug 22nd 2015, 12:39 PM

    Are we supposed to feel sorry for cheaters? All i have to say is Ha-Ha, toolz

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    Mute Bill Dunn
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    Aug 22nd 2015, 12:49 PM

    It’s very unfair, you don’t know the personal circumstances of those people and what the leak will do their family life will do greater damage than creating an account warrants. Not to mention the murder and suicides that could potentially occur. There are email addresses data belonging to people who live in places where the punishment for adultery is death, I wouldn’t want to be explaining the ins and outs of email verification procedures to the Saudi mutaween.

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    Mute Kevin Higgins
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    Aug 22nd 2015, 12:54 PM

    I suppose the act of cheating in itself would be the bigger issue here. I’d imagine the fact that say you cheated would cause the suicides or murder, these hacks are merely speeding up the finding out moment. Saudi Arabia have many backward laws including the adultery one so why in the world would you start an affair online in such a repressive country? We have a right to privacy but does that right to privacy go aboves your wife or husbands right to know. It’s a toughie but I’m kind of siding with those who’s spouse cheated on them as they are the immidate victims.

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    Mute Sgt Pepper
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    Aug 22nd 2015, 12:58 PM

    A huge proportion of people on that site are probably just curious or voyeuristic. I wouldn’t read too much into it. I’d imagine a lot of the members on the site are horny teenagers that used daddy’s credit card to register too.

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    Mute Dr Grinspoon
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    Aug 22nd 2015, 1:02 PM

    If ya dont wanna get caught.. dont cheat. Simples

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    Mute Kevin Higgins
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    Aug 22nd 2015, 1:34 PM

    True that. I saw a HR deperment email sign up, makes no sense. an affair wouldn’t be for me but I suppose I do have to get married first!

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    Mute Tomas Om
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    Aug 22nd 2015, 1:40 PM

    Get out of that Dr Grinspoon. ‘Simple’ ! It’s not that simple unless you have no sex drive. Sex is the reason we are all here today, it’s the most natural thing in the world. We are not made to be entirely monogamous, although that’s how modern western society expects us to be. It’s inevitable that people will be promiscuous. (And I refrain from using the word ‘cheating’ as that’s an Americanism. I agree that it isn’t a nice thing for the other half, so why not stick to our own phrases, like – doing the dirt. At the end of the day it’s not an exam or a game, so the word ‘cheating’ doesn’t make sense)

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    Mute Sgt Pepper
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    Aug 22nd 2015, 1:41 PM

    And there’s a good chance many are not married in the first place but are looking to hook up with married people for kicks of some kind.

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    Mute Dr Grinspoon
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    Aug 22nd 2015, 1:49 PM

    Tommy’s clearly never been *ripped off* (that any better for ya mr anti-Americanisms) you are kinda right but at the end of the day, if you find somebody who you are happy with the need to get your end away elsewhere just isnt a factor.
    Unless ofcoarse your an a$$hole, or your significant other is… but even then, dump ‘em then go get laid elsewhere

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    Mute catherine
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    Aug 22nd 2015, 1:56 PM

    I don’t think it’s any if my business if someone else cheats . If someone was preaching on morals taking a high moral stance on the sanctity of marriage in public life but was having affairs that may be public interest but otherwise it doesn’t concern me who cheats on who.

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    Mute Resel
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    Aug 22nd 2015, 2:18 PM

    What if I Want to cheat AND not get caught?

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    Mute von
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    Aug 22nd 2015, 4:06 PM

    Hard luck resel you risk it and maybe yes maybe no you get away with it.

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    Mute Drew TheChinaman :)
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    Aug 22nd 2015, 1:32 PM

    I’ve discussed it with my wife… What you’re asking for in a bribe buys a hell of a lot of jewelry and shoes. As such we respectfully decline your offer.

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    Mute John Moylan
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    Aug 22nd 2015, 3:47 PM

    @Drew – a lot of shoes – for US $450 ? ….lol..that wouldn’t buy you a pair of Kanye’s in BT yesterday. ..

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    Mute von
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    Aug 22nd 2015, 4:12 PM

    Drew don’t insult women maybe yours is a gold digger or you are an idiot not worth knowing.

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    Mute Drew TheChinaman :)
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    Aug 22nd 2015, 4:44 PM

    I’m assuming they come back asking for more once they realise they have hit on someone willing to pay… That’s how blackmail tends to work.

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    Mute Paul Roche
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    Aug 22nd 2015, 5:52 PM

    And shoe stores…

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    Mute catherine
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    Aug 22nd 2015, 12:44 PM

    Some papers are reporting that they guy who surprised his wife with her pregnancy that she later miscarried was an active user of this site. I’d say that may halt their paid vlogging days if true !

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    Mute Debbie Darling
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    Aug 22nd 2015, 12:47 PM

    Apparently the whole “pregnancy” was a hoax, doctors said it would be very unlikely to detect the pregnancy hormone from toilet water.

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    Mute Mark Ryan
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    Aug 22nd 2015, 1:31 PM

    Apparently???… their acting is horrible.. why do ppl get sucked in by these types.. there job is to attract ppl to their videos

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    Mute Laura Fennessy
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    Aug 22nd 2015, 1:51 PM

    God, they were a pair of feckin ejits.

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    Mute catherine
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    Aug 22nd 2015, 1:53 PM

    It was pretty clearly a hoax alright but I suppose they gave to keep the vlog interesting . After that pregnancy stunt he told the wife he had given up his permanent well paid job as they were making so much money out of the vlog. She wasn’t happy but there’s nothing to stop her going out to work. I suppose if their vlog goes belly up she will just start a new one as the wronged wife. Anything for money it seems .

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    Mute Conor Power
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    Aug 22nd 2015, 3:47 PM

    This info is now easily accessible on the net so paying one blackmailer off would be completely stupid.

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    Mute Alan White
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    Aug 22nd 2015, 4:59 PM

    Yes.

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    Mute Mike Clinton
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    Aug 22nd 2015, 3:49 PM

    If you feel the need to cheat behind a partner’s back then you shouldn’t be in the relationship. Sorry if I offend but I have seen the results of cheating and the trail of devastation it leaves. If you’re not happy , get out and stop wasting your partners time.

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    Mute John Curry
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    Aug 22nd 2015, 12:48 PM

    let him who is innocent cast the first stone……people in glasshouses should not trough stones….. remember these old sayings.

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    Mute Dave Meagher
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    Aug 22nd 2015, 1:33 PM

    They should also get changed with the lights off….

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    Mute VinHeffer89
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    Aug 22nd 2015, 12:43 PM

    You reap what you sow; nice job idiots…

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    Mute Paul Roche
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    Aug 22nd 2015, 1:14 PM

    Stonecaster.

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    Mute VinHeffer89
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    Aug 22nd 2015, 2:17 PM

    If you’re going to have an affair, limit the number of people who may know about this affair. Imputing personal details to a website isn’t the most sensible of things given that once something’s on the internet, it’s pretty much there forever and people hack websites and steal information on a daily basis.
    Basically, Paul, these people are f*cking idiots and are now reaping what they have sown through their own idiocy.

    So yeah, am I casting stones? Not so much in terms of the affair itself, not really my business to do so, but in relation to the stupidity and shortsightedness?
    You betcha.

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    Mute von
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    Aug 22nd 2015, 4:09 PM

    You do Vin like it or not, thats life.

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    Mute Paul Roche
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    Aug 22nd 2015, 11:21 PM

    Well said Vin.
    It would be foolish to judge the morality of signing up to AM, but the act of trusting an unknown third party with intimate details about yourself is idiotic.

    As far as the web goes, one should only post what they want everybody to know. There is no privacy other than what happens in your head.

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    Mute mary carey
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    Aug 22nd 2015, 1:27 PM

    Proof read the opening sentence under the title.. Sort out ur ‘send’ and ‘sent’ journal!!

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    Mute Larissa Caroline Nikolaus
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    Aug 22nd 2015, 2:12 PM

    @Mary, proofreading and the journal, that doesn’t mix

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    Mute Resel
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    Aug 22nd 2015, 2:16 PM

    I neevr proofreed either.

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    Mute mary carey
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    Aug 22nd 2015, 4:48 PM

    They fixed the first one alas the second one went unnoticed!

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    Mute Mark Ryan
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    Aug 22nd 2015, 1:34 PM

    Another issue is the website doesn’t requite email verification so I could sign up someone who’s email I know so it’s not as straightforward as people imagine… Where signing up is so lax, do you think it would be tough for hackers to get sign people up and then blackmail them.

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    Mute Conor Power
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    Aug 22nd 2015, 3:44 PM

    There was a table of credit card transactions dumped also. Irish names and addresses included. Can’t deny that. Pointless paying someone off as the info is now essentially public domain.

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    Mute Stephen Duffy
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    Aug 22nd 2015, 5:17 PM

    That’s it Conor. Totally pointless… They have to face the music and those that will judge..

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    Mute Conor Power
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    Aug 22nd 2015, 5:24 PM

    I had a nosey, some interesting Irish folks in there :)

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    Mute Keith-James Walker
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    Aug 22nd 2015, 1:35 PM

    Why would extra terrestrials ever come here.

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    Mute ThatGuy
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    Aug 22nd 2015, 2:00 PM

    To have an affair?

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    Mute For Connolly
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    Aug 22nd 2015, 12:51 PM

    I’m sure bertie has some he won on the virtual horses.

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    Mute Niall Lonergan
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    Aug 22nd 2015, 1:47 PM

    I have no problem with this type of blackmail.

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    Mute John R
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    Aug 22nd 2015, 2:48 PM

    Niall I have a problem with this kind of blackmail as the people doing it are criminals and I would rather not see them in funds thank you very much.

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    Mute von
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    Aug 22nd 2015, 4:03 PM

    Karma, karma every time i hope wives husbands of these people take them to the cleaners and name them. ( love a bit of gossip me)

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    Mute Stephen Duffy
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    Aug 22nd 2015, 5:10 PM

    If the information is out there, it’s out there and paying off a black-mailer won’t hide the information or stop it becoming public knowledge.

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    Mute Kevin Gaines
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    Aug 22nd 2015, 12:48 PM

    Biffo does.

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    Mute The Dublin Cynic
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    Aug 22nd 2015, 6:17 PM

    Will they accept a cheque?

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    Mute Cynical Samwidge
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    Aug 22nd 2015, 4:53 PM

    Figuratively those poor knobbers are now between two hard places!

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    Mute john rich
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    Sep 25th 2015, 1:10 PM

    HELLO GUYS . ARE YOU IN NEED GO  HACKER ,  LOOKING TO RECOVER LOST ACCOUNT,YOU  HAVE  DOUBTS ABOUT YOUR SPOUSE? NEED SCHOOL RESULT UPGRADING, DEBIT  CLEARANCE ,  BUY  CREDIT CARD AND PERFECT MONEY ANYTHING YOU NEED  CONTACT -SUREHACKING247@OUTLOOK.COM

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    Mute Paul Roche
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    Aug 22nd 2015, 11:06 PM

    How expensive is it when a divorce lawyer takes a fraudulent marriage certificate through the courts to obtain an invalid divorce?

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