Borrowing Rates from The EFSF

Today I re-read this piece that Wolfgang Munchau published in the FT on September 28th. Titled “The Truth Behind the EFSF” at Eurointelligence and “Could Any Country Risk a Eurozone Bail-Out?” at the FT, it concludes that countries that tap the facility will have to pay interest rates of about 8 percent. If this were true, then countries like Ireland could face very substantial financing costs even after seeking help from this fund, which would make successful stabilisation all the harder.

Looking into this issue, it seems to me that Munchau’s assertions about borrowing rates from the EFSF are not correct. By my calculations (see below) the EFSF borrowing rate would be a bit below 6 percent. Now this is still very high but given the large sums that would be involved if the facility swings into action (financing budget deficits and bond redemptions for three years) this difference is likely represent a significant amount of money.

Munchau calculates his 8 percent figure as a 4 percent cost of fundraising for the EFSF plus 350 basis points for administration charges and lending margins and an additional 50 basis points related to the fact that the EFSF will be holding back some of the funds raised as a “cash buffer.” While fundraising costs, administration charges and lending margins and the cash buffer do all come into calculating the correct borrowing rate, my read of it is that Munchau’s calculation isn’t accurate on any of these three figures.

I’ll admit, of course, that this stuff is pretty complicated, so let me start with providing the official sources and then people can tell me if I’ve got it wrong.

The two official sources for figuring this stuff out are the EFSF’s framework agreement and this FAQ that accompanied it.

Let’s take the calculation bit by bit.

EFSF Funding Costs: The facility has a very complicated structure that might be worth describing in detail in a different post. The key thing, however, that impacts its funding cost is that it has been given a AAA rating by all the ratings agencies. The framework agreement tells us that

The interest rate which will apply to each Loan is intended to cover the cost of funding incurred by EFSF and shall include a margin (the “Margin”) which shall provide remuneration for the Guarantors.

The framework agreement is silent on what the likely cost of funds will be but the FAQ is clear about which rates are considered the benchmark for costs of funding and what the margin will be

The blueprint for EFSF support – although not binding – is the financial aid package to Greece where, for variable-rate loans, the basis is three-month Euribor, while fixed rate loans are based upon the rates corresponding to swap rates for the relevant maturities. In addition there is a charge of 300 basis points for maturities up to three years

Now, despite its AAA rating, the financial strength of EFSF will be seen as a function of its backers, some of whom are better credits than others. So, word has it that the fund will not be able to borrow at rates as low as the German government. However, these benchmarks look reasonable to me.

The German government is currently borrowing over 3 months at a yield of 0.48% and over 3 years at a yield of 0.93%. For comparison, the 3-month Euribor rate is currently 0.985% and the 3-year swap rate is 1.57%. If anything, these may be higher than the cost of funds that the EFSF can obtain.

Certainly, I can’t see what underlies Munchau’s premise of “Let us assume the EFSF raises the €1bn at an interest rate of 4 per cent” which implies a huge gap between the borrowing rate of the AAA-rated EFSF and prevailing interest rates for high quality borrowers.

Margin and Administration Fees: The lending margin is 300 basis points. Munchau adds in an additional 50 basis points for administration charges. I suspect this element of his calculation relates to the following section in the framework agreement:
An up-front service fee (the “Service Fee”) calculated as being 50 basis points on the aggregate principal amount of each Loan shall be charged to each Borrower and deducted from the cash amount to be remitted to the Borrower in respect of each such Loan.

My interpretation of this service fee is that it is a just a once-off charge and would not be repeated every year. So, for instance, you could divide the service fee by three when calculating the combined interest rate on a three-year loan.

Cash Buffer: So far, so good. However, there’s some bad news coming. To obtain the AAA rating, the EFSF operates so that its backers guarantee 120% of the amount that is disbursed. So, if you’re borrowing €100 billion, the EFSF raises €120 billion on the bond market and keeps back €20 billion as a cash buffer.

This is covered in the framework agreement as follows:

The Service Fee and the net present value of the anticipated Margin, together with such other amounts as EFSF decides to retain as an additional cash buffer, will be deducted from the cash amount remitted to Borrower in respect of each Loan (such that on the disbursement date (the “Disbursement Date”) the Borrower receives the net amount (the “Net Disbursement Amount”)) but shall not reduce the principal amount of such Loan that the Borrower is liable to repay and on which interest accrues under the relevant Loan.

Ok, so your eyes are glazing over at this point. Did you spot the bad news? As I see it, the bad news is that the section on “shall not reduce … amount … on which interest accrues” implies that if you’re receiving X in disbursed funds and the headline rate is R, you’re not just paying interest of X*R, you’re paying interest of 1.2*X*R. (Admittedly, it’s a bit confusingly written so maybe there’s another interpretation.)

Putting It All Together: So, all that explained, here’s my formula for what a 3-year loan would effectively cost (I’d imagine that Ireland would, if necessary, get a multi-year fixed loan that rather than a variable rate.)

Effective Interest Rate = 1.2*(3-year swap rate + Margin + Annualised Cost of Once-Off Service Fee)

Plug in the current 3-year swap rate of 1.57%, the margin of 3% and annualized cost of 0.167% (= 0.333*0.5%) and we get

Effective Interest Rate = 1.2*(1.57 + 3.0 + .167) = 1.2*4.737 = 5.68.

Note that in my calculation, the cash buffer element raises the interest rate by almost one percent which is higher than the half percent assumed by Munchau. However, the other elements of the calculation point to a lower cost of borrowing than Munchau has assumed.

Munchau’s conclusion that it is “hard to conceive of a situation where a country would both borrow from the EFSF and live happily ever after” may still end up being correct but I don’t think the borrowing rates are as punitive as he has projected.

57 thoughts on “Borrowing Rates from The EFSF”

  1. If the Eurozone cannot correct faults in the design of the Euro other than by this usury then the Euro is dead.
    A possible scenario – stabilization of bond yields followed by highly significant post budget drop with successful auction in early 2011. But any external stressor or mild market manipulation forces a return to astronomical yields in April 2011. That will be the real crisis and by that stage it may be too late for a bailout.

  2. Thought approx 5% was supposed to be the likely cost!

    If so I’m sure some highly dilligent individual will be able to explain why. Its a good point as I haven’t seen a properly convincing analysis yet.

  3. At those rates, if it wasn’t politically impossible, it’d be worth exploring the idea of a solo run to the IMF.

    If it comes to it, we’ll have the ridiculous situation of getting shafted by the ECB on the way up with lower interest rates and crippled on the way down with higher rates.

  4. @ Karl

    The margin for a 3yr loan is 300bps, while for a loan “longer than 3yrs” there is an additional 100bps, so i suppose Munchau could claim he meant for a long term facility it would cost more (though he rather obviously decided not to note this in the article!). So that would bring the rate, per your calculation, on a 5yr term, to 7.31%, still well under “8%” (5yr swap = 1.93%).

    However, re the 3yr swap – the 1.57% you quote is on a semi-annual (ie 6mth euribor) basis. Given that the “variable rate” is based off 3-month Euribor, you could further suggest that the fixed rate would be based off a 3-month-basis swap rate (i didn’t see anything which clarified either 3 or 6 month). This would come in around 1.39%, so the overall cost would be lower again, to 5.468% for the 3yr or 7.1484% for a 5yr (5yr quarterly basis = 1.79%).

    But fine work on this thread from you, the Munchau figures always seemed an awful lot higher than i had seen discussed or done myself on the back of an envelope (though i admit i hadn’t seen the 20% cash buffer clause – this was brought in more recently i think? This would also explain why, as Grumpy suggest, we all thought 5% would be the upper bound).

  5. I kinda have a very bad feeling about all this debt and repayment business.

    I presume the ‘economic model’ (which, by the way, is never actually stated) is that at some point our national income (whatever that is) will have a sufficient disposable element so as to enable us to repay both principle and interest. But is our faith in that un-named model well founded? Or is it delusionary? I fear the latter.

    Debt expands exponentially. A physical economy, linearly. When that debt line crosses over the aggregate economic output line … …!

    I reckon that is what has occurred. So no amount of electronic financial trickery can overcome the physical inability to generate the required real surplus. So what’s the ‘real’ agenda here? Postpone the real crash? Or what?

    As I said, I’m kinda concerned.

    Brian P

  6. My attitude on all this is “I should bloody well hope so” Bailouts are supposed to be feared with serious consequences for those who are endangering the rest.

    Just because the Irish government and finance industry views bailouts as a way to pass the buck and keep their loot doesn’t mean its right.

    Conditions should be closer to a prison than a health spa. We’ve with NAMA and the banks, what happens when a no pain bailout is given to junkies.

  7. @Karl,

    Many thanks for putting the effort in on this. I suspect the apparent lack of precision in the description of the costs of borrowing via the EFSF – and the possibility of using the calcs to come up with a high cost – may be the EFSF (and its principal backers) conveying a message to Spain, Portugal and Ireland: ‘we don’t want you knocking on our door if the market cuts up rough with you; we’re not a soft option; get your acts together and appease the markets.’ The attack on Greece in April/May forced the EU to come up the EFSF. It doesn’t like being forced in this manner and it’s damned if more of the peripheral countries will fall into it’s arms.

    And, Karl, since you have already made a compelling case for an immediate election – which is most likely going to generate a requirement for a combination of two of the three main factions to form a government – it would be an interesting exercise to estimate the likely cost of borrowing from the market for each of the three combinations that are, potentially, possible. And these could be compared with the likely cost of borrowing from the EFSF.

    This is the kind of analysis voters require to make informed decisions – and disinterested academics are in the best position to provide it.

  8. Great to see this post. I read the Munchau article last month and was horrified to see him talking about 7 or 8%. Having read this, I find it strange that he starts out with a 4% cost of funds.

    In the event that a sovereign default was on the cards and a country had to access the EFSF, wouldn’t it be likely that that the EURIBOR swap rate would increase dramatically? What was the this rate when before Greece was bailed-out?

  9. Wolfgang’s most controversial assumption in my eyes is the first assumption that the EFSF raises €1bn at an interest rate of 4 per cent. Can’t see how the markets would price the risk of AAA rated entity backed by the core at 4%.

    However it’s hard to dismiss Munchau – He has foreseen this euro crisis play for play!

    Maybe the market would feel the EFSF issuance would deserve a premium yield reflecting the possibility that that if push came to shove and Ireland could/would not repay the loan at original terms, politically there would be not be a strong enough will to bail us out. In other words, Germany would choose the split up of the euro as opposed to bailing us out at similar terms.

    So the price of the issuance would not be based on the true credit worthiness of the backers, but rather the perceived political will behind the structure. In addition to the lack of transperancy!

  10. @ Bazza

    euribor rallies a lot when there’s a worry about banks, but sovereign problems, in and of themselves, seem to have no affect on it. 3mth euribor was ridiculously stable in the first half of the year when Greece was hitting the fan, held between 0.70% and 0.634% for the entire Jan-May stretch.

  11. Greece of course has its own mechanism and Dominique Strauss-Kahn signaled at the weekend that beyond 2012, the IMF will continue its lifeline: “If the Europeans decide to do something, we certainly will do the same thing.”

    It is also looking more likely that in 2012, a haircut will be imposed on the private holders of Greek debt.

    There may well be good reason for Ireland to use the EFSF if growth in the advanced economies remains weak.

    Irish Economy: Why should the possible intervention of the IMF be viewed as ‘scary’?

  12. @Eoin

    that’s very surprising. If Ireland or Greece were to default wouldn’t that spell big trouble for the banks. As I understood it, Soc Gen, Deutsche and Munich Re would have been decimated had Greece defaulted, hence the accusations that Merkel was really just bailing out German banks and insurance giants and not Greece.

  13. Makes sense. Roughly the same rate as an IMF stand-by loan. It might still be advantageous for the government to use the IMF rather than the EFSF.

  14. just a lending comment: the 50 bps

    “An up-front service fee (the “Service Fee”) calculated as being 50 basis points on the aggregate principal amount of each Loan shall be charged to each Borrower and deducted from the cash amount to be remitted to the Borrower in respect of each such Loan”

    That is likely the same as a ‘loan arrangement fee’ and isn’t an interest rate of itself rather a further deduction so you borrower 100 (interest on €120) but you get €99.5 (if the charge is 50bps would it therefore be 0.6 on the total of 120×0.5?)

    Your rate when compared to an original value (par-50bps) of 99.5 would then be 5.48 so gross it up to get 6% which would be the actual coupon. obviously if its 0.6% instead of 50bps my calculation is off.

  15. @ bazza

    Deutsche Bank has very little exposure to Greek debt.

    Last May, European banks held up to €80bn of Greek bonds, with those in France and Germany having the largest holdings. Two French banks – Crédit Agricole and Société Générale – control Greek banks.

    Bernstein Research said French and German banks’ exposure to Portugal, Italy, Spain and Ireland as well as Greece amounted to at least 20% of their total foreign exposures. “A material devaluation of these assets would be likely to hit the banks’ book value hard,” they said.

    Citigroup analysts estimated the total European bank exposure to the peripheral countries (both sovereign and private credit) at €2.3trn, of which German banks have about €615bn and French banks €700bn. Loans to Italy total €770bn; to Spain, €700bn; Ireland about €460bn (this total is inflated by lending to banks in the IFSC offshore centre); Greece about €200bn

  16. A recent WSJ article had this quote from the EFSF Chief Executive:

    Mr. Regling also disputed estimates by some observers that borrowers would have to pay interest rates of up to 8% when tapping the EFSF, rates that critics had deemed too onerous to be of help to a troubled nation. He suggested borrowers might pay something closer to the 5% rate charged Greece last spring than to 8%. EFSF loans won’t be “cheap,” he said, but they also would not be too expensive to be practical.

    The full article can be found here .

    This is behind a paywall but the title is “Europe’s Empty Pitch: Officials Tout Bonds They Hope Not to Use” and is available if accessed via Google News. (Firefox users can also use the RefControl add-on to achieve the same effect).

  17. @MH

    I could be wrong about Deutsche, but your post highlights my point even more – that a sov. crisis would hurt the banks and therefore, one would expect the EURIBOR to increase dramatically.

    If, as Eoin says, this is not the case, it must be assumed that any losses that banks would take would not affact their credit worthiness.

  18. All,

    given that Banks and Insurance companies have spent the last 5 months selling their peripheral paper to the ECB, I would suggest that the commercial bank and insurnace sector would not be as damaged as some people think in the event of a generalised peripheral default. It is likely that the ECB would be hit hard.

    Munchau’s 8% number may be a bit high but maybe not so off the wall. The Irish govt has probably already discussed accessing the fund but may have baulked given the sticker shock.

  19. A good article about the background to the EFSF and some info on the proposals for its replacement can be found here.

    The Germans are proposing a “Berlin Club” which would allow for an orderly sovereign default with bondholders taking some of the hit (seems reasonable). However (although not mentioned in the referenced article) the proposal would also allow for the direct appointment of people by the Berlin Club to go in and direct treasury operations in the defaulting countries (Hmm – think there could be a little problem here – can’t imagine too many EU countries agreeing to Germans literally flying in and marching up the Treasury steps to take over a nation’s finances). Needless to say the German proposal doesn’t have much support.

    It does seem to be the case these days that Germany is out of step with just about everybody else on things like stimulus, QE/bond purchases, exchange rates etc, and are taking some extreme positions. The French (in the broad sense of Lagarde/Trichet/DSK) seem to be pushing more practical approaches.

  20. The idea of ‘Berlin Club’ seems pointless when we already have the IMF and Paris Club to manage debt restructuring like this.

  21. @Bryan G

    Agree with your assessment of the Germans being out of step. After all, they were the ones who limited the effectiveness of Basel III because the they worried about the effects on their dodgy Landesbanken.

  22. The 300bps payment to the guarantor is very expensive. Especially when you factor in a recovery rate in the event of default and the additional austerity measures that would be forced if a default looked likely. (Personally I would expect a new QE role for the ECB should a default occur).

    Supporting an ailing eurozone member shouldn’t result in healthy returns to stronger members. That said, it’s important not to incentivise countries to access this facility.

    Using the 300bps, I would suggest 100bps to guarantee with 200bps excess spread being trapped in a loss reserve. The accumulating loss reserve would decrease the credit risk of the guarantors or could be used to reduce the 20% OC. If the country doesn’t default and no longer needs EFSF funds, the accumulated loss reserves would be returned and used to repay principal their national debt.

  23. Paul Hunt,

    Thats seems a very dangerous exercise – to guess the markets response to various coalition options and then to introduce those guesses as a factor to be considered by voters.

    Even if independent academics could accurately assess the markets outlook is that something upon which a sovereign state should determine its govts. Are the interests of the markets and the state so perfectly aligned that they should become a determinant of a new govt.

  24. I’m often asked what could force us into the arms of the EFSF, what could be the catalyst? How about the exchange rate?
    The Fed has embarked upon QE2 in a novel form: they are going to target the price level (rather than inflation). Behind this rather technical debate lies something that Martin Wolf has spotted: Washington has noticed the 1930s-style adjustement mechanisms adopted by Europe (deflation imposed on the periphery by Germany). The US is saying no thanks and has worked out the end-game: a euro/$ exchange rate approaching 2. How’s your German economic miracle at that level? How long can you hold out with a mercantilist renminbi policy then?
    It’s a game of chicken between the deflationist ECB/People’s Republic of China and the world’s reserve currency. I know who my money is on.

    Guess who is caught in this crossfire, utterly dependent on an export miracle to offset domestic fiscal deflation? With an exchange rate going through the roof? Good luck with that.

  25. @simpleton

    we are in midst of global currency war ………. must be first war in history where paddy has little impact or direct involvement … but as you note, a war that has the potential to bury quite a few paddies …. lets see it hit 1.50

  26. @Michael H,

    They’ll have the tar’n’feathers out for you if you keep extolling the cuddliness of the IMF. I used to see three elements, but there really are four: EFSF – protection from the bond markets; EC – fiscal invigilation (with a bit of state aid and bank competition thrown in); ECB – keep the banking sytem afloat; IMF – free up the blockages in the domestic economy. That seems to be the division of labour in Greece – though I gather the IMF is less than pleased as it would do the EC’s and ECB’s job much better (but that would frighten the horses in the core EZ countries).

    We have 2 out of the 4 with the EC doing a line-by-liner on the 4-year fiscal programme and budget that will emerge and the ECB trying to see how it can unwind its liquidity support. Since the fear of god will be put into the lobby fodder, whatever the Government comes up with for the 4-year fiscal plan and budget that gets EC sign-off will get through the Dail. FG and Labour will huff and puff and go through the posturing routine, but I expect they know – and Messrs Cowen and Lenihan will explain – the reality.

    Next up is the state asset review and the semi-states, but that’ll probably be put in the ‘too difficult’ tray and then we could have the 3 by-elections. But the real biggie is the next time the NTMA enters the market. That’s when the EFSF and the IMF will loom.

    The problem with this setting up of hurdles and crossing them seems to be taking forever and the domestic economy keeps sinking. The rest of the world will be entering the next recession by the time we get out of this one.


    Don’t worry. Though there should be a body of relevant literature and enough evidence and data to make a reasonable stab at this, I can assure you no Irish academic will attempt it. It is a perfectly valid exercise; voters would not be compelled to take account of it. Most likely few would be aware, but it would be useful evidence for those that were. I think you would agree that the market would put different against each of the three 2-faction combinations.

  27. I think this whole thread misses the main point. The EU/IMF would impose stringent conditions before lending us funds at any interest rate. Who wants to lend to a state/company/whatever that a) has lots of debt already, and b) spends c60% more than income every year??? And while we would all suffer under the EFSF conditions, the contributors to this site would suffer more than I suspect, as public sector pay and pensions are not just out of kilter with the Irish private sector, but more importantly, also with the European average. Call the rate 5%, or 10%, the biggest effect will be on the psyche of people when they realize our government has built up the most generous system of pay and welfare in Europe, which we cannot afford, and the EFSF will not support. German taxpayers have to be considered too……

  28. Euribor is rising due to a (warranted) market perception that the ECB, especially going by Weber’s statements, will embark on tightening sooner rather than later. This is among the causes for the Euro’s recent strength and, maybe, the tightening aimed at will be achieved through currency strength rather than through interest rate moves.

    German 3 year yields have risen from a low in August of 0.62% – a 50% increase for them in the period.

    Irish 3-year yields can be tracked at They’re currently 4.10%. This is well, if not comfortably, below the 5%+ rates at which EFSF money would be available.

  29. @MH


    I wonder why the government feels it necessary to ratchet up the threat to the population of budgetary immolation perhaps it is because no one in government has gotten any prediction right so far. Terro is more immediate than reason. The Minister and his advisers seem to have less the equivalent of a crystal ball at their disposal and more the wooden foot. Would the conditions of EFSF funding be any worse than than the threats? Better to borrow at 5% from the EFSF over a long period than insist that the fatal Houdini stunt of 3% deficit by 2014 is possible. Given the foolscap list of corrections to previous debt estimates, the country seems more like the doomed Titanic as each day goes by.

  30. Eureka
    The EZ is based on fiat money and it is very much alive with usury. At least one religion has prescribed trules for allowing some usury. English kings in particular used devotees to avoid christian scruples and finance what eventually became the greeatest empire the world has ever seen. In a secular, ie non-papal, world, consumerism requires usury. Pay attention at the back!

    The strengthening of the Euro is interesting. Long may it continue. The higher up it goes, the further down the prices in Ireland, especially as the money machine is more broken in Ireland than elsewhere. But it is contrary to the usual theme of falling fiats? Will it last? I know I was suggesting interest rates had no where to go but up, but in fact I was expecting them to callapse along with the Bank of England rate. I am trying to urge caution on those of you who remain “irrationally exuberant” . No need to do so if interest rates are increasing ……

    I think it is not actually in the interests of the EZ to devalue at all, but I did not expect to see many in the EZ of the same opinion. Perhaps it is a temporary phenomenon as those speculating against the $US are using Euro for their main ammunition, given the Yen problems etc? Not all movements are aimed at Ireland. Most of the direct attacks on Ireland have taken place, but there are always opportunities in a crisis.

  31. Simpleton

    What impact will such an exchange rate have? Not much, I think. The USA is hollowing out and shifting all but their arms industry, includes aerospace, natch!, to China. Having the more expensive currency means the EZ will buy rawms more cheaply and can then improve them, not having hollowed out manufacturing to the same extent. They can also, taddah! buy whatever bargains are available as the depression deepens, as they are not deliberately destroying their savings ……

  32. “Brian Woods Says:
    October 14th, 2010 at 8:44 am

    I kinda have a very bad feeling about all this debt and repayment business.”

    Indeed! It all has to be repaid!

    The crisis point of the bubbles was discernible when the extra $ borrowed internally by private borrowers, was only producing additional private revenue to cover the interest if at a rate of 5% or so! No further borrowing would be helpful as all possible logical malinvestments had been made. Once the turning point was reached people found more and more competitors wanting to realize their investments and pay off the loans.

    The equivalent time will occur when interest rates have risen so that preople realize that they will face higher and higher taxes as services will have been cut so far that even journalists no longer call for cuts! Then, no matter what increases are necessary, the government will have the backing and the spine to impose war rates of tax (for you economists who do not know, this means 98% rates on passive income 80% + on earned income and 100% of income over certain levels of pre war time activity) Payback follows rather quickly. This is history folks. The ignorant among you, they are legion, will have to take it on trust! Things will get that bad. They have before. They will again. Prepare now. I am willing to assit for a%!

    Borrowing thereafter tends to become a very hush-hush and rare affair. It happens every 70 years or so!

    Tip to the wise: those implementing investigations into non-compliance are public servants. Having borne the brunt of attacks they will be no way sympathetic with those who have assets left…… loose yar arrows!

  33. My first port of call on this topic would be professional sources first and foremost (not what journalists write) such as the EFSF’s statutes and what it says about itself, (which is what Karl has done in his valuable analysis), and then move on to what other authorities, such as rating agencies etc say.
    Effectively the calculations (surely off the cuff) by the journalist seem wide of the mark.. Anyway this is what makes a market – information is imperfect, and those with better information tend to perform better.
    What rate could the EFSF issue at? One possible comparator for funding levels is EIB – it has a fairly liquid curve though, and the EFSF would be a new issuer, with a certain structure as eg the Moody’s report makes clear. Another possibility among several would be European Union bonds (ie those issued to support central and eastern European states).
    The EFSF documentation doesn’t allow us nail down a rate. It even says, “Decisions about the maximum amount of a loan, its price and duration, and the number of instalments to be disbursed would have to be taken by the finance ministers of the 16 euro area Member States unanimously.” later adding that “The blueprint for EFSF support – although not binding – is the financial aid package to Greece”.
    So rates will be the outcome of negotiation, should we be ever confronted with issuance. But as Mr Regling indicates in the quote above, the all in cost for a borrower could be close to 5%. Like for Greece, there could be different rates, as result of the conditions for each type of loan. But on the whole, we can expect a reasonable line will be adopted, like for Greece.
    Whatever the rate is, even if very low, that changes nothing for Ireland in many way. I have no doubt that the Irish taxpayer should make strenuous efforts to avoid the EFSF like the plague.
    Investors see piles of easy access to cash as cautioning moral hazard, and allowing governments spend more than is best for themselves. That is a key reason why Greece got whacked after getting its so-called “aid”. Investors feared that they were slipping down the seniority order and that the redemptions of their bonds would become politicised. The consequences were most unfortunate, and will last years. While it is easy to put a junkie on a drip, taking it off is no kettle of fish. I am sure any government, if financial rationality still counts, now would exclude such a fate immediately.

  34. @Eureka. Spot on.
    Borrowing at less than 1% and lending at 8%. You don’t need to go into the niceties of the intermediate calculations. They must have got their ideas from Smart Mortgages.
    If Wolfgang Munchau is reflecting official thinking at the ECB or EFSF then the conclusions are obvious.
    1. The ECB does not support this bailout and will make it virtually impossible for members to access.
    2. The immediate consequence is that we will have default by euro members leading to both sovereign debt crises which we have already and as a direct consequence further bank bond crises in those countries.
    3. The ECB as the euro central bank seems unable or unwilling to manage this situation.
    4. The question that has to be asked is are these usurour bail out rates being designed so that the eventual outcome will be further bank crises and a break up of the euro.
    5. Perhaps the ECB now view the forced exit of certain euro members as being immediately desirable.

  35. A general question to the forum.
    How much did Irish banks lose on the bonds / deposits of Lehman bonds, Northern Rock and other banks.
    Why is Ireland expected to pay bond holders in full when there was to my knowledge no such obligation on other non Irish banks that have defaulted?
    Could it be possible that the liquidator of Lehmans is demanding payment in full for all bonds from the same Irish banks that have lost money on Lehman bonds among others?

  36. @ Joseph Ryan

    Northern Rock losses? Eh none there sir, everything repaid in full.

    “other non Irish banks that have defaulted?” – there are none within the Eurozone, or wider Europe in general. Have been some in the US (ie Lehmans, WaMu), but legal structure and bank holding structure is very different there which is why it has occurred in some instances.

  37. @Joseph
    When Northern Rock was nationalised in 2008 – all the shareholders were wiped out. As far as I can make out they have not repaid the Government bailout loan but increased it to fund new mortgages.
    Interesting thing is that in 2008 they lost £1.4 bn and in 2009 £250 mn. As a result they awarded themselves over £13 million in staff bonuses! Bankers really do exist in a different dimension to the rest of us.
    BTW they reducd the 100% guarantee on deposits in NR this year to just £50,000

  38. @ Ciaran

    That’s entirely rational, except for your use of the term ‘moral hazard’. A great deal of moral hazard has been deliberatley created by financial services industry, to underpin the bonus-driven short termist ethic.

    That value system is also pretty deep rooted in the bondolder community. Fear of financial loss is natural, and understandable, but it has nothing to do with morality.

  39. The first problem is with the design of the Euro. The second is that Ireland has become the roulette table of Euro viability. It’s not about economic fundamentals any more – it’s about a bet. How far can you push the peoples of Europe before the Euro cracks? And how much money can you make as it gets there?

  40. @Paul quigley
    I don’t think moral hazard is the correct term, and the issue is not about really about morality, except when it comes to other governments lending to us if that what ultimately transpires.

    If typical government bond investors (eg pension funds) won’t risk their investors’ funds on Irish bonds (which appears to be the case at present, though Ciaran would know more about than the rest of us) then European politicians and IMF officials must also consider their constituents (tax payers) before they give loans to Ireland that European pension funds consider to be too risky. It would be immoral for them to lend money to us if, for example, we paid our nurses, doctors, lecturers, teachers etc more than they pay their own public servants.

    So what does the average professor or teacher earn in Germany? Or in Slovakia or Portugal?

    Those pay scales are coming here…….

  41. @JCY
    ….and what is the average teachers rent or mortgage in Germany or Slovakia?
    You can’t divorce the issues of pay and indebtedness.
    And remember we didn’t get this indebted because we were buying mansions.
    Our level of indebtedness is a direct consequence of membership of a shamboluc single currency!

  42. @eureka
    We are in a horrible position. Again, if pension funds and other traditional investors will not buy our bonds, we must either immediately stop spending c19bn more than we earn in taxes, or come to some agreement with our partners in europe. And reasonably, morally, can we ask that their taxpayers fund our public sector wage levels? It would be political suicide for a German, french , Dutch etc politician to lend us money without making strenuous demands of us.

    At least now this website is starting to focus on the bigger picture, our huge fiscal crisis, rather than just focusing on nama/Anglo etc. It is easier to just avoid it, and criticise nama/banks/bondholders, isn’t it?

    When reasonable people finally review how badly we messed up this country, I think benchmarking, partnership, and all politicians will be assigned a bigger portion of blame than the regulator and banks. No-one served the citizens well.

  43. @Eureka
    “Our level of indebtedness is a direct consequence of membership of a shamboluc single currency!”

    Our current level of indebtedness is a consequence of the money we borrowed.

    Our regulatory system enabled Irish banks, and one bank in particular, to borrow vast sums, which were then largely wasted on ghost estates and vanity projects.

    The government used income from one-off capital gains taxes to expand the public service to unsustainable levels. Our political system facilitated this – we voted them in – we’re responsible.

    There were plenty of warnings around the time of our joining the euro that we would need to manage our financial affairs differently in a low interest rate environment. We didn’t – our political and public administration class failed us completely as a community, and as a community we stood by and let them.

    Let’s not blame the euro – other eurozone countries managed their finances responsibly and didn’t spend a decade talking about house prices.

  44. @ JYC

    i agree completely with your point, but will only note that there have been some on here who have tried to show that the deficit and the structural basis of our economy, rather than NAMA/Anglo, are the real problems that we need to overcome if we are to stabilise the economy, and the nation as a whole. As you said, some people are far more interested in the “easy” and snappy headlines pertaining to Anglo and NAMA. Check out the amount of comments that happen on NAMA/bank threads vs general economic ones and i think you’ll understand why the coversation is slanted in the way that it is.

  45. @Bond, Eoin Bond
    The structural deficit was allowed to develop because exchequer receipts boomed as a result of the explosion of credit.
    That explosion of credit was due to:
    1:Germans prefer to lend their surplus than trade with it and
    2:People whe we thought knew better in banks and bondmarkets had been lobotomized by greed.
    Yes we need to cut the deficit but there’s much more to this than just that…

  46. @ Eurkeka

    again, completely agreed. Our economy became incredibly addicted to credit at multiples points along the line – taxes, spending, job creation, asset growth, economic growth, overall wealth etc. But even if our banks did not have massive losses, or those losses were not being bourne, rightly or wrongly, by the taxpayer, we’d still have an enourmous defict to get under control. That point seems to be lost on some people.

  47. @Bond, Eoin Bond
    Interesting that addiction is the analogy used.
    If we accept that this is what this is then:
    1: what do we do with the dealers?
    2: and do we opt for cold turkey or slow detox?
    The EU is in the conflicted position of being the addicts doctor paid for by the dealers. It is also in the strange position that it facilitated the development of this addiction in the first place.
    The bottom line is that Europe was pivotal in letting this happen. It must do much much better at devising a solution. At the moment this addict is in an isolation ward where few can hear its groans. Contagion is likely and by slow death it could be adios Euro. Some people will do very well out of that!!

  48. @eureka

    Apart from the Germans, bankers and bondholders, is it anyone else’s fault?

    And I suppose if it’s their fault, they should just give us the money we need?

    Here’s another narrative – we had an unsustainable increase in tax receipts over a number of years and made pay agreements, established welfare entitlements and took people out of the tax net based on that unrealistic, temporary tax increase. Now we can no longer afford these, cannot devalue our way out of the mess, and tragically, a generation of people have huge debt levels and devalued assets. And the next penny to drop with anyone in the private sector looking at their pension funds is that they have been obliterated. Which of course is not the prime concern for those who have lost their jobs.

    There are no easy ways out of this, but I think our best chance is to stop avoiding the biggest issues, and to try to reduce the deficit in as fair a manner as possible. That’s where morals come into it. And maybe we’ll be lucky and get a growth spurt to help us along, or maybe things will prove to be worse than expected in the rest of europe and the ECB/EU will be forced into taking much more substantial action that will make matters easier for us.

  49. @JCY
    “we had an unsustainable increase in tax receipts over a number of years”…because of too much credit….because of the Euro.
    Here’s morals for you – a 70 year old man who has raised a family, paid his taxes, will spend the end of his life in excrutiating pain because somebody decided a European bondholder mattered more. A mother watches her son drive off with the local scumbags because she can’t persuade him any more that sticking to the straight and narrow lands you anwhere other than the dole queue…
    If you applied morality to Europe then when exactly should the Germans stop paying for the slaughter of 6 million Jews and countless other minorities?
    Morality cannot become an excuse for stupidity.

  50. @ Eureka

    Im sorry, but how exactly will a 70 yr old man spend the rest of his life in “excrutiating pain” as a result of the government policy on banks and bondholders? And how exactly is the decision by a young lad to head off with some local scumbags anyone else’s fault other than the young lad? Im all for being open and honest with how things got to where they are, but please, lets remember a fairly important thing called personal responsibility, and for the love of God please stop moralising to the extent that you are.

  51. @Bond, Eoin Bond
    Can you really not see the connection between diverting money to bond markets and a crumbling health service?
    Can you really not see the connection between same and social disintegration?
    Are you really that insulated from what’s really going on?
    As for personal responsibility – glad you brought it up – think David Drumm and think bondholder buddies. No personal responsibility for them!!!
    They’re not called morals, they’re called values. You will not find them in the bondmarkets!!! Take a drive. Talk to sme real people – not just money-lenders!

  52. @ Eureka

    so the tale of the “70 yr old man spending the rest of his life in excrutiating pain” isnt actually a real life story, but something you’re just using for dramatic effect? Gotcha.

    Mismanaged or misallocated health services exist across the world. Social disintegration exists across the world. Some of our domestic problems are of course due to the problems with out banks and the costs they have bestowed on us all, but an awful lof of the problems would still be here regardless of the banks. Large parts of our society, despite the boom, remained cronic havens of drugs and crime and poverty. Trying to pin all the blame on the financial crisis isn’t going to solve anything in a meaningful or sustainable way, and trying to make out that i somehow live in some ivory tower or dont “get” whats going on in the real world is a tad irritating as well as a tad idiotic.

  53. @Bond, Eoin Bond
    Apologies if I irritated you – we’ll never see eye to eye on this I suspect.
    I accept absolutely your points about public sector mismanagement and I accept absolutely your point about cutting the deficit. And I’m not actually anti-bond market – when the system is managed prudently it works really well. But we cannot force Irish society to take all the hit. We need to push Europe for something like a several year low interest credit stream tied to realistic budgetary targets to allow us to work our way out of this less painfully. 2014 should become 2020, for example.
    (BTW re dramatic effect – ops like hip replacements are put back every time a surgical ward closes)

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