Month: October 2010

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.

Continue reading “Borrowing Rates from The EFSF”

Two Seminars at TCD

There are two interesting economics seminars at TCD in the coming days:

1.  Daniel Leigh (IMF) will present the recent WEO study “”Will It Hurt? Macroeconomic Effects of Fiscal Consolidation” 9am-10.30am on this Thursday

2. Gylfi Zoega (University of Iceland) will present a paper next Tuesday 12.30-2 on the Icelandic situation: “Lessons from a collapse of a financial system”

Both seminars are in IIIS seminar room on Level 6 of TCD Arts Block. All welcome.

Gender Gap

After the EIU, the WEF now also has a global report on equality between the sexes.

Ireland comes 6th out of 134 countries. That is great.

The build-up is peculiar, though. Ireland tops the bill on equality in educational attainment, although bonus points seem to be given for absent men at third level.

Ireland could do better on wage equality for similar work, on labour participation, and on senior jobs — but does rather well on uncorrected wage equality and on female professionals.

I guess that the data are somewhat older, and Ireland is getting points in gender equality because young men left school to be builders.

Ireland does well in political representation, primarily because of Mary Robinson and Mary McAleese. I would think that the largely ceremonial presidency should be discounted. Ireland does rather more poorly on female parliamentarians and ministers.

It gets strange on “health and survival”. Ireland ranks 89th. One subindex is female to male life expectancy. Irish women do not live long enough compared to men.The other subindex is male to female births — 106 boys for 100 boys, but surely not because of selective abortion or infanticide. [THIS PARAGRAPH WAS CORRECTED]

Not sure what to make of this. Ireland’s rank is too high and too low at the same time.

Fairness and Fiscal Strategy

In addition to the budgetary strategy itself, I hope the Government are hard at work on the political strategy for the four-year plan.   Unfortunately, it seems chances are fading of a limited degree of political consensus to support the credibility of the plan.   As I have written before, I think it will be essential that people focus on the overall fairness on the package rather than on individual measures that particularly target them — there will be lots of the latter for all of us.   The ESRI’s SWITCH model is the best tool available for establishing the allocation of burdens for the plan as a whole.   Tim Callan and co-authors show the power of the model at today’s Budget Perspectives conference:  paper here; slides here.

In the UK the new government appear to realise the importance of the overall perception of the fairness of package, and the debate there is more advanced.   Philip Stephens has a nice piece on the politics of fiscal adjustment today’s FT.   (As a read it, it is hard not to think of the damage done by Mr. Sutherland’s fly-in pontificating.)  Using the example of changes to child benefit, Stephens captures well the challenges involved with coming up with a package that is widely viewed as fair:

Fairness, of course, lies in the eye of the beholder. Though it might seem entirely reasonable to most people that those earning more than £44,000 a year or so should lose child benefit, the anomalies thrown up as between two- and single-earner couples appear less so. What will ultimately matter, though, is how the nation comes to see the spending package as a whole.

We may know more after the weekend. The title of Brian Lenihan’s Keynote Address at the DEW 33rd Annual Economic Policy Conference in Kenmare is “Current Issues in Political Economy”.  

Grandfathered permits

Cement companies are bound to make a lot of money from selling surplus CO2 emission permits; see Irish Times.

The atmosphere is the common property of humankind. The European Union appropriated part of that. Instead of using this to the advantage of all Europeans, it decided to give most of it to selected companies and some of it to the Member States. The government of Ireland decided to pass its share on to the same companies.

These decisions were made years ago and cannot be reversed. In fact, emission allocations have been decided until 2020. We’ve been had, again.