# EFSF Charging 7%?

During the discussion of the bailout on Prime Time tonight, the prospect was raised (and not denied by Minister Batt O’Keefe) of the EFSF charging 7% to Ireland for its loans.

It may be worth taking at look at the calculations that I did on this issue a few weeks ago. I worked out the formula for the interest rate at the time as

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

which worked out at the time as

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

The three-year swap rate is now 1.9%, which would give

Effective Interest Rate = 1.2*(1.9 + 3.0 + .167) = 1.2*4.737 = 6.08.

The government’s most recent projections show the debt-GDP ratio peaking at 106%. This is prior to the admission that large amounts of additional money will be borrowed to recapitalise the banking sector. Piling on an interest rate of even 6.1% onto the likely debt levels would greatly reduce the prospect of Ireland avoiding sovereign default. An interest rate of 7% would be grossly unacceptable.

Put simply, if these reports are true, the government needs to refuse any deal based on such a high interest rate. Indeed, unless the government feel compelled to play their role in a morality play in which Ireland is used as cautionary tale, they should refuse any deal featuring a rate higher than the 5% rate that Greece obtained.

Update: As commenter Tull points out, while we’re drawing down the money over three years, the relevant maturity for the interest rate would be length of time before we have to pay it back.  Plug in seven years, for example, and we’d get

Effective Interest Rate = 1.2*(2.67 + 3.0 + .5/7) = 1.2*4.737 = 6.88.

## 178 replies on “EFSF Charging 7%?”

I posted this on a previous thread but thought it was worth posting again it is an extract from an article in the English version of Spiegel Online, an interview with Peter Bofinger a member of the government-appointed German Council of Economic Experts known colloquially as the “Five Wise Men” – he says that applying punitive interest rates is against Germany’s interests.

“The rescue of Irish banks would also mean the rescue of German financial institutions. The arrears that Irish debtors owe to foreign banks amount to around 320 percent of Ireland’s gross domestic product. One has to ask oneself if the Irish state would ever be in a position to meet such huge commitments.”

“Euro-zone countries apply for help when they have extreme financial difficulties. It is certainly not helpful to then accentuate these difficulties by adding on further interest. It is also better for Germany when problem countries succeed in paying off their debts at relatively favorable interest rates, rather than pushing them into insolvency by adding a punitive surcharge of 3 percent.”

http://www.spiegel.de/international/europe/0,1518,729819,00.html

hoganmahewsays:

Is it now both hopeless and serious?

Karl,

If you price it off the 10 year swap rate of 2.9% and you get to 7.2% by my calcs.

Hard to see how that level of debt is sustainable.

Current GGD is 115bn add the bailout of 85bn draw down over 4 years and the GGD will be 200bn.

Optimistically GNP might be 150bn in 4 years time. That would put debt to GNP at 133%. With interest payments of circa 10bn pa.

How is it possible to avoid default?

Kevin Donoghuesays:

This morning Bloomberg was quoting the Dutch Finance Minister: “We agreed that it will take place at about the same conditions and pricing as with Greece.” Is there any reason to suppose he’s wrong? A non-denial by Batt O’Keefe means nothing at all. Quite likely he just doesn’t know.

Really, the situation is bad enough without speculating about whether the roof is about to cave in.

bill hobbssays:

The mollycoddled, pampered Greens say they acted in the national interest. Smack bang in the middle of critical negotiations they weaken the bargaining position. Better had they waited to opt for partial pregnancy status on more substantive grounds. Instead they shot their load in a fit of pique and anxiety.

Joseph Mary Plunkettsays:

We will pay a billion per word in interest for the undergraduate crawling breathless comment about Bismarck and Castleknock, that featured in the Financial Times

@ Tull

From the EFSF FAQ

“fixed rate loans are based upon the rates corresponding to swap rates for the relevant maturities.”

http://www.efsf.europa.eu/attachments/faq_en.pdf

So the ten-year rate shouldn’t be entering the formula.

But if the reports are true then I seem to have underestimated the rate.

seafoidsays:

No JMP

It is all Morgan Kelly’s fault. If he hadn’t written that article the ECB window would still be open.

Keith Cunneensays:

We should welcome a 7% rate – it may be possible to wake up the Irish executive that its role is not to manage but to make poltical decisions.

Nah perhaps not….. Volcker for ECB president may do it however.

My suggestion to the ECB – forget about this strange chicken hybrid debt vehicle that you are offloading and charge us 20% instead of 1.5% – I dare yaa boy.

Kevin,

technically this is the same deal as the Greeks got adjusted for the longer term.

One problem though how do you stretch out 85bn over 9-10 years.

Might 7% be a spoof to get us to raise our CT rate in exchange for a lower interest rate?

Or are the Chinese saying they won’t buy at anything less than 7% based on their own risk assessment??!!

@ Kevin

“A non-denial by Batt O’Keefe means nothing at all. Quite likely he just doesn’t know. Really, the situation is bad enough without speculating about whether the roof is about to cave in.”

Allright, I’ll shut up then and, in the interest of not rocking the boat, we won’t bother discussing how opposition politicians are saying the interest rate will be 7%.

Honestly, what planet are you on?

Gregsays:

The reports are not true.

Just another red herring like Corporation Tax.

I said two years ago that this was a propaganda war.

I referenced.

http://en.wikipedia.org/wiki/Big_Lie

I was ridiculed.

The purpose of the propaganda is to keep your eye off the prize. It is called miss-direction.

The prize is to get Ireland (the State) to accept the debts of German and French banks.

seafoidsays:

They had to backtrack over the restructuring plans the week before last. If 7% is true they’ll have to reverse direction again. Imagine how this would go down in London tomorrow.

Karl

The info seems a bit scrambled. If you were drawing down money over a 10 year period would 7% be reasonable?

On the other hand we would need a lot more than 85bn over 10 years?

Is it possible that 7% refers to the bank recap? The Bailers could be looking for a (sort of) equity return on that money.

Some of the opposition and journo sources in LH have been more on the money that the govt.

Jimbosays:

Are we sure it is a 3yr facility? A longer term loan would get you to 7% or so as you adjust the swap rate.

This is horrifying news if true and they really would be kicking us (over the edge) while we’re down.

Paulsays:

5% or 7% it’s probably immaterial as we will end up defaulting anyway. At this rate we will be asking the N. Koreans for a dig-out never mind the Chinese.

@ Tull

Ok, I’ve probably been underestimating it indeed. We’re borrowing the money for three years. But of course, we don’t know what the maturity over which we’re paying it back is.

So, there you have it, plug in longer rates and you’ll easily get 7%.

All,
Now I realise that our A team of negotiators is not that great but did Dr H. undermine our negotiating stance (weak and all as it was) with his solo run to Morning Ireland last week?

@Tull
“Is it possible that 7% refers to the bank recap? The Bailers could be looking for a (sort of) equity return on that money.”

If the bailers charge us 7% they will be getting nothing in the return when we default.

Ahura Mazdasays:

I’ll be consistent in my message- time for the ecb to be allowed by gov bonds at close to zero interest rates. This is the only way pigs will correct their finances. Otherwise the euro is likely to fail.

Brian Woods IIsays:

Can we make this a one off test between the good guys and the bad guys. I say that we will not be charged more than Greece’s 5%. The other side says it will be 7%. We will know soon who is right.

Gregsays:

Karl,

Of course as you point out 7% is simply not affordable.

Here’s a prediction for 2013. A new currency. Why did Merkel choose 2013 to punishing bondholders? Well, I’d say it’s going to take that long to unravel the mess.

The entire purpose of getting Greece/Ireland/Portugal/Spain/Italy (GIPSI’s) to load up with sovereign debt is that they can be cut off when Germany and France have finally tunnelled an exit from euro hell.

The Euro was a flawed political project from the start. It was never a currency.

By the by. Ireland cannot afford to pay this debt even at 5%.

All the rest is bread and circus.

hoganmahewsays:

@tull
“did Dr H. undermine our negotiating stance (weak and all as it was) with his solo run to Morning Ireland last week?”
No, I don’t think so. I don’t think it was a solo run either…

If just 85 bn is on offer, that means that the ECB will continue to hold the current repo it has. It effectively has to roll it over. The ICB will have to take more if the deposit run continues/more bond redemptions come up.

The fund is neither large enough nor cheap enough to replace repo funding. Ireland remains systemic and it will get systemicer… 😳

D E,

I meant to ask was 7% the charge on the recap portion only.

Greg is right, I doubt if we can afford 5%.

Ahura is right to, either the ECB monetises the debt or European Bank capital vaporises and so goes the Euro, European project and the global economy.

Gregsays:

Joseph

“We will pay a billion per word in interest for the undergraduate crawling breathless comment about Bismarck and Castleknock, that featured in the Financial Times”

Sweet suffering Jeebus.

Do you people ever get over losing your virginity at university?

Bond. Eoin Bond...says:

@ BWII

i simply don’t think it will be higher than 5% because i simply don’t believe the EU is that ridiculously suicidal.

Any thoughts on what needs to be done to fix the euro ? Do German, British, French and other banks need to discount their loans to Ireland, Portugal, Greece etc? What happens then?

Kevin Donoghuesays:

Honestly, what planet are you on?

I’m not sure. I thought it was my birthplace, an utterly insignificant little blue green planet orbiting a small unregarded yellow sun, far out in the uncharted backwaters of the unfashionable end of the western spiral arm of the Galaxy. But it seems to have changed recently in ways I cannot fathom. Hopefully Ford Prefect will show up soon and explain what the hell is going on.

I suppose it’s possible that EU leaders are daft enough to try a rate of 7%, but if they are that crazy practically anything is possible.

I would be worried that our leaders would think that 7% is a good deal. The Dept of Finance has shown no aptidude at maths and the Central Bank has little skill in looking after an banking system.

grumpysays:

Hmm. Even the 5 – 6% range being discussed earlier was kind of a commercial loan, not a “bail out”. Maybe its just conditioning among an intelligencia bombarded with the “dig-out” culture that led to an expectation of something else.

This is getting a bit binary. If there is no fudging – and it is a loan rather than part loan, part gift – then it seems to me that this is something you sign up to with the intention of defaulting in due course. For the last decade I have been continually amazed that the Irish leadership has repeatedly been able to make me feel insufficiency cynical. Perhaps they really are that stupid.

The remark by that Batty bloke that the negotiations were being led by Honohan was probably bollocks. I would not be surprised if he is in the background and a deal, any deal, is just being made by Cowan.

Gregsays:

Bond. Eoin Bond

” simply don’t think it will be higher than 5% because i simply don’t believe the EU is that ridiculously suicidal.”

Have they met Bertie Ahern?

@BW II
“Can we make this a one off test between the good guys and the bad guys. I say that we will not be charged more than Greece’s 5%.”

Is Greece actually borrowing at 5%? Or do the same calcs used by KW apply.

@ Kevin

Apologies for the invective. But this seemed credible enough to me to discuss plus messing around with the formula and plugging in longer-dated swap rates make a rate this high seem credible.

Seems worth taking up a bit of space on tinternet to discuss.

David O'Donnellsays:

@Karl Whelan

‘An interest rate of 7% would be grossly unacceptable.’

7% is off the wall – beyond default and well into revolt. One hopes this is simply black humour of the most irresponsible type …

anonymsays:

@Greg

Yes, this does look as if it could be a negotiating/PR tactic to generate enthusiasm for 5%. “Rejoice! a rate at which we might be able to avoid default assuming uninterrupted economic recovery over the next three years! The effort to bail out Europe’s banks is back on track!”

Bookwormsays:

The EU is a disaster at managing crises. We would be much better off just dealing with the rational IMF that does not have other agendas.

humble apologies for frightening the horses by introducing the 10 year swap rate.

robertsays:

Do you not get it yet? You have been screwed! The banks are not in debt, they have your money in “International Banks” Time to wake up..

Gregsays:

Bookworm

“The EU is a disaster at managing crises. We would be much better off just dealing with the rational IMF that does not have other agendas.”

“The EU is a disaster”

Fixed that for ya.

anonymsays:

Just an idle thought: is it at all possible that the EFSF negotiators know something about future Eurozone inflation that we don’t?

The Alchemistsays:

Why would any Irish government borrow 3-year money at 7%, a rate marginally higher than a four year bond? The rate must be much lower to discourage a default. Think Greece rates, but remember that Mr Rehn was very involved in ‘helping’ Latvia.

Gregsays:

anonym

Thanks.

Been saying it for two years.

The entire point of all of the “apparent” screw-ups was to keep your mind of reality while you were lead to the slaughter.

hoganmahewsays:

@The Alchemist
I am presuming it is 9 year money with a three year window to draw it down. Otherwise we end up bust again in three years. With inflation in the eurozone at under 2%, we don’t have time in three years to become slowly competitive.

AMERICANEsays:

Amusing that you guys are actually using formulas to determine how much debt you can service. As if Ireland could dig it’s way out of this by paying off it’s debts while the US simultaneously creates mountains of dollars to buy all assets. America never could and never will pay it’s bills. Try and do the math on America’s debt…you will laugh at how ridiculous it would be for America to even attempt such a thing. The debt is out of control.

Your debt will grow faster than your ability to pay it. This is by design. Debt slavery. Dont’ you get it – you are being robbed and you are paying the robber to rob you further.

Gregsays:

Ireland cannot pay €200bn of debt.

It cannot even service that debt @ 5%.

You are being miss-directed again.

Time to default.

“Attack ships on fire off the shoulder of Orion”

Time to die.

ceteris paribussays:

@ Eoin

‘i simply don’t think it will be higher than 5% because i simply don’t believe the EU is that ridiculously suicidal.’

The ECB have demonstrated their suicidal tendencies in triggering this latest crisis.

hoganmahewsays:

Would 7% on 85 bn over 25 years be enough to turn a 7.5 bn adjustment into a 15 bn adjustment?

David O'Donnellsays:

@all

Statement from the Elders of the Goths:

We have no intention of repeating the errors of judgement of the 3rd and 4th centuries. This time we will be returning all the way back to and across the Danube to sort out that little affair between us …….. our Iberian, Greek, Roman, and Irish Brigades will be joining us.

Eurekasays:

Do not underestimate the ineptitude of the European political elite.

Oliver Vandtsays:

@Greg
“The reports are not true.

Just another red herring like Corporation Tax.

I said two years ago that this was a propaganda war.

I referenced.

I was ridiculed.

The purpose of the propaganda is to keep your eye off the prize. It is called miss-direction.

The prize is to get Ireland (the State) to accept the debts of German and French banks.”

+1….at likely 5% (or even less).

Alsays:

@ Greg
Is there anyone in the political classes that cop on to this, or are they all on the Euro shilling…
Who to vote for…

Jamessays:

Seriously has anyone just seen BL on Vincent Browne? Talk about double counting! As a starting point did he really add the €24bn to be repaid over the next few years to the existing debt, of I think he said €89 bn, to get one of his starting figures. That’s before even allowing for him forgetting that the €20bn (his figures) pre-funding is also surely part of the very same €89bn. At that point eyes glazed over & I began to lose the will to live!

JoeJoesays:

Have ye taken your money out of BoI, AIB, An Post savings bonds?

AMERICANEsays:

Irish need to claim (nationalize) what oil remains in the N. Sea, become energy self sufficient, and default on your debts. Start over w/ a clean slate.

Simple as that.

grumpysays:

I can imagine the EU and IMF ofering Cowan 5.7%.

Cowan thumps the table and insists that its 12.5% or nothing.

Alsays:

@ Americane

The north sea!!!
Take a look at the map before you post again.
Are your sure it isnt Tyreland you are on about….

Shay Begorrahsays:

Does anyone have figures on the long term costs to a country of bank’s defaulting on senior debt or sovereign debt? When (if ever) do living standards recover?

I suppose what I am asking is what kind of contingency planning can a country do for that situation.

My personal preference is to split Ireland into a “good” and a “bad” state with the existing state’s debt and bank “investments” gradually wound down.

No seriously, the French would understand one Republic never being enough.

Alsays:

Great Vincent Browne on tonight!!!

Brian Lucey and Paul Summerville, and two … other people

zhou_enlaisays:

If we must not default on senior debt in the banks in order to safeguard eurozone and other banks and the international community want us to take on a great burden for that reason then they should give us cheap money to ease our pain. I am all for helping our international neighbours who have been very good in helping us. However, the deal must be fair and this is our last chance to get a fair deal.

Oliver Vandtsays:

@JoeJoe
A bank run would leave us utterly dependent on the pity/self-interest of strangers. I think it would be bad. Although maybe not as bad as 7%….

grumpysays:

@Brian Lucey

POKER PLAYERS!!!!!!!

grumpysays:

Some of us recall what happenned when the UK telcos used that tactic for 3G licence negotiations!

Good poker players are good at poker. Good horse dealers are good at trading horses. All you need is competence combined with a decent strategic appreciation of the situation and some market savvy – not yet more chancers.

Keith Cunneensays:

I never imagined Lady Lavery as a nuclear weapon but she was a bombshell.

Frank Galtonsays:

At the risk of looking for sanity where there is none, any possibility this is just the pricing on the part of the program that provides capital to banks?

Oliver Vandtsays:

@JoeJoe
Remember too:
“A (bank) run isn’t the answer……….unless you’re top of the queue.”

Oliver Vandtsays:

i.e. by taking your money out someone else may lose all their’s.

Gregsays:

Frank Galton

“there is none, any possibility this is just the pricing on the part of the program that provides capital to banks?”

That is the only point of the entire exercise.

By the way.

It’s not the Irish banks.

It’s the German, French and UK banks.

The next peice of propoganda you will hear is.

It’s the Pension funds.

In 3 … 2 … 1

Gregsays:

zhou_enlai

“If we must not default on senior debt in the banks in order to safeguard eurozone and other banks and the international community want us to take on a great burden for that reason then they should give us cheap money to ease our pain. I am all for helping our international neighbours who have been very good in helping us. However, the deal must be fair and this is our last chance to get a fair deal.”

Just swallow the pill.

At this stage I don’t care what colour pill you swallow.

Oliver Vandtsays:

@Brian Lucey
I hope your figures on VB are absolutely unimpeachable. There is a debt mountain and the vested interests trolls now admit this but if you’ve got anything wrong they will crucify you anyway. I don’t know why, as it hardly seems worth it. They are a bit like the Japanese soldier who stayed in the jungle for 30 years because he didn’t realise the war had ended.

David O'Donnellsays:

@AMERICANE

Good evening!

Default is oft a best option. Of course, you have had more empirical experience of these darn banking system debts on your side of the pond – and if they can’t be carried – well, they can’t. May I assume you remain essentially capitalist over there (-; Moreover, if the darn debts are not their own, the intelligent Irish citizen-serfs should figure it out – they will pay the sovereign but default on the banking/financial system residue; and so should the citizen serfs in Greece, Portugal, Italy, Spain, and all other EU nations. Resolution needs to be central led – and change present policy at EU level.

ceteris paribussays:

S&P revise outlook

“With domestic demand unlikely in our view to recover until 2012, gross debt to GDP at end-2011 looks set to exceed our previous projections of 120 percent,” S&P said today.

By how much?

AMcGrathsays:

@Keith – hasn’t Lady Lavery has been replaced by Blanche Dubois in recent times

ceteris paribussays:

“It appears that the day of reckoning has arrived,” said David Begg, head of the Dublin-based Irish Congress of Trade Unions, the umbrella group for unions, which is organizing the demonstration. “The Barbarians are at the gates.”

Hopefully Croke Park gates

Celtic Phoenixsays:

Lets all pause, take a deep breath and remember it was Batt O’Keefe talking.

Also, the Germans can add and unless theyve decided they want the DM back or us out of the Euro this wont happen. It is in everyones interest that we pay our debts.

Having said that, a concerned citizen I really hope P.Honohan is front and centre on this, and has his A game with him.

P.S
I also hope the greens get wiped out at the next election, but thats neither here nor there.

Gregsays:

Al

“Is there anyone in the political classes that cop on to this, or are they all on the Euro shilling…”

All of the political parties are Euro Shilling including Sine Fein.

Every political party has decided to accept the debts of German and French banks.

Of course they are paid for and bought by German and French banks.

Lucey on VB tonight was Euro Shilling.

Who do you think is going to pay his salary for the next decade?

Whelan? Lane? Honohan?

Who pays theirs?

They can’t handle the truth. It would hurt their lifestyle egos too much. They must accept the role of placing everyone else in their debt.

“anyone in the political classes”

Or perhaps anyone in the educated classes?

They can free themselves of the burden of self interest by using two words.

DEFAULT NOW

“Who to vote for…”

Hopey McChange.

Gregsays:

Eureka

“Do not underestimate the ineptitude of the European political elite.”

They may cause a default by stupidity.

Of course Brian Cowen is part of the European Elite.

I am filled with hope.

Gregsays:

Celtic Phoenix

“Lets all pause, take a deep breath and remember it was Batt O’Keefe talking.

Also, the Germans can add and unless theyve decided they want the DM back or us out of the Euro this wont happen. It is in everyones interest that we pay our debts.

Having said that, a concerned citizen I really hope P.Honohan is front and centre on this, and has his A game with him.

P.S
I also hope the greens get wiped out at the next election, but thats neither here nor there.”

“It is in everyones interest that we pay our debts.”

“It is in everyones interest that German, French and UK banks pay their own debts.”

Fixed that.

Gregsays:

Celtic Phoenix

“Also, the Germans can add and unless theyve decided they want the DM back or us out of the Euro this wont happen.”

The Germans can add and they have decided.

It happens in 2013.

Didn’t you get the memo?

Gregsays:

Celtic Phoenix

“Having said that, a concerned citizen I really hope P.Honohan is front and centre on this, and has his A game with him.”

Honohan doesn’t have an “A game”.

He’s just a branch manager.

Nothing more. Nothing less.

He will do what he is told to do by his boss.

Keith Cunneensays:

@AMcGrath
Yes the beauty of this land has faded – its the heavy makeup of concrete I imagine.
@Greg
I wonder if the ECB is goading us into default – will their postion improve if euro deposits are destroyed here ? and then give a blanket guarantee to Iberia leaving us in the hands of the BOE.
Something is not right between Angela and Trichet as I indicated in a earlier post as Germany may have a civil service of some size and may be exercising some independence over the ECB and Bundesbank unlike Ireland where I suspect the irish central bank is doing the talking with no real input from the irish executive – with of course occasional directions from Frankfurt.

The Alchemistsays:

Unlike ordinary mortals, all of those recommending default presumably have huge cash nest eggs under their beds? I am not unsympathetic to the action in my more exercised moments but how long would the banks be locked up in the event of a default? A day? A week? A month? It seems a reckless course of action to me.

Regrettably and to the terrible cost of the next generation, the bank guarantee precludes even debt restructuring. Because Cowen and Co closed off all avenues for negotiating any compromises with the debt market, the country is stuck with the fiscal equivalent of forty years in the desert. If the EU/ECB/IMF were to suggest restructuring it would have to be done on an EU wide basis. It couldn’t be that Ireland would be ‘let in’ while Greece, Portugal, etc would be ‘kept out’ of restructuring. It might happen, but could it happen with the PIIGS still in the euro?

Gregsays:

Keith Cunneen

“I wonder if the ECB is goading us into default – will their postion improve if euro deposits are destroyed here ?”

No.

Trichet is delusional.

He thinks he’s running the Bundesbank.

He forgot he didn’t have a Treasury.

He can no more blanket Iberia than he could (fire) blanket Vesuvius.

I’ve said it before. This is the European Central Bank.

It has no treasury. It is a kindergarten.

They have nothing.

“Something is not right between Angela and Trichet”

Yup.

Trichet thinks he’s running the Bundesbank and Angela wants it back.

Children eh?

The EU made a toy of German financial discipline and Angela is having a hissy fit.

Time to pony up.

I said this before as well.

Print €1/2 trillion now or kiss the EU goodbye.

Oh. And that means Ireland pays nothing for the German and French banking crisis.

Gregsays:

The Alchemist

“how long would the banks be locked up in the event of a default? A day? A week? A month? It seems a reckless course of action to me.”

A weekend.

But don’t hold your breath.

These people are so stupid they haven’t the patience for a weekend.

They would rather see it blow up in a second.

And it will.

It’s not us. It’s them.

Brian Luceysays:

Check the numbers folks. Big debts and big interest rates = big trouble. Oh, I’ll be blamed/crucified anyhow. Remember when burning senior bonds seemed heretical…now it’s pase. Restructure inflate or default. You choose.

Frank Galtonsays:

Brian. is this an accurate list of the numbers? (via P.ie)

90bn – current sov. debt
20bn – prefunded debt
23bn – redeeming bonds over next 3 years
35bn – bank recapitalisation
45bn – cost of funding the the country over next 3 years
100bn – short term ECB liquidity to irish banks
30bn – irish central bank master loan repurchase agreements
343bn grand total

Brian Luceysays:

Fg
Think so. Not all lt debt ie the liquidity but all debt

Mickey Hickeysays:

The risk of a societal breakdown is no longer minimal. When the fact sinks in that the interest rate being charged is punitive and at least 2% higher than could be comfortably afforded by the ECB/IMF anger will rule the roost. Before this agreement is cast in stone the the public should put the fear of god into the FF/Grns so as they can negotiate a reduction. Our only bargaining chip is to pull out of the Euro Zone and revert to the green printing press leaving the German, British and French banks to stew in Merkels and Sarkozys moralistic stew. We are now doomed to a decade of penury not the three years that was barely tolerable. It was abundantly evident for over two years that the gov’t was frozen in the headlights of reality and quite incapable of grasping what the problem was. The result of the negotiation reflects their lack of ability to deal with anything as complicated as a bailout that could lead to survival or a complete break down. The latter cannot be ruled out.

Martin Fetherstonsays:

While this thread has focused on the EFSF component of the overall package, the IMF website (http://www.imf.org/external/np/exr/facts/sba.htm) provides information on the terms of IMF standby arrangements. This indicates that at current global interest rates the cost of borrowing from the IMF would be around 4 percent (details below), well below the expected EFSF cost. This is, however, a variable rate which would rise if global short-term rates go up.

The Fund’s basic rate of charge (which is computed as an average of short-term rates for the major currencies) is currently 1.4 percent, which would apply in Ireland’s case to loans up to about 3 billion euro (300 percent of Ireland’s IMF quota of about 1 billion euro). For loans above this amount a surcharge of 200 basis points applies, rising to 300 basis points if the loans are still outstanding after 3 years (standby arrangements are repayable over 3-5 years). There is a one-time service charge of 50 basis points on amounts drawn.

It’s not yet clear what the IMF’s share of the package will be. When the EFSF was announced last spring the IMF indicated it would provide a third of the total amount of support. A third of the total amounts for Ireland currently being discussed in the press (e.g. 85-90 billion) would be about 30 times Ireland’s quota. This would be truly exceptional (Iceland’s 2008 standby was about 13 times its quota) so it is not assured that the IMF’s Board would approve it. In any event, for a loan of this size the effective (variable) interest rate would be around 4 percent based on the information above.

BeeCeeTeesays:

If the 7% is true, and applies to all or a large part of the package, by rights this should simplify things for Fine Gael and Labour as they decide how to vote on the budget. Voting it down, so as to scupper the deal, may now be the patriotic way forward, even if they have introduce identical or harsher measures themselves after they take control.

seafoidsays:

It is not some sort of negotiating tactic to get rid of the 12.5% corporation tax, is it?

Paul Huntsays:

It looks like the markets have decided this deal isn’t going to work. As I’ve pointed out before, the markets were using Ireland as the head of the battering ram to force the major core country banks – and their governments – to come clean on the losses they’re concealing. The EU, in its own inimitable fashion, has chosen Ireland as its Verdun – with the Irish providing the cannon fodder – but the markets are demonstrating that they can over-run this position in a thrice. In actual fact they are now our allies, as they are showing they have no wish to see us shed blood and treasure in a futile cause – and destroying our economy in the process.

The markets will continue to over-run the outer perimeter until the commanders in the Franco-German fortress come to terms.

Carolus Galviensissays:

Oh dear, hope abandoned after all:

However, a Government source said yesterday that the cuts will not apply to all payments, with State pensions, in particular, avoiding the axe.

[…] Karl, If you price it off the 10 year swap rate of 2.9% and you get to 7.2% by my calcs. The Irish Economy

Carolus Galviensissays:

Some light relief
A trip down memory lane (13 November 2010, or a light year ago):

I believe that the economic fundamentals are such that we can, with a bit of luck and by pulling together, avoid a bailout and default. … Success is in our hands. … I am convinced there is a willingness to do what is needed if it is shown there is a path through the crisis and back to sustainable economic growth.

http://www.irishexaminer.com/ireland/is-irelands-number-up-136365.html#ixzz16BUjiTg0

John McHughsays:

Brian: I can’t see how you figures are correct:

90bn – current sov. debt
20bn – prefunded debt
23bn – redeeming bonds over next 3 years

If the current debt is €90bn, surely this includes the €20bn we have in the NPRF and the bonds of €23bn that have to be reclaimed.

That €20bn should be an asset and the €23bn is just a debt swap.

Disclaimer: I am not an economist.

Greg
Even if you were wrong, Greg, I woulk not ridicule you! You are partly correct. The Sub-prime has damaged banking in Europe. It allowed reckless expansion into Ireland among others. As we now know, possibly planned from the start, the mortgages from USA are 90% ineffective……
Suing USA banks will mean some recovery but not much.

The money machine can create money, but as we already know, it distorts the playing field and creates inflation. Given time, all the banks can recover. But are we running out of time? The interest rate is not actually relevant as if it is too much it will not be paid and so will be reduced. If it is too little, inflation will result sooner than other wise. Since all central banks desire this, we can see this is a non issue. Powerful economic minds can adjust the inter country debts in a decade or so, as happened to reparations and Marshall aid. Within the EU if it is in existence then…. (!) (I jest!) It is simply that time is running out.

Some mis-estimations appear to have been made, not just by the Irish establishment. Once the current mess continues for a while, there will be derivatives to pay off …. and they will fail. That will have a bad effect. In the meantime, Ireland is being jolted awake and political reform looks far more likely. I do not worry about the actual interest rate. The problem is that this will precipitate the next shoe?

Gregsays:

Pat Donnelly

Don’t know if you have a view on this.

There is continual talk of Ireland “being funded” until June of 2011.

Is that actually the case?

Let me put it this way. If we have borrowed that money already is it included in our national debt?

If not then is it not just a “line of credit”……a commitment to lend to us rather that money in the bank?

(That would be arguments about what money is aside).

@Oliver Vandt – “The prize is to get Ireland (the State) to accept the debts of German and French banks.”

It’s the only game in town.

My guess is there’s a big gun being held to Ireland’s head at the moment. I just wish I knew exactly what it is. Threat of expulsion?

I didn’t see VB last night. What on earth did Brian Lucey say that has everyone so het up? I did see Dr. Gurdgiev on Primetime and he seems to think we are undershooting and need to borrow a lot more (I paraphrase).

I wonder if I should accept Mohamed El-Erian’s advice? Oh I just remembered…. I did that a few weeks ago.

Bond. Eoin Bondsays:

@ Brian Lucey

the big question mark im going to raise at your figures is the 100bn ECB liquidity – not all of this will be run down/ended. In fact, if we’ve got 95bn from the ECB right now for the domestic banks, i suspect this will still end up still being 50-60bn in 12 months time. What the ECB has clearly said is (a) no more incremental increases and (b) get rid of the non-standard collateral. Also helping the ECB PR battle will be the ending of much of the non-domestic ECB liquidity requirements after year end, as i believe Depfa’s (and other failing landes) assets will be moved back home then. So 130bn right now could become 60bn in 6mths time, so the ECB gets to say they cut it in half.

Also, i believe that domestic funding sources will play some role as early as next year towards funding the state, ie domestic Irish banks buying more Irish govvies and domestic pension funds buying sovereign annuity bonds. Hard to put an exact figure on this, but it could be 10-15bn a year in total from these two.

Eamonn Moransays:

Mulling over whether the interest rate is likely to be 5 or 7% is totally missing the bigger picture in my opinion.

Maybe just maybe we can get out of this if we only have to pay back sovereign debt at subsidised interest rate from the EU.

@BL, Karl and others.

Punch in the numbers for defaulting on all senior debt and being given an interest rate of 2% on everything else going forward.
Its still touch and go.
We still have to get the current account in order and as we have seen from previous years adjustments moving the current deficit below 10% GDP is proving very sticky.
We still have large mortgage default and massive job losses in the financial services industry coming down the tracks.
We will get one shot at a default and if mainstream economists cheer one on that is too small by far it will be a huge mistake.

We need to running the numbers on an honest just about getoutable position.
Then we need to ensure that we default by at least that amount.

Eamonn Moransays:

@ Eoin

“simply don’t think it will be higher than 5% because i simply don’t believe the EU is that ridiculously suicidal.”

I think you are right on that one.

seafóidsays:

3bn cuts to social welfare . Any cuts to pension tax relief ?

I have to concur 100% with Greg. The 7% interest rate, as with the Corporation Tax is a RED HERRING. There will be no 7% interest rate and no Corporation tax hike in the EU\IMF deal. However, idle chat about it (encouraged by politicians and commentators alike) will make whatever ruinious deal is agreed look relatively palatable. These red herrings do, however, provide the commentariat, especially economists, with alot of opportunities for airtime and column inches. THERE IS ONLY ONE ISSUE. WE NEED TO DEFAULT AND BURN THE BONDHOLDERS RATHER THAN BAILOUT THE ECB. PLEASE ECONOMISTS STAY ON MESSAGE WHEN ON THE AIRWAVES.

@ David McWilliams.

Re my previous comment. You are an exception in this regard and have done a service to the people of Ireland. Keep it up.

@Bond. Eoin
“Also, i believe that domestic funding sources will play some role as early as next year towards funding the state, ie domestic Irish banks buying more Irish govvies and domestic pension funds buying sovereign annuity bonds. Hard to put an exact figure on this, but it could be 10-15bn a year in total from these two.”

Isn’t the real issue for Ireland at the moment that we might be building up too much debt rather an issue with selling more debt.

Hi Karl,

I’m delighted someone said it. We really need to ask who the negotiating team is and why on earth they are not negotiating the lowest rate possible. Surely our ace card is withdrawal from the euro?

Also, why do we need a loan at all? Can’t we just say no thanks for the loan but we’re happy to sell you our bank assets (mortgage backed securities, etc)?

Would you mind dropping me an email please? Would love to have you on the show tomorrow to talk about it. Thanks Karl.

Mags

Bond. Eoin Bondsays:

@ DE

yes, but this was simply a question of who is going to fund it if we decide to borrow. Domestic funding sources will play a bigger role than previously.

hoganmahewsays:

@John McHugh
Yes, I think you are right, there’s a mix of liquidity requirements and debt levels going on here:
90bn – current sov. debt (debt)
20bn – prefunded debt (debt)
23bn – redeeming bonds over next 3 years (liquidity)
35bn – bank recapitalisation (debt + liquidity)
45bn – cost of funding the the country over next 3 years (debt + liquidity)
100bn – short term ECB liquidity to irish banks (debt + liquidity)
30bn – irish central bank master loan repurchase agreements (debt + liquidity)
343bn grand total

So I think about 250 is what is needed in liquidity in the next three years, with some of that rolled over existing debt. This would leave 20 bn cash still on hand.

The other 100 bn or so is the existing level of national debt, so any new borrowings get added on to that to get the new national debt. (Note, that’s the level excluding NAMA and promissory notes, I think).

@ Margaret Ward

You do a great job on Newstalk keep it up. You are on the money so to speak re our ace card re the euro. DMcW has been banging on about this. This is the only issue (see my earlier comments). Please watch out for the red herrings (e.g. corporation tax, 7% interest rates) that are there to distract from the only issue: we need to default and we need the media, commentators to stay on message with this one.

Gregsays:

Bond. Eoin Bond

“Also, i believe that domestic funding sources will play some role as early as next year towards funding the state, ie domestic Irish banks buying more Irish govvies and domestic pension funds buying sovereign annuity bonds. Hard to put an exact figure on this, but it could be 10-15bn a year in total from these two.”

Confiscation of private savings as a last attempt to bailout the bondholders.

Nice work Mr Bond.

@ Margaret
Margaret, as has been pointed out previously the establishment are wedded to the euro. The ESRI (Baker, Honohan, Fitzgerald) recommended we join it even though we needed higher interest rates at the time. Don’t be surprised if very few come out against it. Peer pressure and career prospects need to be kept in mind. It is like a scientist coming out and saying he doesn’t believe in man made global warming!

Bond. Eoin Bondsays:

They should plonk a copy of this down on the table at today’s round of negotiations…

http://twitpic.com/39opec

@Eoin
“yes, but this was simply a question of who is going to fund it if we decide to borrow. Domestic funding sources will play a bigger role than previously.”

OK, but if we are building up debt and there is a strong possibility that we will be unable to repay in full, is increasing domestic purchases of this debt the best strategy.

I think changing the discount curve for domestic pensions from German to Irish bonds would be a dreadful decision long term

Paul Huntsays:

@Hogan,

I take your point about the doublecounting, but the burden is still horrendous.

@Eoin,

Your gameplan might work if Ireland and the EU were able to proceed at the same stately pace as they have up to now. But I sense the markets are moving in quite rapidly for the kill: what are the French and Germans et al going to do about their dodgy banks?

[…] and if it were, the Irish state couldn’t service the debt at any interest rate in any case. Karl Whelan and Irish Economy regular Tull work the likely interest rate on the bailout at 7%. In my view, such an interest should be refused […]

Richsays:

At All

Ollie Rehn came saw and he panicked! Clearly if the kids on the street have considered our impossible position then the Euro protection process by Germany will require Ireland to leave the Euro; this decision has been made especially as portugal etc are on the same slope. A 7% interest loan cannot be accepted by Ireland in fact neither can a 5% loan – our only recourse is default and to exit the Euro to allow our economy to grom again. The Germans/French want rid of us – lets see what a 12.5% corporation tax does for us outside the Euro!

Paul Huntsays:

This isn’t working. Guardian blog:
reports 10 yr irish sovs hitting 9%.

The conversation is probably going something like this:

Bond Investor: what kind of government is likely to replace the current clowns in January?
Bond Analyst: It looks like a combination of Fine Gael (an uptight version of FF) and Labour.
BI: Have they had any form previously in dealing with big deficits and cutting them back?
BA: Yeah. They did back in ’80s, but they bottled it The predecessors of the current shower had to sort it when they got back into power.
BI: OK. I think we know what to do.

Gregsays:

Rich

” – lets see what a 12.5% corporation tax does for us outside the Euro!”

Let’s see what a 5% rate does.

😆 😆 😆

Carolus Galviensissays:

The ESRI (Baker, Honohan, Fitzgerald) recommended we join [the Eurozone] even though we needed higher interest rates at the time. Don’t be surprised if very few come out against it.

Thanks — and lest we forget: an ‘impressive line-up of academic and professional economists’ were still singing the Euro’s praises in a book entitled ‘The Euro: the First Decade’ published on 1 April 2010.

From Amazon’s blurb:

Despite much criticism and predictions that it would quickly collapse, the first decade of the euro has been a remarkable success. The euro area has now expanded to 16 members with a combined population of 326 million and contributes 16 per cent of global output. This book is the first to provide a wide-ranging strategic review of the first decade of the euro. Written by an impressive line-up of academic and professional economists, The Euro: The First Decade is an invaluable reference for scholars and policy makers …

So much for economic expertise.

Richsays:

@ Greg

Even better – lets make sure we get it right this time. Ireland’s attraction to the Euro is moth to flames stuff, our future lies as part of the EC but seperate like Denmark, Sweden or Iceland. Iceland defaulted on its Euro debt and while a basket case at least it is on the way back

All the other possiblities are not practical nor desirable – we need to grow a set and have the courage to plot our own path.

Gregsays:

Alan Rouge

“Dan Boyle essentially confirmed the 7%”

Dan Boyle is a twit.

@ Carolus Galviensis

I see the book is retailing at approx €100 on Amazon. Perhaps the Commission print a billion copies, sell them to the Irish Government @ €1 which would keep at the top of the bestsellers list for Christmas. We could in turn sell them at €86 a pop. €85bn sorted. Everyone’s a winner and all before the next election!

@ Alan Rouge

” He claims it’s being negotiated downwards…”

Quel Surpise. To what? 5% peut etre? David slays Goliath.

Robinsays:

Re rate to be charfed:

Greece is paying 3yrswaps+2%= 4.75% (+0.5% servicing fee and +1% for longer maturities) to the EU and Basic Charge Rate 1.33% +2% =3.33% to the IMF.

Ireland will pay more under the EFSF because of its structure. In order for it to retain a AAA rating all funds must be backed by a AAA gurantee or cash. 255b of the committed 440b is AAA rated and these countries provide a 120% guarantee, this amounts to 72% of the committed amount. This means that, if the facility is to be maximised, 28% of any loan has to be held in cash. Hence, a borrower will borrow and pay interest on 100 but only receive 72. This gives an effective rate for EFSF funds of nearly 7% (with swap rate at 1.75).

As the EFSF simply passes its funding costs through to the borrower nation if it issues at higher than 3yr swaps, or incurrs costs through issuing in USD (fx swap) then another 0.25-0.50% could easily be added.

Intrestingly 3yr Irish govt rates have traded above 7% for most of November.

With an IMF rate of 3.37% and a EC rate eq

@ Carolus Galviensis
I see one of the contributors to the book is Barry Eichergreen so reverred on this site.

Robinsays:

With an IMF rate at 3.37% and an EC rate at 5% (?) and assuming they lend in proportion to their commitments (EC 60, EFSF 440, IMF 250) then a blended borrowing rate of 5.62% is achieved.

Bond. Eoin Bondsays:

@ Robin

are you Cowen in disguise?

Just now, in the Dail

*COWEN: INTEREST RATE WOULD BE A BLENDED AVERAGE

grumpysays:

@Brian
@Eoin
@hoganmahew
@anyone going on the telly in the next couple of days

Minor point – don’t forget the haircutted collateral at the ECB.

More importantly, to default near term you have to sell the idea of a default so that the bond market – or enough of it – agrees it is the sensible option so you can get funding. Note holders of senior debt and sovs that might be involved will lobby to persuade the gov to wimp out, but the rest of the bond market (the guys who have not misjudged Ireland and are appropriately positioned) won’t give a toss.

The standart tactic for a default is to go along to get funding until there is a funding surplus. Then the (for those not familiar with, VERY MERCENARY) bond market looks through at the fundamentals regarding default risk on new debt at that point. The existing holders of debt would not have much bargaining power at that point.

All of the above would require a big PR push to keep part of the bond market convinced. Do not deploy poker players if thinking of doing this.

@Paul Hunt – when I last looked they were only 8.7% – still got a whole (!) 0.3% to go yet before the 10 year hits 9% !!

I presume that the EU money will be 7’ish % and the IMF money lower than 5% giving us an average somewhere near 5% ??

@Bond. Eoin Bond – “They should plonk a copy of this down on the table at today’s round of negotiations…”

Are you suggesting we should sue them for abuse? 🙂

seafóidsays:

@ hoganmahew
November 24th, 2010 at 9:48 am

Just a question on your liquidity assumptions. You have €23bn + part of €45 bn for bank liquidity. They ran up €130 bn up very quickly recently – when did that start and why wouldn’t this trend continue? I don’t know much detail about the banks but their combined balance sheet size is in excess of €500bn I believe – are you assuming the dam will hold ? Or that things will calm down and that private sector funding can be accessed relatively quickly to manage any new liquidity requirements ?

Carolus Galviensissays:

Eichengreen has actually recommended TE-TFD as a kind of guide to the conventional wisdom and ‘how not to do it’ — plus a nonchalant ‘mea culpa’ regarding his own lack of foresight:

Why, you might have asked, did I dare to suggest 1,000 pages of dense economics? The answer is that this is a marvellous compendium of conventional economic wisdom. It was assembled out of a conference held by the European Commission in late 2007. It neatly summarises what economists think we know, or thought we knew, about the euro. There’s lots of good stuff about the benefits the euro conferred on Europe – the impetus it lent to financial integration and financial deepening, for example. It shows how countries adopting the euro felt pressure to undertake product and labour market reforms. The authors go on for 1,000-plus pages, and yet there’s not a single mention of the kind of dangers that developed at the end of 2009. This is a striking reminder that no one really anticipated the crisis that broke out subsequently. It’s a reminder of how intellectually unprepared we all were. I have a chapter in the book, so I do not exclude myself! [italics mine]

No-one really anticipated the crisis? Really?
I could name a dozen but one will do for the moment (dated 14 August 2007):

The Resurgence of Risk – A Primer on the Developing Credit Crunch
[The Oil Drum Canada]
http://www.energybulletin.net/node/33516

EDsays:

A thread on the breakdown of Irelands balance sheet is needed.

Joseph Ryansays:

@Carolus Galviensis

re: Amidst the gloom, a glimmer of hope:
Social welfare budget may be cut by almost €3bn.

Not everybody would regard this as a glimmer of hope particularly as in the absence of serious cuts in higher level public service pay. And while the country still subsidises private pensions. Indeed, if true and taken that there are indications that the old age pension will not be cut then it is clear that the burden of adjustment will be heavily foisted on the weaker sections of society.
A glimmer of hope for who?

If there is any cutting of oap’s income, it will sure bolster the turnout on Saturday.

Now, where can I get a 7% rate for my savings?

I’ve heard lots of mention of Portugal and Spain but I haven’t heard anyone mention Belgium in the context of troubled Euro-countries. Anyone got any thoughts as to how fragile (or not) their situation is these days. I recall someone saying to me back in July that they thought Belgium was the ‘Greece of the north and Ireland the Greece of the west.’ It put me in mind of wicked witches.

Joseph Ryansays:

@Mickey Hickey.

re: our ace card.

Well said. Do uou think the Central Bank has a contingency currrency already printed? Given their performance to date, I doubt it but who knows.

Eamonn Moransays:

As Homer simpson once called them

“The two sweetest words in the English language: De Fault.”

grumpysays:

@seafóid

All these figures are historic and additionally it is old news that the stock of collateral is low. If you think about it you can see why action has to be taken fairly quickly.

Michael NJ USAsays:

Ireland needs to stop the BS.

The bankers creates the mess.

Let the banks close . . . . there will be plenty to come in an fill the vacuum.

Six acute months misery vis a vis 40 years abject servitude to foreign financiers.

Plus the government should seize all domestic private funds over E100,000 lodged in banks in the national interest and issue IOU’s against them. At least then the debt and interest would be internal.

All that is happening here is that financiers are being kept whole.

And as to the Irish people, can you say LEMMINGS.

Brian Luceysays:

Eoin 2
Yes, i did note that the liquidity element will run down. So we agree there. But, for a good longtime we will have to have it and to have it funded will cost some interest rate.

hoganmahewsays:

@seafoid
“Just a question on your liquidity assumptions.”
For sure; as grumpy says, that’s the old figures. The new figures are unlikely to be better. Indeed, with the S&P downgrade, there’s likely to be another rush to the exits of ratings sensitive money (if not now, when the others follow suit).

My post was more to distinguish between what is an addition to the national debt and what is a refinancing point of pressure.

grumpysays:

One thing to bear in mind about senior bond holders in Irish banks is that they are not that widely held. Last time I looked at the holdings of SLXX and IBCX – which iare the sort of standard GBP and Euro denominated ETFs that most retail investors as well as lots of institutions use for exposure to widely held corporate bonds – Irih bank seniors represeted about 0.3% of the portfolio. That is negligible even if 100% written off. If there are prop desks stuffed full of them using ECB QE for a carry trade, er they have taken a bet.

Also, perceptions seem to be moving. From FT today:

“The senior stuff has traditionally been the sacred cow of European credit markets, so there’s plenty of confusion, anger and market posturing. All the fuss, however, is not much different to the outcry that accompanied the notion of burdensharing for sub-debt holders back in late 2009. Sub-debt investors are still (perhaps surprisingly) getting ‘used’ to the idea — as recent lawsuits and protests should attest. So we might expect it to take even longer for the senior market to catch on.

We should note, however, that a widespread sell-off of senior debt, would tend to up the cost of funding for European financials. That’s what makes bail-ins so damn tricky.”

Siobhainsays:

So, for someone without an economic background who’s trying to get to grips with what’s going on: from commentary here and on the Vincent Browne programme last night, are we basically saying that if we go ahead with the c. €85bn bailout that is being spoken about, we are only deferring the inevitable, i.e. default? And that we are in a better position now to work through the terms of a structured default now than we would be in say a years time?

Eamonn Moransays:

By the way, just so no Irish person feels guilty about having to default, it would be useful to point out who would loose out.

I know that we say that some of the bank creditors are the pension funds of little old ladies. This is hugely exagerated.

I remeber seeing a list of where the Anglo Bond holders were based on the RTE news recently and a huge amount of them were based in The Isle of Man. This should give us a good indication of the type of people/enterprises who own the Anglo bonds.

I think the Irish People have a right to know who exactly the Senior Bond holders in Irish banks actually are. If we got an honest answer to this I think it would make a decision to default a lot more palatable even for the most conservative pundits in our country.

Eamonn Moransays:

@ grumpy

I think we were on the same wave lenth there.
As this gets political it is importandt to expose who these untouchable bond markets actually are.

@ Siobhain

You catch on fast.

seafóidsays:

@ Grumpy

Obviously there’s no time to waste. But why wouldn’t the liquidity need go to say €200bn ? What drove it to €120bn ?

A best case, base case and basket case assessment of bank liquidity needs is required.

grumpysays:

@ Siobhain

So my earlier post. The problem is that trying to negotiate anything beyond the senior bank bond holders is that there is no evidence the populace will tighten their belts – say 30% public sector pay cuts etc – quickly to give the state a chance of going to budget surplus quickly. They still intend to run a big deficit over a number of years. This leaves the state unable to give the finger to sovereign bond investors – unless the idea it is the only option were successfully “sold” internationally.

Joseph Ryansays:

@hoganmahew.

The figures being mentioned above €343 billion are horrendous.
Surely these funding issues are seperate.
1. State funding-which Ireland must pay.
2. Bank losses-which Ireland is paying but should not-it should be bondholders.
3. Bank liquidity-which should have nothing to do with the Irish State. It is an ECB matter. If the ECB won’t provide liquidity for banks at ECB rates, then they are not a central bank. We should simply fold the banks and let all bondholders incluing the ECB wait for whatever is left afetr depositers have been paid..

There is not a snowballs chance in hell of the above mentioned debt ever being repaid.

Discussions of interest rates are somewhat surreal if we have attained a level of insanity that we take the banks liquidity requirements onto the State balance sheet.

grumpysays:

@Eamonn Moran

They will be held in nominee companies and the state would find it difficult to go beyond broad brush indications.

@seafóid

It might, but what makes you think the ECB willl be allowed to do so without collateral being posted?

seafóidsays:

@ grumpy

Thanks for that, How did they run up a bill of €120 bn in the first place? How much of it was related to deposits lost and what was the rest for other than bonds and paper maturing ? How much in funding needs are on the horizon even if they don’t have any deposit leakage? €85bn could be gone in a few days or am I missing something ?

Bond. Eoin Bondsays:

Apologies for formatting…

BN 14:04 *IRELAND’S COWEN: WE CAN AND WILL PULL THROUGH

BN 14:04 *IRELAND’S COWEN STARTS PRESS CONFERENCE

BN 14:03 *IRISH DEBT FORECAST EXCLUDES ANY AID PACKAGE

BN 14:00 *IRELAND TO DEVELOP INITIATIVES FOR PUBLIC TOO BUY GOV BONDS

BN 14:00 *IRELAND: WEIGHING PROPOSALS TO ENCOURAGE FUNDS TO BUY GOV BONDS

BN 14:00 *IRELAND TO CUT PUBLIC SECTOR PAY BILL BY ABOUT 1.2 BLN EUROS

BN 14:00 *IRELAND MAY CUT PUBLIC SECTOR NUMBERS BACK TO 2005 LEVELS

BN 14:00 *IRELAND: WILL CONSIDER ASSET SALE AFTER REVIEW ENDS DEC. 2010

BN 14:00 *IRELAND SAYS NTMA MAY ISSUE INFLATION-LINKED BOND IN 2011

BN 14:00 *IRELAND TO CUT SOME PUBLIC SECTOR PENSIONS BY 4% IN 2011

BN 14:00 *IRELAND: MAY TAP PENSION RESERVE FUND FOR INFRASTRUCTURE PLANS

BN 14:00 *IRELAND WILL SEEK TO ATTRACT MORE OVERSEAS COMPANIES

BN 14:00 *IRELAND SEES 2010 PUBLIC-SAVINGS RATE SIMILAR TO 12% 2009 RATE

BN 14:00 *IRELAND TO CUT MINIMUM HOURLY WAGE BY 1 EURO TO 7.65 EUROS

BN 14:00 *IRELAND TO INTRODUCE SITE-VALUE TAX, RAISE CARBON TAX

BN 14:00 *IRELAND: PENSION RESERVE FUND MAY BE TAPPED TO FUND EXCHEQUER

BN 14:00 *IRELAND SAYS 90,000 NET NEW JOBS WILL BE CREATED 2012-2014

BN 14:00 *IRELAND TO RAISE VAT RATE TO 22% IN 2013, 23% IN 2014

BN 14:00 *IRELAND TO CUT PAY FOR NEW GOVERNMENT WORKERS BY 10%

BN 14:00 *IRELAND TO RAISE EU1.9 BILLION BY INCOME TAX INCREASES

BN 14:00 *IRELAND TO MAINTAIN 12.5% COMPANY TAX RATE

BN 14:00 *IRELAND TO RAISE EU1.9 BILLION BY INCOME TAX INCREASES

BN 14:00 *IRELAND TO CUT PAY FOR NEW GOVERNMENT WORKERS BY 10%

BN 14:00 *IRELAND MAY CUT PUBLIC SECTOR NUMBERS BACK TO 2005 LEVELS

BN 14:00 *IRELAND TO SEEK EU2.8 BLN IN WELFARE CUTS BY 2014

BN 14:00 *IRELAND: EU7 BLN CUT IN DAY-TO-DAY SPENDING, EU3 BLN IN CAPITAL

BN 14:00 *IRELAND SEEKS EU10 BLN IN SPENDING CUTS, EU5 BLN IN TAX RISES

BN 14:00 *IRELAND SAYS UNEMPLOYMENT TO DROP TO BELOW 10% IN 2014

BN 14:00 *IRELAND SAYS GDP TO EXPAND AVERAGE 2.75% BETWEEN 2011-2014

grumpysays:

@seafóid
Allied lost about 13bn in total to mid Nov. BOI said 10bn in a few weeks following the Sept downgrades. Deposits should be much higher than issued bonds outstanding, but aren’t in these banks. The 85bn would not go in a few weeks if the banks are perceived as adequately capitalised. It is fractional reserve banking so perception is key.

seafóidsays:

So they didn’t touch pension tax reliefs . Is that in stage 2?

grumpysays:

BN 14:00 *IRELAND TO CUT PAY FOR NEW GOVERNMENT WORKERS BY 10%

One too many words in this one.

Robinsays:

@Siobhain

Very astute. The German’s cleary see a ‘peripheral’ Europe that needs restructuring and are actually being supportive of foreign taxpayers by suggesting a restructuring now rather than later. It will be messey (where do civil servant pensions & teachers salaries rank vs guarantedd AngloIrisihBank bonds?) but cheaper in the long run.

One thing, it will easier to manage a restructuring while the majority of debt is under Irish law (although most bank debt is issued under English, ironically only the subordinated debt switiching to Irish law on insolvency). Once funds have been drawn down from the EFSF (English law) and IMF (above the law) restructuing is no longer a matter of passing laws in the Irish parliament.

It would also have been better to this before the govt issued guarantees to maturity on €22b of bank debt, and before the €40b of bank debt matured in September, to ensure the burden was shared across European investors (banks). But the ECB didnt want this, it wants senior debt to remain performing and the taxpayer to take the burden and what politician wants to be seen as the one who led a country into default?

Bond. Eoin Bondsays:

@ Seafoid

Implement pension-related tax changes to yield €700 million, with €240 million in tax savings on the public sector pension related deduction.

Robinsays:

Irish banks only have €17b on snior non-guaranteed, non-covered bonds outstanding. The problem is now predominantly sovereign (NAMA debt issued to fund loans bought from banks, prom notes to fund Anglo & IrishNatWid and bank gtfd bonds – add all this to o/s govt debt you get to €191b, and that excludes deposits and all other securities currently under ELGS). NTMA €25b cash + NPRF (not invested in AIB/BoI) funds of €15b are about equal to the deficit to 2013 so, even before a bank recapitalistion, debt/GDP ratio is currently at 122%.

How quickly the Irish sovereign debt market gets to Greek like levels depends on how much finanicing the ECB will provide. I cant see the market getting sufficiently comfortable to provide private finanicing whilst the soveriegn debt profile looks so weak. Recpitalised banks using EFSF funds without a haircut simply mean more soveriegn debt. With no growth, no inflation, a borrowing rate of 6% minimum and debt/gdp rising above 125% the bold politician would be the one offering to stop the music now.

Joseph Ryansays:

I have just read this piece of the plan. Page 63

“More generally, the Government has already taken action to reduce the pay of politicians and senior public servants.”

The top boys hold onto their pay!!!!!
What a country. A banana republic.

Social welfare of course to get deep cuts.

ceteris paribussays:

Overall a very disappointing plan and one which was generally well flagged.
I don’t believe this will impress markets. One item in particular that seems counterproductive is the service charges to be imposed on business.

seafóidsays:

I just came across this ancient history from early September 2010

http://www.ft.com/cms/s/0/07b06b20-be9a-11df-a755-00144feab49a.html#axzz16DMZuEdR

Just shy of the second anniversary of the Lehman collapse, the Irish government last week issued its latest plan for Anglo Irish Bank. It reveals how little Dublin – and most other governments – have learnt from the crisis.
Back then, there were good reasons to offer taxpayer crutches to toppling banks. Contagion could bring the system to its knees. Panic made market valuation useless: even solid banks looked wobbly on a mark-to-market basis. It made sense to tide them over until the insolvent institutions could be distinguished from the illiquid.
Uncertainty is now receding. Unhappily, what is emerging in Ireland is how staggering bank losses are. It is time to let them fall where they should: on unsecured creditors once shareholders are wiped out. But Irish leaders are prolonging the uncertainty in the hope that zombie banks will, Lazarus-like, come back to life.Dublin has poured €23bn into Anglo. The new plan – to split deposits from a “recovery” bank with loans not yet transferred to the government – looks like another round of three-card monty. It does not clarify the final size of the hole to be filled (S&P thinks it can reach €35bn), and continues to make citizens protect bondholders from their own folly.Dublin fears that cutting loose Anglo’s bondholders will kill demand for Irish sovereign debt. The opposite is true, as record-high sovereign spreads show. Its huge fiscal deficits are manageable – just. It is the open-ended exposure to private liabilities across the banking system that drives up sovereign yields. Dublin must get its priorities right.

grumpysays:

Suppose you have to let the government off for sticking to Croke Park and being forced to leave Irish politicians the best paid in Europe. If there had only been something in that agreement about different economic conditions, that would be different.

Oh wait…..!

Greg Says:
@Pat Donnelly
“Once the current mess continues for a while, there will be derivatives to pay off …. and they will fail.”
Tick Tock Tick Tock.”
http://www.thehandstand.org/archive/november-december2010/articles/irishtimesecb.htm

In a blaze of publicity, the European Union has just adopted a regulatory code for hedge funds to manage the systemic risk that they impart to the general economy. In reality, observes Jean-Claude Paye, the new directive is a sieve which will have an effect contrary to that announced. Its real objective is to summarily control the European funds, while opening the door to U.S. funds which will be able to speculate without restriction at the expense of Europeans.

dimsays:

Prof. Whelan
first of all you should NPV the service charge if u want to add it in the interest since its paid upfront not add it every year(7 times even in ur last calc! dividing by 3 doesnt do the trick) and scale it by 1.2

second problem is you multiply by 1.2 because of this:

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.”

the 120% number is the over-guarantee of the amount borrowed….Guarantee is they key word……it doesnt mean efsf goes and borrows 1.2 times the size of the loan. it means efsf borrows 360 and the eurozone states guarantee 120%=440bn

The EFSF does indeed need to keep an additional cash buffer but that is not the buffer ur quote refers to. thats the loan specific one. Which is related with the npv of the anticipated margin. (300bps times the duration of the loan i guess) and the service charge

the faq u quote clearly differentiates between the two

EFSF’s possible future individual debt issues reflect the strong shareholder support
and credit enhancements such as an over-guarantee of the amount borrowed by 120 %
and cash buffer which will be deducted from the cash amount remitted to a borrower
from each loan.

Wrong calculation ==> EFSF Interest Rate = (swap rate + Margin + Annualised Cost of Once-Off Service Fee) NOT multiplied by 1.2
Margin is 300bps for 3 years and an extra 100 basis points per year for loans
longer than three years.
(see EFSF investor presentation page 25)

Joesays:

From the Times site, news on the EFSM raising €5bn –

The European Union has successfully sold €5 billion in bonds which will be used to fund its contribution to Ireland’s bailout.

The bond sale, which took place this morning, was three times over-subscribed and was sold out within an hour, the EU said.

According to Bloomberg, the five-year notes were priced to yield 12 basis points more than the benchamrk swap rate, or about 2.5 per cent. That compares with 1.77 per cent on similar-maturity German government debt and 2.08 per cent on French bonds according to Bloomberg data.

http://www.irishtimes.com/newspaper/breaking/2011/0105/breaking29.html