EU-IMF Bailout Borrowing Rates

This post was written by Karl Whelan

The NTMA have released a note explaining the interest rate associated with the bailout package. The average interest rate is 5.82% and the average maturity of the borrowings is 7.5 years.

The 5.82% is presented as being comprised of an average rate of 5.7% from the IMF and EFSM and 6.05% from the EFSF.

The statement leaves a few questions unanswered about the IMF and EU rates.

Regarding the IMF rate, the IMF’s statement on Sunday night said

At the current SDR interest rate, the average lending interest rate at the peak level of access under the arrangement (2,320 percent of quota) would be 3.12 percent during the first three years, and just under 4 percent after three years.

How do we get from a weighted average of 3.12% and 4% to the government’s figure of 5.7%? The answer appears to be related to the fact that the IMF lends in SDRs at a floating rate. From the NTMA statement:

The SDR comprises a basket of four currencies, Euro, Sterling, the US Dollar and Japanese Yen. The IMF’s SDR lending rate is based on the three month floating interest rates for the currencies in the basket. In the presentation of the financial support programme the interest cost on the IMF’s floating rate SDR lending is expressed as the equivalent rate when the funds are fully swapped into fixed rate Euro of 7.5 years duration.

Since both IMF and NTMA statements must be true, this suggests that the cost of swapping a floating rate SDR loan into a fixed rate Euro loan is somewhere between 170 and 258 basis points. That seems very high to me.

Regards the EFSM rate, the NTMA tell us that it “will be at a rate similar to the IMF funds, i.e. 5.7 per cent per annum.” But presumably the EFSM is lending in euros and so there was no need to undertake a very expensive swap exercise, so this deal factors in a profit margin for the EFSF that does not apply to the IMF loan.

Finally, the mystery that is the EFSF rate is revealed. 6.05%. Less than the 6.7% that was doing the rounds last week but more than the 5.7% that I had guessed a few weeks ago and still a pretty hefty rate.

I have to confess to having no idea how this 6.05% was arrived at. The EFSF FAQ states

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 and an extra 100 basis points per year for loans longer than three years. A one time service fee of 50 basis points is charged to cover operational costs.

So let’s plug in the numbers consistent with a seven year maturity. The seven year swap rate is 2.85%. Add 400 basis points for the profit margin and you’re at 6.85%. And this ignores the 50 basis point service fee which, if annualised over the term, would bring the rate up to 6.92%. Finally, this also ignores the following aspect of EFSF lending. From the framework agreement:

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.

This seems to mean that we are paying the service fee and margin up front. In addition, we are going to pay interest on a cash buffer, which is money kept by EFSF that we’ll never see.

So, two thoughts here. First, it seems likely that the government negotiated in the final days to get the “profit margin” aspect of the EFSF money down. Second, I wouldn’t be surprised if the true effective cost of this loan is understated by the 6.05% figure, for instance because it doesn’t include the up-front service fee or the role played by the cash buffer.

A full detailed explanation of the EFSF rate from either the Irish government or the EFSF would be very welcome.

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31 Responses to “EU-IMF Bailout Borrowing Rates”

  1. anonym Says:

    I think Robert Peston may have the answer: horse-trading at the European finance minsters’ meeting to approve the package.

  2. hoganmahew Says:

    “In the presentation of the financial support programme the interest cost on the IMF’s floating rate SDR lending is expressed as the equivalent rate when the funds are fully swapped into fixed rate Euro of 7.5 years duration.”
    One would suspect that, given the likelihood of low interest rates for some years to come, it might be cheaper to just fix the FX risks and leave the interest rate floating?

    I suspect some spin to make some money seem more expensive and some cheaper (your tone implies you do too). From that it would appear that at least some of the europeans involved are aware that they are lending at an unsustainably high rate and so there is a need to reduce this to preserve the illusion of solidarity.

    Illusions have an unfortunate side-effect, though. They don’t amount to a hill of beans when you try and eat them.

  3. Jagdip Singh Says:

    So Germany’s 10-year bond is at 2.8% and we negotiated 5.8%. Clearly there’s no truth to the proposition that we’re only taking the bailout to help our banks repay borrowing from German banks.

    German Bond Rates

    http://www.bloomberg.com/markets/rates-bonds/government-bonds/germany/

  4. seafóid Says:

    I think EFSF must stand for Eejits, Fools Shut (the) F** (up)

  5. OllieTwist Says:

    Interesting opinion from Italy, one would even say a reasonable and commercially minded opinion, but then that type of rational thinking does not seem to apply to Ireland’s situation.

    http://www.londonstockexchange.com/exchange/news/dow-jones/news-detail.html?newsId=20101203DN005893

  6. seafóid Says:

    In the realm of the theoretical but 5.8% is only viable if the economy grows at a faster rate and in order for that to happen piigs would have to fly but also the world economy would need to grow. The US needs to create 285,000 jobs per month to start getting the unemployment rate down and absorb all of the new entrants to the labour market. So how is it going over there at the moment?

    http://www.ft.com/cms/s/0/9fecbfb4-feb0-11df-ae87-00144feab49a.html#ixzz173e9AX1E

    1345 GMT: Non-farm payroll jobs numbers fell well short of expectations on Friday with just 39,000 jobs created in November, down from 151,000 in October. Economists had been predicting a rise of around 140,000 for November.

  7. Bond. Eoin Bond Says:

    @ Karl

    “Since both IMF and NTMA statements must be true, this suggests that the cost of swapping a floating rate SDR loan into a fixed rate Euro loan is somewhere between 170 and 258 basis points. That seems very high to me.”

    Actually kinda makes sense, its basically just the averaged yield curve. Current SDR lending rate is 1.37%. Its basically the average $, £, Yen, and € short term rates plus 1%. So 7 yr swaps for all those currencies are as follows: 2.47%, 2.99%, 2.80%, and 0.85%. Assuming a weighted breakdown (guessing) of 40/10/30/20, this gives an average of 2.2970%. Plus 1% as described above gives 3.2970%.

    HOWEVER, you dont have to really hedge the Euro part, so stripping that out gives an average of 2.073%, plus the 1% = 3.073%.

    Margin on top of that is a mix of 200bps on the first part (small) and 300bps on the second part (larger). So lets call it an average of 270bps.

    Therefore: 3.073 + 270bps = 5.773%…..Ta-da!

    Also, i believe the 20% cash buffer will be dropped (via market chatter, rather than anything official), which will bring down the rate.

  8. bazza Says:

    @Eoin

    why do you add 200-300bps to the average swap rate? I though the margin was only to be added to the EFSF loan, not the IMF one.

  9. Bond. Eoin Bond Says:

    @ Bazza

    they charge a margin too, trying to find the link on the IMF website

  10. Joseph Says:

    I never knew there is an IMF app for your iPhone until 5 minutes ago.

  11. Bond. Eoin Bond Says:

    Actually, not sure about whether you have to hedge the Euro part or not, and you also have to include basis swap issues between the currencies, so my figure above is ‘dirty’ at best. But either way you’re getting to the ballpark figure easy enough. Also, EUR swap rate should actually be lower if its tied to Eurepo as the t-bill to Euribor spread is much bigger in Eurozone thanks to sovereign spreads being so different. So you could probably chop 15-20bps off the EUR swap rate, so you end up in the 5.50-6.00% area anyway.

    SO i stand by my figures above, albeit with some notes at the end and some different inputs in the middle!!

  12. Interest rate on EU Stability Fund loan is over 6% - Karl Whelan Says:

    [...] explanation of the EFSF rate from either the Irish government or the EFSF would be very welcome. The Irish Economy

  13. Georg R. Baumann Says:

    Well… isn’t it remarkable. Not only does a government with no ethical mandate sign a deal against the will of it’s citizens, they also come out afterwards with the usual “There is no other way” rhetoric and a complicated model of interest rate commitments that even well educated economists struggle to understand.

  14. bazza Says:

    @Eoin - thanks for the info.

    @Georg - I laughed when I read your piece and then I got angry.

  15. Bond. Eoin Bond Says:

    Nice…

    Dec 3 (Reuters) - Germany and France hold particular responsibility in Europe, but they must also show consideration for other nations, German Finance Minister Wolfgang Schaeuble said on Friday.

    Schaeuble added that the idea Germany would help another euro zone member state out of sheer generosity was “simply nonsense.” Germany acted in its own interests when helping other countries, he added.

    (Reporting by Gernot Heller)

    http://www.reuters.com/article/idUSBAT00583720101203

  16. seafóid Says:

    “Schaeuble added that the idea Germany would help another euro zone member state out of sheer generosity was “simply nonsense.” Germany acted in its own interests when helping other countries, he added.”

    Mrdevalera on youtube has a very funny video of FG shooting itself in the foot which could just as easily apply to Germany.

  17. David O'Donnell Says:

    @all

    … by far the best and most surreal moment in this loss of at least fifty billion in this particular game occurred as I observed the IMF spokesperson delicately and piercingly almost silently pronounce “THREE POINT ONE TWO PER CENT” … and the credits roll on screen.

    Those different interest rates also play hell with the perceptions of the ever numerous actors in this game - a postmodern tragicomedy hoisted on a populace that has yet to complete its modernization - and these perceptions influence the politics of decision making, and spin/propaganda.

  18. DottyD Says:

    @Eoin

    SDR rate (=remuneration rate) needs to be adjusted.

    The rate of remuneration is the same as the SDR interest rate.
    The rate of charge is equal to the SDR interest rate plus 100 basis points.
    http://www.imf.org/external/np/fin/data/sdr_ir.aspx

    The rate of remuneration and the rate of charge are also adjusted for the financial consequences of protracted arrears under the burden sharing mechanism.
    http://www.imf.org/external/np/tre/sdr/burden/2010/112910.htm

    You then need to adjust for the currency units per SDR (Euro was 1.1600600 on Dec 3) if the country wishes to pay in Euro rather than pay multiple coupons as per the basket. [ NB Most countries tend to pay in the denomination that they raise taxes in. ]
    http://www.imf.org/external/np/fin/data/rms_five.aspx

    The IRS costs (all currencies including Euro) are on top. You have the idea.

    On the issue of margins, I haven’t seen them for Ireland yet but they will be available post-dispersement. For example, Greece published the terms as SDR 5,549.44m dispersed 12/5/2010. Maturities from 12/8/2013 until 12/5/2015 (quarterly). Coupons are a step-up of 3Μ SDR, 3M SDR + spread 2% and finally 3M SDR + spread 3%

    Source: Page 3 of http://www.minfin.gr/content-api/f/binaryChannel/minfin/datastore/b7/56/1e/b7561e69f994d53fb6e60a66f848e3ba1ce9580d/application/pdf/100819_debt_en.pdf

    Interestingly the terms of the EU deal for EUR 14,500m were worse. Dispersed 18/5/2010. Maturities from 14/6/2013 until 13/3/2015 (quarterly). Coupons are a step-up of 3M Euribor + spread 3% for the first three years and 4% for the remaining years until maturity.

    If 5.7% was the all-in-rate negotiated for the IMF and EFSM loans, then Ireland negotiated a “good” deal compared with Greece (longer, lower margins). However that doesn’t make it any more affordable for the country in the long run nor factor in the potentially socially divisive costs nor factor in the reduction in GDP from austerity.

  19. Martin Fetherston Says:

    Here’s the IMF factsheet spelling out its policy on charges:

    http://www.imf.org/external/np/exr/facts/sba.htm

  20. Mark Dowling Says:

    Feck it lads, there are payday loan shops on every corner in Canada which could do a better deal than BLTD just did with the Eurocabal.

  21. Martin Fetherston Says:

    (Resend of prev. comment on IMF charges - hit the button prematurely).

    Here’s the IMF factsheet spelling out its policy on charges:

    http://www.imf.org/external/np/exr/facts/sba.htm

    Disclosure - I used to work for the IMF.

    This factsheet refers to charges on standby arrangements (SBAs), but the charges are the same for extended arrangements (EFFs) (the latter arrangements have been rare in recent years and last year some members of the IMF board suggested abolition). They are not subject to case-by-case negotiations, unlike apparently those for EFSF part of the Irish package.

    The NTMA note and Karl’s and Eoin’s expositions above make clear that part of the high headline interest cost of 5.8 percent reflects, given the yield curve, the long maturity of the loans under this package. The cost would have been lower if the package was on SBA terms (repayment 3 1/4 to 5 years after each disbursement instead of 4 1/2 to 10), and I wonder therefore why the government opted for the longer EFF maturity given that drawings under an SBA could also have been structured over 3 years. Suggests a very cautious approach to Ireland’s prospects for regaining market access over the medium term.

  22. Martin Fetherston Says:

    The adjustment to the IMF rate of charge mentioned in DottyD’s comment is currently 1 basis point and the adjusted rate of charge is 1.38 percent. This rate is then subject to a surcharge of 200 basis points once the country’s liability to the Fund exceeds 300 percent of its IMF quota - in this case the surcharge will apply to about 90 percent of the Irish loan. The surcharge rises to 300 basis points for loans outstanding for more than 3 years.

  23. anonym Says:

    Gentlemen: if the BBC report is correct, then there may not be any purely technocratic rule by which the EFSF rate can be derived. Political economy, yes?

  24. AMcGrath Says:

    @Karl
    This discussion is a bit jesuitical. Does it really matter how they derived the interest rate. It feels a bit like a debate on how they sharpened the knife they’re going to stab us in the back with

    BTW coincidentally with IEs 2nd birthday - it’s Keiser Reports 100 episode and guess what, it’s almost entirely devoted to our travails with the IMF/ECB. 2nd half features Gonzalo Lira. Entertaining as usual - apparently it wasfeatured on the Daily Show (that’s Daithis - not John Stewarts) today - a clip where Max says that the Wall st bankers (which he says is what basically the World Bank and IMF are) are taking over Greece and Ireland so that they can moor their yachts cheaply and get a cheap supply of Shillegaghs.
    Oh and he has a viral campaign ongoing for anyone who feels strongly about JP Morgan. Some rumours that they are 1.5 trillion short on silver. So Max’s campaign is simply “Buy Silver - Crash JP Morgan”

  25. AMcGrath Says:

    Oh and the link
    http://rt.com/programs/keiser-report/keiser-report-episode-100/

  26. isaac Says:

    There was a piece in the current edition of The Phoenix about the interest rate the Europeans are charging, in particular Regling’s outfit. “Loan shark” is what comes to mind. It is humiliating.

  27. Bryan G Says:

    The NTMA note does not say that the IMF portion of the loan will be swapped/converted into a fixed-rate loan. I expect that the IMF loans will be disbursed exactly as specified in the IMF press release/press conference, with the interest rates as described there (SDR+3% & SDR+4%). The repayment schedule is, according to Chopra

    So, the first payment after any drawing doesn’t start for 4½ years, and it takes 10 years with 12 installments to pay off the loan.

    I think the 5.7% rate is just a “made-up” rate based on what it would cost at market rates to convert the IMF money to 7.5 year fixed. There is no indication that this will be done in practice. From the press conference again, somewhat incoherently this time with the EU Commission speaker:

    So if you compare anything with anything, and I think it’s useful to compare, you know, an
    orange and apple — now not to compare orange to apple, but try to compare, you know, the same currency, same maturity rate and, you know, if there is better, we encourage the Irish government to use that .

    The EU are encouraging the Irish government to use this made-up rate since it makes the EU look better. It is a marketing construct, not something that has any meaning to the IMF themselves. I doubt the IMF are very enthusiastic about the portrayal of their rate in this manner, which explains why Chopra just referred to the IMF press statement and never once mentioned 5.7% or 5.8% himself.

  28. Bond. Eoin Bond... Says:

    @ Bryan G

    completely agree. They were pressed for an all-in blended rate for the public/media, so they had to say “if it was all drawn down at the same time and for the same maturity it would be X%”. Remember, the IMF part will most probably be undrawn as its only, as far as i know, going to be used for the contignency fund, and there’s 15bn in fresh capital sitting in front of that, so the rate of the IMF part (a) might be academic if never drawn and (b) even if drawn, it will likely be in a few years time when rates are very different.

    So, assuming its undrawn, the rate on the entire package will most like be (if the above rates are true) around 6% on the EFSM/EFSF amount of 45bn, rather than 5.8% on the IMF/bilateral/EFSM/EFSF amount of 85bn.

  29. Bryan G Says:

    @Eoin

    Also just saw this, which is from another IMF press conference on Dec 2 - shows they are not on board with the “5.7% IMF rate” idea.

    QUESTIONER: May I ask you about the recent deal with Ireland? There has been a lot of comment about this in Ireland, particularly about the interest rate that’s been charged by the IMF. Let me make just two points. One is a general comment if you have it on the deal. And the second point is on that interest rate which is worked out apparently at 5.7 percent after the swap rates have been exercised. Is that the optimum rate that the IMF would give for such a deal and was there pressure to make it higher or make it lower?

    MS. ATKINSON: Thanks for that question. First of all, our interest rate on our loan to Ireland is 3.12 percent on the SDRs that we lend. We have exactly the same interest rates that we charge to every single country depending on which facility they borrow under, and what type of country they are and what — there are very clear rules so there is no room for discretion and there — I would say that is a reasonably advantageous interest rate of 3.12 percent. And there’s no room for deviation from that interest rate. It’s set by very clear rules and the interest rate on our standby facility (SBA) and our extended arrangement (EFF) are identical. We have special low interest rates or zero interest rates for low-income countries.

    I’ll admit I hadn’t seen anything so far about the IMF funds only being used for the contingency fund. The Greek bailout had a fixed 3:8 ratio of IMF to EU funds in each disbursement.

  30. How one large part of the UK economy may avoid an Irish fate | Michael Burke - Yachydda is Politically Arguementative and Topical - yachydda.co.uk Says:

    [...] here, but not in Ireland, is that the interest rate on these new EU loans will be approximately 7%, compared with just 3% on IMF [...]

  31. Jockser Says:

    not sure whether this question from karl was ever cleared up but the way the interest rate comes to 5.8% is as follows:

    IMF - cost of SDR funding is approx 2.5% i.e. the cost of funding on the imf side. add to this a punitive charge to ireland of 317 bps and you arrive at the imf rate it charges us of of 5.7% (it passes the cost of its own funding and the punitive int rate to ireland). the recent scope of a reduction in rate from the imf side is on the 317bps punitive rate, reducing this to 304bps which makes little or no difference to ireland as it only adjusts the current imf rate of 5.7% marginally.

    efsm and efsf - both have a cost of raising finance on the market between 2.5% - 3%. add to this punititve penalties to ireland of 292bps and 317bps and you get a efsm rate of around 5.7% and a efsf rate of over 6%.

    taking the average of the 3 rates over an average maturity period of 7.5years gives you the 5.8% average int rate we are paying.

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