IMF/EU Deal Interest Rate

In an article in the Sunday Business Post I explain how the deal will allow Ireland to finance its deficit over the next three years at somewhat lower cost than the headline interest rate would suggest. The article is here.

25 thoughts on “IMF/EU Deal Interest Rate”

  1. Its difficult to come to the conclusion that the IMF deal will give us time to recover when the measures being put in place to pay for it will depress domestic demand, which is the real source of jobs growth in Ireland.

  2. John

    A bit off topic but I want to pick your brains as you are there. The Balance of Payments surplus. Is this as good a news as it appears. What it seems to mean is that Ireland Inc. is living within its means. But could it mean that the MNC sector is have large surpluses whilst the true domestic sector is very negative.

    Reading the article had a welcome calming effect.

  3. ‘However, because the overdraft facility is there for the next three years, the NTMA can now undertake some short-term borrowing with the certainty that it can be refinanced, if necessary, by drawing down the overdraft.

    The advantage of such short-term borrowing is that, over the next three years, it may well prove possible for Ireland to find lenders willing to lend for short periods at much lower interest rates than would be charged for the overdraft.

    When Ireland last borrowed such money in the summer, it was paying an interest rate of 2 per cent.’

    This is a bit like getting another credit cards to pay off the first. The premise that bond traders will buy our debt at lower interest rates is off the wall.

    The 35b for the banks is not enough and will cause another crisis if Alan Dukes is correct.

    I think I will stick with my realist stance.

  4. The ECB is worried about haircuts-

    “The issue is that the ECB is worried about potential losses from its bond buying,” one source said.

    “At the moment we are buying very modest amounts, but what if that is increased, and what if the bonds you buy are suddenly worth 30 percent less?” the source said, referring to the risk of a writedown on a euro zone government’s debt.

    The central bank declined to comment.

    The ECB disclosed on Monday that it had increased its purchases of euro zone government bonds to 2.667 billion euros ($3.5 billion) last week from 1.965 billion euros a week earlier. It was the biggest weekly total since June but well below levels seen at the height of the euro zone crisis.

    Altogether, the ECB has bought 72 billion euros in bonds — exclusively Greek, Irish and Portuguese, analysts believe — since it began intervening in May to stabilise markets.

  5. I agree that we can both get cheaper money and that the ultimate debt figure doesn’t really matter. What matters is that there is a plan, the plan has been, to some degree, imposed, and the Irish fiscal situation is now “somebody else’s problem”. It has been covered in a faded red and white check table cloth, with strategically placed cigarette burns.

    All we have to do is pretend it doesn’t exist in a manner consistent with the plan that has been laid before us.

    In 2014, the infinite improbability of us meeting the deficit goals will result in a lot of head-scratching, some quick jottings on a see-through iPad and a new plan (probably with debt reduction or increased transfer payments from the rest of the EU for being such jolly good sports).

    Meanwhile, we have a domestic crisis that is just too good to waste. Let’s get on with reforming lots of stuff…

  6. @Brian Woods
    The profits of MNCs, whether paid out or accrued, are included as part of net factor income abroad. Thus the current account of the balance of payments takes account of these payments already.
    A balance of payments surplus next year would mean that while the public sector will be borrowing around 9.5% of GDP abroad the private sector will be reducing its net foreign laibailities by a larger sum. This would reflect a very high level of saving by households and Irish companies and a very low level of investment on their part.

  7. REJECTING MOU MAY NOT BE DANGEROUS

    Slightly off topic but, in view of of the “MOU vote” in the Dail on wednesday nevertheless VERY relevant.

    A very guiet bit of news was released on BBC world service over the last few days. Iceland will now repay Ice Save deposits.

    BUT WAIT FOR IT: only by 2046.

    As we all discovered when the international media descended on Iceland during the volcano (which no one can pronounce) eruption the population does not seem to have suffered a drastic reduction in the standard of living following the financial collapse of 2008.

    As I recall the the population decided by referendum that they could not and, would not, repay these deposits despite heavy pressure (including enactment of terrorist laws) and freezing of Icelandic assets in the Netherlands and UK.

    Perhaps wavering FF should politicians take note and reject the (incorrectly named) “bailout” terms until a proper interest rate is applied and the Euro Zone matches Ireland`s ” free gratis” contribution of 17.5 b.

    Since we clearly cannot pay we might as well send it back to the “drawing board” now that this opportunity has been belatedly (and reluctantly) presented by the coalition.

    In light of the “fear of contagion” and news emanating out of Germany and Iberia I have no doubt a more palatable offer offer will be back on the table by the end of next week which we can all vote on in a referendum combined with the forthcoming general election.

    In the meantime our own contribution of 17.5b will keep the ATMś open and the organs of state functioning. This seems like a more reasonable option then continuing to discuss (and eventually) defaulting.

  8. @JF
    re NTMA €20 billion.
    “This cash was needed to tide things over if the state had problems borrowing. However, with the EU/IMF overdraft now available, which can be drawn down whenever required, it will be possible for the state to use much of this cash in 2011 to fund its day-to-day expenses, avoiding the necessity of additional borrowing.”

    From a bookkeeping perspective this is correct.

    But I doubt you will find a treasurer in any company that would leave themselves with zero reserves, particularly as the bank manager seems to have taken an unseasonal dislike to the cut of your jib.
    Indeed it would be foolish housewife, that used the kitty to help pay off the husband’s gambling debts on the promise of an overdraft.

  9. The under-reporting of the
    Iceland deal
    with the UK/Holland is odd, but then again maybe it isn’t. Perhaps it would have raised too many awkward questions before this week’s MoU vote. Questions like

    – If Iceland can make a deal with 3.0% and 3.3% interest rates why can’t Ireland? The principle was that the interest rate should be based on the cost of funding with no interest premium.

    – if Iceland can make a deal that caps debt servicing to a % of GDP, why can’t Ireland?

    – if Iceland can make a deal whereby most of the principal repayments are tied to the recovered assets of the failed banks why can’t Ireland?

    – if Iceland can make a deal whereby repayments may extend to 2046, why can’t Ireland?

    – if Iceland can make a deal whereby any future disputes are referred to the Court of Arbitration in the Hague rather than clauses requiring endless ‘consultations’ with the EU Commission in case of disputes, why can’t Ireland?

    Oh I forgot – their negotiators actually believed that their taxpayers have rights which may supersede the rights of bank creditors involved in private transactions; believed that ‘sovereignty’ actually means something; and were prepared to play hardball with referenda etc. Glad that’s sorted.

  10. @BYRAN G
    Maybe it is because the average Icelander is aware of his own existence.

    The average Irelander however just wants more spice to sustain his own sorry sustenance.
    You fight or you die in this war of the derivatives.
    Passive submission to this buggery is only a option to natural born alter boys.

  11. @MH
    re: Ernst & Young
    Looks like one of the the navigators of the crashed Anglo Irish bank is still alive and chirping.

  12. @ JF

    Thanks for that clarification – I thought it was only physical repatriations that counted in income abroad.

    So it really does pull the rug from under those who say we have the “wrong” exchange rate.

  13. I would suggest that playing at the short end of the yield curve for the next three years would be a risky strategy, building a stock of refiniancing commitments towards the later stages of the plan.

    What if, for exmaple, we do stock up on seom extra2-3 year debt and also find oulr borrowing requirment is much greater than oringially envisaged – say the underpinning growth assumptions in budget planning are wrong 😉

    And then the EU/IMF have no extention to offer us. That would make for a nasty 2014.

  14. @MH – re: Ernst & Young

    Thanks for depressing me before the day even gets going 🙁

    I fear those interest rate rises are going to happen sooner in 2011 rather than later…. and I have lost count of the number of young people I have spoken to in the past two months who have told me they are going to leave Ireland after Christmas.

  15. @ Joseph Ryan Says:

    Looks like one of the the navigators of the crashed Anglo Irish bank is still alive and chirping.

    They were among good company with all the others who missed the elephants in the room.

    This from WikiLeaks on a report of a conversation in Dublin:

    Kevin Cardiff, now secretary general at the Department of Finance, echoed the regulator’s views. “[Cardiff] pointed out that auditors contracted by his department to look at the books of at least two of the institutions under pressure came away with a ‘favourable impression of the loan books’,” the cable said. “While he admitted that the amount of ‘speculative loans or those that are not currently product is not insignificant’, he stressed that all involved in putting together the package were confident that government would not be forced to bail out the banks.”

    The auditors Cardiff referred to, had rubber-stamped risk policy or the lack of it at the banks, over many years.

  16. re: Ernst & Young
    16% unemployment and high levels of migration? Looks like London Irish won’t be short of supporters for the rest of the decade.

  17. It seems that there should be scope for an interesting, useful and enlightening debate here between what might be termed the ‘official’ or ‘supportive of the official’ view of the Troika deal and the more sceptical stance being adopted by some of the principal contributors.

    But we don’t seem to do ‘debate’ here that might involve adopting potentially adversarial stances derived from differring assessments of data, research and analysis. And this seems to be quite common in the policy and political arenas both here and throughout the EU. It contrasts forcefully with the US approach which allows potentially conflicting positions to propose, rebut and counter-rebut the evidence suporting the respective stances with a view to forming a judgment.

    Our public discourse and policy-making is the worse as a result. It is simply a replication of the ‘debate’ that occurs in the Dail. The Government proposes, allows the opposition to moider on ineffectually and sits there confident that, irrespective of the evidence presented – or the oratory employed, the lobby fodder will ensure safe passage.

  18. Credit Institutions (Stabilisation) Bill 2010 just published by the government.

    Lots in there, but key lines around questions asked on here re state recap and how that will work in terms of being able to burden share etc etc…

    Part 4, section 28:

    (2) In considering whether to make a proposed subordinated liabilities
    order in relation to a relevant institution the Minister shall
    have regard to such of the following matters as the Minister considers
    appropriate:
    (a) the amount of the indebtedness of that institution to its
    subordinated creditors relative to its assets;
    (b) the extent and nature of financial support provided or to
    be provided to that institution by the Minister under the
    Act of 2008 or otherwise;
    (c) without prejudice to paragraph (b), the extent to which
    the State has, in particular, provided financial support by
    way of equity investment (or equivalent) in that
    institution;
    (d) the quantum of the financial support relative to that insti-
    tution’s balance sheet;
    (e) the viability of that institution in the absence of that financial
    support;
    (f) the present and likely future ability of that institution to
    raise equity capital from market sources;
    (g) the likely extent to which the subordinated creditors would
    be repaid amounts owing to them in a winding up of that
    institution in the absence of such financial support;

    http://www.oireachtas.ie/viewdoc.asp?fn=/documents/bills28/bills/2010/5810/document1.htm

  19. AND WHEREAS THE COMMON GOOD REQUIRES PERMANENT OR TEMPORARY INTERFERENCE WITH THE
    RIGHTS, INCLUDING PROPERTY RIGHTS, OF PERSONS
    WHO MAY BE AFFECTED BY THE PERFORMANCE OF
    THOSE FUNCTIONS; 35
    AND WHEREAS THE URGENT REORGANISATION OF
    CERTAIN CREDIT INSTITUTIONS IS OF SYSTEMIC
    IMPORTANCE TO THE STATE;
    AND WHEREAS IT IS NECESSARY TO MAINTAIN PUBLIC
    CONFIDENCE IN, AND ENHANCE, THE PROTECTION OF 40
    DEPOSITS IN CREDIT INSTITUTIONS GENERALLY;
    AND WHEREAS IT IS DESIRABLE TO PROMOTE AND
    FACILITATE INVESTMENT BY PERSONS OTHER THAN
    THE STATE IN CREDIT INSTITUTIONS TO REDUCE THEIR
    RELIANCE UPON STATE SUPPORT;

    45
    AND WHEREAS BECAUSE CERTAIN CREDIT INSTITUTIONS IN THE STATE ARE PARTIES TO CONTRACTS
    AND OTHER ARRANGEMENTS GOVERNED BY THE LAW
    OF A STATE OTHER THAN THE STATE;

  20. @ B_E_B

    I think this answers Karl’s question on choreography. Timing doesn’t matter. If any support has been given since 2008 then the Minister is free to burn subbies, guided by the criteria you have outlined and in particular what they would have got if the institution was wound up without support. In other words the Minister seems free to hypothesise – imagine we done nuffin’ since 2008 – where would that have left the subbies.

    It does not require PWC to work this one out. The answer is zero.

  21. @ BWII

    i think you’re right – Lenny also said in the accompanying statement: “In the first instance, the provisions in the Bill once it is enacted by the Oireachtas will be available to the Minister to effect, in part, the injection of capital into Allied Irish Banks prior to year end as necessary to ensure the bank is compliant with the regulatory capital requirements as set by the Central Bank of Ireland.”

    This suggests that we may end up seeing a deeply discounted sub debt exchange/tender in the next week (ie “prior to year end”), and then if this doesn’t turn out to be successful in turns of take up, then the legislative Plan B can be implimented. As i suggested before, it will prove to be a meaty stick to use on subbies in both AIB as well as more healthy institutions like BOI/IPBS.

  22. @MH
    re Kevin Cardiff, now secretary general at the Department of Finance, echoed the regulator’s views. “[Cardiff] pointed out that auditors contracted by his department to look at the books of at least two of the institutions under pressure came away with a ‘favourable impression of the loan books’,” the cable said.

    This is same Mr Cardiff that was in the room on Sept 29th 2008.

    Was there an open interview for the job of Secretary of Dept of Finance when Mr Doyle exited the stage in his golden chariot?
    Imagine the list of achievements that Mr Cardiff could have elucidated to the interview panel!

    You are right about David Begg. ALL board members during the critical ‘gross negligence’ Bank period should be removed. A list of names would be helpful.

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