Further Reductions in IMF Rate Are Likely

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A reader has written to me about an important item missing from my briefing paper on the IMF-EU loans. I noted in the report that the amount of money that Ireland can borrow at cheap rates is three times our IMF quota and that this quota was about to increase. However, I did not mention that a much larger increase in Ireland’s quota is likely to occur over the next year or so.

On November 5th, the IMF concluded its 14th General Review of Quotas with the Executive Board recommending that the Fund’s Board of Governors adopt the proposed quotas. The proposals include a doubling of the total amount of quotas and review of each county’s share of the total. Ireland’s share is proposed to increase further from 0.528% to 0.724%). This means that Ireland’s IMF quota will increase to around SDR 3.45 billion, which at current exchange rates would translate to a quota for almost €4 billion.

If implemented, these proposals would allow Ireland to borrow almost €12 billion at IMF’s low interest rate (currently 1.38%) with the remaining €10.5 billion at the higher rate (3.38% for the first three years, 4.38% thereafter). Over a seven and a half year period, this would translate into a loan that had an average margin over the variable SDR base rate of 228 basis points, down from the 326 basis point margin associated with the IMF lending terms that prevailed at the time the bailout deal was increased.

To come into effect, the proposals must be approved by 85% of the IMF’s voting share and 113 member countries. It’s unclear how long this will take but it may take a year or so.

I think this adjustment of the IMF lending terms is an important point to keep in mind when considering the lending terms on the EU loans. The EU lending authorities have been keen to point out that, once compared in the appropriate fashion, their loans can be viewed as having equivalent cost to the loan that the IMF offered the Irish government in November. This is true. However, when compared against the terms that the IMF is going to offer Ireland in the near future, the European loans are a good deal more expensive.

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8 Responses to “Further Reductions in IMF Rate Are Likely”

  1. veronica Says:

    Karl,

    The Bretton Woods (Amendment) Bill relating to the 2008 IMF quota adjustments went through the Dail on 19 January. “The increase in Ireland’s quota share will result in a reduction, by approximately 18 basis points, in the interest rate payable on the funds borrowed by fund, a saving in interest payments of approximately €1.8 million per billion borrowed per annum,” the Minister said. He added that countries have been asked to get their houses in order for the 2010 quota reforms by autumn 2012.

    “The impact of this quota adjustment, when implemented, will have a more significant inpact on Ireland’s interest rate, with a potential reduction estimated at 80 basis points when the 2010 quota increase is implemented,” he said. “This would constitute an interest rate saving of approximately €6.5 million per billion per annum.”

    I guess we should be glad that this Bill managed to get through the Dail before Cowen imploded his government the following day. But are there other necessary pieces of legislation that are still hanging out there, (because they couldn’t fit into the truncated timetable allowed for the Finance Bill) whose non-passage in the lifetime of this Dail we may yet have cause to regret?

  2. Micheal O Callarain Says:

    I’m wondering if there’s an opportunity for you to guest blog on our site at http://www.mentors.ie/blog (or vice versa). Your material would be right up the alley of our readership, I think. Please reach out to me directly at my email.

    Cheers – Micheal O Callarain, Director, Mentors.ie

  3. Karl Whelan Says:

    @ Veronica

    Just to clarify, this bill you are referring to is that adjustment in Ireland’s quota that I referred to in my Oireachtas note.

    What I didn’t mention is that there is likely to be a further upward adjustment in Ireland’s quota soon.

  4. veronica Says:

    @Karl,

    Yes, I knew that. I’m sure the next administration won’t be slow to get their house in order on subsequent quota adjustments either. However, my concern is twofold : that we’ve had a blitz of finance legislation over the past couple of months about which there’s been precious little public debate in the MSM and that, as I recall, there were some items promised to go through along with the Finance Bill in January that now fall by the wayside with the end of this Dail. I guess I’m wondering what the implications might be?

  5. Eureka Says:

    Yet another reason to favour an IMF-only bailout over the current fiasco
    Whether or not the rate is reduced the method of calculating those rates is very transparent.

  6. Martin Fetherston Says:

    For the quota changes to come into effect the US congress needs to act (given that the 85 percent majority cannot be reached without the US). Given the outcome of of the November election and the views of most Republicans on anything that can be construed as foreign aid, don’t hold your breath!

  7. David O'Donnell Says:

    @Karl Whelan

    IMF are transparent, imho … but IMF are not an EZ state.

    On that other interest rate – yes a reduction in EU/ECB will probably ensue – that said, in the overall scheme of things, this is the equivalent of reducing a few inches off the hangman’s rope – the end result is the same, simply prolongs the agony.

    More spin on the way – looking at present election polls – one must now seriously consider despair ………. FG, FF, Lab appear content to leave the noose firmly in position around the neck of the citizenry …. and simply reduce the length of the rope – and crow about this achievement …….

    And we pay for the rope …

    JHC – how does one communicate this debt-knell to Irish citizens ………

  8. Eureka Says:

    http://capitalismandfredom.blogspot.com/2010/03/no-bailout-clause-of-lisbon-treaty.html
    This is a link to Article 125 Lisbon Treaty.
    The current EFSF contravenes this. Is the bailout constitutional because the referendum is on a fundamentally different treaty

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