IMF Projections Show EU-IMF Funding Not Big Enough

One of the odd aspects of the election campaign so far is that despite constant references to the EU-IMF deal, nobody seems to have pointed out that even by the IMF’s own calculations, the deal does not in fact provide enough money to fund the state for three years.

I’ve been over this before in detail but here’s a quick reminder. The IMF’s report on the Irish deal projects cumulative general government deficits of €43.5 billion over the period 2011-2013. This includes a phantom €1.8 billion for interest on promissory notes that will count on the deficit in 2013 but for which cash payments are intended to be deferred. So the IMF are really projecting a cash requirement of €41.7 billion to fund deficits over the next three years. (See spreadsheet with calculations here.)

Add in €16.4 billion to honour long-term bond redemptions and €9.3 billion for principal payments on promissory notes and you get €68.7 billion.

The EU-IMF programme provides €50 billion over the period 2011-2013 to fund budget deficits and other cash payments. This means that, based on the IMF’s own deficit projections, the Irish government will need to come up with an additional €17.5 billion to fund the state over the next three years and also honour comittments on bonds that it has issued.

Do we have this €17.5 billion? Unfortunately not. After €10 billion is contributed to the bank recap, the NPRF will have €4.9 billion remaining. Exchequer balances were €15.7 billion at the end of 2011. Deduct the remaining €7.5 billion for the banking package and €6 billion for paying off our remaining T-bills over January to March and we’re left with €2.2 billion.

So, by my calculations, we don’t have the €17.5 billion that the IMF figures imply are required to get us through 2011-2013; we have €7.1 billion. (Note that we would still need €11.5 billion if the government’s deficit projections came to pass, implying we’re still not funded for the three years.) Since none of the above calculations are based upon secret information, one must assume that the IMF officials overseeing the deal also believe that insufficient money has been promised to meet the stated goal of three years of funding for the Irish state.

Two questions, then, that might be worth asking over the next few weeks of the campaign:

1. Do the various parties running for election intend to request additional funds from the EU or IMF to allow the state to be funded through 2013 or are they intended to return to the bond market before the end of 2013 to fund the country?

2. Given that the €7.1 billion left in liquid funds are not sufficient to fund the country for the next three years, do those who propose spending these funds on windmills, broadband and electric cars accept that they will need to negotiate a larger borrowing package with the EU-IMF because of this spending? If not, what is their plan for funding the state through 2013?

There are many potential answers to these questions. But the questions seem worth asking.

42 thoughts on “IMF Projections Show EU-IMF Funding Not Big Enough”

  1. Karl

    “Do we have this €18.7 billion? Unfortunately not. After €10 billion is contributed to the bank recap, the NPRF will have €4.9 billion remaining. Exchequer balances were €15.7 billion at the end of 2011. Deduct the remaining €7.5 billion for the banking package and €6 billion for paying off our remaining T-bills over January to March and we’re left with €2.2 billion.”

    Where are the Exchequer balances? Are these deposits in Irish banks. If so that would be a 13.5bn reduction in deposits over the first quarter.

    Obviously this will have been properly thought out, and this is not the case Can anyone enlighten me?

  2. “One of the odd aspects of the election campaign so far is that despite constant references to the EU-IMF deal, nobody seems to have pointed out that even by the IMF’s own calculations, the deal does not in fact provide enough money to fund the state for three years.”

    Yeah, just one of the odd things. There are one or two others:

    1. NAMA has been an abject and total failure. Anybody got a policy to deal with this?

    2. We are the only country in the world without a banking system. Anybody got a policy for this?

    3. The 4 year plan is dead in the water. Anybody….

    4. The only thing keeping this economy from total, as opposed to merely catastrophic, collapse, is the world economy. Thankfully, the latter is booming. Should it turn down, sovereign default will be automatic. Anybody….

  3. Q1 Another 500 million in permanent cuts. This is the first of many landmines left by our outgoing government. Anglola.

    Q2 Or even more cuts if stimulus package is introduced. Therefore difficult to see a sizeable stimulus.

    When they say we have to rely on export growth they really mean it.

  4. @Simpleton: “The only thing keeping this economy from total, as opposed to merely catastrophic, collapse, is the world economy. Thankfully, the latter is booming.”

    Booming? I have some very grave misgivings in this direction. It looks like a ‘boom’, but the fundamentals are awfully sandy looking. What is noticable is the acceleration of aggregate economic activity from ‘west’-to-east’. But some consumer has to have enough disposable income to pay for the ‘booming’ exports of east asia. That lotsa credit. The western economies are (mainly) tuckered out on credit! So who is going to do the buying?

    Please keep a close watch on Baltic Dry index of shipping. Not so good at present. Liquid fossil fuel production seems to have plateaued. May only be a temporary blip, but some ‘oil-watchers’ are quite concerned. The time-line on this one is from now until 2015. But you may take it that crude prices over $ 90/bl will slow aggregate economic activity. Re-cycled petro dollars are not being used for productive investment. Blowing another bubble somewhere???

    BpW

  5. I’d assumed their plan was to get the irish to burn through all their cash reserves and then force new corrective measures through in quarterly reviews to ensure the agreed funds are adequate.

  6. Simpleton,

    Welcome back

    You are right on point 1. I venture the putative govt leader does not want to confront this until he gets in and sees the files. He will want to know, if he does not already know why NAMA had the effect opposite to that which was intended…i.e to accelerate rather than prolong loss recognition. He will also need to find out how NAMA can operate if the SC rules in such a way as to change the model. Any policy at this point would be complete rubbish. He will also find out that there is no way of “unscrambling NAMA”. You can’t put the assets back to the banks.

    Point 2. Same as point 1. No policy is possible until you talk to the ECB. They want to reduce the exposure with a fire sale of assets at the bottom of the cycle and the Irish taxpayer to bear the cost. That almost certainly brings the issue of default front and centre. Nobody will extend liquidity or equity to the banks until this process is clarified.

    Point 3. Yes it is dead in the water. But the fiscal adjustment is likely to be accelerated not elongated by point 4.

    Point 4. Default as virtually independent of what direction the world economy goes in. Since the EZ did not countenance burden sharing at the start of the crisis, which they never would do and still will not do, the losses of an unregulated banking system would always end up where they have ended up. Ergo…well it is obvious innit.

  7. Karl,

    the plan I presume is to issue bills. Both Portugal and Spain have issued bills at OK rates in the last few weeks. There is also CP.

  8. The Irish State is bankrupt. Everybody knows it. No one is worrying
    about the missing €18 billion because they all know perfectly well that
    the state will default long before it has to find those funds.

    The whole country is essentially sitting around, eyes down, nodding away
    in agreement that default is “unthinkable”. But in typically Irish
    fashion it’s all a con; they don’t actually accept such conclusions; and while they won’t say so outright, they will
    passive-aggressively behave completely contrarily to what is expected of
    them. Hence the refusal of the state to make serious effort to tighten
    its expenditure, and the recent splurge in new car
    sales
    . The behaviour is endemic, from Government to individual.

    Ireland is a broken home. Government officials, commentators, etc, lead
    by the Minister for Finance, play the part of the demented, naive, still
    hopeful mother, ceaselessly reassuring the children(the Irish Public)
    that everything will be OK and that things will get better. That their
    father (the Banking sector) is not in fact the drunkard, liar, and
    bankrupt he appears to be. That the mean people calling to the door with
    threats don’t mean it, and that things will get better once daddy gets
    back on his feet.

    And at first the children believed her. But as the the food grew scarer and the house got colder, as his absences got longer and her tears came quicker, their questions came rarer, and finally they knew that she wasn’t telling the truth. And they became delinquent, keeping up appearances at home for their mothers sake, but now finding solace in what mischief they could find outside the home, forgetting the entreaties she made of them.

    She’ll leave him; they know. The nights he spends away shows he knows it too. She likely knows herself, but still she clings to a desperate thread. In vain. The lies have knotted up and there’s a coldness now. It’s a Divorce then. The sooner the better. The house will go, but he’ll keep his debts and the visitors. She’ll keep the children, and have a few shillings to spend for them at the end of the week.

    The Irish State will default. The only question is when. This €18 billion only puts an upper time limit on the inevitable writeoff of the banking debts. It has not been dealt with because the State, its officials, and the general public have no intention of dealing with it or any more of these funding issues until the banking crisis is definitively and decisively resolved. Only then will the country move on.

  9. Am I wrong to think that the game has now been lost. Depopulate, default, and then rebuild. We will recover but not in our lifetimes

  10. @ ObsessiveMathsFreak

    The Irish State will default. The only question is when.

    I agree 100%.

    There are some (non-economist) commentators saying how we have a week hand and can’t renegotiate. The fact is we are simply unable to keep to the agreement. There are few things more powerful than inevitability. I hope the new government will bear this in mind when we finally restructure our debt (and my preference would be restructuring by letting the bank bondholders and ECB learning that their actions have consequences, and repaying the sovereign bondholders).

    I hope that we default soon so at least the savings of people below €100,000 can be protected.

  11. From the tone of the Irish media coverage I get the impression that composure has been restored since the embarrassment of November and that the worst is over. In reality nothing important has changed for the better since November- the same parameters are in place , European banks will not be sharing in any losses and that is final. The banks are all on the floor . The dependence on the ECB for funding has intensified. For how long more is the charade going to be allowed to continue?

  12. @ Colm

    “the plan I presume is to issue bills. Both Portugal and Spain have issued bills at OK rates in the last few weeks. There is also CP.”

    That may be the plan, though I’d presume the opposite since we chose not to roll over January’s T-bills and this may well be the choice of our international partners. And Greece’s T-bill rates have not been ok.

    Either way, short-term debt issuance doesn’t really change the question of how long we are funded. Even if we issued €10 billion in T-bills this year on the back of having EU-IMF funds in place, once those funds began to be run down, we’d have to wind up the T-bill program.

    So it doesn’t really matter — one way or the other, I reckon the €8 billion figure is the right one to look at when thinking of what the cash resources of the incoming government would be.

    Needless to say, I’d prefer they didn’t spend it on windmills and electric cars.

  13. “the plan I presume is to issue bills. Both Portugal and Spain have issued bills at OK rates in the last few weeks. There is also CP.”

    My impression was that there was a consensus generally, that being reliant on rolling over short term instruments was a Bad Idea for states, SPVs and hedge funds. I list these out separately in case any readers can still tell the difference.

  14. 1. NAMA has been an abject and total failure. Anybody got a policy to deal with this?

    Make it bigger. See recent speeches of Elderfield/Honohan. Also, wait to see how many cats the Supreme Court puts among the pigeons when it finishes the McKillen judgement.

    2. We are the only country in the world without a banking system. Anybody got a policy for this?

    Banking services will be provided by the state or banks owned and run from the UK and the Netherlands. It’s Iceland via the scenic route.

    3. The 4 year plan is dead in the water. Anybody….

    Minister Lenihan says that plan is the FF manifesto. I’m not sure MM agrees.

  15. @Ahura Mazda

    I’d assumed their plan was to get the irish to burn through all their cash reserves and then force new corrective measures through in quarterly reviews to ensure the agreed funds are adequate.

    I would say you are right. More cuts please or I won’t give you the money to pay next months outgoings. What a pity the govt pockets will be empty at that stage. The only option will be to extend the begging bowl and ‘Can I have some more please’. A fine way to run a sovereign nation!

    On a more general point re the bank funding in the exchequer accounts. It seems to be all over the place. Bank receipts with capital receipts, promissory note payments in non voted capital payments, cash payments to banks routed through the NPRF, interest on such payments and promissory notes presumably lost in non voted current exp as interest.
    Surely there is an argument for putting all bank related costs and income into its own catagory, with its own detailed statement. We could then all see what the net costs of all the banks are. And more importantly keep a record of it so that every cent can be extracted back from the Irish financial sector regardless of who owns the banks or if it takes forever.
    Maybe The Bertie Bank Bowl would be a suitable line item caption.

  16. @all

    The game may, almost certainly has, moved on in Europe. 30 yr extensions, etc but I do not see Germany/France (the latter less than former) ready to address the Banking Black Hole in EZ – the recent paper by Gros & Meyer [flagged by M Hennigan & KW] prob worth a thread for those more savvy then I on the intricicies of this stuff ……. but essentially the GIPS (much neater than PIIGS (-; ) are bust, bankrupt, insolvent …… Restructuring a MUST …. and on present trajectory [see recent thread on Central Bank – Chart 5] we DEFAULT asap and force issue – Angela/Nicolas tango-lateral [excluding the Commission – and every other EU Citizen] on 2013 has its consequences …… and we are out of Mawrket ……… and in a political vacuum at a key time before March 20ish meetings ……. (prob a fudge …… we are expendable – unless some teeth are shown – from the polls – no teeth – and we are almost certainly DONE.

    Leadership anyone?

  17. @simpleton

    Automatic has been turned off – on ‘Manuel’ Faulty at the mo ….. for a wee while. Other than that minor detail – +1

  18. @all

    Opposition to the tango-lateral …. [via EuroIntelligence …..

    “They came to Brussels, jointly announced the agreement, went into the Council and realised that almost everybody disagrees with them, on style, or substance, or both. Angela Merkel and Nicolas Sarkozy had a disastrous summit, and through sheer diplomatic ineptitude managed to turn what many thought was a pre-cooked deal into a cliffhanger. ……..”

    Munchau – ‘it does not constitute a solution to the current crisis, which is a banking crisis, first and foremost, which would require a commitment to force bank restructuring, which is still lacking. …”

    http://www.eurointelligence.com/article/article/aftermath-of-a-surreal-summit.html?tx_ttnews%5BbackPid%5D=901&cHash=7822491d34aad9e9ffbe7020049700f2

    A comment from An Taoiseach would be welcome …..

  19. @Joseph Ryan

    “Surely there is an argument for putting all bank related costs and income into its own catagory, with its own detailed statement. We could then all see what the net costs of all the banks are.”

    You will never prise control of the numbers out of their hands. Numbers are power.

  20. So on IMF figurse we are 10bn short, on government figures we are 3bn short. So what? 3 years is not a drop dead date. 50bn is a very round number. This situation will unfold continually. As we aproach 2011 budget we will have revised the 3 year forecasts. This may or may not require a further top up of the package. Maybe by 2013 we can return to the markets, maybe not. Karl, I really don’t know why you are fixated on the accuracy of the current package, nobody knows.

    For sure, scrap the windmills and electric cars.

  21. Interestingly, Karl’s calculations seem to concur with a line in the IMF’s own projections that people do not appear to have noticed. (I certainly didn’t notice until prompted by this piece to have a look).

    Remember that the IMF exists to provide balance of payments support to members. (Technically, the IMF does not provide fiscal support). Therefore, calculations of the financing need for the country are based on estimating the hole in the balance of payments. This calculation is presented in Table 5 of the Staff Report (page 38) and the financing gap is about euro 67.5 billion. (Proposed funding to close the gap is presented in a memorandum item to the same table).

    It is not possible to tell from Table 5 whether the public sector borrows during the programme period. However, Table 6 (on page 39) provides very detailed projections for external financing requirements and sources. And the external financing sources include (23 lines down the table) public sector medium- and long-term borrowing of euro 3 billion in 2012 and euro 18 billion in 2013. This suggests to me that the IMF are counting on a return to sovereign bond markets in late 2012. (And the required amounts are, not surprisingly, close to Karl’s calculations).

  22. Karl is very right to point out that the EU loans are going to be much more expensive than last November’s all-in rate of 5.83% (including profit margin). It will come as a shock to many that since then, the 7.5 year Euro swap rate has moved from 2.80% (on 26 Nov 10) to 3.26% this morning. So that’s 46bp extra already.

    But the 5.83% all-in cost was always misleading given the gradual draw-down of the bail-out money: If we look at where the 7.5 year rate, starting 1 year FORWARD (i.e. implied rate starting 30 Nov 2011 for 7.5 years), it stood at 3.14% back in November. Out of the same November 2011 start date today, this forward rate stands at 3.58%, i.e. 78bp over the 7.5 year mid swap rate from when the package was announced.

    I know, the forward interest rate typically exceeds the expected future spot rate by a (unobervable) risk premium, but if the Treasury wanted to hedge interest rate risk on the EFSM/EFSF loans today, they would pay that high forward rate. Hedging future borrowing two years and three years forward, it would look even worse.

  23. A little off topic but Kathleen Barrington continues her investigation on the strange sale of Anglo’s Austrian private bank in September 08. The main question is if certain Irish people have hidden deposits with this private bank. Link: http://kathleenbarrington.blogspot.com/2011/02/how-fitzpatrick-sent-600m-deposit-book.html

    @ Joseph Ryan,

    On the bank funding point: It would be useful to us casual observers but mightn’t be helpful in the overall context.

  24. I repeat, 50Bn is a very round number, a very round number indeed. Anybody who interprets that this is precisely honed to last until 31st December 2013 is not in the real world.

    On the IMF projections it will last till about 3.0c on August 12th 2013, on the Government’s own projection it might make December but will miss the Christmas shopping.

    My guess is it won’t even make 2013, so what!

  25. @ BW2

    “This may or may not require a further top up of the package. Maybe by 2013 we can return to the markets, maybe not. Karl, I really don’t know why you are fixated on the accuracy of the current package, nobody knows.”

    “My guess is it won’t even make 2013, so what!”

    Perhaps you don’t care how long the funding is likely to last but I suspect the fact that those providing the funds don’t believe it will last to 2013 will be news to many, including many of our politicians.

    As, as for your confidence that we can just “top up the package” I have no idea what this is based upon.

    You can say “50Bn is a very round number, a very round number indeed.” But, in fact, that’s all the money they’ve decided to give us and asking for more could come with serious repercussions. You might care then.

  26. Face it guys, our country is banjacksed.

    The government we will soon officially say goodbye to have made some stupid moves, and the IMF package is not going to be able to make up for them.

  27. @KW

    Have you sought to confirm your analysis with the IMF itself? One of the organization’s internal rules is that a program cannot be presented for Board approval unless all of its financing has been identified. Sometimes forecasts of key variables that underpin the financing calculations can prove incorrect ex post, but that’s a different issue – your claim is that the IMF program is underfinanced even on its own terms ex ante. Yet the staff report shows (in tables 5 and 6) how the program’s external financing requirements are to be (fully) covered, leaving no residual gap (it does not do the same for the budget explicitly). Given this, saying that the IMF believes there isn’t enough funding seems to me to go too far.

  28. @ Karl

    My point is that it is not a drop dead package. It’s longevity is hopelessly impossible to predict. It would be a brave person who would say that this package is enough to deliver us back to financial independence.

    There must be a very strong chance that we are forced back to this well. The negotiatiog positions will be the same, the EU/IMF will know that we need their support, we will know that a suicide rejection of there terms will torpedo the whole Euro project.

    We have kicked the can down the road. How far the can as gone, who knows? Officially 3 years. According to the IMF a bit shorter than that. Personally I think even shorter still.

  29. @ Martin

    As Gary O’Callaghan noted above, the IMF tables you’re referring to assume that the government are returning to the medium\long-term bond market in 2012 and in a big way in 2013.

    Now page 8 of the programme documentation (http://www.merrionstreet.ie/wp-content/uploads/2010/12/EUIMFmemo.pdf) states “Our estimate is that the financing need would be up to €85 billion until the end of 2013”

    Perhaps those who wrote this sentence had in mind a return to the bond market in 2012 and lots of market-based borrowing in 2013. But that’s not how I (or I suspect other people) interpreted the description of the programme.

  30. Bloomberg made a big deal of the Danish bank burning senior bond holders by the new EU banking programme (EFF ?) . So,this was supported by the EU. Bloomberg suggested that this could even have major implications for Europe and Spain and Portugal will surely notice this. They even said that the USA may consider this for future bank bailouts.

    This is bigger than we think – our politicans are asleep, the Irish people are getting scared, in denial and not facing up to reality.

    As was posted earlier:

    http://ftalphaville.ft.com/blog/2011/02/07/481011/a-senior-haircut-precedent-in-denmark/#comments

  31. From bottom of that table
    EU/Bilateral loans of 28.6bn in 2011, 13.1 bn in 2012 and 3.3bn in 2013. The IMF meanwhile is seen as paying 5.8 bn in 2010, 8.5 in 2011, 6.6bn in 2012 and 1.7 bn in 2012.

    The EU later than sees
    http://www.efsf.europa.eu/mediacentre/news/2010/2010-006-eu-and-efsf-funding-plans-to-provide-financial-assistance-for-ireland.htm
    In 2011 the EU will, under auspices of the EFSM, raise up to €17.6 billion and in 2012 up to €4.9 billion
    The EFSF in 2011 will raise funds up to €16.5 billion and in 2012 up to €10 billion.
    etc etc

  32. Karl in case you are interested your figures for the IMF’s projections appear to be incorrect. In your spreadsheet you say GDP is 158.9 in 2011. I calculate it at 158.6 based on GDP of 159.6 in 2009. In 2012 you claim GDP to be 171.5. This is a growth rate of 7.9%. The IMF predict a growth rate of 2.7%. This leads to output of 178 in 2011. As a result your budget deficits are too much by €1.4 billion.

    While acknowledging this does not dramatically alter your conclusions. We will need every €1.4 billion we can get.

  33. Thanks Pa — a few gremlins in the spreadsheet alright. I did these calculations a whole bunch of times and got them right and then I put up a spreadsheet with a mistake.

    Anyway, apologies — I’ve fixed it up and the numbers are right now. Conclusions still the same.

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