Improving the bailout terms

The Government rightly continues to make the case that there is a common interest in lowering the interest rate on EFSF/EFSM borrowings, among other adjustments to the programme.   Writing in the Sunday Independent today, Peter Mathews – in one of the milder articles in the paper – goes quite a bit further and accuses “EU partners” of “profiteering” (see here).    

Last January, the European Financial Stabilisation Mechanism charged Ireland an interest rate of 5.51 per cent for money that it borrowed at 2.59 per cent. A month later, the European Financial Stabilisation Fund charged Ireland an interest rate of 5.9 per cent for money that it borrowed at 2.89 per cent. On this basis, the EFSF earns a profit margin of 3.01 per cent and the EFSM earns a profit margin of 2.93 per cent.

These margins are draconian. The majority of the interest that Ireland pays is not used to pay for the EU’s borrowing costs. It is excessive profit for the countries that are lending us money. For every €1m that Ireland pays in interest costs, Ireland must pay another €1.08m so that our EU partners make a profit. This, clearly, is not a bailout. It is exploiting our vulnerability. It is financial bullying.

It would appear that Peter believes that the EU is taking on zero risk in lending to Ireland.   (Formally, at least, the EFSF has eschewed IMF-style preferred creditor status.)   I would be interested if readers agree that these official funders can rest assured their loans are riskless. 

 

The Sunday Business Post provides its usual welcome calm analysis of the options (no web access until Monday).   Understandably frustrated with the pace at which EU governments are responding in terms of providing a mutually-advantageous exit route from the crisis, its lead editorial advocates taking a tougher line, notably with Anglo (and presumably) INBS) senior debt. 

With our government bond interest rate soaring and our banks locked out of the markets, we haven’t got a lot to lose.   We are most unlikely to be able to return to the markets on the schedule set down in the EU/IMF programme late next year, or in early 2013.   It would be much better realise this and arrange some restructuring of the deal now – and there are many ways this could be done.  [Emphasis added]

Just looking at the first sentence, my interpretation of the first clause is that the resulting dependence on external support means, unfortunately, we do have a lot to lose.   With popular pressure for a tougher line ramping up, it seems a worthwhile issue to debate. 

49 thoughts on “Improving the bailout terms”

  1. It is looking like the Greeks will be given another 60b in a revamp of their bailout with a soft restructuring of their debt mountain by extending maturities and possible better rates. We should sit tight and see how this plays out in the markets. As regards zero risk on Ire debt that is plain daft.

  2. Point taken John. Might have been better worded as ” we don’t have a lot to lose in terms of the market opinion of us.” Clearly we are vulnerable in terms of the attitude of our Eu/IMF lenders and ECB funders.

    However I think one thing has changed. When Ireland was still in the markets, one argument for not hitting bank senior debt was that this might affect the attitude of our lenders. Now we are out of the market, that does not apply — or at least only applies insofar as you believe it affects the attitude of potential lenders in a couple of years time, when we are due to return to the markets.

    The only reason for repaying all the bank senior debt now is to protect the wider EU banking system. I dont even think there is a credible argument in relation to the future market view of the banks themselves — with the possible exception of Bank of Ireland.

    Yet diplomatically we are clearly on the defensive and there is no apparent account being taken of the hit Ireland is taking for wider EU interests.

  3. Neither the article by Peter Mathews nor the leader by the SBP is worthy of serious debate. When I read the SBP editorial, I wondered how it could possibley be in the same paper the leading frontpage article of which carries the headline “Bank bailout cash to be used to fund the state” with an opening paragraph which reads: “Savings on the projected cost of the bank bailout are likely to be used to bolster the government’s financial position and postpone a return to bond markets”.

    Ruairi Quinn in the Week at One confirmed what should by now be blindingly obvious: the government has no choice but the implement the MOU. “Sitting tight” does not come into it. (I would, however, concur with the other view expressed by Ceteris paribus that the idea of a zero risk premium on Irish debt is just plain daft).

    Banging one’s head off a brick wall is painful only to the headbanger, not the wall. The wall in question is the perception in Europe that there are still many actions that can be taken in Ireland to improve the capacity of the country to repay its debts and there will be no softening in that position until the contrary has become evident. That is still some considerable time away.

    In the meantime, it would be a help if the various spokesmen for the government could, at least for the time being, sing in tune. Jedward managed it!

  4. John

    “With our government bond interest rate soaring and our banks locked out of the markets, we haven’t got a lot to lose.”

    In reacting to this I think you have to factor in the PR situation. If Irl does what most seasoned market observers without a vested interest would view as the right thing (for capitalism if nothing else) the ECB would have a very uphill task in trying to maintain the impression that it is headquartered on the planet earth if it were to have a real strop.

    To make the point again, Ireland could have had an open goal and a clean win on this if the election campaign had resulted in some popular support for a fallback position of very fast primary deficit closing, but that aspect of the country’s position was studiously ignored by just about everyone. A real own goal.

    The core EZ funders – and their electorates – view the interest rate as deliberately high to incentivise countries not to just switch from funding by markets to funding by them, without a real sense of urgency about sorting their acts out. And yes they will be putting capital at risk though it is the residue sov bond holders who seem to be first in line. This makes the approach to senior bond holders look all the more absurd.

  5. Ok, I’ll be the first to say it – Dominic Strauss Kahn, wow, that’d make for an interesting discussion with Enda & Co, should certainly cut out any faux moralising. Honestly, what is wrong with these people?

  6. I should add that an article that would be really worth discussing is that by Damien Kiberd in today’s Sunday Times (regrettably not freely available online) entitled “Germany at risk from an itchy trigger finger”.

    On reading Grumpy’s contribution, the penny dropped with me as to why the Portuguese bailout is being funded solely through the EFSM and the IMF: it must surely be the fact that the funding governments do not have first call under the EFSF, an “error” being corrected in the ESM. (It remains to be seen what exacttly is the view the UK government takes of the matter).

    To quote Damien Kiberd: “The euro is heading for a crash and there is no clear solution other than a federal Europe, which the German public will not tolerate. The longer the crisis is allowed to fester, the bigger the bust-up. That is what happens when you create a currency union and pay no attention to wildly variable unit labour costs”.

    This opinion is inherently contradictory because it rules out in the first sentence the “only” solution while making the point that the crisis gets worse the longer it is allowed to go on. The fact is that the EU – the core of which, notably Germany and France that make up nearly half of it, is doing very well, thank you – and is stumbling towards recognising that there must be some form of “co-insurance” of both sovereign and banking risk short of the issuing of eurobonds which remains anathema because of the associated risk of “free-riding” i.e. removing the incentive to take the necessary action to bring costs back into line on the part of economic laggards. If proof were needed of this risk, all one has to do is view the current debate in Ireland.

  7. Here’s Colm McCarthy in the Sunday Independent.

    I appreciate his column usually gets a thread to itself, but the closing sentences stood out with regard to the topic started off here.

    “Nor can we walk away from the sole available lender, but it is surely time to cut out payments to unguaranteed and subordinated bank bondholders.

    If the EU and ECB want to pay them the €20bn still outstanding, that is their affair. Our Government needs to explain that Ireland cannot be expected to place its sovereign bondholders in further jeopardy in pursuit of a Band-aid solution to the European banking crisis.”

    http://www.independent.ie/opinion/analysis/forget-forecasts-only-the-markets-view-matters-2647447.html

    @ Cliff Taylor

    The tone of your reply suggests you wrote the article in question – is that right?

    @ Eoin Bond.

    !!!

  8. @John McHale/Cliff Taylor/Gavin Kostick.

    Peter Mathews is over the top. The interest rate overcharge by the EU/EFSM is annoying but somewhat irrelevant at this point. The total annual overcharge is about equivalent to one month of deficit.

    As somebody who leans a lot towards towards the Morgan Kelly solution, I am astounded and alarmed that the talk of default is now almost centrestage without any concept or willingness to even begin to do the obvious precursor to default. To mange to live within our means.

    Its a bit like a patient who is bleeding profusely from several limbs deciding that he has to have a triple bypass to sort out the old ticker as he can’t manage to run uphill any more. Any sensible surgeon would advise him that it would be best to stop the hemmorage first.

    But it is as simple as this:
    The army of upper echelon freeloaders consider the ‘burn the bondholders brigade’ somewhat insane, because they know that it will be the end of the free loading.
    And the ‘burn the bondholders brigade’ don’t seem to recognize the preliminary imperative to live within our means.
    That is now the Irish dilemma, for what its worth.

    PS. I also think that Prof Antoin Murphy is misinterpreting Kelly’s proposal in his Sunday Business post analysis. Specifically he refutes Kelly’s “Irish government can halve its debt to a survivable €110 billion”.

    I think Kelly’s figure is probably correct. The difference of course is that Kelly is presumably proposing to run no deficit in 2012/2013/2014.
    In other words the State debt remains as it will be at the end of 2011 (or earlier) . Kelly is not starting from the 2014 €190 billion figure.

  9. Help requested in reconciling this:

    John McHale: “Formally, at least, the EFSF has eschewed IMF-style preferred creditor status.”

    With this:

    Colm McCarthy: “Bluntly, if the EU is unwilling to lend to Ireland at a sustainable interest rate, and with preferential creditor status, why should anyone else volunteer?”

    How much work is “formally” doing here? Would Humpty-Dumpty be paying it extra?

  10. @Cliff

    Thanks for the clarification. I agree that the only reason for not imposing losses on Anglo seniors at this stage is the risk to the outside support.

    @grumpy

    You have indeed been consistent since early in the campaign in calling for a mandate to close the primary deficit cold turkey if we did not get better terms. But mandate or not a threat is only credible if it is optimal ex post to carrry it out. Surely that is not the case here?

  11. According to the WSJ even the IMF doesn’t enjoy formal preferred creditor status: “it’s not codified anywhere. There’s just an informal understanding that the IMF gets paid back first.” So is the EU graciously declining an “IMF-style” privilege that the IMF doesn’t have? That’s big of them.

  12. @Kevin Donoghue
    Yes that does need clarification – I seem to remember somebody – can’t recall either who wrote it or in which organ – wrote an article ( FT I think ) – where the clear suggestion was that EU funding by it’s preferential status effectively ensured that we would not enter the bond market again due to this effective demotion of the bond markets credit status.

  13. John McHale: “But mandate or not a threat is only credible if it is optimal ex post to carrry it out. Surely that is not the case here?”

    Paul Samulson: “Surely, no sentence beginning with the word ‘surely’ can validly contain a question mark at its end?”

    (I must admit I’m no more respectful of Samuelson’s style-guide than he was himself.)

    I think John McHale is on weak ground here. There’s nothing sure about the notion that we must lumber ourselves and our children with a crippling debt burden in order to avoid an admittedly nasty slump. The spectrum of reasonable opinion runs from Karl Whelan (assuming he still favours gradual adjustment) to Morgan Kelly, who is no lunatic despite determined efforts by poorly-qualified analysts to certify him as such. Mostly your answer will depend on just how highly you value autonomy.

    @A. McGrath: Thanks. I don’t pretend to know, but it looks like John McHale is in the minority on that particular point. Colm McCarthy and the WSJ are not infallible of course.

  14. @Kevin

    My you are a hard critic.

    If you really are with Morgan — cut all borrowing to zero and no default — I would just point out that the cash requirement for this year’s deficit and redemtions is eur43 billion. Even if eur10 billion is for the banks,I don’t think “nasty slump” quite captures it.

  15. It’s strange or maybe not that even though first quarter growth in the Eurozone was double the level in the US, it’s effectively ignored.

    Anti-euro folk like to highlight that the UK is our biggest export destination. It isn’t of course as the Eurozone takes about 40% of exports.

    Sixty-nine per cent of German imports came from the rest of Europe in 2010.

    So the Germans maybe despised but France also had a good quarter with manufacturing expanding at the fastest rate in 30 years.

    So much for Damien Kiberd’s certainty: “The euro is heading for a crash…”

    Here we are again with, all the well-off vying to get a grab of the public megaphone, obsessed with what Europe should do for us but mute on what we should do for ourselves.

    John McHale says: “Understandably frustrated with the pace at which EU governments are responding in terms of providing a mutually-advantageous exit route from the crisis..”

    1. While we don’t have to opt for Jeffrey Sach’s style ‘Shock Therapy,” we could surely do better than the pathetic record on structural reform in the past 4 years.

    Of course we don’t care that Angela Merkel has backbenchers as shortsighted and maybe as self-interested as our doomsayers at home.

    2. Default appears a popular option for vested interests and economic illiterates; why worry about downsides?

    We have moved from property to anti-Euro hysteria but it is relevant to say again that Ireland was the only Eurozone country that conflated sovereign and private bank obligations during the financial crisis; it was done without official consultation with EU institutions (for a reason) and in breach of Ecofin principles that were then in force, including a specific reference to burden sharing.

    Ireland at slow-motion speed…Mr Justice Kelly this week again lambasted the ODCE for the glaical speed of the Anglo inquiry.

    That’s the way things work and after the issue of State bank guranatee, the food was taken off the pedal; it took almost 2 years to even quantify Anglo’s losses while markets just ran out of patience.

    Why worry though?

    Those insuffereable Europeans should have sorted us out a long time ago!

  16. @John McH

    “But mandate or not a threat is only credible if it is optimal ex post to carrry it out. Surely that is not the case here?”

    Not optimal, just credible or possible. People who are cheezed off can do things that a dispassionate observer would consider sub-optimal. They do every day. Throw in nationalistic tendencies and I would stop and think if I was on the other side of a negotiating table.

    Trying to negotiate from a position where the other side was afforded absolute certainty that Ireland would take and stick to any terms it was offered was stupid.

    I don’t think it is as simple as just the numbers either. Had that fallback position been available you have to consider the market reaction to its use.

    A country that did that might find a significant ammount of support in the bond investor universe and it is possible that if it were clear to all – vigilanties included – that the country was actually doing everything it could given that it had opted for that route to balance its books, that either inability in the short term to roll might be analysed as just that – and accepted, or that enough confidence about the long term might emerge to actually issue long dated. Those two are not as contradictory as they might seem.

  17. @ Gavin Kostick

    Many thanks for the link to the article by Colm McCarthy. But I think that the opening sentence in the section that you quote – which is omitted – is the most important.

    “The budget cannot be balanced overnight, although it should certainly be addressed far more rapidly than the Government intends. This should start with an emergency Budget before the Dail adjourns in July. Nor can we walk away from the sole available lender….”

    I am tempted to quote things that go together like a horse and carriage. If we wish to show the other side that we are serious about matters in their control, we have to show that we are serious about matters in our control.

  18. @John McHale
    Re your 43b requirement for this year.. That would amount to 25% of GDP
    It seems very high ???

  19. @A McGrath
    Thanks; per your link, the Nomura team agrees with the WSJ: preferred creditor status has no legal meaning. So saying that “formally, at least, the EFSF has eschewed IMF-style preferred creditor status” doesn’t amount to much. The IMF isn’t relying on formal law, it’s relying on the natural strength of a very-last-resort lender. The EU institutions are doing much the same.

  20. @Kevin

    It is worth re-reading Wolfgang Munchau’s column from a few weeks back for a viewpoint that suggests the European lenders are facing quite a bit of risk.

    http://www.ft.com/intl/cms/s/0/c67b5e20-5e22-11e0-b1d8-00144feab49a.html#axzz1MSADHsF0

    My point in referencing Munchau is that there is a good deal of uncertainty about how burden sharing will actually evolve, including the ultimate meaning of any preferred creditor status. It hardly seems right to view the guarantors of the EFSF (and the ESM to follow) as facing no risk. Surely, these “profiteers” would be happy to hand the loan assets back (no question mark).

  21. @ John McHale

    I can recall two other reasons given as to why the EFSF loan is at a higher rate of interest to us, than the rate at which they raise the money:

    (a) To discourage use of bailout as an easy option.
    (b) To be fair on Greece. I know is this a bit woolly, but the general tone was that Ireland should should get its money at much the same rate.

    If the difference is based on risk being factored in, was a formula or some sort of methodology used to arrive at it? That might tell us what the EFSF was thinking.

  22. @Gavin

    Thanks for that. I am not actually arguing that the rate was set because of the risk, though I would think it was a real factor, but just pointing out that idea of profiteering is quite simplistic. It is interesting that we judge the fairness of the rate based on the rate the funding countries pay for their own borrowing and not the market rates we would have to pay for ours.

  23. @John McHale
    “But mandate or not a threat is only credible if it is optimal ex post to carrry it out. Surely that is not the case here?”
    Echoing grumpy – optimal now or optimal later?

    For sure closing the deficit now is sub-optimal and for a number of years out. Is it sustainable, though, to argue that interest rates will stay as low as they are (even at 5.8%) and that the long-term debt is manageable? Could we end up as a basked-case highly-indebted rich country? What happens when the next big thing in energy happens and we (as a nation) are not in a position to invest in it? Consistent slippage back to second-world status?

    I dunno whether it is sub-optimal for the future to make a desperate stand now. History is against the idea that a high foreign debt burden can be carried indefinitely.

  24. From the opinions I have read here it seems that until we control public spending then Europe is not going to be too lenient with us. Seems to me we are stuck between a rock and a hard place but either way we are going to have to reduce the public deficit quite quickly. Would we not be better to bite the bullet now and default knowing full well that we have to sort our public deficit out anyway before any leeway will be provided?? Would the public be open to it, and by that I mean the general public not the elities, if it was communicated properly?? Hang on and we still have all this debt, which will be a drag on the economy for a very long time, but maybe some leniency from Europe. Bite the bullet and there will be a lot of short term pain but we might be masters of our own destiny again. The question I have is more around the social impact of defaulting and how the public would react if it was communicated properly.

  25. @Hoganmahew.

    For sure closing the deficit now is sub-optimal and for a number of years out.

    It is not as sub-optimal as closing it at short notice with all the cash in NPRF gone. That is the exposure now opening up to full view. And just like the initial banking crisis I doubt there is as much as a one page contingency plan.

    In addition closing the deficit need not have a a one to one massive effect on GNP if it were done through, the elimination of pension tax reliefs, a very large reduction on upper level PS salaries, the vast majority of which is saved etc. If it is done through cuts at the lower levels, it would be disastrous.

    The “no lethal injection” is a convenient riposte for an awful lot of high level freeloaders.
    The constant concentration with the debt level is frustrating. The hole in the bucket will be have to be plugged first. Then the debtor has the high ground on who to pay, when to pay or if to pay.

  26. Interestingly for France, Richard Bruton tonight stated that the Irish government might be persuaded to engage in discussions about the CCCTB but any inclusion of the principle of profits being taxed where they arise would be “totally unacceptable”.

    Was it really sensible to publicly close off a face-saving position for France by making it so clear that they can whistle?

  27. Erratum. “Then the debtor has the high ground on who to pay, when to pay or if to pay.”
    That should read creditor.

    @grumpy
    Good timing by Bruton, I would say. France will be busy protecting its image.
    There has been enough of French manhood on public display for the moment.
    Strange event! Strange timing!

  28. There is a request that Ireland send a representative to New York to post bail for Dominique Strauss-Kahn. Please convert any Pounds or Euros to Dollars beforehand or an official Irish Government American Express Card will be acceptable. The IMF also thinks an Irish representative might be helpful dealing with the Irish NY cops and DA.

  29. In many press articles, the bailouts are judged a failure because bond yields have not come down. Personally, I consider that bond markets are currently overreacting especially in the case of Ireland and Portugal. But if someone wants to stick to bond yields as the reference, then he should admit that the bailout interest rate of about 6% represents an enormous subsidy of 3-4% compared to the oh so rational markets.

    I would first like to discuss how I regard Ireland’s execution of the bailout terms so far:
    – The Irish government had to carry out serious stress test of the recapitalization needs of the 4 banks. That has been done. And the last stress test has also been well received by the markets. If another stress test in say one year would demonstrate that the losses have been properly identified, market confidence in the solvency of the 4 banks might start to recover.
    – My recollection was that the recapitalization of the 4 banks had to be carried out by the end of the first quarter. This has not been done. As long as that is not done, there is no reason for the markets to regard the 4 banks as solvent.
    – Apart from sorting out the banking mess, Ireland is basically required to reduce its budget deficit over a number of years. Given the starting point (the highest deficit of the EU in 2010 together with Greece and the UK), the rhythm of deficit reduction is not too demanding. Seen from afar, it really does not look like there is a strong drive to reduce the budget deficit in line with what has been agreed with the troika.

    To summarize, Ireland has delivered on one key commitment, has clearly failed to deliver on another one, and is not showing much enthusiasm for the third key commitment. Instead, the Irish prefer to discuss how best to renege on their commitments, running the risk of losing any support from their European partners (or even incurring retaliatory actions) and of precipitating a massive combined sovereign and banking default. Under such circumstances, I really wonder why anyone with a sane mind would expect bond yields to have fallen. In fact, some might wonder why bond yields are still so low.

    But markets are not completely dumb either. They are probably discounting the hope that the Irish will recover their mind at some stage and start to look at their predicament with more realism.

    Ireland should run a current account surplus of about 1% of GDP in 2011 (EU Commission forecast). Given that the public sector is expected to have a deficit of 10% of GDP in 2011, this means that households and corporates are deleveraging to the tune of 11% of GDP per year. This looks pretty strong to me, and will also support the solvency and deleveraging of the banking system going forward.

    The combination of negative growth and deflation that occurred in 2009 and 2010 was deadly for a country with too much public and private debt. As of 2011 however, GDP is not expected to contract in real terms anymore. And Irish inflation has recently turned positive again. Nominal GDP should thus grow again, which will support the deleveraging process.

    Finally, the public debt level is still expected to remain below 120% at peak, and to decline thereafter. If a country like Italy can access bond markets at acceptable rates with a similar debt level, I do not see why Ireland could not do that once its banking mess has been sorted out and its budget deficit has been bought under control.

    Having demonstrated why I consider that Irish public debt is sustainable, I come back to the initial question: How could bailout terms be improved? The Irish can whine as much as they want about the bailout interest rate or burning the senior bonds. But I regard these issues as a sideshow. In my opinion, it would be much more sensible for Ireland to ask to their European partners for ways to reduce downside risks. I would suggest the two following measures.

    – Transfer NAMA (assets and liabilities) to some EU (or EZ) vehicle, which would be then in charge of unwinding them.
    – After recapitalization, the 4 banks would be solvent and their equity should have value. They could also be sold to some EU vehicle. Ireland could then also rescind the bank guarantee. The EU vehicle would then carry out the deleveraging process, find a solution for weaning the banks off ECB funding, and would eventually privatize them.

    At first glance, both transactions would be financially neutral to Ireland and the EU. But there would be 2 benefits. First, Ireland would lose any downside risk to NAMA and the banks, while the downside risk are completely immaterial for the EU as a whole. Second, the EU vehicles would not have to operate under the same pressure as Ireland to monetize the NAMA assets or deleverage the banks. This could provide options to enhance value, to the benefit of all parties involved.

  30. @ Michael Hennigan

    Hard to disagree about the pace of structural reform in Ireland, but I think you are underestimating the size of the undisclosed problems in the core EZ banks. The outcome in Spain will reveal the limits of the EZ.

    http://www.washingtonpost.com/opinions/plan-b-for-europe/2011/05/13/AFbqUQ4G_story.html

    ‘We have moved from property to anti-Euro hysteria but it is relevant to say again that Ireland was the only Eurozone country that conflated sovereign and private bank obligations during the financial crisis; it was done without official consultation with EU institutions (for a reason) and in breach of Ecofin principles that were then in force, including a specific reference to burden sharing’

    I am not sure if I would call the current atmosphere hysterical, but there is lot of disappointment and fear about, with obvious conflicts among the ruling elite. People are beginning to wonder seriously who is driving the bus.

    The actual processes preceding the 2008 guarantee are as clear as mud. Absence of official consultation does not mean absence of influence. All we know is that many EZ banks are bust and ours are among the bustest, so it would be naive to imagine that there were no communications. It’s all a game of political/economic/financial poker, in which people and institutions have different kinds of stakes.

    Thanks to all for a fascinating set of posts

    @ Incognito

    ‘Ireland should run a current account surplus of about 1% of GDP in 2011 (EU Commission forecast). Given that the public sector is expected to have a deficit of 10% of GDP in 2011, this means that households and corporates are deleveraging to the tune of 11% of GDP per year. This looks pretty strong to me, and will also support the solvency and deleveraging of the banking system going forward’

    I would like to see an analysis which separates out the contribution of the FDI sector to those financial flows. The MNC sector is getting a bounce from the core EZ pickup, but the trajectory of the domestic economy is the one which ought to concern us most.

  31. @incognito

    Your characterization of Ireland’s compliance with the bailout agreement is wrong.

    On the fiscal side all conditions required by end-Q1 were met. If you can point out any condition that was not met then please do so.

    On the banking side there was a €10 bn recapitalization due by end-Feb that was not carried out. Lenihan deferred this until the new government was in place. The PCAR was carried out as scheduled, and the resultant &euro24; bn in recap costs is now scheduled for end-July, as outlined in the updated MOU.

    So on the fiscal side the plan is being followed directly; in Q2 there are some minor changes/substitutions in policies that result the in the same fiscal outcome. On the banking side some of the required recapitalization was delayed, but this occurred in the context of making the entire banking part of the plan a bit more workable (e.g. avoiding excessive fire sales). I’m sure the ECB and EU governments are quite happy with a situation where the Irish taxpayer will fund a €24bn recap by end-July.

    Talk of moving to an immediate primary surplus is like talk of a time machine. It is an interesting thought experiment, but not relevant to the real world. The current plan assumes a primary surplus will be achieved by 2014. A speeded up deficit reduction plan would save some money in the long term, but I don’t buy the idea that a speeded up plan would gain the country some metaphorical gold stars and result in anyone’s evaluation moving from “problem child” to “star pupil” (e.g. a primary surplus in 2013 rather than 2014).

    For the most part I think that those arguing for a quicker primary surplus are really doing so on the basis that they are disappointed with the pace of structural reform (Croke Park achievements, anyone?) more than anything else.

  32. @John McHale,

    Please don’t take this the wrong way, but your relentless reasonableness is preventing you getting on the correct page of the narrative that’s being crafted. The message coming from the commentariat – and which I expect is also being conveyed by the Government in the corrdiors of power in the EU – is that Ireland has placed the sovereign at risk to manage down the blow-out of its banks and, more crucially, to protect the EZ’s financial system and the solvency of many of its banks. This is no longer sustainable and our EZ partners must contrive some mechanism to reduce this burden. And I would be surprised if the Government weren’t quietly encouraging opinion-formers behind the scenes to keep up the drum-beat.

    It is unfortunate that this narrative provides some comfort to those who wish to protect their poorly-justified gains during the bubble period and who are resolutely opposed to the structural reforms badly required, but a crisis situation often throws up some strange bed-fellows. But the focus at the moment must be at getting this message across to our EU partners.

    Politcially it will be impossible to secure the necessary popular support for the fiscal adjustments and structural reforms required while people have the view that they are taking the pain to bail-out other dodgy EU banks.

  33. Does anybody think that Ireland will be able to come back on the market at the end of 2012?
    If this is clearly an impossibility, what should be the terms of bail-out 2? What should be the objectives of the Irish government in this future negotiation?

  34. @Paul

    I don’t disagree the Government is pushing the “credit for stabilising the euro banking system” narrative. I don’t have any objection to this and it may do some good, though it can shade quickly into the grievance narrative — just look at the Mathews piece (albeit not too much shading there).

    I have doubts the credit narrative will get us that far, however. That is why I put more emphasis on the argument for mutual advantage in giving us an exit route from official assistance.

    I think the grievance narrative, which is the one that is really dominant in the mass commentariat, is positively damaing to our interests. It undermines our “official creditwothiness” — i.e. creditworthiness with official creditors. It also works to undermine domestic support for the necessary fiscal and structural adjustments (which further undermines official creditworthiness). I doubt the official funders quite get our heightened sense of grievance, given that we are getting liquidity support roughly equal to our GDP (much of it at 1.25 percent) and getting fiscal support equal to roughly half our GDP at an interest rate equal to about half the rate we would pay in the market. But we certainly do grievance with gusto.

  35. @John,

    I’m not disagreeing with your desire to identify where ‘mutual advantage’ lies and to pursue it assiduously, but tactical political imperatives will always trump rational economics in the absence of statemanship. And DSK’s disgrace, whether he is proven guilty or not, has changed those dynamics at the EU level. It seems pretty clear that Pres. Sarkozy and Chancellor Merkel were determined to keep the lid on things until next years election in France and the following year’s Bundestag elections had passed. And I expect their resolve will now be re-doubled. The IMF’s ability to force them to confront the sovereign debt problems in the smaller peripherals has now been weakened. And Pres. Sarkozy is now envisaging a replay of 2002 when the elimination of a weak Socialist candidate in the first round forced the Socialists to vote for Chirac in the second to prevent a NF victory.

    Unfortunately, sensible economic policy will play a negligible role in all of this – and I expect it must be very galling for the economics fraternity. It would be far better for Ireland to get on with the structural reforms required – and to go beyond what is mandated in the EU/IMF package – and to let the sovereign bond market communicate the ‘no feasible exit’ message. But there are too many deeply embedded and vociferous vested interests that would have to be confronted. It’s much easier to do ‘grievance with gusto’ as you put it.

  36. I literally put my head in my hands when I read the Peter Mathews’ article.

    Our EU creditors are profiteering to the tune of €1.3bn per year?

    That’s 3% of €45bn, the original higher limit of the EU element of the €85bn bailout (the other elements being the €22.5bn from the IMF and €17.5bn from our own resources).

    For some time now, I have been trying to establish what you might have thought would be a simply calculated figure – how much will our EU creditors profit from their loans over the life of the loans?

    No-one seems to know though the basics of the calculation would simply involve the timing of the draw-downs, the sources and interest rate and the repayment date. At what was little more than finger-in-the-air stuff, I calculated €7bn would be the profit figure that is the difference between what our creditors charge us over the life of the loans less what our creditors pay the market for the original funding.

    And if it is €7bn or whatever number, that should be on our lips constantly. Enda should make sure to remind France and Germany at every opportunity that they are profiting at that figure. Nationally it should be on our lips as much as €85bn (bailout), 5.8% (average interest rate on bailout) or €200bn (officially projected national debt).

    It is shameful that in a country with enough economists and more than enough mandarins that the total profit figure, which Peter Mathews crudely calculated for one year, is not out there.

  37. “The Government rightly continues to make the case that there is a common interest in lowering the interest rate on EFSF/EFSM borrowings, among other adjustments to the programme”.

    It seems from the comments of the MOS for European Affairs on Morning Ireland this morning that Ireland (i) will continue to make the case for an interest rate reduction but does not expect an early result (ii) no further change are being sought with regard to the structure of the bailout and (iii) the government is totally committed to implementing it.

    This clarification is welcome, especially as it corresponds to the reality of Ireland’s negotiating position and not the one imagined – at least by some -hitherto. It also removes the inherent contradiction implicit in questioning the feasibility of the bailout when only some months into implementing it.

  38. @Paul Hunt
    Your knowledge of the Irish Economy is better than your knowledge of French and German politics, which is understandable.
    I think you should beware of a fallacy that is common on this blog: that the French left (not counting the anti-European populist left) would be more sympathetic to the Irish position than the French right.
    First, national interest trumps ideological posture, especially in France where the Civil Service is particularly strong (and rather competent).
    Second ,the type of Europe that Ireland is pursuing is anathema to Social Democrats. Do you think that the daughter of Jacques Delors would accept the notion of “tax competition” any more than Christine Lagarde?
    Why is it that Georges Osborne ,the heir to Margareth Thatcher seems to be Ireland best friend?
    The fact that the Irish (at least the Irish press) tend to see themselves as victims in the present circumstances appears both funny and a little bit sad to most foreign observers.

  39. @John McHale
    Thanks for the link.
    I note that the financing requirement for 2010/11 is 55b. I am coming around to your way of thinking…a default now would create a catastrophic Situation.
    Again, I repeat, the strategy should be to wait for Greece to blow and then assess the options when we have a clear view of the resultant market fallout. It may not be as bad as feared…people have had sufficient time to prepare.

  40. @Overseas commentator.

    I cheerfully accept your admonitions. Believe me, I’m not operating under any illusions. I believe that Ireland has to shift from a ‘low tax/high point-of-use charging’ model in its own interests and to be more compatible with its EU partners. But there is no political desire to do this. It’s much easier to do ‘grievance with gusto’. And I agree it must appear both amusing and pathetic from the outside.

  41. @John,

    “Am I right in inferring you see zero risk to the guarantors?”

    That’s a very fair point. But €7bn (or whatever the profit figure is)?

  42. @John et al.

    It is a fair point to say that the bailout loans cannot be regarded as risk-free. It would be useful however to sketch out some of the risk scenarios and see what the margin of 3% implies.

    Private creditors account for 2/3s or more of the debt, so in one scenario the ECB/EU (who will dictate the timing and nature of any default/rescheduling) decide that private creditors should take a haircut but official creditors are paid back on time. In this case the 3% margin is pure profit.

    In another scenario the EU loans are rescheduled. As I understand it this will require the EU countries to raise new loans to pay back the original lenders on time. The cost of servicing these new loans will be a direct cost to the other EU countries until such time as Ireland pays back the full amount. Offsetting this servicing cost will be the “profit” from the 3% margin. Here is where some analysis would be very useful – will other EU countries still make a profit? Will it vary country by country (e.g. weak countries will have to pay higher interest rates on their portion of the new loans)? What sort of restructuring will be involved – will Ireland end up paying a lot more (over a longer period) to offset the cost to other countries so that at the end of the day those countries still make a profit in the long term?

    It seems to me that Ireland is “pre-funding” the costs of a rescheduling or default with the interest rate margin and it would be an interesting exercise to see how severe a restructuring is needed to get to the point that other EU countries actually lose money.

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