The Troika Review: New Financing Plan

This post was written by Philip Lane

The European Commission has released its detailed report on the Troika’s recent review of the Ireland deal: it is here.

The revised financing plan is especially interesting on page 21.

26 Responses to “The Troika Review: New Financing Plan”

  1. 2Pack Says:

    You mean this bit? Revised drawdown requirements. Will it clear the ELA balance in 2011 one wonders?? I suspect not.

    “EU and IMF have provided EUR 17.8 billion in the first quarter of 2011 (Table 2).4
    Disbursed EFSM tranches amounted to EUR 8.4 billion which result from bond issuances in
    January and March. The EFSF provided the first tranche of its loan (EUR 3.592 billion) in
    January 2011.5 The first drawdown of IMF funds under the programme was on January 18 for
    an amount of SDR 5.0 billion (EUR 5.8 billion).
    “In light of the revisions to the estimated costs of reforming the domestic banking sector,
    the authorities have requested a re-phasing of the programme disbursements. Following
    discussions with the Irish authorities, European Commission Services and IMF agreed to
    reduce the planned disbursements in 2011. The funding for Q2 to Q4 now amounts to EUR
    4.6, 4.5, and 11.6 billion, respectively. Disbursements for 2012 and 2013 are tentatively
    planned for EUR 19.0 and 10.0 billion, respectively. This calculation is based on the
    assumption that only EUR 19 billion of the EUR 24 billion identified recapitalization need
    will generate financing needs for the State, while the rest will be achieved through other
    means (private investment and LMEs). The EUR 19 billion will be met to a significant extent
    via NPRF funding and the use of the government’s own liquid assets. At the same time, the
    ongoing difficult funding situation implies that the Irish debt agency does not plan to issue
    Treasury Bills or government bonds in 2011 (Graph 14). The revised disbursement schedule
    ensures that a sufficient cash buffer is maintained throughout the programme period, also in
    light of the profile for maturing government debt. Table 3 shows the projected financing
    needs and sources until the end of the programme period.”

    The table, sorry I am not namawinelake with his magic spreadsheets :)

    Table 2:
    Past disbursements to Ireland Date Facility Issuance (bnEUR)Disbursement
    (bn EUR)Maturity(years)Base rate/couponRate to midswap(bps)Lending rate/Estimated cost
    1/5/2011 EFSM 5.0 5.0 5 2.59% +12 5.51%
    1/18/2011 IMF 1/ na 5.8 4.5-10 SDR rate na 5.82%
    1/25/2011 EFSF 5.0 3.6 5 2.89% +6 5.90%
    3/17/2011 EFSM 2/ 3.4 3.4 7 3.25% +8 6.18%

  2. Bond. Eoin Bond Says:

    @ 2Pack

    i’m thinking the required “market funding” figures are the more interesting read…

  3. Gary O'Callaghan Says:

    The IMF version of the Review is out at:

    http://www.imf.org/external/pubs/ft/scr/2011/cr11109.pdf

    No punches pulled on the ECB/EU.

  4. ObsessiveMathsFreak Says:

    Troika?

    People keep using this word, but it appears no-where in the report, and furthermore seems to describe a triumvirate that in reality does not exists.

    There is no IMF, or EU. There is only the ECB. And its will is absolute.

  5. Paul Hunt Says:

    @Gary O’Callaghan,

    No punches pulled indeed. Despite the usual diplomatic language, the IMF’s impatience with the EU is palpable. The message is clear: ‘Ireland is on a tight-rope. It has a lot going for it to get it safely across. But your pfaffing around runs the risk of knocking it off. Just get on with it.’

  6. zhou_enlai Says:

    The IMF document says:
    “The authorities will agree with European Commission Services a time-bound action plan to implement the recommendations of the study on the economic impact of eliminating the cap on the size of retail premises with a view to enhancing competition and lowering prices for consumers.”

    This action is to be taken by end of Q3 2011.

    Has this study already been carried out? This implies that perhaps it has been carried out.

  7. Philip II Says:

    Zhou
    Walmart is coming. Or Asda. Or maybe sainsbury…we should be so lucky as to get Carrefour.

  8. Kevin Donoghue Says:

    There’s a cap on the size of retail premises? How much bigger than Ikea’s place can a shop get?

  9. Jagdip Singh Says:

    The IMF telephone press conference is now also available which deals exclusively with Ireland. Interesting words now that the non-French John Lipsky is interim boss

    (1) changing our corporate tax rate will not support growth
    (2) a medium term ECB facility is needed
    (3) there needs to be European wide burden sharing

    Oh and the IMF seems to have forgotten that the DoF projected GDP growth for 2011 was 1.75% at Budget 2011 in December.

    http://www.imf.org/external/np/tr/2011/tr052011.htm

  10. Jagdip Singh Says:

    Oops, and also that an immediate closure of our budget deficit would result in such a contraction of economic growth that it wouldn’t be worth it. Indeed any fiscal contraction beyond that in the bailout agreement appears not to be worth it.

    So a thumbs down to the Morgan Kelly (immediate) and the ESRI (2 year) proposals.

  11. David O'Donnell Says:

    @all

    IMF: Transcript of a Conference Call on the First and Second Reviews under Extended Fund Facility Arrangement for Ireland

    http://www.imf.org/external/np/tr/2011/tr052011.htm

  12. Robert Browne Says:

    Chopra…”On the issue of ECB financing, again, I simply will repeat what I said earlier. The point that we’ve been making is that in Ireland’s case the effectiveness of deleveraging and enabling banks to regain market-based funding would be supported by medium-term availability of euro system financing and as long as Ireland is delivering on its commitments on banking reform we do “HOPE” (emphasis mine) that such financing will be available.”

  13. Greg Says:

    “Ireland experienced strong growth from the early 1990s, after decades of poor economic performance. Boom-related windfall fiscal revenues were largely spent, contributing to overheating and loss of competitiveness. Amid intense competition for profits in the booming economy and property market, the pace of credit expansion accelerated sharply.

    Well you cudanod?

    Wow these ECB people are really really smart.

    I wish I was smart enough 20 years ago to get one of those jobs.

    And again WOW.

    Think of all the pension benefits.

    This paper is just more ridiculous nonsense from a failed Central Bank.

  14. Greg Says:

    Recapitalisation to a 12-percent core tier-1 capital ratio by end-February, which was to have been an early confidence building measure in advance of the stress tests, was not implemented as the outgoing Finance Minister considered it inappropriate to inject public resources with the Dáil dissolved
    for elections. The new government formed on March 9 considered it was appropriate to await the completion of the Financial Measures Programme at end March to determine the recapitalisation needed.”

    Does Credit Agricole have 12% Core Tier 1?

    http://www.economicpolicyjournal.com/2011/05/s-downgrades-credit-agricole-to-from-aa.html

    Still.

    Not to worry.

    The Macro-Economists have everything in hand.

    Can someone remind me again why the State pays Macro-Economists?

    Fire them all.

    Some savings on the budget?

    No?

  15. David O'Donnell Says:

    @all On Conversations with Washington - IMF gettin eXplicit!

    IMF Survey: Wider Plan Needed to Address Ireland’s Problems The Irish government has been making good progress in addressing the country’s deep-seated economic problems since it took office in March. But the IMF says that without comprehensive action from the European Union, Ireland and other euro area countries with programs will struggle to restore their access to the markets.

    http://www.imf.org/external/pubs/ft/survey/so/2011/car052011a.htm

  16. Gavin Kostick Says:

    @ All

    I wonder if Philip’s lacomic pointing at page 21, isn’t to note the IMF’s interest rate on line 2 of the table, and the complicated explanation of same underneath - if not, I’ll note it anyway. The IMF seem to be at pains to point out that by some complicated swapping of things, the interest rate is much higher than the amount they are mandated to give at.

    Also, I note the stress tests have resulted in the ILP (apart from trackers, a non-nuts building society) shareholders being wiped. What’s the justification of stuffing the banks with money again? That’s a non-rhetorical question.

  17. Kevin Donoghue Says:

    @Gavin: What’s the justification of stuffing the banks with money again?

    The only justification I’m willing to entertain is that it may enable us to sell them off in bite-sized chunks to foreign owners, so that when they screw up again somebody else can bail them out, or terminate them with extreme prejudice, as they see fit. For my part I will ensure that I have only a minimal sum invested with them. Not that they will miss my deposits very much, but it’s like voting: if enough of us do it intelligently, we can make a difference. It will be damned hard for anyone to argue with a straight face that bailing out banks, which we make little use of, is something we can fairly be billed for.

  18. DOCM Says:

    @ All

    It would be nice if the IMF was sitting permanently at the EU/Eurozone negotiating table but it is not.

    It represents but one actor in a scenario with at least nine principals: (i) Germany (ii) France (iii) the ECB (and the manner in which their interests are represented in the Executive Board) (iv) the other EZ creditor countries (NL, Aus, Finland etc.) (v) the two large Med countries, Spain and Italy (vi) the debtor trio of Greece, Ireland and Portugal (vii) the non-EZ countries (principally interested in ensuring that the EU’s borrowing/lending capacity is not skewed) (viii) the UK, as a non-member of the EZ but with a major interest in any outcome through the city of London (ix) Commission as sole proposer of EU legislation and competition authority for the EU as a whole.

    The remarks of Chopra and the IMF are undoubtedly helpful, especially in the context of settling the issue of the CCCTB. But they fail to recognise that the paymasters are engaged in a game of chicken with the countries in difficulty, one side saying “show us the money (solidarity)”, the other “show us the performance”. As each side has to cope with domestic political considerations, it seems unlikely that this tug-of-war will cease any time soon and, indeed, probably has to be viewed as permanent background to any decisions taken.

    One could read the view of the IMF that sticking to the present programme is adequate as underlining the fact that the situation is very finely balanced and could tilt one way or the other with the bigger risks being to the downside. The paramount policy objective of the government should, therefore, be to confirm the accuracy of the view of the IMF that it is steadfast in pursuing the programme while, at the same time, demanding the solidarity to which the country is clearly entitled. A difficult balancing act.

  19. DOCM Says:

    @ All

    P.S. I inadvertently omitted the words “with a walk-on part” after the word actor.

  20. Ceteris paribus Says:

    @DOCM
    “A difficult balancing act”
    Indeed and about to get more difficult with the news that Christine looks like a shoo in for the IMF post. The question now is will she continue the hardline French approach about our tax rates or will she listen to Chopra?

  21. Overseas commentator Says:

    I am not so sure she will be elected.
    If she is ,she will studiously avoid the subject.You can count on the new minister to keep pressing,though.

  22. DOCM Says:

    @ Ceteris paribus

    Her responsibilities would be to the IMF which, it must be reiterated, is involved solely on German insistence (and decided to become so probably because of the decisive influence of DSK). If anything, she must welcome the prospect of being able to speak her mind rather than to be just one among many in the political entourage of Sarkozy who have little choice but to try and read the great leader’s mind and not get out of step with it.

    Chopra is not alone outside the EU, or within it for that matter, in having a very poor grasp of how the EU actually functions and of the interplay of institutional and political forces within it. Lagarde would not suffer from this handicap.

  23. David O'Donnell Says:

    @DOCM Ceteris Paribus

    Au contraire! Mr Chopra is more than aware of the idiocy, incompetence, and nationalistic ethnocentrism at the heart of the present Franco-German roight alliance; its input to Irish ‘loan arrangement’ end of 2010 ensured that the plan is unsustainable, as is the conflationist debt (whatever the present spin from the local establishmentarians and their well-heeled fellow travellers); Chopra has both experiential and more than sufficient empirical evidence of such incompetence. Minister Lagarde was/is central to this abysmally designed failure; hence, imho, she is totally unsuited to heading up the IMF at this time. One wonders how much the core EU banks are investing in the lobbying process for their blue darling? ‘Spose there’s a cheque in the post for DOCM!

    Radical moves are necessary for decisive European action (something to do with capitalism and unrequited banking system risk) and such necessity is explicitly flagged in sharp colours by the IMF; this demands someone with credibility, competence, and balls. Staying European this time, may I humbly suggest Axel Weber.

  24. DOCM Says:

    @ David O’Donnell

    The best means of reply is probably to cite what Chopra actually had to say about the IMF view of what should be done by the EU (or to be more precise, Germany, as it is the country that is deciding all the steps, the mood music and the possibly not very successful outcome).

    QUOTE
    Now this is why we have put emphasis on support from a comprehensive consistent European plan. Our Acting Managing Director, John Lipsky, made some public remarks at the Bretton Woods Committee here in Washington yesterday, on Thursday. What he notes was that although EU leaders have taken some important steps, the crisis in the euro area is not over. More needs to be done to implement a cooperative and shared solution. So what might such a cooperative and shared solution look like? First, as I’ve already noted, Ireland needs to deliver the necessary policy action. It’s difficult but it will pay off. Indeed, the authorities fully recognize that banking reforms and fiscal consolidation are needed under any scenario.

    Second, European partners need to make clear that for countries currently with programs there will be the right amount of financing on the right terms and for the right duration to foster success. In other words, the countries cannot do it alone and putting a disproportionate burden of the cost of adjustment on the country may not be economically or politically feasible. The resulting uncertainty affects not only these countries but through the high spreads and lack of market access it increases the threat of spillovers and creates downside risks to the broader euro area. Hence, these costs need to be shared including through additional financing if necessary.

    Thus, a key element of a comprehensive solution is a stronger area-wide crisis management framework. This is a prime example of a cooperative response to a common good problem. The priority here is to put into effect quickly an EFSF upgrade that can deal more flexibly with the crisis we face today. In addition, continued availability of ECB liquidity support for countries that are addressing their banking system problems is critical. In Ireland’s case, the effectiveness of deleveraging and enabling banks to regain market-based funding would be supported by medium-term availability of Eurosystem financing.

    Third, all euro zone countries need to support a comprehensive approach with accelerated repair and reform of financial systems through rigorous and transparent stress tests. These stress tests need to be followed where appropriate with bank recapitalization. In some cases banks may need to be restructured or closed down. It will also be necessary to upgrade EU governance frameworks in support of enhanced crisis management, notably through an EU-wide approach to bank resolution.

    Finally, looking at these issues through the lens of investors, they’re understandably concerned about the implications of the advent of the European Stability Mechanism, the ESM, which starts operations in 2013. Against this background it is an uphill battle to bring back private creditors to countries that are now out of markets. This returns me to my earlier point about the need for additional financing at appropriate terms. Specifically, the magnitude and terms of the financing need to be such that private creditors are convinced that the debt burden will be sustainable even in adverse scenarios and, hence, debt restructuring is off the table.

    Putting in place such a comprehensive and consistent approach is now a matter of urgency, not just for the crisis countries but for all countries in the euro zone. Countries that are implementing their required policies to address their problems need the support of their European partners and the international community. As a result of the crisis, Europe needs more integration, not less.

    To conclude, the problems that Ireland faces are not just an Irish problem. They’re a shared European problem that requires a shared solution. UNQUOTE

    I agree that Chopra probably has a low opinion of the capacity of the EU to to take the necessary decisions - we all do - but he is underestimating the complexity of the decision-making procedures in a Union of 27 - and a single currency area of 17 - that is still made up of sovereign nation states in a sui generis form of organisation which is far from being an adequate replacement for them collectively. This is not the type of animal that the IMF is used to dealing with and it would probably have been better if it never had had to.

    The key consideration is almost certainly contained in the sentence: “Specifically, the magnitude and terms of the financing need to be such that private creditors are convinced that the debt burden will be sustainable even in adverse scenarios and, hence, debt restructuring is off the table”.

    This is the core contradiction in the ESM as presently contemplated.

    The issue of medium-term liquidity financing would become much less of a problem were the EFSF adapted to take over some of the burden from the ECB, a burden which largely exists because of (i) the unwillingness of incompetent politicians to act or (ii) to remedy the outcome of some of the ill-thought out actions of Merkel and Sarkozy.

    Between now and the next European Council, the main leaders in Europe will have to come to terms with the danger implicit - as the IMF has clearly now indicated - in giving the markets a message of half-hearted solidarity. It may well turn a bad situation into one that becomes unmanageable.

  25. David O'Donnell Says:

    @all

    Der Spiegel Online worth a read here - ….. strange stuff on EBS!
    ECB’s Balance Sheet Contains Massive Risks
    Asset-backed securities, bank bonds, etc & EBS!

    By applying a great deal of pressure, ECB President Trichet made sure that the Europeans came to the Irish government’s aid so that Ireland was able to protect its banks from collapse. This spared the central bank the embarrassment of having to realize the precarious instruments among its asset-backed securities, which are based on real estate loans in County Longford and elsewhere.
    But if the euro crisis rumbles on, the worst-case scenario isn’t all that far away. To ensure its national survival, Ireland should reject the European rescue effort and, instead, accept the failure of its banks as a necessary evil, Morgan Kelly recently said. The renowned professor of economics at University College Dublin knows who would be especially hard-hit by such a step: the ECB.
    “The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner” Kelly wrote in the Irish Times earlier this month.
    http://www.spiegel.de/international/business/0,1518,764299,00.html#ref=nlint

    Meanwhile, we are waffling on about corportate tax rate, reduction of a few inches on the hangman’s rope, and how to respond to all this bread and circuses for the masses - we cut loose from the banks or they sink us in 2013 ………..

  26. David O'Donnell Says:

    The Problem With Christine Lagarde

    By Simon Johnson [Baseline Scenario]

    ‘The contest to run the IMF seems over before it has even really begun. But Ms. Lagarde has a serious problem that may still derail her candidacy, if there is ever any substantive, open, or transparent discussion of her merits. There is major design flaw in the eurozone and Ms. Lagarde is the last person that non-European governments should want to put in charge of helping sort that out. […] .. French, German and other “core” banks facilitated this divergence with a surge in lending to both consumers and governments in the periphery – convincing themselves, shareholders, and regulators that this was low risk. […] Ms. Lagarde has led the “no restructuring” school of thought in recent months with regard to Greece – and presumably other eurozone countries also. Debt restructuring is no kind of panacea. But to take the option completely off the table is also not smart – unless you really think there is no deeper issue that must be addressed. […] Ms. Lagarde personifies the strategy of gambling for eurozone resurrection with other people’s money. Why would taxpayers in US and elsewhere want to support her on this basis?

    http://baselinescenario.com/2011/05/26/the-problem-with-christine-lagarde/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29

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