Noonan on the EU-IMF Bailout

This post was written by Karl Whelan

Listening to the News at One on RTE Radio One, I heard Minister for Finance Michael Noonan dismissing comments over the weekend from Minister Leo Varadkar that Ireland would probably have to seek a second bailout as it would not be able to return to the markets. That’s fair enough, one would expect a Minister for Finance to say the current programme is going to work and Varadkar was clearly off message.  However, it worries me that Noonan’s comments completely misrepresent the true picture in relation to Ireland’s funding situation.

Noonan said (I’m paraphrasing here but the audio links will be available later) that the EU and IMF are providing enough money “to carry us forward in all eventualities” and that the deal runs through Two-Thirteen (which I take means 2013). Noonan indicated that while there was a plan to return to borrowing from the markets in, yes, Two-Twelve, that this wasn’t actually necessary. The clear implication from these comments is that Ireland would not have to request a new deal until after 2013 if at that point market funding cannot be located.

This is not an accurate representation of the EU-IMF deal. Here’s the European Commission’s report on Ireland, released in February. The last page shows the financing needs. It is clear that the EU and the IMF are not providing enough money to get us through the end of 2013. Indeed, the EU and IMF funds probably only get us to early 2013 (this was clear before the Commission’s report) and that market financing is required. So if we cannot obtain this market funding, we will have to request a new deal from the EU and IMF.

It’s reasonable to expect bluster from our Minister for Finance but we should at least expect him to show a clear understanding of the parameters of the state’s financing needs.

Update: Here is the updated European Commission programme document from this month. Financing needs are discussed on page 22. They differ a bit from the February document but the key point is the same. The programme calls for €14 billion in market financing in 2013 to fund the state.

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65 Responses to “Noonan on the EU-IMF Bailout”

  1. seafóid Says:

    Here comes the wagon, the wonderly wonderly wagon

    http://www.irishtimes.com/newspaper/finance/2011/0518/1224297222949.html

    “THE NATIONAL Treasury Management Agency is embarking on its first investor roadshow since the EU-IMF loans bailout last year as it travels to continental Europe, the Far East and the United States over the next four to six weeks.
    Chief executive John Corrigan will lead the trips to Hong Kong, Singapore, Malaysia, London, Paris, Frankfurt and the US”.

    What sort of a reaction will they get given the yield is at 11.1% and the price at less than 70 ?

  2. Bond. Eoin Bond Says:

    @ Karl

    Seamus Coffey has a nice detailed post with all the updated figures here

    http://economic-incentives.blogspot.com/2011/05/how-much-do-we-need-where-can-we-get-it.html

    He reckons mid 2013, with the potential for end-2013 if we sold down the remaining non-banking NPRF. Obviously at that stage we may have also sold off some of our banking assets for at least something non-trivial.

  3. grumpy Says:

    I thought officially it was back to the market mid 2012 on analyses consistent with that you did a while back. Then there was the bank recap estimates that have absolutely convinced everybody that nowhere near the full 35bn will be needed (Irish bond yields are, of course a function of Greece when they go up and the soundness of the Irish banks when they go down).

    This “spare” facility then is usable for deficit funding therefore effectively extending the current bailout’s cover of Ireland’s financing - it is assumed.

    Isn’t he co-opting this as fact?

    Varadkar’s stuff yesterday was typically clumsy but surely news to few. Odd reaction.

  4. bwooley Says:

    The European Commissions latest projections for Ireland were published in May 2011, not February.
    http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp78_en.pdf

    The financing needs and sources table is on page 22 and indicate that the sovereign will require €14bn of market funding in 2013. The EU Commission also indicate that their projections are based on the assumption that the state’s cash balances remain at €12bn through the forecast period. So these cash balances could be used to meet the sovereign’s funding needs - and hence would provide most of the funds for 2013, should the cash balances be used for that purpose.

  5. seafóid Says:

    Munchau on Greece but why would it be any different for Ireland?
    The funding will get rolled over… otherwise it’s September 15 2008 all over again..

    http://www.ft.com/cms/s/0/cf7b10b8-8a25-11e0-beff-00144feab49a.html#ixzz1Np34PLrp

    “Until recently the EU has wasted precious time with a discussion of silly schemes such as soft restructuring, or reprofilings. These would have made no difference to Greek debt sustainability but would carry their own inherent risks. The IMF’s hardline position has at least shown the Europeans that they cannot muddle through this crisis with half-hearted schemes. The policy alternatives are becoming increasingly clear. Either the EU/IMF continues to bankroll Greece for as long as it takes, or Greece will be forced into a hard default. There is no middle way. Some form of private sector involvement is likely, even desirable for political reasons. But it will not be material in terms of a reduction in the net present value of Greek debt.
    A default would mean an average haircut of 50 to 70 per cent. I suspect foreign bondholders might face a near-total loss. In that case, the probability of Greece leaving the eurozone must be high. A “within eurozone” default would bring some relief on debt payments but might be more than outweighed by the damage to the financial sector and the decimation of household savings. The best strategy to generate growth under those circumstances would be a large real devaluation. It is hard to imagine how that could happen without an exit from the eurozone. Once your financial system is already down, the relative cost of exiting may be lower than the cost of staying inside.
    My hunch is that the European Council would prevent a break-up of the eurozone at this stage, and accept a follow-up programme. Once that programme ended, the same situation would present itself again. Northern European politicians will hyperventilate. They will talk about debt restructuring but in the end, they will roll over again for as long as Greece meets the conditions. “

  6. Rob S Says:

    According to the DoF our GGB in 2013 is projected at 12bn

    The NTMA say we have 7bn maturing in 2013

    The EU/IMF say in the review from last week(p21) that we are recieving 10bn from them in 2013 in light of the reduced costs of recapitalising the banks.

    19-10=9

    That took 5 minutes - I hope the Finance Minister is actually aware of this alright.

    (http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp78_en.pdf)

  7. ObsessiveMathsFreak Says:

    Well, knowing the Department of Finance (for whom the Minister is chief mouthpiece in matters media), the Minister is probably referring to the funding of the country’s state debt, minus the banks, or some other such typically Irish fudge. He may also be factoring in future taxes/cuts which could help bring the state deficit down, though I doubt it. Given that no-one—economists included— seems to be able to actually calculate how much the country owes and earns, I’m not sure that the Minister can be regarded as being especially inaccurate by Dublin standards.

    I’m not sure where the “all eventualities” part comes from though. The ECB is by now infamous for making cold threats to withdraw funding unless it gets its own way. For all we know, the ECB could decided withdraw its funding and keep the whole class in during lunch break until they get a “Tá brón orm” from Varadkar for speaking out of turn.

  8. What Goes Up... Says:

    Comical Mickey following steadfastly in the clown shoe-shaped footprints of Comical Leni.

    *Honk*Honk*

  9. Paul Hunt Says:

    There’s probably a fine delicate political balance to be secured between saying this won’t work irrespective of the efforts we make and it needs to be reconfigured, but there are things we need to in our interests even if they won’t solve the probem and saying this won’t work, so we’ll sit and sulk, not do anything and guarantee it won’t work.

    Colm McCarthy, in the Sindo:
    http://www.independent.ie/opinion/analysis/we-must-fight-back-to-renegotiate-bailout-2660569.html
    continues to advance the case for the former course.

    There’s also a fine political judgement between doing enough to demonstrate compliance while highlighting the need for a reconfiguration of the support package and being so compliant that the EU and IMF take the view that we’ll struggle thorugh without a reconfiguration of the deal - and then focus any relief on offer on Greece and Portugal.

    All we can do is hope that our key elected and appointed officials are working the corridors of power to highlight both our willingness to comply and the need for a reconfiguration of the deal. It probably doesn’t do any harm if a senior minister states the bleeding obvious for public consumption occasionally.

  10. Eamonn Moran Says:

    A lot of peoples assumptions at the time was that the ELA was the ECB’s way of reducing exposure in the Irish banks by making the ICB become the lender of last resort for a large part of their previous exposure. This has now been confirmed to be the case on Lorcan Roche Kelly’s Blog Corner turned.

    http://blog.cornerturned.com/2011/05/30/irish-central-bank-comfort/

    So had the markets already priced this in?

  11. Al Says:

    @ PH
    That “fine political judgement” needs to reflect that fact that Irish politics isnt necessarily that same politics as our potential saviours.
    What passes for political talent and judgement in this country may not cut the mustard abroad. Maybe we need to hire or elect some foreigners?
    Varadkar,,,,… hmmmm!

  12. David O'Donnell Says:

    @all

    Taoiseach Kenny on news at 3 radio 1: plenty cash ‘under all eventualities’ up to ‘end’ of 2013.

    @all at all: A. N. Other Michael, Michael

    ‘The problem is that credit is debt, and debt must be paid – with interest. And when an economy pays interest, less revenue is left over to spend on goods and services. So markets shrink, sales decline, profits fall, and there is less cash flow to pay interest and dividends. Unemployment spreads, rents fall, mortgage-holders default, and real estate is thrown onto the market at falling prices.

    When asset prices crash, these debts remain in place. As the Bubble Economy turns into a nightmare, politicians are taking private (and often fraudulent) bank losses onto the public balance sheet. This is dividing European politics and even threatening to break up the Eurozone.’

    …So “saving the euro” is a euphemism for governments saving the financial class – and with it a debt dynamic that is nearing its end regardless of what they do. The aim is for euro-debts to Germany, the Netherlands, France and financial institutions (now joined by vulture funds) to preserve their value. (No haircuts for them). The price is to be paid by labor and industry. ‘

    Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College. Cross posted from CounterPunch.

    http://www.nakedcapitalism.com/2011/05/michael-hudson-breakup-of-the-euro-is-iceland%e2%80%99s-rejection-of-financial-bullying-a-model-for-greece-and-ireland.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

  13. Karl Whelan Says:

    @ EB

    Agreed that you can possibly get to end-2013 if you start making all sorts of optimistic assumptions. But, as Seamus acknowledges, the big maturing bond looming in January 2014 would rule out stringing everything along until late 2013 and then looking to negotiate another deal.

    Surely there is one thing we can all agree on — we don’t have enough cash “under all eventualities” to get us to 2013. They should stop saying this immediately.

  14. Rob S Says:

    @Eamonn Moran

    I am not sure there was ‘really’ any remaining doubt but it is certainly nice to see it formally acknowledged.

  15. DOCM Says:

    @ All

    What is really striking about these exchanges is the seemingly unquestioning view in relation to Ireland’s “funding needs” as if these were some God-given figure which had to be met. The markets’ willingness to provide funding is a function of their perception of the creditworthiness of the State and this, in turn, is a function of the progress made in getting our definition of “needs” to correspond to our capacity to meet their cost. (To say that there is plenty of meat left on the carcass of public sector spending - including that within the responsibility of the author of the “Varadkar effect” - would be an understatement).

    The debate about the budgetary arithmetic, while informative, is not the decisive issue and should not be allowed to distract our attention simply because we have a government at sixes and sevens that is clearly not (yet) coming to grip collectively with harsh reality.

    A more immediate pertinent issue is the stand-off between the ECB and the Merkel/Sarkozy duo in relation to what to do with regard to Greece, the outcome of which will have a big bearing on whether or not Ireland can distance herself from that country, see bond yields fall, and return to the markets. My money is on the ECB cf. FT interview with the much-maligned - at least on this blog - LBS.

    http://www.ft.com/intl/cms/s/0/91f52140-89e2-11e0-beff-00144feab49a.html#axzz1NpAR1E1W

    It seems to me also that sight is being lost of the actual negotiations on the ESM, the outcome of which will also have a big bearing on whether or not Ireland can return to the markets sooner rather than later.

    Herewith an interesting link from the English language edition of Helsingin Sanomat.

    http://www.hs.fi/english/article/Investor+responsibility+divides+euro+countries/1135266291713

    Sarkozy said explicitly, appropriately enough, in Deauville, that the avenue of a “soft restructuring” was on the table or, in his precise words and for those who want to polish up their French;

    «Si la restructuration signifie qu’un pays ne doit pas rembourser ses dettes, c’est non, ce mot ne fait pas partie du vocabulaire français. En revanche, si la question est de savoir comment les investisseurs privés ou les partenaires privés peuvent prendre une part du fardeau, il ne s’agit pas du tout d’une restructuration […] et nous devons avancer dans cette direction.»

    To be continued…

  16. Bond. Eoin Bond Says:

    @ Eamonn

    there’s nothing new in the ICB annual report and what it tells us about the ELA. The Irish state was always gonna be on the hook for any losses in the ELA (something MK doesn’t seem to get), and people who think that this could create even bigger losses than currently accounted for in the banking system are guilty of a massive double count (Gurdiev, MK).

    Perhaps the only new item of note on this was the (if you work the maths back) information that the ELA seems to be provided at roughly 2%. Another unheralded subsidy for the Irish state that we should be aware of.

  17. grumpy Says:

    @KarlW

    “Surely there is one thing we can all agree on — we don’t have enough cash “under all eventualities” to get us to 2013. They should stop saying this immediately.”

    Agreed, if the audience is domestic voters then it is er misleading. To cynics in the market it invites the reaction “here we go again, different idiots, same country”.

  18. grumpy Says:

    Slightly off-topic.

    Back in 2008 the heroic forces of capitalsm were trying to stop Ireland getting conned into shoring up Anglo - by attempting to get its share price to reflect reality.

    The forces of gombeenism outgunned them for a while - long enough for the government to get conned by the bankers - using a share support scheme that looks illegal.

    A court case today has some participants in that scheme actually claiming it was illegal.

    The regulator’s reaction was to investigate the people who had worked out Anglo might be bust and try to scare them away. Compare to Guinness bid for Distillers, where the Serious Fraud Office secured prosecutions and people went to jail.

    How is it possible and what does it say, that the intended beneficiaries of this scheme would have walked away with the profits if it had worked, but sue for damages on the basis it was illegal, if it doesn’t work. Meanwhile an apparent admission of illegality is of no apparent interest to anyone?

  19. Incognito Says:

    Does Ireland plan to release its first quarter 2011 GDP figures one of these days? Or is it something optional? BTW, even Greece and Portugal succeeded to deliver that on time!

  20. zhou_enlai Says:

    From today’s FT leader in relation to Greece:

    “Officials think Greece will be unable to return to the financial markets to raise money on its own in March - as originally planned in the current €110bn package - meaning that the IMF is now forbidden from distributing any additional cash.”

    This is the issue about Leo Varadkar’s comments. If the IMF concludes, on foot of information received form the Government, that we will not be able to return to the markets then we are in big trouble.

    The Troika might do what they are proposing to do to Greece. They might tell us to hand over state assets to be held in trust by them and to authorise them to collect our taxes OR ELSE.

    It is hard to imagine Christine Lagarde, a trained lawyer, deciding not to follow an IMF policy which predates her and which is part of the legal foundations Fund, especially when it accords with her own hawkish views.

    The General Counsel of the IMF was very clear when he spoke in TCD that the IMF will only provide part of the funds to rescue a country and it cannot participate in a rescue if it does not think the rescue will allow the country to re-enter the markets.

    The incoherence of this Government, particularly on the FG side, is becoming a little bit disconcerting.

  21. zhou_enlai Says:

    Link to FT article which quote was taken from:
    http://on.ft.com/kUufSi

  22. Michael Hennigan - Finfacts Says:

    The incoherence of this Government, particularly on the FG side, is becoming a little bit disconcerting.

    This is making a mountian out of a molehill.

    Noonan can hardly be candid and add to to exodus of deposits from the banks.

  23. Ceteris paribus Says:

    @ MH
    Agree Noonan cannot be candid but his statement today is remarkably close to that of Varadker…our foreign owned Sunday newspapers can and are openly advocating deposit diversification in one of the advice columns published yesterday.

  24. Tomc Says:

    Given the structure of the post July 2013 esm facility there is a certain chicken and egg to any re entry to the bond markets. If the market believes there is a big risk to a self sustaining re entry to the bond markets than they will be closed until the esm facility and the required hard debt sustainability analysis is done.

    Either way we are barely six months into the current programme and we are already obsessing about bailout 2 while at the same time pretending we’re still tinkering around with the details of bailout 1.

    I think the true importance of today’s conflicting comments ( from two of the smarter members of FG) is to remind us all that there is not a lot of time to waste in correcting the fiscal and structural problems in the public sector. I can’t imagine there are many votes for labour in the brutal public sector reforms that will be implicit in any future bailout 2.

  25. Jagdip Singh Says:

    Today’s 10-year bonds closing mid-prices for the PIGS

    Portugal 9.75% (+.17%, +1.77% relative)
    Ireland 11.07% (-0.01%, -0.12% relative)
    Greece 16.43% (+0.01%, +0.08% relative)
    Spain 5.39% (0.06%, +1.2% relative)

    Given the hullabaloo that followed Leo Varadkar’s comments, you’d think that havoc would be wreaked upon our bonds in the market.

    If anything, the market reacted to the suggestion that we might not be able to return to the markets next year positively.

  26. Tomc Says:

    @ jagdip

    10 year Irish govt bonds now trade in the high 60’s with 5% fixed coupons. Knock 30% off the face vaiue of Irish debt and we’re at average ezone debt/GDP levels in 2013. You could argue the bonds are already pricing in a coordinated and non chaotic haircut. Would u rather buy a 10 year german bund with a 3% coupon trading at 100?

  27. David Blake Says:

    Is it possible that the odd formulation “”Two-Thirteen” means Q2 of 2013? That is when ESM is supposed to start.

  28. Martin Fetherston Says:

    The FT piece is wrong to state that the Fund cannot disburse further, period, if Greece is now expected not to be returning to the market in March. If additional nonmarket financing could be mobilized (big if, for sure) to fill the hole then the Fund could go ahead, so long as there’s a reasonable prospect of a return to the market later in the program (another big if). There’s plenty of precedent for this from past crises.

  29. Tomc Says:

    @ martin f

    The FT as always is an expert on Greece but hasn’t read basic IMF rules. These state that they can’t make a disbursement of funds unless they can be confident that the country can repay all debt due in the following 12 months. As greece has now admitted it won’t be able to issue next year and the current programme assumes they can, Europe needs to provide a gtee that they will provide more funds to repay bonds maturing in 2012. Some trial ballon of getting a rabble of Greek banks, the ecb and state controlled banks to roll 2012 bonds into later dates will also be in the mix.

  30. Bond. Eoin Bond... Says:

    @ David Blake

    i think its just the way people of that age speak - my Dad does the exact same thing, refers to 2006 as “Two O Six”, for example.

  31. DOCM Says:

    @ Tomc

    France appears to be getting cold feet with regard to (i) private sector involvement in the context of the ESM and (ii) the linked issue of seniority of ESM loans. Does this not suggest that the issue is no longer the status of the bonds of individual countries but the excessive offer relative to any foreseeable demand? In other words, the excessive overhang of government debt in the developed world generally.

  32. tomc Says:

    @ DOCM

    how does that explain the consistently low yields for US,UK,Japanese, even German and French debt? in a world of fiat money you could actually argue that there is still an excess of demand for “risk less” soverign debt.

    i think the french realise that no developed country with a large welfare state and declining demographics can ever repay their debts. all they can ever do is refinance it. not sure whats driving their new aversion to private sector bond holders sharing the pain of soverign bailouts….mabye they are just clinging to the old world of perpetually rolling over your debts.

  33. Livonian Says:

    @OMF

    “Given that no-one - economists included -seems to be able to actually calculate how much the country owes….” And : “I´m not sure that the Minister can be regarded as being especially inaccurate by Dublin standards”.

    I could not agree more and was flabbergasted by the vast array of discussions and debate across the media spectrum following the appearance of a certain”guarter of a trillion” newspaper article which almost had us owing 301 BN at one stage.

    Sure whats 30 -110Bn between friends!

    The only information I managed to obtain from all these discussions/debates was that anyone who dared refer to a figure of 190 BN Euro national debt was rapidly dismissed.

    Here is a prediction for 2015 :
    National debt 185 BN Euro(or equivalent in the currency we will be using)
    Annual budget deficit 4%,
    Debt/GDP ratio 105%
    Bond rates ranging between 3.75%-7.5%
    Annual salary of the Irish Central Bank Governor 249 999 Euro.

    I have to disappear now (hopefully for not as long as six months) as I have just been alerted to the following:

    The sky is falling, vested interests are panicking and (most importantly) European history/politics has just been clarified. Apparently Ireland (like the other PIGS) was a totalitarian regime until the 1970`s while the overwhelming majority of European states are actually paragons of democracy, governance and economic discipline by comparison.

  34. DOCM Says:

    @ tomc

    Although I am no expert in the matter, is not the explanation the size, depth and resultant liquidity of these particular bond markets? And the advantage that they gain as a “safe” haven when smaller bond markets are disrupted (an advantage which they are most unwilling to lose).

    I think what is worrying the French is the idea of being legally required to introduce CACs for all new bond issues. It will be interesting to see what ESM text finally emerges. The package for Greece will provide an interesting test case in real time.

  35. tomc Says:

    @ DOCM

    agree with your point on the french.i think the CAC issue (while sounding great in principle) is now brining up some highly relevant questions. it wont help greece,ireland,portugal get out of bailout programmes. it wont help the slower growth economies (france,italy) fund themselves at lower levels. all it really does is impose a framework for solving a future debt crisis in europe in the distant future. politically the germans reckon they need it and its the price europe needs to pay. gut feeling actual introduction of CAC clauses into bonds will be slow and watered down.

  36. tomc Says:

    @ DOCM

    re demand for developed countries debts. agreed with your point Re dept and size of developed countries bonds markets but small countrys which have shown a consistent history of sound fiscal management and stewardship of their financial economies are still issuing at close to record yield lows…denmark, finland, switzerland, israel..

  37. grumpy Says:

    @docm

    As the private sector de-leverages the public sector has to borrow - or else there is a glut of savings chasing inadequate supply of bonds. This is why you can and should run deficits in cyclical recessions.

    The problem for the pigs is that the money-weighted average view among investors is that they are not in ordinary cyclical recessions, and you therefore should not and cannot spend your way through the downturn. In these countries the non-linearity Trichet was going on about applies, at least it does in the market’s view.

  38. zhou_enlai Says:

    @Michael Hennigan

    “Noonan can hardly be candid and add to to exodus of deposits from the banks.”

    Varadkar’s transgression was the serious one. Noonan is MoF. He sets the Govt line on Finance. Kenny’s contradiction of Bruton also showed incoherence.

  39. Joseph Says:

    I would imagine Herr Noonan is blustering because he’s still in trauma/shock at what he’s discovered on taking over. He’s probably unable to sleep at night thinking: “Stone me, if the people of Ireland ever find out about……. they will…….”.

    Fill in the dots yourself. Please do. It should get some witty answers from some on this board.

    @David O’Donnell - “…So “saving the euro” is a euphemism for governments saving the financial class ”

    Your analysis is spot on. The public need to be made to believe it is saving the Euro/banking system from collapse and cash machines not working, etc. rather than the truth or there would be revolt. In the media, putting the attention of a story on one aspect (saving the Euro) when actually promoting another agenda (saving the financial class) is called ‘framing’…….. and, er, yes journalists did learn that by spending too much time hanging around politicians or being told how to pitch the story if in the pockets of the financial class.

    I wrote a paper once on the amazing number of directorships and cross-directorships of media companies occupied by heavies from the financial services ‘industry’. Damned if I can find it now but take my word for it, the financial services boyos have the media in their pockets.

  40. DOCM Says:

    @ tomc and grumpy

    I would generally agree wiuth points made. However, I saw a figure somewhere that 40% of bond purchase were by governments through sovereign funds (China being the prime example).

    As being disconcerted is a sensation likley to be shared by more than zhou_enlai, I continue to marvel - and to be disconcerted - at the myopia and parochialism of media - and other - commentary, with the odd exception. For example, Fintan O’Toole has it about right in today’s IT when he syas that “the gravy train continues to stop at all the right stations”. Varadkar has, unfortunately, pointed out that the terminus is in sight, the train is out of control and there are no buffers.

    Roubini in one commentary recently said that some recent IMF studies revealed that spending during a recession - even inefficient spending - was beneficial. As the ineffficiency of the spending on which we are embarked is hardly in question, can anyone point me to these studies?

    Also, on re-reading Pat McArdle’s article, it strikes me that the statistics may distort the situation by comparing the average salaries of the working population with a discrete element within it which, presumably, would show strong differences if applied to any other group, the banking industry, for example. But again, I am not a statistician.

  41. Michael Hennigan - Finfacts Says:

    Davy economist, Conall Mac Coille, says that funding will be available up to mid 2013 when the ESM will become active: “That the sovereign is funded through 2012 became apparent in the April stability programme update by the EU, IMF and Department of Finance, when it was announced that the unused €7.5bn (of their overall €17.5 contribution) provided by the EU/IMF to meet the PCAR/PLAR capital and liquidity requirements, could now be used for sovereign funding needs.

    The latest EU Commission update on Ireland’s economic adjustment programme shows that Ireland requires €14bn of market funding in 2013, but these funding needs could be largely met by eroding the €16.2bn (at end-2010) of cash balances available to the state.

    So, the Irish sovereign is funded up to the point where the European Stability Mechanism (ESM) is due to replace the current funding arrangements from the European Financial Stability Fund (EFSF). As we argued in our research report issued on May 27th (’Irish economy and bond market — a medium-term path to debt sustainability’), key elements of the ESM funding arrangements indicate that it will be difficult for those countries that draw on ESM funding to re-engage with private markets. Indeed, the IMF has recently criticised the shortcomings of the proposed ESM framework.

    Nonetheless, it is crucial that the EU have a funding programme available for sovereigns within the Eurozone that face liquidity problems. Hence, policymakers should focus on ensuring that support is on the right terms to allow re-engagement with private markets.”

  42. Gavin Kostick Says:

    @ DOCM

    It’s not really what you’re looking for, but here’s chapter 3 of the IMF’s “World Economic Outlook: Will It Hurt? Macroeconomic Effects of Fiscal Consolidation”, October 2010.

    Including:

    “Fiscal consolidation typically has a contractionary effect on output. A fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point. Domestic demand—consumption and investment—falls by about 1 percent.”

    However, worryingly for Ireland, on scanning this report, it is based on cases where interest and exchange rates change as part of the consolidation.

    I’ve looked a bit more. This, from the IMF website, “Fiscal Expansions, what works?” 2009 seems more relevant.

    http://www.imf.org/external/pubs/ft/fandd/2009/12/baldacci.htm

    “We also find that the composition of fiscal expansion—how it is distributed as current spending, investment spending, or tax cuts—matters. Higher public consumption—government purchases of goods and services and wages—and lower income taxes shorten the duration of financial crises. For example, a 10 percent increase in the share of public consumption in the budget reduced the crisis length by three to four months more than larger fiscal deficits alone would have. The same cannot be said for capital expenditures. Why? We believe that implementing capital projects generally takes longer than directly injecting demand through government purchases of goods and services.”

    So for efficiency, it does matter how the stimulus is laid out, but that is not to say any old stimulus is not beneficial:

    “Did fiscal expansions help in shortening the length of financial crises? Our results, based on regression analysis of the factors that affected crisis duration, indicate that they did. Higher government spending and lower taxes boosted aggregate demand by replacing falling private consumption.”

  43. DOCM Says:

    @ All

    Interesting article in the WSJ which suggests that Germany is abandoning insistence on private sector involvement in the second Greek bailout, at least for the time being, but is absolutely insistent - Schaeuble’s line all along - on forceful measures to ensure Greek government compliance with the bailout terms.

    http://tinyurl.com/3oarc6s

    It may also be noted that Greece will be joining Ireland and Portugal in the EFSF.

    The present situation raises an interesting paradox in relation to moral hazard as far as Ireland is concerned. Is the limit at which it applies to be defined by the IMF in terms of achieving the minimum compliance with the terms of the bailout, which is clearly not persuading the markets, or should we not address the question adverted to again in the Sindo by Colm McCarthy of a quicker rectification of the deficit in the public finances?

    As far as Schaeuble is concerned, there can be little doubt about how Germany sees the Irish government’s position or, more accurately, lack of one.

  44. DOCM Says:

    @ Gavin Kostick

    Thanks for the information. There is a certain logic in it if you are a government with the capacity to act using one’s own resources.

    There is no logic, howeevr, in attempting to cut the wages of those who have no leeway for discretionary spending and in funding a “jobs initiative” on the back of a dubious pension levy which frightens the daylights out of those who have, worsening the crisis in consumer spending and adding to the difficulties of the Irish banks.

    Incoherence and incompetence at a political level in Ireland continue to rule OK. How can the markets but be aware of it?

  45. zhou_enlai Says:

    @Michael Hennigan

    Has Davy economist, Conall Mac Coille, factored in that the IMF may not agree to further drawdowns if they decide Leo Varadkar is right.

    The IMF have said Ireland is doing its part but the EU may need to do more in relation to Ireland to make it work.

    It is not inconceivable that the IMF may conclude from its next review, that Ireland ill not be able to re-enter the markets on foot of the current arrangement and that the IMF will not allow any further funds to be drawn down until Ireland and the EU come to a new deal. This has happened in Greece.

    Leo Varadkar’s statements makes it much easier for the IMF to do this. They will not base their decision on his remarks but he has opened the door for the IMF to do this in a big way. According the Morgan Kelly’s thesis, this may not be the worst thing in the world if it happens. However, it is risky.

  46. seafóid Says:

    This little German piggy went to market
    This little Portuguese piggy stayed home
    This little Irish piggy had ECB funding
    This little 2013 piggy had none

  47. Eureka Says:

    If I were a bondster I’d manipulate the market through rating agencies etc to have as much money commuted to the PIGS before 2013. Then after 2013 I wouldn’t lend any money to anyone and I’d make them come up with a Euro bond for me. That way Id bypass the ESM.
    I’d also be hedging that if my plan didn’t work there would be massive depreciation of the Euro and I could make money out of that.
    It’d be win-win. I’m not a bondster but wonder if there might be something in this..

  48. Seamus Coffey Says:

    @MH,

    The extract you cite from Conall Mac Coille suggests that the unused money from the €17.5 billion contribution of the EU/IMF package to the €35 billion bank contingency fund can now be used to fund the State on top of the €50 billion already provided.

    This could be of the order of €7 billion to €8 billion. By any chance would you (or anyone else) have a link to an EU or IMF document that confirms this? Thanks.

  49. Karl Whelan Says:

    @ Michael H.

    “The latest EU Commission update on Ireland’s economic adjustment programme shows that Ireland requires €14bn of market funding in 2013, but these funding needs could be largely met by eroding the €16.2bn (at end-2010) of cash balances available to the state.”

    I don’t believe that you can match up that €14bn with that €16 billion. The EU and IMF knew about the cash balances that we had at the end of 2010 when drawing up the plan and deliberately gave us less money than needed for funding needs so we would have to use it up.

    I was writing about this a few months ago
    http://www.irisheconomy.ie/index.php/2011/02/06/imf-projections-show-eu-imf-funding-not-big-enough/

    The point remains that the EU says we need to borrow €14bn in 2013 and, if we fail to do so, we will need a new programme, most likely in the early part of that year.

  50. Karl Whelan Says:

    @ Zhou

    “Leo Varadkar’s statements makes it much easier for the IMF to do this. They will not base their decision on his remarks but he has opened the door for the IMF to do this in a big way. ”

    I think you’re getting a bit carried away there Zhou. Leo has just said in public what everyone, including the IMF, thinks in private.

    In Ireland, that’s a big sin.

  51. Karl Whelan Says:

    @ Seamus

    Here it is

    http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp78_en.pdf

    Not sure it precisely makes that statement about unused money. There is the following:

    “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.”

    Interpret that how you will.

  52. zhou_enlai Says:

    @Karl Whelan

    The problem is Leo is in Cabinet.

    Everybody knows he is probably right. However, the Troika are saying the deal might work and the Government are saying the deal might work.

    Why the charade? If it is their view that it won’t work then legally the IMF cannot proceed. The problem with Leo’s statement is that he is a member of the Irish Government.

    In fairness to Leo Varadkar, things have become a bit Kafka-esque when we are mis-stating the facts for fear of having to abide by the law. Leo Varadkar may be right in calling it like it is and letting the law do its job.

    However, one would think that any such decision should be a decision taken by the whole cabinet. Perhaps Leo knows the cabinet cannot get their heads around the facts and is determined to “do the right thing”? Unfortunately, he is showing up an incoherency in our Government which does not inspire confidence.

    Paddy may like to know what is going on but you can be sure he wants his Government to do the best for him even if it involves a few white lies.

  53. Enda F Says:

    By all accounts, the NTMA are saying they can get by until the end of 2013 during their recent roadshow. Doesn’t mean they are right but that is the story they are selling.

  54. hoganmahew Says:

    @zhou_enlai
    There’s no such thing as ‘white lies’ when it comes to predictions. There is ‘getting it roughly right’ and there is ‘being made to look at fool’. This government in ignoring simple arithmetic with bland assurances runs the risk of being made to look as foolish as the last government.

    In the case of the last government, their 2008 buffoonery was the end of them and resulted in the troika arriving in 2010 - a significant loss of economic sovereignty.

    The current stupidity will result in absolute loss of economic sovereignty in 2013.

  55. zhou_enlai Says:

    @hoganmahew

    In fairness to the Government, they have said it is a challenging situation and they have called for changes. They have said success is possible and all our efforts are directed to success. Varadkar said success was unlikely. While I sympathise with him, he should not have been so explicit if that was not the Government line.

  56. hoganmahew Says:

    @zhou_enlai
    Perhaps I ordered a cheesburger…
    http://rmfo-blogs.com/karibeth/wordpress/wp-content/uploads/2009/06/farside4personality.jpg

  57. Gavin Kostick Says:

    @ hoganmahew

    “This government in ignoring simple arithmetic with bland assurances runs the risk of being made to look as foolish as the last government.”

    Yes, Enda Kenny’s reassurances that we weren’t going to run out of cash any time soon had a distinct ring of ‘fully funded’ about it.

  58. zhou_enlai Says:

    @hoganmahew

    Very good.

  59. Seamus Coffey Says:

    @ Karl

    Thanks for that. I have read it and I do not think it says we can avail of the unused EU/IMF money from the €35 billion contingency fund. The extract you quoted says:

    “The EUR 19 billion will be met to a significant extent via NPRF funding and the use of the government’s own liquid assets.”

    I assumed that “to a significant extent” would mean 50/50 as was the case for the full contingency fund - €17.5 billion from us and €17.5 billion from the EU/IMF. It could still be an even split but we have already committed €10 billion from the NPRF so it hard to see why “the use of the government’s own liquid assets” would also be required.

    If it is not an even split and we provide a higher proportion that means there would be even more than €7-8 billion of EU/IMF money from the bank contingency fund unused. When this was set up it was ringfenced for the banks and was explicitly stated that it could not be used for other purposes.

    I think Conall Mac Coille is incorrect to say we have access to this money. Everything suggests that we will need (even Leo Varadkar knows that!) but there is nothing to suggest that we will get it.

  60. Bond. Eoin Bond Says:

    @ Seamus

    from the IMF teleconference after the second review, where the suggestion seems to have arisen from:

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

    QUESTIONER: Some of my questions have already been asked so I’ll maybe just go ahead with a few others. In terms of the cost of recapitalizing the banks it’s come in as 10 billion below what was originally earmarked in the plan. Is there a chance that this money could be diverted to the sovereign if the sovereign continues to struggle to get access to the markets? Also, is there a situation or any room –- any situation in which the scheduled repayments over seven-and-a-half years could be extended?

    MR. CHOPRA: I’m going to ask Craig to answer these questions.

    MR. BEAUMONT: On the cost of recapitalization you do note the correct figure that it is somewhat lower than we had previously allowed for, and we note in the staff report that this gives a somewhat larger contingency available in case it’s needed, and that could indeed cover the possibility that there could be some delay in regaining market access compared with what we had previously allowed for.

  61. Seamus Coffey Says:

    @ Bond. Eoin Bond

    Thanks for that. I did note that in the transcript and looked for something that might say the same in the report. The closest I can find is this from 14 of the pdf:

    “As noted in the original program request, risks to debt sustainability stem from the high debts incurred for bank recapitalization and the associated
    sensitivities to the growth outlook and interest rate developments (Box 6). In that regard, the authorities’ policies on recapitalization and reform of the banking system are important to reduce uncertainties around potential fiscal costs, and it is beneficial that the €24 billion additional bank capital needs identified by the PCAR analysis are significantly less than the €35 billion set aside in the program. At the same time, this leaves a sizable buffer of financing available should contingencies arise.”

    I took this to mean that the money would be available for the banks should there be the need for additional capital. The quote from Craig Beaumont seems to cover two issues: the contingencies for the banks the “regaining market access” (I assume for the state). I still don’t think it’s official but it looks like any money not used by the banks can be used by the State.

    This is a change from the original IMF report which said that:

    “If the needs are lower [than €35 billion], as is currently anticipated, less financing under the overall program will be required.”

    Now it seems that the full €67.5 billion from the EU/IMF will be available to us regardless that the €17.5 set aside for the banks will not be used in full. If this is the case we are now funded until close to end-2013.

    This isn’t a huge difference but there is alot that can happen in the forthcoming 31 months. Aside from the huge economic problems we face, there is the added uncertainty problem of just how serious our problems are. We do not have a good recent record in this regard. Over the coming two-and-a-half years there is the opportunity for the situation to stabilise and some certainity on our difficulties to take hold.

    It still seems unlikely at this remove that we will be able to independently rollover the €12 billion of bonds maturing in January 2014 but if we have our house in order by then it will not take a huge additional push from the EU/IMF to get us over that threshold and we have another two-and-a-half years until the next bond redemption date after that.

  62. Seamus Coffey Says:

    @ Karl RE: Update

    The €14 billion that the EC see us needing is based on the assumption that we don’t use any of our cash reserves. These won’t get us to the end of 2013 but we don’t need all of this €14 billion. There is also the possibility discussed above of getting access to the unused bank contingency fund.

    Running down our cash reserves would be a dangerous thing to do and the EC are right to recommend that we source market funds rather than use this cash buffer. If this is eliminated we have absolutely no ability to deal with any negative shock. We should be trying to maintain these cash reserves at the current level of 10% of GDP but that may not be possible.

    It would be nice to think that we could raise some funds on private markets by 2013 but there is no way it could be guaranteed to be enough to meet all our financing needs. It would have been useful if the EC had extended this table and graph to 2014. That would show just how quickly we need to fully resume market borrowing.

  63. Karl Whelan Says:

    @ Seamus

    “The €14 billion that the EC see us needing is based on the assumption that we don’t use any of our cash reserves. These won’t get us to the end of 2013 but we don’t need all of this €14 billion.”

    I’ve been doing these calculations for some time now and I’ve never really thought of it that way, i.e. the EU sitting around worrying about us blowing our cash resources.

    The EU and IMF were well aware of the cash reserves we started with and I suspect they designed the package so that we could squeak through to some point in 2013 (possibly the end of it if lots of other things went right) by using those cash resources. Not that this aspect of the deal was ever admitted to by Cowen or Lenihan, who repeatedly described it as a deal that secured three (and sometimes four) years of funding.

    Noonan and Kenny seem determined to also over-sell how much funding the deal provides. Beats me as to why.

  64. Seamus Coffey Says:

    @ Karl,

    It would be nice to think the EU are sitting around worrying about us and you are right in suggesting that they are not. They want us out of their hair as quickly as possible. However, when discussing the funding table and graph on page 21 the EC document says:

    “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.”

    They are envisaging us holding on to a cash buffer and I presume the latter part of the sentence relates the Janurary 2014 bond redemption.

    The IMF likewise see us using none of the €16 billion cash buffer we have over the coming years, but we can only imply this because they see the GG Debt increasing by the full amount of the GG Balance each year, i.e. all the money needed to fund the deficit will be borrowed.

    Both the IMF and EC plans are based on the view that we return to markets in late-2012/early-2013 to get the €20 billion or so that will see us to the end of 2013. We have the short-run “get out of jail card” of our cash reserves if we can’t raise that money. Of course, as you have pointed out we then hit the wall in January 2014.

    I also think Noonan and Kenny are over-selling the deal but they are just selling it as it is. The deal envisages us getting about €20 billion from markets before the end of 2013 and having our cash buffer intact as we head into 2014. That is the only way we can get past January 2014. I am pretty sure the IMF and the EC know it and I hope that Noonan and Kenny know it.

    To me it looks like the debt burden is just about sustainable (and we have the Promissory Note card to play) but it would be utter incompetence if we let the whole thing collapse because we did not arrange to get the required funding in place. Is there a secret card room in the back where all this is being sorted?

  65. colm brazel Says:

    “Both the IMF and EC plans are based on the view that we return to markets in late-2012/early-2013 to get the €20 billion or so that will see us to the end of 2013. We have the short-run “get out of jail card” of our cash reserves if we can’t raise that money. Of course, as you have pointed out we then hit the wall in January 2014.”

    I notice a lot of commentators take this view including Colm McCarthy writing in last Sunday’s Indo, ‘we must fight back to renegotiate bailout’

    So, let me give a contrarian alternative view. Suppose the ECB is clever enough to see we won’t return to the markets in late-2012/early-2013, that we’re banjaxed.

    Suppose their policy is to keep our ship afloat until they extract as much as possible from the doomed ship to pay back bondholders, to pillage our National Pension Reserve Fund or any other assets they can get their hands on, to penalise us with 5.8% because they know our ship is going down, they’ll take as much as they can get before the ship sinks?

    Then the view put out our negotiating team needs to painfully educate the ECB over a long extended period of negotiations to correct their incompetent mistakes, becomes embarrassingly ridiculous and makes our negotiating team, a team of gombeens selling us down the river?

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