Bailout Interest Rate White Flag Department

Journalists sometimes get things wrong, so I’m going to phrase this as follows. Tell me this isn’t true:

Minister of State Brian Hayes has said the Government is looking for a 0.6% reduction in the bailout interest rate during its ongoing negotiations with the EC and the ECB.

Mr Hayes told RTÉ’s Drivetime programme that this would amount to a saving of €150m per year on the remaining amount of the loans which has not yet been drawn down.

All the signs are now that the government has gone into white flag mode on this one (what with the little-remarked-upon previous concession on Anglo-INBS bank bondholders, the flag’s had a busy week).  The key thing to watch for here is the approach of claiming lower and lower figures for what an interest rate reduction can achieve, with the benefit now down to €150 million per year.

Look, this isn’t rocket science. Greece, which hasn’t been very successful in implementing its package, received an interest rate cut of one percent in March. No Irish government could possibly be looking for less than a similar cut of one percent. We are borrowing €45 billion from the EU, so a one percent cut would save us €450 million a year, three times the figure being quoted. With an average maturity of seven and a half years, let’s call it seven, this would save the Irish taxpayer €3.15 billion or about €700 a head. It’s not a game-changer on the debt stability front but it’s not worth dismissing either.

Focusing on getting a cut in the remaining loans that have been drawn down is a red herring. It doesn’t matter that the EU has already sourced funds to lend to us as what we’re discussing cutting here is the EU’s own margin on these loans.

The only possible reason to define down the potential gains from an interest rate cut is to prepare the public for failure to achieve this cut, at which point we’ll be told that it wasn’t important.

Any hope that we might show some backbone on this issue (a la Namawinelake) is fading.

Update: Looking at yesterday’s Dail proceedings, one can find Minister Noonan stating that a one percent reduction in our interest rate will save us about €200 million a year. I know the Minister has the combined brain power of the Department of Finance officials on his side but it still seems to me that one percent of €45 billion is €450 million.

30 thoughts on “Bailout Interest Rate White Flag Department”

  1. @KW
    There should be a very simple response to this from the Government. Not to the people refusing to give the interest rate deduction.
    The response should be directly to those who are the direct beneficiaries of the money borrowed. The seniors bondholders of Anglo/INBS/ILPS.

    “Gentlemen,
    Consequent to the decision of the EU/ECB re interest rate, the State needs to make some savings on some non-essential expenditure items such as dead banks. These organizations will now be put into receivership. The receivers telephone number is Castletownbere 21. We hope to have an office set up for him sometime in 2014. Money is scarce.
    Thanks you for you kind attention.

    Yours etc.”

  2. The Ministers may have been basing their calculations on the fact that we have yet to draw down 45 billion. The immediate savings of a one percentage point decrease would be much less than 450 million.

  3. I think the justification for Noonan giving the €200 million yesterday was because of the assumption that any interest rate reduction would only apply to drawdowns from now on. Any existing drawdowns from the EU would be at the old rate. Whether this is true or not is hard to say but it appears to be the assumption he used. I’m still not sure this brings the savings down from €450 million to €200 million though.

  4. As discussed last Autumn and throughout the election campaign, with no mandate for tough negotiations backed by public understanding and acceptance that it was possible the country might have to do without the credit line, it was obvious to the other parties that Irish politicians had put themselves in a position where they had no option but to take whatever deal they were offered.

    What was so difficult to understand about this?

  5. @ Grumps

    Are you going to tell us now that is was obvious last Autumn that the EU would give Greece a percent rate cut and tell us to take a hike?

  6. @Karl

    If you are willing to drop the specifics, and deal with it in approximate terms, then yes.

    We all knew Greece was going to reach the point comparatively quickly, where it was impossible to maintain the fantasy that it was going to be able to repay. We also knew that at that point restructuring, interest reductions, default or whatever you want to call it – would happen.

    Similarly, Ireland would take much longer to get to the point where Austerians in the core would be convinced Ireland’s “bailout” would fail. Until that point is reached the EZ would play bad-bailout-cop, so no real concessions would be made.

    Having said that, no, it was not obvious that even an insignificant rate reduction would be refused. It looked as though there would be a token reduction as a fig-leaf to a new administration – and I think that was genuinely on the cards.

    The sound and thunder over rejecting out of hand any alteration at all of the corp tax rate, combined with Bruton very publicly chopping of the French face-saving position (by stating that CCCTB that took into account the origin of revenues, was absolutely unacceptable rather than shutting up and talking to them, waiting for someone else to publicly ditch the idea) was so inept IMO that even the interest rate was taken off the table.

    Few expected Ireland to mishandle things quite so effectively.

  7. @ All

    Firmly off thread.

    A while back, during the debate on “Paul Krugman: When Austerity Fails”, May 2011, I emailed Prof. Krugman on the subject of ‘expansionary austerity’, recieved some references by reply, and then for the sake of debate emailed M. Trichet at the ECB. Well, a couple of weeks and a few emails later, the reply is in and is attached at 106 of that thread. Fair warning: the reply is by way of quotes and links to public speeches. I note it here for the sake of completeness.

  8. My view as per recent letter in the SBP and email to all TDs:

    “Any offer of a minor reduction in the interest rate should be rejected out of hand. Instead, the Government should demand a reduction in the bailout interest to a nominal rate (say, 1%), a payment reschedule spread over decades and an immediate write down of outstanding bank bonds by about 50%. In return, it must adhere to the bailout terms and agree for purely political reasons to a temporary levy of, say, 3% on top of the sacred corporate tax rate.”

  9. A useful way to get a sense of the value of a one percentage point reduction for debt sustainability is to note that €45 billion will be roughly between one-quarter and one-fifth of outstanding debt when fully drawn down. Thus it would lower the average interest rate on outstanding debt by between one-fifth and one-quarter of a percentage point.

    In the standard debt sustainability calculation, a given percentage point decrease in the average interest rate has the same effect as the same percentage point increase in the nominal growth rate. With even quarter point increases in growth hard to come by, this is not to be sneezed at.

  10. Is the objective of this excellent site to offer informed debate (i.e how much the government actually hopes to eventually borrow from the EU/ECB) or just slag off the government for the sake of it?

    Given that the the IMF is offering the best rate on itś 22.5BN loan it would seem logical to me (following the stress test) that the government hopes to draw down significantly less than 45 BN.

    Based on the “stress test plan” (24 Bn – 5.3bn) and an existing rate of 5.8% this would have reduced borrowing from 45 BN to 26BN .6% of which is 156 BN.

    We will only know Bank of Ireland has not recapitalised (and moved into majority ownership as predicted by the author of a previous thread) when it has actually happened.

    We also do not know (and possibly Minister Hayes is erring on the side of caution) whether Mr Noonan actually wants to drive this borrowing further down to 20 BN thereafter hoping to only draw down from the EU element of the combined EU/ECB loan.

    Three scenarios (or a combination of all three) could easily bring the remaining borrowing down to 20BN:

    1) The Government decides to leave the currency with a consequent relative devaluation.(“White Flag” does not necessarily mean surrender it can also mean that one side does not want to waste resources fighting anymore and is willing to return to more familiar territory)

    2) The western EU countries who are not in the Euro decide (which may include Ireland when the “decision” is made) some kind of “haircut” is acceptable. We may only have “one man and his dog” working in most EU embassys but the fact that we have representation in evey EU state should indicate that the Government is focusing on itś future relationship with the EU.

    3)The Finance Minister listens to the electorate and “lets rip” at midlle to higher paid public servants in the full knowledge that A) Labour wants to broaden itś electorate base, B) Fianna Fail (who hired most members of that cadre) are a spent force C) the next representative elections are three years away and D) Sinn Fein is mainly concerned with lower paid workers in the private and public sector.

    The only fact we can be absolutely sure about(and many vested interests would be wise to adapt) is that socio-economic transformation is happening within a state with a sophisticated electorate living in the longest continuous democracy of all Euro Zone states.

  11. I’m afraid that FG and Labour were simply politicking when they said that they could negotiate a better deal on interest rates than FF. I posted that here during the election campaign. In the anti-FF hysteria that was rampant then, no one was interested. However that’s in the past. Kenny and Noonan are at the helm now, and all FF supporters should give them their support. They are doing a good job in lots of ways. If the French simply refuse to lower the interest rate, I don’t know what they can do.

    The way round all this nonsense is to go back into the bond market in the very near future, accompanied by a ruthless and aggressive campaign to convince individual decent and honest savers and investors throughout Ireland and the UK (and elsewhere) that, whatever crooked and cocaine-fuelled bond traders say, Irish bonds are a good bargain at a much lower interest rate than the EU/IMF are offering, which they are. I can hear the sniggering and sneering allready, but my own personal experience today convinces me that the time is ripe for it.

    That personal experience was the annual meeting with my company pensions advisor from England. I won’t mention the pensions company by name in case they sue, but it is very well known. He gave me a statement that contained a long list of all the things that my pension pot is invested in. This is entirely separate from my own personal savings, which, as I have posted here before, I have very wisely moved south of the artificial border in Ireland to avail of the low inflation and high real interest rates. In contrast, my pension pot is invested entirely in the UK, as I have no control over it. The incompetent blandly informed me that my pension pot had increased by 3.2 per cent in the past year, bringing the increase to a cumulative 10.1 per cent since 2007. In his arrogance, he expected me to be pleased about it. I pointed out to the incompetent that UK inflation was currently 4.5 per cent and forecast to reach over 5 per cent in the very near future, bringing it to a cumulative 17.6 per cent since 2007. So my pension pot, that I have had regrettably no choice but to entrust to his lousy company to invest, is actually worth less in real terms now than it was a year ago and much less than it was in 2007. And, so painful is it, I can’t even bear to think about what it is worth if I convert it from crummy sterling to euros. It must be worth at least 10 to 15 per cent less in euro terms than it was in 2007. I pointed out to the incompetent that my own personal savings, that I had invested myself in Ireland, were showing a far greater real return than his company’s lousy UK-based investment of my pension pot.

    I am not an isolated case. There are millions all over the UK who are now seeing their savings and pension pots eroded away by a combination of roaring inflation and abysmally low interest rates. It is becoming a major issue. According to a BBC report (link below), the average savings rate in the UK is now 0.81 per cent versus an inflation rate approaching 5 per cent. The contrast with Ireland could not be starker. In Ireland, the combination of low inflation and high interest rates is producing a bonanza for savers, or at least those savers who, like myself, pay no attention to the celebrity doommongers. In the UK, the combination of high inflation and low interest rates is wiping out savings and pension pots. Just to show that I am not exaggerating, these are a few links that show the extent of the problem in the UK.

    http://www.guardian.co.uk/business/ireland-business-blog-with-lisa-ocarroll/2011/may/04/ireland-banks-interest-rates

    http://www.bbc.co.uk/news/business-12466074

    http://www.nestfinance.co.uk/savings/2011/05/16/half-of-brits-concerned-about-savings-rates-survey-says

    This is what the FG-Lab government should do:

    (1) Put Irish-government bonds on offer at exactly the same price as UK-government bonds, whatever price that is. No more, no less.

    (2) Since the UK financial media and bond traders will almost certainly sneer at the offer, meaning that it is entirely possible that, initially, JTO will be the only buyer, follow this up with a ruthless and aggressive campaign to highlight the fact that this is actually an extremely good bargain for decent and honest savers and investors throughout Ireland and the UK (and elsewhere), by emphasising:

    (a) Inflation in Ireland is currently 1.5 per cent – in the UK 4.5 per cent, and that this is not a flash in the pan, but the fourth year in a row in which inflation in Ireland has been 3 to 4 per cent lower than in the UK.

    (b) Because of the much higher UK inflation, sterling is likely to continue to fall against the euro.

    (c) Ireland is moving into balance-of-payments surplus, while the UK remains in deficit.

    (d) FDI is moving into Ireland in an extremely big way, with almost daily announcements. Google, Intel, Dell are just the tip of the iceberg of recent announcements. Nothing similar is happening in the UK.

    (e) Ireland’s budget deficit, although high, is roughly of the same order of magnitude as that in the UK, and is on track to meet targets.

    (f) In contrast to the UK, where there have been a number of riots against government cuts, and massive waves of strikes are scheduled for the autumn, Ireland is a model of social stability. There have been virtually no street protests, and certainly no riots. And Ireland has become a virtually strike-free country.

    Even if this campaign does not result in the government being able to fund all the budget deficit in the open market intiallly, it can fund part of it, and an increasing part if it. Every little helps. To the extent that borrowing can be done in the open market, reliance on IMF/EU funding is reduced. I have never pretended to be an FG supporter, but Noonan does seem to be a bit of a bruiser and just the man to lead such a campaign. Time to put the boot into the bond traders.

  12. David McCullagh on RTE telling the public that any interest rate cut could only apply to future loans and not to existing loans.

    Why do people parrot these talking points? There’s absolutely no need for this to be the case. It’s just a line being put forward to

    (a) Allow the government to lower the bar for what it would be considered a success.

    (b) Allow for failure to be waived away as not important because success according to definition (a) doesn’t help much.

    Expect a lot more Pravda reporting on this issue.

  13. @John McHale

    Look after the millions, and the billions will look after themselves. 😀

  14. @ Livonian

    Perhaps it is the case the government are basing their low figures on the idea that, thanks to the supposedly positive news on the banking front, we’re now going to have to borrow a lot less from the EU.

    Based on how things are actually going in the real world, as opposed to the government spin room, that would be a bit mad.

    Either way, the idea that we’re bargaining for a 0.6% cut illustrates either a white flag or a preparation for failure.

  15. @ Karl

    it could be related to the French reluctance, sorry, pigheadness in not wanting to lower the interest rate without a corporation tax quid pro quo. Noonan/Kenny yesterday said that only Germany and France were holding out (“25 out of 27 EU nations support a cut”), and that Germany was more willing than the French to cut the rate. So maybe this is Noonan playing the martyr, internationally/externally, and essentially calling the French bluff. The domestic comments on it are just to brace the public should we actually have to follow through on it. Thats what i’m hoping anyway.

    As DoD says above, i think the public would support FG/Lab telling the French that if the cost of the interest rate cut is the CT rate, they can go and stick it. It seems bizarre, to the extreme, to me that the EU will not cut our rate given the reductions in the Greek rate and the lower rate offered to Portugal. But, then, this is the EU we’re talking about…

  16. Karl. Dont think there is any possibility of not drawing down all the money. It seems from listening to Noonan and looking at figures in IMF report that the plan is to divert the” savings” from the bank bail-out and use this for general exchequer borrowing, to extend the length of time we can stay out of the markets. However as far as I know we have only drawn down around 15 billion euro of the 45 billion from the EU to date. So not sure how you get 200 million, even if you exclude drawn downs so far….. so maybe it is a lower percentage interest rate cut…

  17. @ Karl

    on the “it’d only affect future drawdowns”, this may have a lick of truth in it on the EFSF stuff – this was specifically structured in such a way as to create a buffer in capital for the investors, not sure if there was a reference to the margin too? So it might be difficult to change that. But the EFSM stuff is much more flexible, its just an “EU” general issuance.

  18. Eoin
    on my sums just over 4 billion of the 15 we have received so far from Eu is from EFSF.

  19. I know this is a moot point as France are the main problem but when the media/Gov say we need unanimous EU approval for a rate cut – is that true?

    Surely this would only be the case for the EFSM?

    Why would the non-Euro countries in the EU get a say on the interest rate charged on the EFSF interest rate?

  20. @ Cliff

    End-May exchequer figures have it as 3.6bn from the EFSF so far, and 11.4bn from the EFSM. So the EFSF drawdown is chump change in the bigger picture. It’d probably involve a change to the t’s&c’s in the future EFSF loans, but i still reckon all the existing EFSM could be changed by a simple vote.

  21. @eoin
    think its around 4.2 from efsf now — they drew down a few more hundred million in early June for some reason. another question is why we are being pushed to draw it all down so quickly, long before we need it……maybe they are giving us as much as possible early because they only plan to cut the rate on the stuff they havent given us yet…. 🙂
    interesting point though that it might be harder to get efsf rate cut

  22. State has lowered ambitions on bailout rate, says Kenny

    Mr Kenny said it was “unfair” some countries were seeking extra conditions to be imposed on Ireland in return for an interest rate cut. In an implied criticism of France, he said interest rate reduction that had been approved in principle by the European Council was being “allowed to drag because of national issues”. Mr Kenny also said he will bring up the issue of the interest rate at the European summit later this month. He said he would raise the matter of structuring the proposed European stability mechanism [due to commence from 2013] in a way that “will help counties to help themselves when it comes into effect . . .”

    Iceberg. Lifeboats. Coup anyone …?

    http://www.irishtimes.com/newspaper/frontpage/2011/0609/1224298641790.html?digest=1

  23. The Neu Regime for the Serfs

    Would you go out and buy a hare for 4s. 6d. and bring it home and cook it for your family? You could feed 12 people on a good hare, or you could get two dinners for your family of six at 2s. 3d. a time. Is that expensive?

    Did you ever think of buying pigeons? Three wood-pigeons at 1s. 6d. each will feed a family of six-and feed them well.

    Not everything in a butcher’s shop is expensive. Buy two sheep’s heads. They will cost you 1s. each. Steep them until all the blood has drained out of them. Remove the brains, which you cook separately. Boil the heads in flavoured water until the meat is tender: pick it off the bones, and (together with the tongues and the cooked brains, served with a delicious sauce) it provides a light meal for your family – and you have a fine pot of stock.

    What’s wrong with a young kid? You nearly all have relatives in the country, where kids can be bought for 7s. 6d. (sometimes much less), and are often used only for the skins. Young kid is delicious, rather like lamb. And yet there is a stupid prejudice about it in this island. It is not good enough for the men and women of Ireland. You’ll go to Italy and you’ll eat donkey salami, and you’ll turn up your nose at kid.

    http://www.irishtimes.com/newspaper/opinion/2011/0609/1224298636917.html

  24. In a Dail Speech Michael Noonan stated the following “For illustrative purposes, the saving arising from a 1% reduction on the interest rate charged on the full €45 billion available from EU sources would be €450 million for each full year borrowed. If this €45 billion was held for an average 7.5 years, i.e. the term envisaged in the programme, the total saving would amount to €3.375 billion. There is no moratorium on interest payments on any part of the funding agreed under the EU-IMF programme.”

    The calculations are on this spreadsheet. What it is doing posted up on a GAA website I don’t know.

    http://www.anfearrua.com/db.asp?a=topicdisplay&tid=995014

  25. @cliff

    We’re drawing down money early so we can have ‘cash balances’. These were very important to Brian Lenihan immediately before his capitulation.

  26. @Paul

    ‘… What it is doing posted up on a GAA website I don’t know.’

    The state of the youth labour market is of central concern to the GAA. Youth unemployment and youth emigration impact directly on its activities, and on how it is to plan for them. At a more mundane level, ticket pricing becomes both a social and an economic issue, and GAA has already demonstrated its understanding in this area. Of course there are many other examples of how f*ck_ups in the financial and political systems impact negatively on the local community lifeworlds within which the GAA finds its home; it is therefore fully entitled to observe and comment on any issue within such lifeworlds that may parallel its own mission and activities.

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