Month: June 2011

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.

Bank of Ireland Set for Majority State Ownership

Bank of Ireland have released details of their capital raising plans.  The fraction of government ownership of the bank will depend upon how many subordinated bondholders take equity instead of an alternative cash offer. Various scenarios are presented but it seems pretty likely that the bank will end up in majority state ownership. So we’re likely to have nationalised all our domestic banks. We await the long-predicted frogs and locusts.

Schauble Proposes Greek Maturity Extension

It’s being discussed in the comments already but it’s worth giving German Finance Minister Wolfgang Schauble’s letter to the ECB, IMF and Ecofin ministers its own thread. The key proposal:

This means that any agreement on 20 June has to include a clear mandate — given to Greece possibly together with the IMF — to initiate the process of involving holders of Greek bonds. this process has to lead to a quantified and substantial contribution of bondholders to the support effort, beyond a pure Vienna initiative approach. Such a result can best be reached through a bond swap leading to a prolongation of the outstanding Greek sovereign bonds by seven years, at the same time giving Greece the necessary time to fully implement the necessary reforms and regain market confidence.

Just to be parochial about this for a minute, this raises an interesting question. If this approach was implemented successfully and did not trigger a financial crisis (I know some disagree — this is a hypothetical question) what are the chances that a similar restructuring would not be part of any potential second EU-IMF deal for Ireland?

Art and the economy

Last nights programme on Irish playwriting during bubble and bust was thought-provoking and enjoyable (I’m not sure if the link works outside Ireland). It also gave us a chance to see frequent commentor on this site, Gavin Kostick, in his natural habitat.

I love Irish theatre, and the last 10-15 years have given us some fabulous plays. But O’Toole wanted something more: art that engaged with the really big themes in Irish society, a lot of which are, nowadays, economic. I found myself wondering how you would have written a bubble play that would have been more than an unfunny and joyless (Michael Colgan’s phrase) social satire. But surely there are cleavages in Irish society today that are ripe for artistic exploration.

Professor Sinn Misses the Target

I’ve written a post at the IIEA blog commenting on Hans Werner Sinn’s recent columns on the operation of the Eurosystem. Sinn has made some seriously incorrect claims and followed them up with dangerous policy recommendations. These columns have been cited approvingly by Martin Wolf, Paul Krugman and Felix Salmon over the past week.

Felix, however, has now read this post by Olaf Storbeck of Handelsblatt and doesn’t seem sure who is correct on these issues: He’s looking for “a central-banking wonk out there who fancies adjudicating this dispute”.

Well, with 11 years experience working in central banks, I suspect I meet the job requirements. I wrote my post before seeing Storbeck’s but hopefully my arguments back his up to help counter Professor Sinn’s somewhat wilder claims.