EU Interest Rate Calculations

Well thanks Silvio! If it weren’t for the comical actions of Signor Berlusconi, I doubt if we would have obtained yesterday’s long-hoped-for interest rate cut on our EU loans. Certainly, the cut isn’t in any way related to the negotiating skills of the government – who were last seen essentially waving a white flag on this issue.

On the substance of the deal, like Namawinelake, I’m frustrated at the lack of useful detail about the new interest rate and potential changes in loan maturities.

An annual saving of €800 million is being widely cited but I have my doubts if the correct amount has actually been calculated. My guess is that the final savings could be a bit larger, perhaps as much as €1.2 billion annually.

The first open question relates to which funds the cut is being applied to and the second relates to the size of the cut in the interest rate itself. The statement merely says

The EFSF lending rates and maturities we agreed upon for Greece will be applied also for Portugal and Ireland.

However, Ireland is only borrowing €17.7 billion from EFSF and no reasonable multiple of this number delivers annual savings of about €800 million. It seems most likely that the reasonable assumption is being made that the interest rate will also be cut on Ireland’s €22.5 billion of loans from the EFSM, though as this is an EU vehicle, last night’s meeting could not announce such a cut.

If we applied a cut of “about two percent” to the “about €40 billion” of EFSF and EFSM loans, then my fuzzy math calculations come up with “about €800 million”. So that’s the likely source of the figure.

However, it seems likely to me that the terms of Ireland’s €4.8 billion in promised bilateral loans from the UK, Denmark and Sweden will be renegotiated, so a more accurate fuzzy math would apply “about two percent” to exactly €45 billion to arrive at “about €900 million”.

Then there’s the question of the size of the interest rate cut. The Irish media have clung firmly to the notion that the average interest rate on our loans was about 5.8 percent, despite plenty of evidence that the cost of the EU component was going to be higher than had been projected last November.

As I reported here a few weeks ago, by my calculations (spreadsheet here), the average interest rate on Ireland’s EU loan was going to be 6.21 percent. The Eurozone statement promises an interest rate

equivalent to those of the Balance of Payments facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost.

That could imply a cut of 2.7 percent, which if applied to the full €45 billion would give “about €1.2 billion”. That may be right or wrong since we don’t have much information yet. But I suspect that once things are worked out, the savings will be greater than the €800 million being quoted.

Update: Sean O’Rourke just put my calculations to Michael Noon on the RTE News at One. The Minister conceded that it was likely that the interest rate cuts would be extended to the bilateral loans and that this would get the savings up to €900 million.

When a higher figure of €1.2 billion was put to him, the Minister noted that this might have included the likely reduction in future IMF rates (something I’ve written about before but wasn’t including here.)  The difference here comes from my comparison of the “about 3.5 percent” with my calculated current average EU rate of 6.2%.

With the average margin over cost of funds currently running at about 300 basis points, it still seems to me that a reduction of this margin to get the interest rate “close to” the funding cost sounds like a reduction closer to three percent than two percent. But I could be wrong.

82 thoughts on “EU Interest Rate Calculations”

  1. But surely you can only calculate savings based on the margin the EFSF/EFSM’s cost of funding.

    For Ireland Greece and Portugal this margin is basically being cut to almost zero. If you expected the old interest rate to increase beyond 5.85% due to increased interest rates being paid by the EFSF/EFSM then surely the new rate of 3.5% should also increase by the same amount.

  2. RTE reports News at One, that inclusion of EFSM (22.5bn) and bilaterals (5bn) still both subject to agreement and EFSM needs EU meeting.

    But if the EFSM is included I think we get to €800m pretty quickly. And that is good news for a number of reasons including the actual fact of the reduction and the fact that neither EFSM or EFSF will be profiteering. So great news on that aspect, subject to agreement.

  3. It is quite complex but basically:

    1. Absolute inflexibility on PSI
    2. Constructive engagement on CCCTB
    3. ?????
    4. €800bn

    Do keep up.

  4. That was the moths again. Should be:

    1. Absolute inflexibility on PSI
    2. Constructive engagement on CCCTB
    3. ?????
    4. €800mn

  5. Perhaps, the 3.5% is for Greece and we will have a rate slightly higher, perhaps proportional to the previous difference between our rate and Greece’s/Portugal’s.

  6. @ Humble dude

    If you talk about reducing the margin to close to zero, you’ll get similar numbers. The spreadsheet shows the average margin on EU loans of 300 basis points. Since it won’t go all the way to zero, 270bp would seem close to right amount.

  7. My understanding form the press conferences yesterday was that the reduction in interest rates would only apply to loans not yet drawn down.

  8. What is deeply worrying to me is would Noonan (or indeed the great Irish media) have even thought about this had the likes of KW not pointed it out first…..

  9. I’m lost in this euro soup – it seems the core strategic objective of the eurozone is to persuade its subjects to lose the will to live.
    Its a sad little organisation really , with the ambition of a cabbage ( except the bit where the remaining bits of surplus will always keep the banks alive – thats quite a endeavour accomplished with much elan & imagination )

    Time to retreat from civilisation me thinks.

  10. There is another present value benefit associated with the lower interest rate and longer term. The interest rate is a below-market rate (given Ireland’s level of credit risk) by any reasonable standard. Longer-term loans have lower present value when the interest rate is a below-market rate. So if the “true” market rate is 6% then a 40 billion loan for 14 years at 3.5% has total value 3.71 billion less than a 7 year loan at the same 3.5%. Assumes all principal paid at maturity.

  11. @Karl

    Ok I was under the assumption that we were paying 5.85 now and rates over 6% per cent were a future estimate. I thought you weren’t allowing for future increases in the new 3.5% and comparing it to an increased 6.2%.

    We need more detail on the rate, on current borrowing costs in order to know more about the margin and possible savings. 800mn would seem to be the pessimistic figure provided Howlin is right about the EFSM.

  12. @ Mike Hall

    “The problem is still the austerity (having made good the gamblers).”

    I largely agree and enjoyed reading the article.

    However, I do think the ‘austery damages growth’ case is being won and items 4 and 12 look to me to be a way to try to deal with it. As noted by others, if the countries concerned cannot afford a stimulus package, then it can come from elsewhere.

    Item 4

    “We call for a comprehensive strategy for growth and investment in Greece. We welcome the Commission’s decision to create a Task Force which will work with the Greek authorities to target the structural funds on competitiveness and growth, job creation and training. We will mobilise EU funds and institutions such as the EIB towards this goal and relaunch the Greek economy. Member States and the Commission will immediately mobilize all resources necessary in order to provide exceptional technical assistance to help Greece implement its reforms. The Commission will report on progress in this respect in October.”

    Item 12

    “We will implement the recommendations adopted in June for reforms that will enhance our growth. We invite the Commission and the EIB to enhance the synergies between loan programmes and EU funds in all countries under EU/IMF assistance. We support all efforts to improve their capacity to absorb EU funds in order to stimulate growth and employment, including through a temporary increase in co-financing rates.”

    Of course this all depends on the scale and deployment of the funds – Barroso mentioned ‘billions’ for Greece, but I haven’t yet seen a breakdown.

    Also, it looks like the EU don’t really trust the locals to spend the money well, so it will come with helpful oversight.

  13. @Zhou

    I’m not sure you’re not thinking laterally enough.

    Surely it is safer to assume he was assembled out of old corks by an economist-turned-crazed-scientist in a lab funded by one of those smaaarrrtt economy boondoggles Henningan keeps moaning about.

  14. http://www.voxeu.org/index.php?q=node/6778

    If one reads the names below this panicky article and notice their mainly Italian nationality you would understand why the EU has come out with this new arrangement which helps Ireland.
    Italy is one of the big guns in the Euro area.
    Personally it seems to me that Ireland has been unfairly treated becuase of its lack of influence in the ECB and EU in general.
    Almost as soon as Itlay wants help in the secondary market, things get done.

  15. Fantastic, well done Karl you have saved the economy €400m and your intellectual supremacy gains a power bonus, because that is exactly what this is – a game for academics to explain how they elongated Wiley coyotees self made bridge. Not being sufficient to waste tax payors money on your pet idlings you add grist to the mill by offering RTE spin city an opportunity to set these savings against the need for further austerity – brilliand I’m glad I pay taxes

    What about the other €9bn in interest? What about the immediate need to close the budget deficit? this really is fiddling while Rome burns..and the Italians really have little need to worry, they fund most of their own bonds and while having significant public debt their private debt is low

    Ireland will still default, we are Albania without FDI, and default will affect this, maybe if we reduced the budget deficit we might squeeze through but not like this

  16. I’m frustrated also there isn’t a spreadsheet to look at the haircut to the individual loans, but the incompetence that led to this doesn’t surprise me.

    Re “If we applied a cut of “about two percent” to the “about €40 billion” of EFSF and EFSM loans, then my fuzzy math calculations come up with “about €800 million”. So that’s the likely source of the figure.”

    We need to get negotiators to answer the question posed here: http://www.youtube.com/watch?v=OaiSHcHM0PA

    Correct me if I’m wrong, but the only haircut so far is approx €350 million from either the EFSM, not the EFSF

    http://www.karlwhelan.com/IrishEconomy/Oireachtas-Jan11.pdf

    From Karl’s briefing note above link:

    “We do not yet know what the loan rates will be on the €22.5 billion loan from the European Financial Stability Mechanism (EFSM) or the loan of €17.7 billion from the European Financial Stability Facility (EFSF) because they depend on the rates that these organisations will obtain when they borrow funds from financial markets”

    So any further negotiations will be contingent on market rates for the EFSF over the short to medium term.

    For clarity we could also find a speadsheet on the sources of EFSM funding very useful as it came as a surprise to me EFSF was not sourcing funding from ECB in the form of some form of QE Quantitive Easing or direct proportional contribution contribution from member states. Seems to me Germany has insulated itself well from being on the hook from that potential liability!

    So its not all helpful if not misguided to be bandying about figures such as €1.2 bn as the annual saving for Ireland. The mathematical ‘show me the money’ argument paints a much bleaker picture.

  17. @ Colm

    you’re a little bit all over the place there.

    EFSF and EFSM are both sourcing funding directly from the market, and then giving those funds directly to the programme countries. That it came as a surpise to you makes you in a very unique club – they are very open and transperent about what each tranche of EFSF or EFSM funding is being used for, and we have gone through on here a few times just how the EFSF is being structured. That you see a much ‘bleaker picture’ than the rest of the world suggests something wrong with your understanding of what has just been agreed rather than “propoganda” or “incompetence”.

  18. Corrections above,

    drop ‘either’ from ‘from either the EFSM, not the EFSF’

    ‘sources of EFSM funding’ should be ‘sources of EFSM and EFSF funding’

  19. @ Eoin Bond,

    re “That you see a much ‘bleaker picture’ than the rest of the world suggests something wrong with your understanding of what has just been agreed rather than “propoganda” or “incompetence”.”

    I understand you appear to be in a bubble where you believe the markets are throwing their hats in the air. This is patently not the case. Re ‘propaganda’ there is a distinct difference between between €350 ml and Karl’s €1.2 ml:)

    Re the funding from markets, you miss the point: the point is the reduction can only be a function of the market price of EFSF and EFSM. There is no fixed reduction across the board.

    Let the spreadsheets be published to clear up this confusion!

  20. Noonan says “There’s a commitment that if countries continue to fulfil the conditions of their programme, the European authorities will continue to supply them with money even when the programme concludes”.

    “That takes the whole issue of a second bailout for Ireland off the table”.

    Surely if this is the position of the European Authorities position then it should me made official. The primary reason for moody’s downgrade as I saw it was that private sector involvement might be included if Ireland needed a second bailout. If this is Europe’s position it would greatly reduce Ireland’s likelihood of default and therefore bond yields.

  21. @ Gavin

    ‘Of course this all depends on the scale and deployment of the funds…’

    That is a problem. It will be too small & misdirected. Pretty much everywhere., democracy has been captured by the interests of the financialised economy.

    But more than that, in common with all other money in Europe also, the money will come from more debt – in this case loaded onto the real economy in other areas of the eurozone. It doesn’t matter where. The only way austerity can get any growth is by exports, but if everyone goes for austerity, who’s going to import?

    There is another bigger problem. Continuing to rack up debt with large amounts siphoned off to unproductive use in the ‘financialised’ economy is not a sustainable plan for the majority of citizens’ well being or prosperity. This is the bottom line of why ‘we are where we are’.

    Just seen on zerohedge, re the latest ‘plan’ for Greece (really of course to prop up the failed eurozone banking & monetary system a while longer):

    FxPro’s Simon Smith, chief economist and Michael Derks, chief strategist, in London: ‘‘Eventually, a forced default is still more likely than not. The euro will breathe a sigh of relief, but there’s little reason to party’’

    Citigroup Inc.’s Valentin Marinov, a currency strategist in London: “The key issue is whether the current bailout will lastingly reduce investors’ concerns about debt sustainability in Greece and the euro zone periphery more generally. We think not’’

    Morgan Stanley strategists led by Hans Redeker, head of foreign- exchange strategy in London: ‘‘What we did hear out of Brussels does not convince us that euro markets can remain stable for long. While the EFSF now has the flexibility required to deal with the challenges of protesting credit markets, the size of the EFSF has not been increased, leaving markets guessing how long it may take before this market-calming instrument may run out of funds’’

    Bank of Tokyo-Mitsubishi UFJ Ltd.’s Lee Hardman, a currency strategist in London: ‘‘The plan falls short of achieving debt sustainability with debt to gross domestic product ratios for Greece, Portugal and Ireland still likely to remain comfortably above 100 percent. A continuation of solvency concerns will leave the door open for contagion fears to rebuild. Beyond the new bailout euphoria, relative economic fundamentals are turning against the euro with growth in the euro-zone slowing sharply’’

  22. @ Humble Student

    “Noonan says “There’s a commitment that if countries continue to fulfil the conditions of their programme, the European authorities will continue to supply them with money even when the programme concludes”.”

    That’s a Blubble (spelling correct) statement = my grandchildren will continue to fund your debts:)

    Its also a tautolgy. Think of ‘There’s a commitment that if countries continue do not fulfil the conditions of their programme, the European authorities will continue will not supply them with money even before the programme concludes” In other words, a tautological inversion of the warning given to Greece:)

    Its not a pat in the back as Noonan thinks it is.

  23. @Colm

    When you start preaching on Finance and Economics I throw my arms in the air not my hat. Go back to college for 6 – 7 years and learn a bit about the subjects. Then work in Finance for 20 years and you might know what you are talking about. I generally use a word which starts with B and ends in T. Why would anyone want to publish a spreadsheet for your delectation when all you want to do is bitch about it.

  24. @ Colm

    “the point is the reduction can only be a function of the market price of EFSF and EFSM. There is no fixed reduction across the board.”

    What do we know?

    The margins on existing EFSF tranches will be reduced. This is unequivacal.
    The margins on future EFSF tranches will be reduced relative to what we originally assumed they would be. This is unequivacal.

    What can we safely assume?

    We can apply the same methodology to EFSM and Bilateral as to the EFSF. This is pretty straight forward.

    What do we not know?

    What the origination rate will be for future EFSF, EFSM, and Bilateral loans will be. This is, i think, your point.

    But we didn’t know that yesterday, last week, or at any stage. It has not, nor ever would be, changed as a result of yesterdays agreement. That you have identified this is to be commended, even though we all realised this a long long time ago, but a belated welcome aboard.

    But thats not what we’re talking about, we’re talking about the saving, you’re referencing the overall rate itself. That old economics chestnut, ceterus paribus, everything else unchanged, means that we are definitely around 472mn (implied margin reduction off 270bps on 17.5bn) per annum better off than yesterday, and probably another 700mn or so better off than yesterday when we make safe and logical conclusions about EFSM and bilateral loans (270bps x 27.5bn).

    So what your argument (i’m being nice) boils down to is this – how can we know what will happen to the EFSF and EFSM funding rates, and were they directly affected by yesterdays decision? Well we can’t know the answer to any of those questions yet. But i’ll let you in on a secret – the spread of them over Bunds is completely unchanged today vs yesterday, and their absolute level is lower today vs yesterday. So, again, using only what we know, we can expect our rates to be 274bps (270bps plus today’s drop of 4bps in swap yields), or 1.2bn per annum, cheaper going forward than they were yesterday. Everything else is pure guesswork, but that expectation is based on about 45 billions times more common sense than anything you’ve been ranting about up there.

    We don’t live in a word of absolute certainties, we can only deduce analysis and opinions based on what we know and what is likely. Thats what we’re all using, you should try it sometime.

  25. I really don’t get this at all. Somebody help me please.
    How do the core countries raise enough debt to fund the EFSF (and support their own populations) and still keep their borrowings at less than 3% of GDP.
    If I’m missing something really obvious I don’t mind it being pointed out to me – Im by no means an expert.

  26. @ TRP

    “Why would anyone want to publish a spreadsheet for your delectation when all you want to do is bitch about it.”

    I’ve postgrad quals in English and Maths added to earlier postgrad quals and plenty of other quals as well and presume we’re all literate here in economics and mathematics, the fact you try personal vitriol to replace deductive reasoning based on facts and figures, shows you need to go back to college yourself and perhaps do Maths this time 🙂

  27. Certainly, the cut isn’t in any way related to the negotiating skills of the government – who were last seen essentially waving a white flag on this issue.

    This is nitpicking of me and I largely agree that the government and the country just got an enormous slice of luck.

    But within the EU (community arrangements, inter-dependence, oftentimes quite a bit of good-will) I think there’s an argument to be made that the best negotiating strategy is to be polite and not aggressive, at least in public. Few German voters will complain about this rate cut but had the government taken an openly hostile “Cut the rate or we cut the financial system” approach, things might not have been so cordial.

  28. ~€1 billion down, €17 billion to go, in the current account deficit that is.

    This is not a silver lining. It’s a let up in the rain.

  29. @ Eureka

    actual paid in capital to the EFSF will be, as things stand, 80bn i think. Thats the only part that will hit their balance sheets, and think thats bit by bit over the next couple of years. And its vs a combined GDP of €5.5trn or so for Eurozone ex PIIGS, or around €8bn ex PIG. The rest of the EFSF backing is just guarantees and ‘off balance sheet’ as it were.

  30. @Eureka

    Watch bund rates over the next few weeks to see how diluting core creditworthiness goes down. Like Ireland swallowing up Anglo, what happens if Germany is presumed to have to swallow Italy?

  31. @ Colm Brazel

    UK just announced rate cut in bilateral loan rate. Comes with free humble pie…

  32. @ Eoin Bond

    Re “We don’t live in a word of absolute certainties, we can only deduce analysis and opinions based on what we know and what is likely. Thats what we’re all using, you should try it sometime.”

    I like Math which helps see what is there, not what we’d like to see there. All I want is the spreadsheet data on actual savings, not ‘what is likely’. Don’t know who you are alluding to when you say ‘we’ or rant on regarding what is likely to be with terminology that even uses the word ‘guesswork’

  33. also, Re “So, again, using only what we know, we can expect our rates to be 274bps (270bps plus today’s drop of 4bps in swap yields), or 1.2bn per annum, cheaper going forward than they were yesterday.” I hate to prick your bubble, but your calculations are based on EFSM to the tune of €350 ml, the other tranche, I have to repeat, the EFSF tranche is subject to further negotiation and process. I hope your guesswork proves to be correct and negotiations over bilateral loans and EFSF prove to realise agree haircuts of the order of €1.2 bn, but as of now, apart from your rant on likelihoods, we have not got the money!

    Show me the spreadsheet data, when these negotiations get concluded. The Greeks must have had more hardboiled negotiators than us, they didn’t come away with half promises, but got nailed down a comprehensive package that even included selective private sector involvement.

    Again, show the spreadsheets of the reductions across the tranches and let us know what clothes the emperor is wearing 🙂

  34. @ Colm

    “I hate to prick your bubble, but your calculations are based on EFSM to the tune of €350 ml, the other tranche, I have to repeat, the EFSF tranche is subject to further negotiation and process.”

    What am i missing here, cos you don’t appear to be making any sense?

    First, the EFSM is 22.5bn, and at 260bps, per Karl (its 10bps cheaper than EFSF), thats 585mn per annum. You seem to agree that this one WILL be agreed, at that rate?

    Secondly, from the agreement last night: “We will provide EFSF loans at lending rates equivalent to those of the Balance of Payments facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost”.

    For the purposes of clarity, from the EU, here is what the BoP Facility says about its funding costs: “‘AAA loan rates obtained by the EU on international financial markets at the moment of fund-raising are passed on to the Member States in need without adding any additional margin.” At the moment, the EU BoP facility is actually the same sourcing mechanism as for the EFSM, and is able to fund itself at around the same rate as the EFSF can.

    So the EU, last night, said that they would provide EFSF lending at rates “equivalent to the BoP facility, close to, without going below, the EFSF funding cost”, which at this point in time is “close to” 300bps cheaper than the previous agreement we had. All that is to be negotiated is what the term “close to” means. If thats what the crux of your point is, then my God, you are the most pedantic man alive. “Close to” can reasonably be inferred to mean something pretty small, ie sub 50bps. Rational people believe this, but you don’t. Make of that what you want.

    Finally, the first and largest bilateral loan has now had the rate on it cut, as predicted and within 20 hours of the agreement being in place.

    You can wait as long as you want for the spreadsheets, and look more and more ridiculous in your wait, cos the rest of the world can already see what’s happening without them. We got a cut, its a minimum 200bps in size, its on the entire 45bn, and its worth a minimum of 900mn per annum. Get over it.

  35. Off topic I’m building a mobile phone and desktop application using RSS with some links. The design is meant to supply information/links/videos/pdf’s/docs to introduce people to information to help make sense out of economic issues the general public may want to grasp.

    You can already use these as an RSS feed in your email client or rss client but if anyone wants to suggest further links/resources, feel free to do so.

    Samples: http://www.bankpoll.net/rss/intLinks.xml

    and

    http://www.bankpoll.net/rss/feedLinks.xml

  36. @Din

    “What is deeply worrying to me is would Noonan (or indeed the great Irish media) have even thought about this had the likes of KW not pointed it out first…”..

    Oh Please. Of course they knew. He made it clear that was being agreed in the bi-laterals. The refusal from some quarters to acknowledge that actually the government is playing this really well is churlish. (and yes Karl!!! that can mean you too sometimes Mr White Flag 🙂 🙂 )
    This is peace process stuff. There are things the government cannot say and can never say but the strategy is – behave publicly, stick with the programme and leverage the worse is better trajectory of the euro project to our benefit. I think its all going fantastically well. (Merkel is still a pain and DB/SocGen are still pulling too many strings, but it’s progress).
    And yes, the deficit still has to be cut (have we actually cut anything off it yet? or are we still stabilising?)
    We will have our default/voluntary-private-sector-burden-sharing, it’s just sit tight and wait….

    As Enda H said “I think there’s an argument to be made that the best negotiating strategy is to be polite and not aggressive, at least in public.” I think more of you should recognise this.

    Face it, the government is fab 🙂 Go Enda!

  37. Well, A wet week in July certainly brings out the human warmth on this blog.

    We’ll go back the the source of all wisdom, The Dork of Cork (for the moment):

    it seems the core strategic objective of the eurozone is to persuade its subjects to lose the will to live.

    Most would agree that the new deal is, if not a huge help to Ireland or a visionary new policy, definitely of real benefit. Our situation financially is better today than it was yesterday as a result of EU policy, which is a pleasant change. There is however serious fatigue setting in about the manner of Euro decision making, in particular that this welcome, if late, deal seemed to have to wait until Merkel and Sarkozy were in the mood and it was no longer politically advantageous to punish the peripherals for not sharing a border with Germany.

    France and Germany represent 30% of Europes population but have effectively set the course of the most important EU policy decision ever between them on a bilateral basis, with their primary concerns being that of their domestic banks and the next national elections.

    This is no way to run a union and the sense of alienation settling in on this blog (except among the aliens, who consider us flies to be swatted) is indicative of a process where the democratic deficit and lack of accountability at the heart of the modern EU is making those outside the core wonder whether a more distant relationship with our would be European masters might not be a happier situation.

    I for one would never have supported entry into the Euro had I known it would leave us utterly at the mercy of domestic political concerns in Germany and France when the next crisis of capitalism came along, and that, sadly, is where we are.

    Losing our will to live as Europeans.

  38. @ Eoin Bond,

    Re “Rational people believe this, but you don’t. Make of that what you want.”

    Your posts are full of this puerile sniping which doesn’t help communication. I’ll try and ignore the vitriol and snipes as unworthy of debate. Also your assumption I don’t believe or am pedantic regarding my understanding of the term ‘close to’ is incorrect. Re ““Close to” can reasonably be inferred to mean something pretty small, ie sub 50bps. ” I know the difference between fact and inference often the subject of political fudging. You need to get a grip on this especially when we’ve seen the cost of bank bailouts dance upward in the Dáil from €3 bn to ten times that plus. apart from that, thanks for your other points, you’ve persuaded me there’s a reasonable inference your interpretation re ‘close to’ = 50 bps is correct, but it could be 150bps, so it seems to me Irish negotiators once again fail to dot the i’s and we’re left with less than crystal clarity that is the breeding ground of political fudging. Overall, most the deal has done is bought a bit of time. The Autumn will bring up harder problems this deal hasn’t even attempted to deal with, such as the lack of growth the deal depends on to succeed, the coming abattoir budget that will deflate us more:-(

  39. Seems to be a lot of negativity on here today.

    While I’m still only reading the details this seems like a good step forward for Ireland. The govt hasn’t got everything everyone might want but they got something pretty meaningful nonetheless. The perspective on the larger Euro picture is still going to take some time to settle, but it’s a step forward for Ireland.

    Perhaps the phrase “A lot done, a lot more to do” covers it pretty well 😉

  40. @Sarah

    Crikey!

    “The refusal from some quarters to acknowledge that actually the government is playing this really well is churlish. (and yes Karl!!! that can mean you too sometimes Mr White Flag 🙂 )”

    “Face it, the government is fab Go Enda!”

    You seem surprised and delighted by the announcement. Nothing wrong with that. Not sure you should be having a pop at people critical of the government on the basis this is some sort of unexpected coup resulting from negotiating prowess. Loads of analysts have been anticipating this sort of thing – especially once Italy started getting sold off – note Italian banks today even! As an example for you to take aim at, apart from the possibility the second bailout will sort of be an extension of the first, what was wrong with my view of 17th July below, and what has changed?

    “We are assuming there will probably be official funding interest rate reductions (assuming Germany doesn’t continue to trade wider) and term extensions. None of that seems to alter the case for (not) buying gilts at anything close to official funding rates – for 2012, 13, 14…..

    Egro, Eurobonds linked to significant core EZ influence on Gilmore and Kenny’s protected constituencies – income tax and welfare rates, not to mention at least tokenism on Corp Tax. Alternatively, another bailout with renewed pressure on Irish costs etc compared to German costs.

    Also, you have the politically attractive option of refusing to budge much more and joining Greece in a default. You will then be trying to persuade people who share my analysis, that it is a sustainable proposition to invest in 10 yr gilts in a country which has made a clear choice to stick with a high cost economy – and that a low Corp Tax rate as the only unique feature will prop it up.”

  41. @ Sarah

    The way things went, one could have argued that this day (rate cut etc) was inevitable when Italy came in to the picture. If that is so, then it is international events rather than quality of Govt that is the initiator here.
    If Kenny deserves credit it was for his speech in the Dail during the week!!
    And he deserves credit for that.

  42. @ Bond @ Grumpy
    Thanks for the explanation.
    The markets may force Spanish banks in next. Will Spain have to guarantee those banks with the EFSF money? That could be expensive.
    It seems that the fund could be eaten through fairly quickly. What Noonan may not be drawing sufficient attention to is that between now and our 2013 crisis there will have been Italy and Spain. They are big enough to exhaust the scheme – and maybe the Germans will not enlarge it a second time

  43. @Sarah Carey

    You can,t be taken seriously. the only time you appear on this blog is to defend Fine Gael or denny O Brien. I though you were a journalist and they don,t wear their colours in public?. Get off your horse and grow up.
    Lets see the detail of this so called deal.

  44. Looking forward to the Exchequer figures for July – too soon to change the expected servicing on our debt from over 5bn to over 4bn?

  45. I never said surprised. I had full faith a deal would come, and I think this is a start, not an end. (or to quote Brendan Howlin, this is a process not an event). In fact, most commentary I’ve read said they’d never get a deal cos they were pathetic supplicants.

    And David – top tip – all journalists have political views – but they conceal them under a sneering hyper critical visage and dangerous self-censorship.

    And I think you’ll find my comments have been considerably more wide-ranging than you allege.

  46. @Sarah

    Reading the print edition of the Irish Times today cover to cover. I didn’t see one article or opinion piece questioning the fact that:

    “Hey wait a minute! How can it be a 600-800m saving if the EFSF is only 17.7bn in size?”

    I didn’t see any mention of the fact the EFSM would have to be included to make the 800m.

  47. The amount of different lenders and maturities is confusing. Given that Ireland’s position is so uncertain, we should aim to rationalise our debt issue:

    1) Aim to have all bonds moved to a Dec 2016 maturity
    2) we should aim for 30% of the total issue to have ‘super juniority’ , with the bulk of super juniorty being attached to the non market loans

    This would then:
    a) ringfence maxiumum losses of EU loans
    b) enable us to re-enter private market

    I think such a solution is more elegant than any ‘guaruntee’, which frankly does little to resolve uncertainty

  48. @ Eoin Bond

    I saw that on news also Gilmore telling us to get behind the deal and wear the green jersey. These guys have betrayed taxpayers, Kenny is not Iceland’s Haarde or Sweden’s Bo Lundgren in spite of his welcome ‘beat the dead horse’ speech in the Dail. He’s a puppet of the banks and no Papandreou, who really deserves hats off in this deal:) Substantial burning of senior secured and unsecured senior bondholders along with leaving the EMU and rejoining sterling with an alliance with NI is the language he should be using. I’ve macroeconomic ideas re the euro project coming undone, Spain, Italy, Greece and believe we should get out before they crash the EMU. I am a supporter of the EU sadly being ruined by the EMU. But our euro peacocks are wedded to the banks, to NAMA, to the bailouts they are supping from. The deal buys a little time, kicks the can down the road, nothing more, the markets will see it as such, bond spreads for Ireland are down to 12% from 14%, nothing close to market survival pricing and we havn’t had our budget. Is that fella from Finance still after me, the cheek after his ilk the ‘we’ wrecked the economy under Bertie’s property bubble – supported by all except a few naysayers:-)

  49. Journalism has been very disappointing really.
    It cheerlead the boom, cheerlead austerity, cheerlead the bailout….
    Most people only read journalists’ opinions because they think somebody else might believe them – in fact nobody has that much faith in them

    Back to the point – the financial press seem to think that the bailout is not big enough but still a good idea (Happens to us all…!) The interest rates had to be cut because (wait for it) there is now a European back guarantee that the loans will be repaid – interest is to cover the risk of non-repayment so obviously the guarantee would bring that down. Nothing to do with Enda at all

  50. @Eureka

    Totally agree. I don,t even bother reading the Irish Dailys anymore. the Irish Times on a sat would put you back to sleep for the weekend.

  51. @Sarah Carey

    This was,nt a deal and it certainly is not a process when two countries are calling the shots. In the long run this suits Germany fine, weak countries serving their needs while they get on with taking on China to be the next World Super Power. Irish Journalism never gives a vision of what Europe may look like in what ever years time. It just conforms to the conventional wisdom and anyone who dares think outside this narrow view is seen as a leftie looney.
    Just even your thought process is so conforming, we are on the right path blah, blah. True leadership is strangled by politics and we will never get it in this country. Enda coming across as all wise on RTE as though he had taken on Sarko and Merkel. I know what language I,ll be teaching my son. All roads lead to the Fourth Reich.

  52. @Desmond Brennan
    “1) Aim to have all bonds moved to a Dec 2016 maturity”

    Why would we want to setup a funding cliff of that size?
    Unless we planned to default on this date can’t see how it would help.

  53. @ David Burke

    “they get on with taking on China to be the next World Super Power”

    Kinda difficult to do that with a declining and ageing population. Germany, like Japan, is in decline. Rich and powerful, but in decline. All this talk of Germany now being able to create some sort of new Reich as a result of this deal is chronically ignorant of some key facts.

  54. The guy from the NTMA was saying on the radio yesterday that we could be back in the bond market next year ,that our debt interest repayments were higher in the eighties and presumably a lower interest rate on the bailout loans would improve our ability to borrow.

    In the eighties our debt profile was 80% domestic ,20% foreign whereas since joining e.r.m. and then the euro it has become the inverse of the above.
    We could devalue our currency then and have minimal impact on bondholders as most were domestic investors who would not have lost in any devaluation.

    Our present circumstances are dictated in part by the fact most of our bondholders are foreign (including the toxic mix of bank debt) and backed by Germanic and French interests and that the forced repayment in euros is next to impossible.
    So the NTMA guy was not comparing like with like.

    Most of Italian sovereign debt is held by Italians so presumably if they required a bailout they could play hardball with the ECB as they could more easily seek writedowns from their own citizens .
    If the ECB played hardball with Italy like it has with Ireland they could pull the trigger and cause a euro breakup with minimal consequences for themselves as domestic holders of sovereign debt would not fare as badly in a subsequent devaluation .

  55. @Bond Eoin Bond
    You bring up an interesting point – they got the money and we got the, shall we say, libido.
    If you comine the two you get a recipe for success……
    But – they’d probably insist on some quality control

  56. @Bond.Eoin Bond

    If Germany is so unhappy with the current situation then leave the euroand go back to the Deutchmark and see it rise 20% and then we will see their true colours when their exports are,nt so snappy. One thing I have learned over the last four years is never believe a word thatcomes out of a politican or bankers month. You have to do your own analysis and seek out the right news and info. I honestly believe Ireland is screwed. If RTE are making announcements that 100 jobs are going to be create over FIVE years in wherever you have to be nervous. I am a Zero Deficit guy and this is not politics just a fact. The sooner we get our deficit down to zero and get the pain out of the way the sooner we will have some hope. this is just 40 years of fat being trimmed off.

  57. What I want to know is will Noonan be recapitalizing our banking system again at the end of July?

    If so it’d seem likely that all roads lead to Ireland getting a Greek deal at some stage. No doubt there’ll be a line similar to the one contained in yesterdays document once she does, though instead of the phrase ‘engage constructively’, it’ll be ‘agrees to adopt’.

    Perhaps it’s time to start planning for a society that isn’t so realient on NMCs avoiding tax or people buying and selling property to each other.

    Our smart economy isn’t so smart though, we haven’t invested in broadband enough, we’re about low mid-table at that, we’ve got a middle-high cost base, we’re mid table in terms of education/health/public-transport, and probably the worst in Europe for 2nd languages.

    We talk English though, have reasonably good motorways and plenty of houses, coast line, sheep, pigs and cows.

    Our tourism has more potential for growth, perhaps we should be encouraging more students to learn English here, though they don’t exactly spend much. How about signs in English/Irish and Chinese? Get ready for the new middle classes, the Indians can already understand us, come to think of it can we get Leo V to do a few Board Failte adds over there? We have loads of cows and we could build a few more cricket pitches.

    Agri-business would appear to have huge potential. The organic market. We could create an ‘organic-island’. All agri-business related products from Ireland is gauranteed to have x good stuff and none of the y bad stuff. A kind of a Irish-Kosher.

    So it’s tourism and agri-business.
    Though I’m hoping for a major gas and oil find, that or a machine to convert wool in to gold, or better still poor journalism+politics in to gold, we’ve more of that.

  58. @Dreaded_Estate
    I don’t mind the exact maturity date, but I think our asking for anything too far in the future is foolish. By 2016 our deficit should be tamed, and the ground settled, if the built up tail of debt proves unsustainable, that would be a good time to default

  59. I agree with Enda H on the petty ‘white flag’ jibe.

    A slanging match via the media would have been fun for some but what would have been served by remaining without allies as was evident in 2010 compared with rebuilding goodwill?

    Sarkozy had won some public support from other leaders in March but as key officials such as Barroso, Rehn and Van Rompuy publicly supported Ireland’s position, the issue of changing the corporate tax regime faded. Again, behind the scene talks between Noonan and Lagarde, were likely to be more productive than making a big song and dance in public.

    Mike Hall laments the ‘financilised economy’ and then quotes from 3 of its well-paid foot soldiers.

    ‘The problem is still the austerity,’ he says and while being true, the chances of some new tooth fairy descending from the ether, would be improved if we somehow developed the appetite to mend broken systems and tackle vested interest gougers.

    It’s more comfortable to blame the Germans.

    There are of course variants of the tooth fairy still to be found, in places like the busy courts’ system and recently John Bryan, IFA president, said 94% of average farm income is from public funds.

    @ david burke

    I know what language I,ll be teaching my son. All roads lead to the Fourth Reich.

    Recall in 2008 when many were deaf to the swooshing sound of air escaping the bubble, we lectured Europe on democratic deficits and elites ignoring the will of the citizenry?

    Well, we have got what we wished for but still don’t like it.

    We the nouveau-riche even thought that with the days of the €40bn+ in net cash aid from German and Dutch taxpayers, coming to an end, we needn’t bother with Europe.

    It would actually be good to have your son fluent in the main European languages as even with faster population growth, it doesn’t follow that there would be a rush of European companies establishing in Ireland.

    @ All

    Living within our means and creating sustainable jobs are the key challenges.

    We are back to high long-term unemployment and the obsessions of many here are small when compared with the impact of the changes afoot in the global economy.

    Frank Field MP recently said that most of the 400,000 jobs that were created in the first year of the Cameron-Clegg government, went to migrants.

    Many US consumers were able to offset stagnant incomes with equity release but no more.

    Fork-lift truck drivers in the UK could expect to earn £19,068 in 2010, about 5% lower than in 1978, after adjusting for inflation. Median male real US earnings have not risen since 1975. For full-time males, 25-64, pay in 2009 was at the 1969 level.

    Average real Japanese household incomes after taxation fell in the decade to mid-2000s. And those in Germany have been falling in the past 10 years but from 1985, German have outpaced the US in pay rises.

    Today, only 66% of American prime-aged men hold full-time jobs, down from 80% in 1970.

  60. @Karl

    I’m Italian. What exactly were Berlusconi’s ‘comical actions’? I couldn’t find them in the Italian media, or anywhere else. Not that I would be at all surprised …

    Thanks!

  61. @Michael Hennigan

    Its a class war and the upper echlons are winning. That comment actually came from Warren Buffet believe it or not. We have it here in Ireland with Nama. Part of the concept of Nama was a bailout for the professional class. What does a guy or gal do all day in Nama world, put valuations on property and gettting paid 200,000 euro.

  62. @John Foody

    Back to the land?. Sounds like what the Barbarians did when they defeated the Roman Empire and where did that get Europe for the next 100 years. No ideas and no innovation because they were out in the sticks with their hand up a cows arse

  63. @ Hennigan

    “I agree with Enda H on the petty ‘white flag’ jibe …. Again, behind the scene talks between Noonan and Lagarde, were likely to be more productive than making a big song and dance in public.”

    I’m afraid you’re just wrong on this. Two points:

    (a) If you actually read the white flag link, you will see the limit of the government’s stated objective on this issue “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.” Now we see that over €1 billion in savings were possible once the right arguments were put forward by the right people. You may consider it “petty” to characterise asking for a tiny fraction of what was possible as waving the white flag but that’s exactly what it was.

    (b) We now know that the effective argument was pointing out the threat the high interest margins posed to European financial stability (making this argument did not require “making a big song and dance” any more than the approach pursued by the government did.) Asking for a small margin cut was the wrong approach, most likely born out of a desire to get something, anything, that would have allowed the government to claim it got an interest rate cut.

    As for “behind the scene talks between Noonan and Lagarde, were likely to be more productive than making a big song and dance in public” I can’t believe even you think that Noonan’s talks with Lagarde had any influence on what happened on Thursday.

  64. Anyway – a good analysis here on what is what. And the incompetence of our leaders shown up as well who signed up to something without knowing its value (again).

    Excuse me if I’m not excited as I pull on my “I spent €70Bn on paying other people’s debts and all my friends got me was a €1.2 Billion subbie” tshirt.

    Our politicians are no doubt playing the short game here- eliminate bad headlines, reduce austerity during my term in office. The 15-30 years to pay for all of this are sickening indeed.

    As a % of GDP, the largest transfer of wealth from public to private – akin to what happened in post-Gorbachew Russia (only to foreigners)

  65. @ Michael H

    ‘Mike Hall laments the ‘financialised economy’ and then quotes from 3 of its well-paid foot soldiers’

    As Pierre Bourdieu sepny a lifetime demonstrating repeatedly, objectively and conclusively, there is no such thing as an objective point of view. Everyone has some sort of skin (eg money, prestige, networks) in the social game.

    We don’t disregard Roubini or Buiter just because they market their skills and contacts effectively. The FT is full of hired guns. It’s more a question of discerning the element of vested interest behind the opinion, and discounting it to whatever degree is sensible.

    I think Mike Hall shares your pessimisitic view of the the globalisation process, and of the prospects for employment in Ireland, as do I. We have a serious f***ing conundrum on our hands here. Tackling the ‘gougers’ without sinking what’s left of the domestic economy is a very tricky task.

  66. @Karl

    I must say that’s a very cynical analysis of the outcome of this week’s events. It’s almost as if you’re suggesting Dustin the Turkey would have been just as effective a negotiator for Ireland. Just because our assumed negotiating position was a 0.6% interest reduction on the €25bn future drawn-downs from the EFSF/EFSM only and what we actually achieved was 2.4% of all the EFSF/EFSM (including previous draw-downs) and 2.4% of the bilaterals – a result so good that even the Taoiseach underestimated the benefit by 25-66% on Thursday evening. Just because Portugal got precisely the same deal as Ireland without any conditionality on corporation tax. Just because we were excluded from the Greek solution. And just because there was not a word about bank bondholders on Thursday or medium-term facility for our banks. None of this evidences a white flag. It just evidences the fact that Ireland is practically irrelevant to the storm in Europe at present

  67. @ Remnant Says,

    Totally agree with your view there. Enda was elected to make a grandstanding speech jailing bankers and getting us off the hook for their debts, alas this was not to be the case, so we’re stuck with this effort to backstop the leaking Titanic with any plugs we can extract from European events outside our control.

    In spite of the propaganda to the contrary, we’re likely to sink. No amount of snipping away at minor cuts in interest rates will stop this. The burden of banking debt allied to sovereign debt allied to austerity will beggar the nation for the foreseeable future.

    Our default will precipitate a takeover of the country along similar lines to what is occurring in Greece. There will be asset stripping and stripping away of much fought for social services. The country in 2016 will for all intents and purposes be run by foreigners.

    You shouldn’t have to read the story of Fiver in Watership Down to see us rabbits rather than being returned to economic sovereignty, we’re being taken along the road to a complete takeover by banking interests whose main purpose will be to extract rent on their continued support.:-(

    Easter 2016 should be interesting.

  68. @ paul quigley

    The interesting aspect about the challenges facing the biggest developed economies, the US and Japan, are no longer theoretical.

    @ Whelan

    No I don’t believe that Noonan’s meeting with Lagarde was crucial but a small bankrupt country should value good relations with key individuals, such as the head of one of our bankers, the IMF.

    So all the discussions and arguments have to be put in a press release?

    Seeing that you were a senior member of the staff of the Central Bank during the most reckless period of the bubble, at a time when Patrick Honohan was highlighting the big surge in foreign borrowings by the domestic banks, it’s a reasonable question to ask of a critic of policy, what arguments/warnings or not, were you giving to colleagues?

    Did you ever consider resigning as a matter of principle or did you go with the flow like the rest?

  69. @ Karl Whelan at 9:48am says:

    <…some mean but factual things…>

    I like new mean Karl, the blog needs it, we need it. Also, kudos for terminating the deficit thread with some relevant figures.

    @ Jagdip Singh

    Just because Portugal got precisely the same deal as Ireland without any conditionality on corporation tax. Just because we were excluded from the Greek solution. And just because there was not a word about bank bondholders on Thursday or medium-term facility for our banks. None of this evidences a white flag.

    In light of the real satirical power of these lines I would consider rewriting the rest of the post around them. Ouch.

    A great but unappreciated man, me, once observed that what Ireland needs is not a different solution to Europe’s currently perceived problem, but different European problems. The Greek crisis and the nascent Italian one illustrated that rather nicely but we still need to highlight the scale of the problem and help provoke the panic (or awareness) that will partially erase the catastrophe of the EU policy of private sector protection.

    Roll on a German bank collapse or an attack on Italy, Silvio is still in charge folks, profits to be made.

    @ remanant on protecting the bond holders.

    As a % of GDP, the largest transfer of wealth from public to private – akin to what happened in post-Gorbachew Russia (only to foreigners)

    The strange and new thing about the Irish bailout is that it is only strange and new for a first world nation of white(ish) English speaking people, it is otherwise of a piece with the majority of international banking crises and bailouts of the late twentieth and early twentieth first century, it is about having the free movement of capital without the free movement of losses and the citizens of nation states back stopping the investors of international capitalism.

    We are enjoying in a small way what many other countries have experienced before us – the startling power of international capital to protect itself from backing the wrong horse by having the horse sold for parts.

  70. Willem Buiter on Bloomberg video. This is probably the best assessment of the situation we are likely to see for the next month or so.

    http://www.creditwritedowns.com/2011/07/willem-buiter-on-eu-bailout-fund.html

    Now that restructuring is on the table visible to all, contagion risk has increased and Spain and Italy are in a more difficult position than they were last week. Greece will be back for more in 2012, markets will worsen in September. Ireland and Portugal were in a very difficult position and that continues unchanged.

    Neither Germany or France can rescue the EuroZone largely due to public opinion and the political risk in both countries. It is time Ireland started to look within itself for solutions. The best approach is internal deflation and restructuring as now approved over the past few days. Restructuring is in effect default taking place one step at a time over a few years (decades?). As in Greece the first move will not be the last.

  71. can someone tell me when we need to start paying back this money and roughly how much will it be per year? Interest and capital

  72. @ Hennigan

    Perhaps you missed it but I did resign. And my position wasn’t a senior one by anyone’s stretch of the imagination.

    Anyway this thread isn’t about me and what I did or didn’t do in the past. Time to wrap it up I think.

Comments are closed.