Reminder: IMF loans more expensive than EU loans

The Sunday Times reports that the IMF could be an alternative source of funding in the event of a No vote.

One point to keep in mind in this debate is that the IMF charges a penalty premium of 200/300 basis points on large loans, whereas the premium has been dropped from EU loans, as decided at the July 2011 summit.

The relevant IMF funding schemes  (Extended Fund Facility, Precautionary and Liquidity Line) are described here and here.

29 thoughts on “Reminder: IMF loans more expensive than EU loans”

  1. A fair comparison needs to take into account the fact that both IMF and EU loans come with policy prescriptions attached. If the IMF-prescribed policies make sense and the EU-prescribed policies don’t, it’s likely the EU loans cost us more in the long run. And with all due respects to Keynes, the long run matters, for the young at any rate.

  2. From Mr. Funky Kirkegaard (as linked by Mr. McCarthy above):
    “By the end of 2012, Ireland will have received IMF funds equal to 1,315 percent of its IMF quota, a number scheduled to rise to 1,548 percent by the end of 2013 under the current program.

    The standard IMF procedure for an EFF program is that a member can only borrow up to 200 percent of its IMF quota annually, up to a total maximum of 600 percent in total outstanding credit.2 Ireland has obviously already greatly exceeded these maximum levels.”

    Mr. Funky goes on to point out that EU soft guarantees are what enabled Ireland to exceed its loan quota. “the belief that the IMF would somehow, in these circumstances, agree to lend Ireland even more money beyond the 1,300-plus percent of Ireland’s IMF quota is delusional. The chance of that happening is precisely zero.”

    The only way around this that I can see is that the IMF will implement a far harsher program with some additional money as necessary (probably a two year program?) with Ireland stiffing its other creditors (including its citizens) in return for full repayment of the IMF senior money (the existing and limited future money).

    This is not really going to do much for the constituencies of most of those advocating a no vote (though it does suit those who see an immediate balance and debt repudiation as a good idea), unless of course a chaotic end to the current arrangements and the consequent social dislocation are what is desired.

    Political opportunism at the cost of current citizens? Nah, that would be too cynical. The revolution is always right.

  3. Crucial point being overlooked is the question of debt write down. You are signing up to pay in full the ¢47 bn eg of PN’s for IBRC, no debt write down is the policy of the ECB and through them the troika. Effectively you are signing up to pay back odious debt which according to the latest IMF research papers with growth at .5% means we will be unable to pay this back as debt levels will become unsustainable. The question then becomes the rather ludicrous one of designing another bailout when the present one is failing, inefficient and unsustainable, this is to be the function of an second bailout under the ESM? Lets simplify all of this. We don’t need a second bailout. We need the current bailout to be redesigned to provide for debt writedown. So we got a straight forward Boolean choice; either they give us a debt writedown, or they don’t. If they don’t, we should leave the euro and negotiate unilateral debt write down based on Icelandic conditions of ability to repay. Let’s stop the austerity nonsense and end this false propaganda we do not require debt writedown. Why look for further bailouts to fund a programme that currently fails? This is only a ruse to make sure banks do not have to share in the loss and do have to join the austerity queue. Why mention as Joan Burton does the need for water wings, that on examination under the microscope, are anchors taking Ireland to Davy Jones’s locker 🙂

  4. Aside from the obvious questions i) can we borrow more from theIMF when in excess of quota and ii) what rate would they offer to lend kindly offer to lend us another 1000% of quota there is iii) what terms & conditions would come with the loans

    Some people around here think the IMF are nicer than all those fluffy EZ Social Democrat types in Brussels.

  5. I don’t think there’s an appreciation for how unique this recession is. This economy is only a few decades old. As recently as the 60s over a fifth of the money supply existed as cash.

    With digital money in dominance, Governments now find their ability to create money is negligible. Hence the invention of new taxes.

    The change to digital money, created only by banks with a corresponding debt, is significant. It has happened through advances in technology and not through careful consideration by economists.

    For this digital money system to operate we need to continuously organize higher and higher loans. Mortgages have always been able to increase in duration but not any more. This is the main reason why this is such a unique recession.

    At some point we’ll have to allow Central Banks to create digital money for their Governments. It wouldn’t be anymore inflationary than its cash equivalent which we’ve had for centuries.

    I can’t see how we’re going to have anything other than stagnant growth and IMF loans for the foreseeable future until we make such a simple change.

    Paul Ferguson
    Sensible Money

  6. @ Colm Brazel

    “¢47 bn eg of PN’s for IBRC”

    There’s 47bn in promissory notes?

    Re IMF growth rate of “0.5%” – the IMF see Ireland’s long term structural growth rate as one of the higher in the Eurozone at 2.9%

  7. The best prescription is monetary sovereignty and democracy. Ireland should have its own currency and the central bank should deal directly with the public not the banks when conducting monetary policy. Money shouldnt be created as debt either.
    Check out this proposal if interested:

    internationalmonetary.wordpress.com

  8. @ Bond

    ” Re IMF growth rate of “0.5%” – the IMF see Ireland’s long term structural growth rate as one of the higher in the Eurozone at 2.9% ”

    Huh, growth rates are officially down to .7% projection for this year. IMF projections are that .5% growth rates bring debt to unsustainable levels. Not worth commenting on the ‘long term’ 2.9% given the current nose dive of the euro, job losses in the financial sector beginning to bite, extra 5-6 bn in costs when we come out of the present programme, but feel free to comment on this will achieved yourself….?? Perhaps jobs putting in water meters with billions borrowed from Pension Reserve Fund to pay for this?

  9. @InternationalMonetary

    That looks similar to the state bank of North Dakota and proposals for similar state backed credit systems with Central Bank joining the same system. Its worked very well for North Dakota who’ve escaped the credit crunch.

    http://banknd.nd.gov/

  10. @ Colm B

    Its not worth commenting on long term IMF projections? You are a self proclaimed leading authority I suppose…

  11. @ Colm Brazel. Do you realise some of the basic implications of what you suggest? Any course of policy undertaken without the approval of Ireland’s creditors means no more credit, maybe for decades. ==> That is one sure way of getting Ireland’s budget deficit to zero, pronto.
    ==> That would entail immediate and large reductions in public employment and pay, far lower rates of benefit and much higher taxes, overnight.
    I’d sure be in favour of a somewhat tougher course of budget deficit reduction than laid out by the Troika. But your suggested cocktail of policies would be highly disruptive, and possibly much worse. (Printing cash for sure would only heighten the ensuing instability).

    @ All. I haven’t seen projections for what Ireland would be paying the IMF in the future. But I am told that for other countries in a similar position, the rates are looking extraordinarily high…. (far higher than EFSF, EFSM, ESM and bilateral loans). The IMF of course likes to build in sweeteners that get countries off its lending after a few years, and rightly so.

  12. @ Bond,

    Nope, blame the Mathematics Dept in UCD who beat the nonsense of ‘conjectured’ figures like 2.9% as opposed to ‘real’ figures out of me 🙂
    The 2.9% or 3.0% is a shibboleth that’s been around a long time and was once used to excuse the setting up of NAMA. It was also hauled out to justify our bailouts, but its balloon has long since burst. Note you havn’t stepped up to show how 2.9% growth will be achieved?

    @ Ciarán

    Iceland was similarly threatened, Argentina, many more examples. Markets however, when they see positive steps to deal with debt, in the form of default, are not motivated by that fear at all. There is going to be disruption whichever course is taken. Also you are ignoring the hidden cost of the troika bailout, which is no debt write down.

    In a default, ability to pay is the final reckoner, not the absurd and ludicrous proposition that you will get a further bailout under ESM to pay for the previous bailout; the current bailout will be used to help you pay back all debt that is unsustainable including debt from unsustainable bailouts.

    Our programmes we force you into under threat of being taken to an international court under blackmail.

    No.

  13. @ Colm

    You accept the IMFs wisdom in saying 0.5% growth rate for this year, but not their long term forecast? One could politely suggest you, a leading authority no less, are picking and choosing your figures. If I wasnt being polite i’d suggest you’re just making stuff up as usual. 47bn in promissory notes? 5% EFSF rates? Nama represrning 30% of GDP? Open risk fx swaps? IMF endorsed ESM-routed debt-for-equity swaps? The list goes on…

  14. There may be some light at the end of the tunnel for the vast majority of people seeking to understand how on earth a bank debt became their debt. It won’t alleviate the IMF/EU/ECB burden but it may make a grotesque situation more transparent.

  15. @Colm Brazel
    “Iceland was similarly threatened, Argentina, many more examples. ”
    Erm, let’s see – Iceland still has capital controls, without them the currency would collapse – http://www.bloomberg.com/news/2012-03-14/iceland-tightened-krona-controls-to-prevent-speculative-chaos.html

    Inflation in Iceland is running about 6.5%. Real wages are ahead of this so far this year, but it remains to be seen how long that can continue.

    Argentina has resorted to expropriating private pensions and is now engaged in expropriating private investments. Inflation remains high and is felt by many to be understated – http://www.economist.com/node/21548242

  16. Philip/hogan/BEB

    It’s so important that this info gets out. The “sure the IMF can lend us the money” is so mainstream already. Still 4 weeks to correct the myths…

  17. @ Sarah and KW above, Hoganmahew

    I do notice the Y propaganda machine is out in force. Factually the ‘No’ position is in danger of being completely suffocated with reality distortion and open deception. I’m watching a debate on TV between LB’s Pat Rabbite and SF’s Toibin following another piece of RTE propaganda on News at Nine announcement from the IMF it was committed to a programme for members of the EMU in conjunction with ECB and EU in its approach to members of the EMU. Unfortunately, we are saddled in the No Campaign with all the baggage that comes with Sinn Fein. No problem with anyone supporting the No campaign, but surely Sinn Fein provide a too narrow scope to examine the full dimension of the No position. So where’s the deception and where’s the RTE propaganda? Consider the following. Its true what RTE have said re the IMF position; it is joined at the hip with ECB and EU for EMU programme countries. But who is talking of staying within the EMU as part of their No position. I’ve no doubt many in the no camp are. For example, I wonder how far SF would travel with the No position that holds the view we should default, exit the euro and rejoin sterling. Propaganda is so overwhelming that ‘default’, ‘leaving the euro’, ‘debt writedown’ are verboten in the Goebels like wave of propaganda that will neither discuss these issues nor allow them enter into the Compact debate. If you want to see the propaganda at work, use those words. Let’s see now, use ‘leaving the euro’ and the ‘IMF’ in the same scope and what does it give you. Hmm, Ireland is no longer a member of the EMU so does not fall within the parameters of ECB, EU, IMF programme for the EMU. Does it then fall within the criteria for a unilateral IMF programme. Yes it can. Similarly, outside the euro, Ireland can argue a debt write down it has failed to achieve as a member of the EMU. The costs of a programme for Ireland involving significant debt writedown of 50% for PN’s would save Ireland ¢26 bn for starters. Factor in a liquidation of the NAMA portfolio over a 2/3 yr period, a devaluation, then light appears at the end of the tunnel. The No campaign does not deserve to be reduced to the narrow political affiliations of SF nor the compromised propaganda of LB/FG.
    The No campaign deserves a full audit of our position as a member of the EMU with its unfortunate consequences if we remain attached to a currency that is failing from the core to the periphery. What the euro offers to Ireland is not what we signed up for. It hasn’t provided stability, its future is filled with instability.

    @hoganmahew

    Re currency controls. It may surprise you every currency operates currency controls including the euro, dollar, renminbi, rouble etc. LTRO, banning CDS short selling bans by Merkel, Stability & Growth Pact 3/60, FOMC, devaluation, controlling interest rates, Central banks, etc Iceland by all we are led to believe should not be back in the markets, should not have an unemployment rate of 7.5%,

    “What was once the poster child for economic excess has emerged a role model for countries struggling to save their bacon in the global bond market.

    Fitch Ratings on Friday raised its credit rating on Iceland to BBB- from BB+. The move marks the passage of Iceland’s debt from junk back to investment grade. At the same time, Fitch declared Iceland’s economic outlook stable, something that might have seemed unattainable three years ago.”

    http://articles.marketwatch.com/2012-02-17/commentary/31070325_1_icelanders-fitch-ratings-bbb

    The Referendum debate will only mature in Ireland when we consider

    1. Leaving the euro

    2. Debt write down

  18. @ Bond

    Good list there, nope disinformation and propaganda is your dept, not mine

    Re “47bn in promissory notes?

    Yep that would include interest calculates at  €16bn and €30.06 with honahan entry point at 5.8% later hauled back last September, gave you the doc/links

    NAMA GDP I sourced in Namawinelake whose figures are given here

    http://namawinelake.wordpress.com/2012/03/27/at-last-governor-patrick-honohan-before-an-oireachtas-committee-to-account-for-anglo-promissory-notes/

    NAMA being a SPV is not classified as part of general government debt. But any points you need clearing up there, check namawinelake

    Re “IMF endorsed ESM-routed debt-for-equity swaps?”

    IMF staff discussion not april 24…..read all about it

    http://www.imf.org/external/pubs/ft/sdn/2012/sdn1203.pdf

    Forward, OTC, currency swaps are features of LTRO banking euro/dollar exchange rate investments you might know more about than I but noted a lot of LTRO went into dollar based TB bonds instead of sovereign bonds, but the links to opinion on that check out yourself 🙂 I suggest, you are picking and choosing your figures. ITs not rocket science to compare the long term reliability of figures in the volatile euro crisis with short term forecasts of 12 months, but you fail to grasp the point? The inductive method you use to find fault with a single fact to prove the set of facts of which the one point is a mere member, is unobjective and unscientific and selectively propagandistic, but good luck with that.

    5% EFSF rates? Nama represrning 30% of GDP? Open risk fx swaps? IMF endorsed ESM-routed debt-for-equity swaps? The list goes on…

  19. @Colm Brazel
    You don’t know what currency controls are. Doing a Dork on it puts you in a certain camp…

  20. Well, if the IMF either won’t or are too expensive, there’s always Carol Vorderman. “Got outstanding loans with three lenders? Want to consolidate AND reduce the payments on your PN’s?”

  21. @Colm Brazel
    No, by attempting to say that the currency controls that Iceland has are the same as Central Bank interventions you are greatly diminishing the effects of the currency controls on both the Icelandic economy and on the external value of the currency.

    Iceland is as close to a closed economic system as you will get at the moment.

  22. @ Dorc,

    By chance I happened to watch a rather fascinating Bio Channel documentary on the origin, writing, making of that movie last night, catch it if you can; almost more interesting than the movie 🙂

  23. @hoganmahew

    OK, I don’t wish to get into the question of currency controls. Its an inportant subject that needs careful management in every default situation and even where there is no default. If academic papers come up on the list here I’ll comment. Suffice it to say currency controls are not by definition a bad thing and can be used to protect an economy against vultures. Iceland by any measure has achieved a remarkable comeback in the face of predictions of Armageddon. Unfortunately, our banks were not in as bad a state as the Icelandic banks and we were conned into the view they could be saved and taxpayers pay for this so Iceland got its default, we didn’t…..but feel free to provide more links to information and go into the subject more if you want, not stoppin ye 🙂

  24. @ Colm

    47bn in promissory note total payments includes some rather large payments to a state owned entity in IBRC. if you made a loan to yourself would you claim it as an income?

    Re IMF: discussion paper vs current policy. Two almightily different things. You can’t seem to be able to separate them. Try harder.

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