Karl Whelan has a very useful post on options relating to reducing the burden of banking-related debt (see here). Of particular interest is his comparison of the present discounted cost of the current promissory notes/ELA arrangement and a low-interest (3 percent) long-term (30-year) financing deal with the ESM to immediately payoff the ELA. This calculation shows that that ESM alternative has a lower NPV by a wide margin.
We could perhaps quibble with some of the assumptions used in the calculation. Karl assumes the ECB’s main refinancing rate rises to 4.5 percent by 2016, which would require a strong euro zone recovery (see Table 7 here). Also, in a world where official financing remains available as an option over the longer term, the assumed discount rate of 7 percent (based on current secondary-market bond yields) could be considered high. (I am also not sure from the calculations if Karl is allowing for Irish Central Bank profits on outstanding ELA.) But Karl’s basic conclusion seems robust to reasonable relaxations of these assumptions.
Karl notes that I am “neutral” with regard to whether the long-term refinancing via the ESM would be a good deal, waiting to see the details. Based on his numbers, I am happy to agree that a 30-year deal at 3 percent is likely to result in a substantial reduction in the burden of this debt.