Tony Leddin and Brendan Walsh provide additional clarity on the government’s net debt situation in today’s Irish Times, with an attempt to reconcile figures from Morgan Kelly and the NTMA.
Seamus Coffey’s detailed response to Constantin Gurdgiev is also helpful in this regard.
In the Eolas piece I looked at Ireland’s policy options taking the European bailout/bail-in regime as exogenous (albeit uncertain). Of course, a different question is what we would want that regime to be, one now being hotly debated given Greece’s new difficulties.
A central focus in the recent debate is the proper extent of early private sector involvement (PSI) in bail-ins. Looked at from an Irish perspective, a range of considerations come into this calculation: (i) the reputational damage in a debt restructuring/default; (ii) the ultimate reduction achieved through a restructuring in the net resource transfer; (iii) the risks associated with increased dependence on official creditors and their domestic politics; (iv) the risks of domestic and international contagion; and (v) the implications for future market access of a weakening of the implicit guarantee given to private creditors.
I think the last of these points deserves additional discussion. At the moment we seem to be between two stools. Early PSI is ruled out; but PSI is central to the post-2013 ESM regime, substantially weakening the implicit guarantee and scaring off potential new creditors. Thus there is a certain incoherence at the heart of European policy. It also is a particularly bad combination given the trade-off involved with any resolution regime: it is good to be able to share losses with private creditors ex post; but a regime with easier loss sharing will weaken the implicit guarantee and make you less creditworthy ex ante.
We need European policy makers to move one way or the other, either allowing early PSI before a substantial amount of private debt is paid back, or providing clarity on the nature of the implicit guarantee that gives a feasible route back to the markets for countries that follow through on their adjustment programmes. The ECB seems to be calling for a full guarantee by effectively ruling out defaults. This seems neither likely nor desirable. However, further clarity on the way PSI will be applied in the future, with a reasonable path to avoiding it, would give a country a chance of regaining market access and not having to resort to default. It is probably unfortunate for us that policy precedents are being set in this area based on the quite different Greek situation.
Here is a short article on crisis resolution strategies that I wrote for Eolas magazine. It was written before the debate over Morgan Kelly’s new resolution proposals. The piece contrasts a Plan A — involving a phased fiscal and banking adjustment, offiical assistance to cover funding shortfalls, and absorption of significant banking losses — with a Plan B that has an earlier focus on debt reduction. Morgan’s proposals — a Plan C? — combine immediate elimination of the borrowing requirement with eschewal of both official assistance and responsibility for bank losses.
The Government rightly continues to make the case that there is a common interest in lowering the interest rate on EFSF/EFSM borrowings, among other adjustments to the programme. Writing in the Sunday Independent today, Peter Mathews – in one of the milder articles in the paper – goes quite a bit further and accuses “EU partners” of “profiteering” (see here).
Last January, the European Financial Stabilisation Mechanism charged Ireland an interest rate of 5.51 per cent for money that it borrowed at 2.59 per cent. A month later, the European Financial Stabilisation Fund charged Ireland an interest rate of 5.9 per cent for money that it borrowed at 2.89 per cent. On this basis, the EFSF earns a profit margin of 3.01 per cent and the EFSM earns a profit margin of 2.93 per cent.
These margins are draconian. The majority of the interest that Ireland pays is not used to pay for the EU’s borrowing costs. It is excessive profit for the countries that are lending us money. For every €1m that Ireland pays in interest costs, Ireland must pay another €1.08m so that our EU partners make a profit. This, clearly, is not a bailout. It is exploiting our vulnerability. It is financial bullying.
It would appear that Peter believes that the EU is taking on zero risk in lending to Ireland. (Formally, at least, the EFSF has eschewed IMF-style preferred creditor status.) I would be interested if readers agree that these official funders can rest assured their loans are riskless.
The Sunday Business Post provides its usual welcome calm analysis of the options (no web access until Monday). Understandably frustrated with the pace at which EU governments are responding in terms of providing a mutually-advantageous exit route from the crisis, its lead editorial advocates taking a tougher line, notably with Anglo (and presumably) INBS) senior debt.
With our government bond interest rate soaring and our banks locked out of the markets, we haven’t got a lot to lose. We are most unlikely to be able to return to the markets on the schedule set down in the EU/IMF programme late next year, or in early 2013. It would be much better realise this and arrange some restructuring of the deal now – and there are many ways this could be done. [Emphasis added]
Just looking at the first sentence, my interpretation of the first clause is that the resulting dependence on external support means, unfortunately, we do have a lot to lose. With popular pressure for a tougher line ramping up, it seems a worthwhile issue to debate.
In case you missed it, Greg Mankiw had an thought provoking piece in Sunday’s New York Times: see here.