Category: Bailout

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.

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?

Squeeze Is On for Greece’s Private Sector Creditors

Here’s a thread for people to discuss the latest stories (here and here) on Greece’s private sector creditors being asked to roll over their funds or else. A quick summary:

The governments will give Greece new lending, to be provided by the European Financial Stability Facility, the euro zone’s sovereign rescue fund, officials said. But that financing will likely come with the condition that the banks, pensions funds and other investors holding Greek bonds agree to exchange them for new bonds with a longer maturity to help fill Greece’s financing gap over the next three years, they said.

“Private investors would have a strong incentive to participate, because if they don’t, there will be a default,” said one official.

It’s the Don Corleone approach to default negotiation, involving making people offers they can’t resist.

Still, providers of CDS insurance will be thrilled to hear that

the debt-exchange process envisioned by the governments won’t rewrite existing bond contracts or trigger a credit event, the officials said, partly easing the ECB’s concerns that private creditors are being forced to contribute financing.

Can someone explain to me why it’s so important to the ECB or any government whether a restructuring scheme constitutes a credit event for CDS purposes? Are the firms that offer this insurance somehow more important sources of systemic risk than those who own Greek sovereign bonds? Or is it more for the appearance of purity — “it was not a default, now way, sure the CDS guys say it wasn’t a credit event”, that kind of thing?

Anyway, what odds are there now that holders of Irish sovereign bonds will walk away unscathed?

Anglo Bondholders to be Repaid in Full

Today’s Sunday Independent appears to provide the answer to the question I posed on Tuesday about the government’s position on Anglo bondholders. Despite Brian Hayes stating firmly on April 2 (go here and click on the April 2nd edition of Saturday View, about 56 minutes in) that the government’s position was that haircuts should apply to Anglo senior bonds, the Independent reports that the Department of Finance has confirmed that Anglo’s senior bondholders will be repaid in full.

This is a good time to point people in the direction of NAMAWineLake’s very useful post from Friday detailing all the outstanding bonds of the Irish banks by maturity. November 2nd promises to be a great day for those international hedge fund investors who chose to buy some of the $1 billion senior unsecured Anglo bond first issued in November 2006.

Leogate and Green Jersey Economics

Throughout Ireland’s economic crisis, our government has adopted policies based on overly optimistic assumptions. The language of corners turned, manageable problems and final estimates has dominated communication of these policies. And throughout this period, the approach of the Serious People in Leinster House and at institutions such as the Irish Times has been to attack those who question these overly optimistic assumptions as unpatriotic folk who are talking the economy down.

Against that background, this green jersey editorial from the Irish Times on Leo Varadkar’s comments is deeply depressing. It adopts Michael Martin’s ridiculous line about “loose talk costing jobs” as if serious businessmen thinking about creating jobs were not already aware of the likelihood of a further EU-IMF deal for Ireland. It makes claims about sovereign bond markets that serve to illustrate that the writer clearly doesn’t understand these markets. If Leo’s comments created “doubt and uncertainty in financial markets among those that most matter, the bond investors from whom the State hopes to borrow again next year” then how come sovereign bond yields didn’t budge?

Then we get this gem:

As the euro zone debt crisis has unfolded, Ireland has lost credibility and sustained major reputational damage at various levels – government, public service, banking and business – which the Fine Gael Labour Government is attempting to regain and restore. This was best exemplified last November when talks about an EU-IMF bailout were under consideration while Fianna Fáil ministers issued public denials. It will take some time to re-establish trust in what governments say and confidence they can deliver on commitments made.

So Fianna Fail lost credibility by lying about the scale of our problems and ultimately denying things that everyone knew were true. And the IT’s reaction to this loss of credibility is to condemn a minister who makes a statement everyone knows to be true and to encourage the government to repeat a mantra about “no second deal” that will, in time, be just as discredited as the previous government’s approach.

The Irish Times may not wish to hear government ministers admitting that, despite best efforts, we may not be able to get back to the bond market. However, the “everything’s going to be fine” approach runs the risk of being exposed as just as false as the corner-turning rhetoric of the previous government. And it hardly helps with negotiating better terms on the current deal.