Category: EMU

EFSF Borrowing Rate

Calculated Risk is one of the best economics and finance blogs out there. It’s a fantastic free resource for analysis of the US macroeconomy, financial markets, housing markets and other issues. Ireland has hit CR’s radar in the past week or so and in a number of posts he has written that the likely borrowing rate from the EFSF will be 8%.

I believe the source for this figure is an article by Wolfgang Munchau (who in turn perhaps based it on a Barclay’s Capital research note that was subsequently corrected). I discussed this issue here: I believe the correct rate will be lower than 6%. This is still very high but it is worth clarifying that the 8% figure just seems to be based on flawed calculations.

CR must get a million emails and comments a day, so I thought I’d use the blogosphere to hopefully clarify this issue.

New European Treaty?

I don’t have time to write about this in detail now but reports that Germany and France are pushing forward with the idea of an amendment to the Lisbon Treaty are an important development (news story here and a nice article by Arthur Beesley here). Apparently they want to use a new Treaty to formalise the sovereign bailout fund that is currently set to expire in 2013 and to formalise sanctions for states that break new EU budget rules.

These announcements appear to hijack what was an ongoing process involving the Commission and a task force chaired by EU President Herman van Rompuy. This process had just arrived at this package of significant reforms, which the accompanying press release had emphasised were “compatible with the existing Treaty of Lisbon”.

I’m pretty unenthusiastic about this. I don’t see why Treaty reform is required to formalise a sovereign bailout fund, when the thing is currently up and running without any Treaty change. The political sanctions element doesn’t strike me as desirable. And the whole idea seems to underestimate the complete lack of appetite of the European public for more Treaties and referenda.

Given that this would require a referendum in Ireland and what would be on offer would be the possibility of political sanctions for Ireland, one might imagine the people who worried about us potentially losing a Commissioner under Lisbon might also get a bit excited.

Borrowing Rates from The EFSF

Today I re-read this piece that Wolfgang Munchau published in the FT on September 28th. Titled “The Truth Behind the EFSF” at Eurointelligence and “Could Any Country Risk a Eurozone Bail-Out?” at the FT, it concludes that countries that tap the facility will have to pay interest rates of about 8 percent. If this were true, then countries like Ireland could face very substantial financing costs even after seeking help from this fund, which would make successful stabilisation all the harder.

Looking into this issue, it seems to me that Munchau’s assertions about borrowing rates from the EFSF are not correct. By my calculations (see below) the EFSF borrowing rate would be a bit below 6 percent. Now this is still very high but given the large sums that would be involved if the facility swings into action (financing budget deficits and bond redemptions for three years) this difference is likely represent a significant amount of money.

Munchau calculates his 8 percent figure as a 4 percent cost of fundraising for the EFSF plus 350 basis points for administration charges and lending margins and an additional 50 basis points related to the fact that the EFSF will be holding back some of the funds raised as a “cash buffer.” While fundraising costs, administration charges and lending margins and the cash buffer do all come into calculating the correct borrowing rate, my read of it is that Munchau’s calculation isn’t accurate on any of these three figures.

I’ll admit, of course, that this stuff is pretty complicated, so let me start with providing the official sources and then people can tell me if I’ve got it wrong.

Continue reading “Borrowing Rates from The EFSF”

More on Ireland from the FT

There is a long analysis piece by David Gardner and John Murray Brown: you can read it here.

Wolfgang Munchau is gloomy about Ireland in this article.

Cuddly Lenihan

The BBC has been leading its bulletins this morning on the latest statement by Minister Lenihan.  He gave an extensive interview on the influential Today  programme on Radio 4.  Listeners can make their own assessment of its tone by listening to it at http://news.bbc.co.uk/today/hi/today/newsid_9047000/9047087.stm

You might be alarmed to learn that the BBC headlines the interview on its website as “Lenihan: Ireland ‘can’t print money'”.  Is the Minister restarting his midnight visits to Dave McWilliams gaff?