Vol 42 Issue 2 (Summer 2011) of the Economic and Social Review is available online here
The Economic and Social Review invites high-quality submissions in economics, sociology and cognate disciplines on topics of relevance to Ireland. Contributions based on original empirical research and employing a comparative international approach are particularly encouraged.
Published papers are listed in the Social Sciences Citation Index.
Reuters report Minister Noonan as saying:
“There is a commitment that if countries continue to fulfill the conditions of their program the European authorities will continue to supply them with money even when the program is concluded,” Noonan told Irish state broadcaster RTE.
“The commitment is now written in that if we are not back in the markets the European authorities will give us money until we get back in the markets.”
In the event that the State cannot fund itself on the open markets, this statement would seem to imply the Minister readily expects more cash than previously agreed with the EU, IMF, UK, and Sweden. But apparently that’s not a new bailout.
Presumably this statement was intended to reduce uncertainty about Ireland’s post-2013 funding position. But these statements inject more uncertainty.
The Minister expects there will be more cash if we are good boys and girls. Ok, I can accept that. But there are important follow on questions: That’s more cash, for the same terms? On different terms? Cash from whom, using what mechanism (EFSF/EFSM/IMF/Something else)?. When, if not in 2013, will Ireland return to the markets? Is there a Greece-style road map somewhere for Ireland?
Can we see it?
These are just some of the questions raised, on the night at Macgill Summer School we hear the Taoiseach proclaiming Ireland’s intention to repay all of its creditors. which, if we’re Greece 2.0, wouldn’t be correct at all.
Tony Wrigley has posted a short introduction to his work on the role of energy during the Industrial Revolution, here.
Well thanks Silvio! If it weren’t for the comical actions of Signor Berlusconi, I doubt if we would have obtained yesterday’s long-hoped-for interest rate cut on our EU loans. Certainly, the cut isn’t in any way related to the negotiating skills of the government – who were last seen essentially waving a white flag on this issue.
On the substance of the deal, like Namawinelake, I’m frustrated at the lack of useful detail about the new interest rate and potential changes in loan maturities.
An annual saving of €800 million is being widely cited but I have my doubts if the correct amount has actually been calculated. My guess is that the final savings could be a bit larger, perhaps as much as €1.2 billion annually.
The first open question relates to which funds the cut is being applied to and the second relates to the size of the cut in the interest rate itself. The statement merely says
The EFSF lending rates and maturities we agreed upon for Greece will be applied also for Portugal and Ireland.
However, Ireland is only borrowing €17.7 billion from EFSF and no reasonable multiple of this number delivers annual savings of about €800 million. It seems most likely that the reasonable assumption is being made that the interest rate will also be cut on Ireland’s €22.5 billion of loans from the EFSM, though as this is an EU vehicle, last night’s meeting could not announce such a cut.
If we applied a cut of “about two percent” to the “about €40 billion” of EFSF and EFSM loans, then my fuzzy math calculations come up with “about €800 million”. So that’s the likely source of the figure.
However, it seems likely to me that the terms of Ireland’s €4.8 billion in promised bilateral loans from the UK, Denmark and Sweden will be renegotiated, so a more accurate fuzzy math would apply “about two percent” to exactly €45 billion to arrive at “about €900 million”.
Then there’s the question of the size of the interest rate cut. The Irish media have clung firmly to the notion that the average interest rate on our loans was about 5.8 percent, despite plenty of evidence that the cost of the EU component was going to be higher than had been projected last November.
As I reported here a few weeks ago, by my calculations (spreadsheet here), the average interest rate on Ireland’s EU loan was going to be 6.21 percent. The Eurozone statement promises an interest rate
equivalent to those of the Balance of Payments facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost.
That could imply a cut of 2.7 percent, which if applied to the full €45 billion would give “about €1.2 billion”. That may be right or wrong since we don’t have much information yet. But I suspect that once things are worked out, the savings will be greater than the €800 million being quoted.
Update: Sean O’Rourke just put my calculations to Michael Noon on the RTE News at One. The Minister conceded that it was likely that the interest rate cuts would be extended to the bilateral loans and that this would get the savings up to €900 million.
When a higher figure of €1.2 billion was put to him, the Minister noted that this might have included the likely reduction in future IMF rates (something I’ve written about before but wasn’t including here.) The difference here comes from my comparison of the “about 3.5 percent” with my calculated current average EU rate of 6.2%.
With the average margin over cost of funds currently running at about 300 basis points, it still seems to me that a reduction of this margin to get the interest rate “close to” the funding cost sounds like a reduction closer to three percent than two percent. But I could be wrong.