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.

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.

Europe Needs a Permanent Bailout Fund

so writes a group of European academics and former policy officials in this FT op-ed.