Tag: EU-IMF

One of the odd aspects of the election campaign so far is that despite constant references to the EU-IMF deal, nobody seems to have pointed out that even by the IMF’s own calculations, the deal does not in fact provide enough money to fund the state for three years.

I’ve been over this before in detail but here’s a quick reminder. The IMF’s report on the Irish deal projects cumulative general government deficits of €43.5 billion over the period 2011-2013. This includes a phantom €1.8 billion for interest on promissory notes that will count on the deficit in 2013 but for which cash payments are intended to be deferred. So the IMF are really projecting a cash requirement of €41.7 billion to fund deficits over the next three years. (See spreadsheet with calculations here.)

Add in €16.4 billion to honour long-term bond redemptions and €9.3 billion for principal payments on promissory notes and you get €68.7 billion.

The EU-IMF programme provides €50 billion over the period 2011-2013 to fund budget deficits and other cash payments. This means that, based on the IMF’s own deficit projections, the Irish government will need to come up with an additional €17.5 billion to fund the state over the next three years and also honour comittments on bonds that it has issued.

Do we have this €17.5 billion? Unfortunately not. After €10 billion is contributed to the bank recap, the NPRF will have €4.9 billion remaining. Exchequer balances were €15.7 billion at the end of 2011. Deduct the remaining €7.5 billion for the banking package and €6 billion for paying off our remaining T-bills over January to March and we’re left with €2.2 billion.

So, by my calculations, we don’t have the €17.5 billion that the IMF figures imply are required to get us through 2011-2013; we have €7.1 billion. (Note that we would still need €11.5 billion if the government’s deficit projections came to pass, implying we’re still not funded for the three years.) Since none of the above calculations are based upon secret information, one must assume that the IMF officials overseeing the deal also believe that insufficient money has been promised to meet the stated goal of three years of funding for the Irish state.

Two questions, then, that might be worth asking over the next few weeks of the campaign:

1. Do the various parties running for election intend to request additional funds from the EU or IMF to allow the state to be funded through 2013 or are they intended to return to the bond market before the end of 2013 to fund the country?

2. Given that the €7.1 billion left in liquid funds are not sufficient to fund the country for the next three years, do those who propose spending these funds on windmills, broadband and electric cars accept that they will need to negotiate a larger borrowing package with the EU-IMF because of this spending? If not, what is their plan for funding the state through 2013?

There are many potential answers to these questions. But the questions seem worth asking.

One of the features of political commentary everywhere is that it tends to be dominated by a smallish cadre of insiders who view themselves as “sensible people” and usually figure they know what needs to be done. For example, Washington DC-based political commentary tends to be dominated by folks (Paul Krugman’s Very Serious People) who think politics should be about bi-partisanship and dealing with a crisis in Social Security. In reality, wide political differences make passing bi-partisan legislation impossible and the crisis in Social Security isn’t such a big deal.

In Ireland today, the sensible people have decided that the election should be about two themes. First, that any talk of renegotiating the EU-IMF deal is simply misleading the electorate, with some columnists resorting to much stronger rhetoric. Second, that the electorate should be focusing on the fact that Fine Gael and Labour have different policies. (I’m not singling out any columnists in particular but a few random selections from the Irish Times opinion page should confirm these points).

On the EU-IMF programme, the sensible people seem to have missed that the deal was going to be up for some type of renegotiation even before the ink had run dry. I’ll offer the following observations:

1. The EU-IMF negotiators knew there was going to be an election when the deal was put together and met the main opposition parties during their time here to prepare for the inevitable change in government.

2. When asked in December about what might happen after an election, the IMF’s Ajai Chopra was very relaxed about the idea of the plan being changed saying “as long as the overall objectives of the program are agreed to by all, and that does seem to be the case, the specific policies as to how to achieve that can be discussed.” At a press conference on Thursday, IMF Caroline Atkinson, Director, External Relations Department, stressed the same message. Atkinson refused the opportunity to say that the deficit targets in the programme must be kept unchanged

3. When Mr. Chopra was asked about whether there was a possibility of the overall interest on the package being renegotiated, his answer was “For the IMF, no. This is the rate that is applied to all member countries.” This answer clearly leaves the door open to the idea that the EU rates could be renegotiated. Also, because Ireland’s IMF quota is just about to increase and is likely to increase substantially further in a year or so, the underlying interest rate at which the IMF will be able to lend to Ireland will be about 100 basis points lower than announced last November. This will make the IMF loan rates at least 100 basis points lower than the EU equivalents, even when controlling for the fact they are variable rather than fixed rates.

4. The argument that Ireland cannot unilaterally renegotiate the interest rate on the EU loans is, of course, correct but the implication that the interest rate shouldn’t be discussed in the campaign is a little silly. We are borrowing from the EFSF and EFSM at the rates that these organisations have set for their lending operations and so these organisations would have to change the rates that they set for all countries, not just Ireland. However, right now, they are only lending to Ireland and, at a time of great change in European institutions, the next Irish government would be remiss if they did not raise the issue of lowering the interest rate.

5. Much was made about Jean-Claude Trichet’s comments at his press conference this week that Ireland needs to “apply the plan”. Some seem to interpret this as somehow meaning that the man in charge of the EU-IMF programme had just said that nothing could be changed in the plan but this is simply not correct. M. Trichet is, of course, very keen to see key aspects of the plan implemented, particularly the banking sector measures, and so one wouldn’t expect him to say anything else. However, the ECB does not set the interest rates on the EFSF or EFSM loans and, frankly, I doubt if M. Trichet cares very much about this or about whether there are small adjustments to the fiscal plan.

On the other point being pushed by the sensible people, that Fine Gael and Labour have (gasp!) … different policies, it might be worth pointing out that the last time an Irish election produced an overall majority government was 1977. Coalitions, featuring programmes for government thrashed out between parties with different policies, are now the norm in Ireland. Since Fianna Fail have no chance of forming an overall majority government, perhaps it might be worth also emphasising that they too have different policies than any of their potential coalition partners.

A reader has written to me about an important item missing from my briefing paper on the IMF-EU loans. I noted in the report that the amount of money that Ireland can borrow at cheap rates is three times our IMF quota and that this quota was about to increase. However, I did not mention that a much larger increase in Ireland’s quota is likely to occur over the next year or so.

On November 5^th, the IMF concluded its 14th General Review of Quotas with the Executive Board recommending that the Fund’s Board of Governors adopt the proposed quotas. The proposals include a doubling of the total amount of quotas and review of each county’s share of the total. Ireland’s share is proposed to increase further from 0.528% to 0.724%). This means that Ireland’s IMF quota will increase to around SDR 3.45 billion, which at current exchange rates would translate to a quota for almost €4 billion.

If implemented, these proposals would allow Ireland to borrow almost €12 billion at IMF’s low interest rate (currently 1.38%) with the remaining €10.5 billion at the higher rate (3.38% for the first three years, 4.38% thereafter). Over a seven and a half year period, this would translate into a loan that had an average margin over the variable SDR base rate of 228 basis points, down from the 326 basis point margin associated with the IMF lending terms that prevailed at the time the bailout deal was increased.

To come into effect, the proposals must be approved by 85% of the IMF’s voting share and 113 member countries. It’s unclear how long this will take but it may take a year or so.

I think this adjustment of the IMF lending terms is an important point to keep in mind when considering the lending terms on the EU loans. The EU lending authorities have been keen to point out that, once compared in the appropriate fashion, their loans can be viewed as having equivalent cost to the loan that the IMF offered the Irish government in November. This is true. However, when compared against the terms that the IMF is going to offer Ireland in the near future, the European loans are a good deal more expensive.