The Central Bank’s new PCAR statement hasn’t yet been linked to on the site so here it is. This is the most detailed statement released yesterday in relation to the future of the Irish banking sector.
On Morning Ireland a few hours ago, Amadeu Altfaj Tardio, Spokesman for the European Commissioner Olli Rehn, was asked by RTE’s Rachael English (about 5.08 minutes in) whether the EU would countenance senior bond holders sharing the burden as part of the Irish bailout.
Possibly Amadeu didn’t quite understand the question (though he was asked it twice in pretty clear terms.) Anyway, my understanding of his response was that he could countenance this type of burden sharing. He said the issue “was under discussion” though it seems as though he meant this in the sense of a general Euro-area policy in this area was being discussed, rather than that he knew that this issue was being discussed in the current Irish bailout negotiations.
Further clarifications on this issue should probably be sought.
During the discussion of the bailout on Prime Time tonight, the prospect was raised (and not denied by Minister Batt O’Keefe) of the EFSF charging 7% to Ireland for its loans.
It may be worth taking at look at the calculations that I did on this issue a few weeks ago. I worked out the formula for the interest rate at the time as
Effective Interest Rate = 1.2*(3-year swap rate + Margin + Annualised Cost of Once-Off Service Fee)
which worked out at the time as
Effective Interest Rate = 1.2*(1.57 + 3.0 + .167) = 1.2*4.737 = 5.68.
The three-year swap rate is now 1.9%, which would give
Effective Interest Rate = 1.2*(1.9 + 3.0 + .167) = 1.2*4.737 = 6.08.
The government’s most recent projections show the debt-GDP ratio peaking at 106%. This is prior to the admission that large amounts of additional money will be borrowed to recapitalise the banking sector. Piling on an interest rate of even 6.1% onto the likely debt levels would greatly reduce the prospect of Ireland avoiding sovereign default. An interest rate of 7% would be grossly unacceptable.
Put simply, if these reports are true, the government needs to refuse any deal based on such a high interest rate. Indeed, unless the government feel compelled to play their role in a morality play in which Ireland is used as cautionary tale, they should refuse any deal featuring a rate higher than the 5% rate that Greece obtained.
Update: As commenter Tull points out, while we’re drawing down the money over three years, the relevant maturity for the interest rate would be length of time before we have to pay it back. Plug in seven years, for example, and we’d get
Effective Interest Rate = 1.2*(2.67 + 3.0 + .5/7) = 1.2*4.737 = 6.88.
The completely nebulous nature of last night’s annoucements in relation to bank restructuring means we are no wiser today than yesterday about what is actually going to happen with our banks. However, the following statement from Michael Noonan (not a man given to reckless speculation, I would venture) is worth discussing:
Fine Gael finance spokesman Michael Noonan said there may be conflict between European officials and the International Monetary Fund the restructuring of Ireland’s banks.
Mr Noonan said the IMF may favour more burden sharing with bank bond holders than European officials as a condition of aiding Ireland.
As is this article by John McManus.
On This Week on RTE Radio One, just now, Brian Lenihan has admitted that his banking policies failed in the sense that the banking problem proved too big for the state to solve on its own.
The audio is now available here. Here’s the exchange about the failure of banking policies:
Richard Crowley: Our strategy failed. Could you not admit that now?
Brian Lenihan: Yes it did in the sense that the banks were too big a problem for the country. I accept that.
Richard Crowley: And the steps you took were not enough to prevent it.
Brian Lenihan: The steps could not, given the limited resources a small state has. Yes, I accept all that. But nobody has suggested they were the wrong steps.
The incredibly depressing thing about the banking meltdown is how predictable it all was. Click here for a post from a year ago that links to a presentation I gave to the Labour Party titled “The Banks After NAMA.” A few highlighted phrases:
“government argues that the NAMA loan transfers will fix our banks and get credit flowing. There are good reasons to believe that this is not the case”
“The banks have not developed a sustainable new funding model.”
“more losses to come: The severity of this recession will trigger big losses on mortgages, business loans, credit cards”
“major banks are seriously undercapitalised relative to the size of their balance sheets.”
“the ECB’s unlimited lending policy is likely to come to an end over the next year or so. What then?”
I guess we have an answer now to the last question.
Patrick Honohan has given an interview to Morning Ireland (audio available here) that provides some more clarity as to what is going on in relation to Ireland borrowing from the IMF and EU.
Update: For those without access to audio, here‘s an almost-accurate transcript from the Guardian’s new Irish business blog (I doubt somehow if Ireland will be borrowing in the form of FDRs. Different kinds of dead presidents are likely to be involved.)