Just a short entry to draw attention to the fact that our friends at the European Financial Stability Fund (EFSF) appear to sold €5bn of one-year bonds at a yield of 2.5% – there seems to be some confusion at present with the Irish Times saying the sale was by the European Financial Stability Mechanism (EFSM) and Yahoo Finance say it was for the EFSF. The difference between the EFSF and EFSM?
(a) The EFSF is lending to us at 6.05% per annum, the EFSM is lending at 5.7% (according to the NTMA)
(b) The EFSF represents the 17 Euro countries, the EFSM comprises all EC member states (including the UK)
(c) The EFSF is contributing €22.5bn of the €85bn bailout, the EFSM is contributing €17.7bn and of course the IMF is contributing €22.5bn and there are bilateral loans with the UK, Denmark and Sweden of €4.8bn. And of course we are contributing €17.5bn from our own resources (NPRF and NTMA).
Although the 2.5% rate is a little higher than the German (1.77%) and French (2.08%) rates, it is considerably less than the 5.7-6.05% that will be charged to Ireland.
Penalising a member country for getting into financial difficulty is one thing (and there is a deterrent argument even if it does all seem cruel) but “helping” a member country’s citizens repay their banks’ lending from other EU country’s banks (and profligate lending at that during the property boom) and then making a substantial profit on that “help” just seems wrong and you would have thought politically unacceptable.
NAMA Wine Lake 
no comment…
http://www.independent.ie/business/irish/swiss-central-bank-refuses-to-touch-irish-state-bonds-2483913.html
.
This is not “penalizing” the country. It is a tax on the weak, who received no benefit from the bubble. The people who are directly responsible for the crash are ending up the best.
Isn’t this the moral hazard Karl Whelan refers to?
The arguement is that if the government bails out the subordinate bond holders that will only encourage them and the banks to become reckless again.
They can gamble with impunity knowing the government will bail them out .
But if the Euro countries bail out the Irish government without harsh penalties this time, isn’t it the same thing?
Okay, but where does this profit end up? Does it go to the member states, the EU, back into the fund? As members of the EU will we get some of it back?
If it does go back into the fund (which I believe is what the IMF has been urging ie. an increase in the fund’s size), and it looks like other countries might be needing EFSF support is this not reasonable behaviour?
Hi SOMK/John,
Yes there is an argument that the rate charged by the EFSF/EFSM should be punitive to deter others from seeking to access the funds (which might be regarded as an easier option than actually sorting out the root cause of the crisis necessitating the bail out) And to the extent that Ireland needs the funds to manage its day to day expenditure (the famed salaries of nurses and Gardai) I would tend more to accept that those bailout funds should be punitive because ultimately we have to contain what we spend in what we earn. But in respect of our day to day spending, we were supposed to be fully funded to mid 2011 and the pension reserve would have funded us into 2012 and if we sold off State assets, that in other countries, were privatised ages ago then I believe we would have gotten to 2013 before we needed a bailout for day to day expenditure. And at that point our deficit:GDP should be running at around 5%. And if funding wasn’t available at that point then further harsh decisions would be needed to immediately balance then our expenditure with income.
The issue I have is that this bailout is being spun as a bailout of day to day funding when I would suggest that was not the immediate problem (to 2013 I would argue). It is to place up to €35bn in the banks (€4.2bn went in before Christmas into AIB and EBS). And it is so that the banks can continue to function and service the economy. But it is also to enable the banks to repay lending from other EU banks that scrambled to find higher interest homes for their depositors’ savings during the low interest, sluggish growth 2000s. That lending was private bank debt which the State took on as sovereign debt in late 2008. There are arguments that this debt is not equal to sovereign debt and was acquired under ignorant circumstances and that therefore some default should be forced upon those debt holders. The State has refused to entertain such burden sharing so those EU banks that lent so profligately during the boom will be repaid 100% of what they are owed. In those circumstances I would have said that funds advanced to Ireland to repay other countries’ banks should not have an additional profit element at all.
As regards the EFSF and EFSM yes we are shareholders and will benefit to an infinitesimally small degree. Other countries eg Germany whose banks are reputedly being repaid by Irish banks will profit hugely. That just seems politically unacceptable to me.
“In those circumstances I would have said that funds advanced to Ireland to repay other countries’ banks should not have an additional profit element at all.”
Excellent point.
Where are our investigative journalists?
Instead of running around trying to figure how Gayle Killilea got scammed buying an EB5 visa, they could more usefully investigate what really happened that fateful night in September 2008.
What private parties “advised” the government that night? How many of those “advisors” benefitted from the decision to guarantee the bondholders? Were any of those “advisors” bondholders themselves?
They are far more relevant issues than Gayle’s visa.
http://www.davidmcwilliams.ie/2011/01/05/swiss-bank-vaults-filling-up-with-our-deposits
Was the AIB court drama before Christmas somehow related to the SCB decision of the 21st of December ?