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Archive for March 26th, 2011

I don’t know. But given the stock of national hope placed in our Taoiseach, Enda Kenny’s efforts in securing a 1% cut in the interest rate on our bailout, I think it might be helpful to find out. This entry examines the calculation.

To arrive at a precise answer, you’d need to know:

(1) The timing of the receipt of the bailout funds – the best forecast of the receipt of the funds that I have seen is on page 40 of the IMF Memorandum of Understanding which shows the European bailout being provided as follows: €28.6bn in 2011, €13.1bn in 2012 and €3.3bn in 2013. That is a total of €45bn upto and including 2013.

(2) The amount of funds received – the EU element is supposed to be capped at €45bn but part of this is to be a contingency for the banking sector. Overall the contingency for the banking sector is €25bn out of a total bailout of €85bn but it is not clear whose contribution will be reduced should the contingency not be required (the IMF, various EU sources or our own domestic sources)

(3) The timing of the repayment of the bailout funds – again I have not seen a schedule setting out the repayment timing. The NTMA Technical Note on the bailout says “the average life of the borrowings, which will involve a combination of longer and shorter dated maturities, under each of these sources is 7.5 years” This would imply an average repayment by 2018 but what confuses me is the claim in the Greek press recently that their extension from 3 to 7.5 years to repay their bailout to the EU is by reference to a start of 2013 (that is, that repayment will be completed by 2020).

(4) The bailout funds that will benefit from a 1% cut in rates. The IMF element of a maximum of €22.5bn has fixed rates which can only be altered by changing the repayment period or altering Ireland’s quotas (which in turn reflect our funding of the IMF itself) – so the IMF element is pretty much fixed. When we talk about a 1% reduction, we are talking about the EU element only which to recap comprises the following – European Financial Stability Fund, EFSF (€17.7bn ), European Financial Stability Mechanism (€22.5bn), bilateral loans from the UK (€3.8bn ), Denmark (€0.393m) and Sweden (€0.598m). It is not clear which of these sources are being asked for a reduction in interest rates.

When I say “I don’t know”, this is after studying the IMF’s Memorandum of Understanding, releases from the NTMA including their technical note on interest rates charged, the Department of Finance’s “National Recovery Plan”, the press releases from the EFSF (here and here) on the raising and supply of funds to Ireland and Professor Karl Whelan’s presentation (here and here) to the Oireachtas Committee on European Affairs in January 2011. So I have looked, but this information, which you might think was pretty basic, doesn’t appear to be in the public domain.

What we do know is

(1) The non-IMF element of the bailout is pencilled in at a maximum of €45bn. The IMF element is set at a maximum of €22.5bn but the interest rate charged on that is fixed according to the length of the bailout and Ireland’s authorised bailout quota.

(2) The “National Recovery Plan” shows debt interest calculations for to 2014. It is not clear whether this will be paid as it accrues or if it will be rolled up. If it is rolled up, it will mean that any interest rate is applied on a compound basis to both the principal and accrued interest.

Bearing all of the above in mind and making the following assumptions

(1) Receipts from the EU sources are on 1st January in each of the years 2011, 2012 and 2013

(2) The receipts from the EU are in line with the IMF Memorandum of Understanding, in terms of timing and quantum

(3) Interest is paid in 2011-2014 as it accrues

(4) The principal and ongoing interest are repaid between 2015-2020. The NTMA says that the repayment period is “an average of 7.5 years” and I have interpreted this to run from 2014, in line with press reporting of the Greek bailout. Also I cannot see us being able to repay €45bn in three years between 2015 and 2018. I have chosen a profile for repayments with a gradual acceleration in the outer years. Lastly the IMF Memorandum of Understanding also seems to forecast repayments over a 14 year period to 2024. So I really can’t square all of this with the NTMA statement that the average loan is for 7.5 years.

The results are:

(Click to enlarge)

At 5.8%, the interest payable to all EU sources will be €19.1bn. At 5.2%, the interest payable will be €16.4bn. And at 4.8% which is widely reported as the target interest rate that Taoiseach Kenny has in mind, the interest payable will be €14.9bn

So a 1% reduction on the EU element of the bailout, using the assumptions above, would save us €4.2bn in the next 10 years.

Part 2 of this entry is available here.

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How much of a bailout will Ireland need to rescue her from the financial crisis? “You can work it out for yourselves” said former Minister Lenihan last November, 2010 on the eve of the EU/IMF rescue. And on here, we did and estimated €207bn. In the event, the headline bailout was confirmed at €85bn a few days later, which was greeted with surprise on here. The €85bn comprises €17.5bn from Ireland’s own reserves and €67.5bn from external sources (simplistically €22.5bn from the IMF and €45bn from the EU). The €85bn bailout was advertised as comprising €50bn for dealing with our ongoing budget deficit and €35bn for the beleaguered banking sector. Four months later and it seems that realism is creeping into the assessment of Ireland’s finances. And the bailout, it seems, is now set to double for the following two reasons.

(1) It is now understood that Irish banks will face funding difficulties for some time to come. Confidence in the country’s banking system has evaporated which has had a double-whammy effect – deposits have fled and alternative market sources of funding have not been available. Step forward the ECB and the Central Bank of Ireland which have been funding Irish banks to the tune of €100bn+ since last May 2010. This funding is typically short-term which makes our banking sector entirely dependent on the ECB and with the stroke of a pen in Frankfurt, Ireland could be rendered back to a barter society. Plainly this is no way to run a banking system, or indeed, a country. And it now seems that the ECB has been persuaded to convert its overdraft to Irish banks to a more formalised term loan which might give the banking sector (not to mention the nation) some confidence that its ATMs will be operating after the weekend. The Irish Times today reports that a new “medium term” facility totalling €60bn is to be made available to Irish banks. “Medium term” is not defined so we don’t know if it is three months or three years but the tone implies the latter. No sources for the story are cited, it’s an “The Irish Times has learned –“ piece but the claim is that there will be an announcement after the results of the bank stress tests are revealed on Thursday next, 31st March.

With respect to the bank stress test results on Thursday next, the opinion bubbling through the media is that additional capital of some €25bn (compared with the €35bn which the bailout makes available) will be required. Taoiseach Enda Kenny apparently has the draft numbers – I would be shocked if the ballpark numbers have not been known for some weeks – but it will be Thursday next when we get the presentation of the €20m-costing exercise. The battle to convince our bailout partners that there shouldn’t be further capital-sapping fire sales seems to have been substantially won. And that being so, it seems imperative that medium term funding for our banks be strategically secured. It would seem though that €60bn still leaves the banking sector heavily exposed to changes in sentiment and dependent on the ECB, but perhaps that is intentional as it will place the ECB is a commanding position when those pesky domestic interests demand a burning of the bondholders.

(2) Although the NTMA might try to give you some guff that the existing bailout will meet “existing debt maturities” to 2013, the EU believes that we will need go back to the market in the second half of next year. And if we look out the window to see how the market is looking at the moment, then the prospects of a return there next year don’t look great. Our 10-year bond closed at 10.12% mid-point yesterday, a record and up from the 6.6% at the end of September, 2010 which saw us decide to retire from the bond market. Will we be able to attract “market” finance for the State at rates below 6% by the second half of 2012? Maybe, who has a crystal ball but from this position, it seems like a demanding ask. And if we are effectively deprived from seeking market finance then we will need to seek an augmentation of the bailout. We have €6.852bn of debt maturing in 2012 and €7.137bn maturing in 2013. Are we going to leave the funding of this maturing debt unaddressed for another year? That is no way to run a country, so presumably we will shortly seek funding to cover this maturing debt also. How much will we need? With a further €12.674bn maturing in 2014, about €25bn should cover our needs until the end of 2014.

And together, the €60bn medium-term ECB facility and the funding of our maturing debt to the end of 2014 of €25bn will give €85bn, a doubling of the existing bailout. Some further points:

(1) Although David McWilliams might say that the ECB is funding “worthless rubbish” in Irish banks, there are other views which claim that the ECB is careful to fund gilt-edged assets in the banks and to apply appropriate haircuts. So this formalisation of funding from the ECB could be said to be backed by verifiable asset values in banks.

(2) The funding of maturing debt will not add to our national debt in that we are simply substituting one loan (from the market) with another loan (from the IMF or EU).

(3) Even with a formal €60bn medium-term facility, Irish banks will still be dependent on the ECB and Central Bank of Ireland to the tune of €120bn + (end February 2011 figures). So it seems that Ireland will remain dependent on the ECB for stability of its banking system for some time to come. Yes, the other 16 Eurozone countries are likewise dependent on the ECB but we are absolutely dependent on short-term lending which must surely expose the country to a national strategic risk.

(4) The €60bn facility will be between the ECB and the banks, but the betting is that it will be guaranteed by the State. In any event, the main banks – Allied Irish Banks, Bank of Ireland and EBS are either State-owned or effectively State-controlled. Irish Life and Permanent’s status as an independent financial institution doesn’t look too promising and the stress test results on Thursday next might make that bancassurer particularly exposed to mortgage losses.

UPDATE: 29th March, 2011. The Independent claims today, using the “it is understood” device, that the ECB is seeking an explicit Irish state-guarantee on part of the €60bn medium term facility. To paraphrase Sam Smyth from last week and to use the original expression  “if it walks like a duck, swims like a duck and quacks like a duck, then it probably is a duck” and this medium-term liquidity facility is beginning to bear all the outward signs of a bailout.  The guarantee will presumably be enshrined in some agreement which may set out conditionality. The Independent piece today is full of sources declining to comment but there is speculation that the stress test announcements on Thursday might introduce the medium-term facility in some detail.

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