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How much is a 1% reduction in bailout interest rates actually worth? (Part 2 of 2) »

How much is a 1% reduction in bailout interest rates actually worth? (Part 1 of 2)

March 26, 2011 by namawinelake

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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Posted in IMF, Irish economy | 3 Comments

3 Responses

  1. on March 26, 2011 at 5:21 pm Vincent

    For the life of me I cannot figure out what exactly they are trying to achieve. In any of this. This thing started in 07-08 and will continue at a best guess ’til ’20. So, what the hell could be so damn bad about allowing the banks to hit the wall, where they would have to sell everything. And where the only guarantee was for €100,000 and that’s it.
    All the current shit would be over with by now.
    But Nooooo, the group of ideologically driven gobshites more suited to shell games outside a racecourse decided to bleed the place dry. Had they never come by the notion that markets have two sides. Fools.


  2. on March 27, 2011 at 10:31 am john keane

    “Every little ‘elps.


  3. on May 27, 2011 at 4:29 pm Paul

    Michael Noonan has slightly different figures with regards to the 1% saving.

    http://debates.oireachtas.ie/dail/2011/05/03/00115.asp

    “For illustrative purposes, the saving arising from a 1% reduction on the interest rate charged on the full €45 billion available from EU sources would be €450 million for each full year borrowed. If this €45 billion was held for an average 7.5 years, i.e. the term envisaged in the programme, the total saving would amount to €3.375 billion.”



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