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Archive for July 6th, 2011

It is still unclear why Ireland did not seek 100% of its bailout from the IMF. And why Ireland entered into negotiations with the EU and bilaterally with the UK, Sweden and Denmark. It is true that beggars can’t be choosers but back in November 2010, we supposedly had funding in place for six months plus a substantial National Pension Reserve Fund, plus a valuable basket of state-owned companies which might have been sold if necessary. All of which could have stretched our own funding to 2014, and if those were the cards we needed play with, there would have been extraordinary efforts to balance our budget in less than six years. But we didn’t do that. Instead we negotiated a €85bn bailout, with €17.5bn coming from our own resources and the remainder sourced externally. The IMF is only providing a maximum of one third of the bailout, or €22.5bn and the remainder is coming from a mixture of European funds – the so-called EFSF and EFSM – and from bilateral loans from the UK, Sweden and Denmark. Back in November 2010, the British Chancellor of the Exchequer, George Osborne apparently had to convince skeptics in his own party and beyond that a bilateral loan to Ireland was a good idea. He correctly stated that Ireland was a major trading partner with the UK and accounted for more trade annually than the UK’s trade with the BRIC countries (Brazil, Russia, India and China) combined. And more than that, said the man whose family originally hailed from Tipperary and Waterford “Ireland is a friend in need and we are here to help

And as if to prove the maxim that “no good deed goes unpunished”, no sooner had George proposed a bilateral loan agreement with Ireland and the negative Nellies were all suggesting George had ulterior motives beyond simple friendship. Britain’s New Statesman magazine suggested George was helping Ireland because Ireland had no greater cheerleader than George during the galloping 2000s as our economy grew at an average of 5.9% per annum between 2000-2007. And the New Statesman felt George was trying to save his reputation by propping up what had been the model Irish economy. Closer to home we had the temerity to suggest that British banks were heavily exposed to bonds in Irish banks and that George was only saving his chums in the City of London, by providing funds to Ireland which would then be used to repay bonds. There is certainly a giant exposure to the Irish economy generally by Lloyds/Halifax/Bank of Scotland whose local unit closed in Ireland in 2010 and transferred some €30bn of loans to run-off asset management vehicle, Certus. And RBS is also exposed to a similar extent through local unit, Ulster Bank. But regardless of George’s motives, the agreement signed between the UK and Ireland last December 2010 certainly pulls no punches in either the terms, penalties or oversight. Here’s a summary

In a couple of sentences : the UK commits to making up to GBP 3,226,960,000 available to Ireland between now and 2013, at an interest rate which is based on the cost of funds to the UK plus a 2.29% margin (about 5.8% at current rates), all repayable 7.5 years after receipt of any instalment and there are other fees including commitment fees as well as rights of audit. The UK will make a profit of approximately GBP 0.5bn on the deal.

How much?

And specifically payable after IMF/EU reviews (the third of which is happening right now)

How long are the loans for?

At what interest rate? Currently 7 year swaps at 3.5%, so with the 2.29% margin, it’s approximately 5.8%

Other fees? Yes, indeed

Rights of Inspection. Potentially intrusive but seemingly dependent on Ireland’s engagement with the IMF and EU.

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Five months ago, the Labour party leader put some steel into his faltering general election campaign by declaring “it’s Frankfurt’s way or Labour’s way” The defiance was welcomed at the time by a demoralised nation, but Labour was no more than a paper tiger and the reality is that when a country is dependent on an external institution for day-to-day funding of its banks, it’s always going to be Frankfurt’s way, and never Labour’s way. Sad but true. Our friendly IMF/EU missionaries arrive in Dublin today for a 9-day review of our compliance with the bailout agreement. But is it time forIreland to conduct its own review of the bailout agreement? This entry examines more realistic options that those espoused by Labour above.

(1) Change the timing of draw-downs. The competence of the staff at the NTMA never ceases to amaze me. In the next 24 hours, Ireland will incur nearly €4m in interest on nearly €22bn of bailout funds. And what are these funds doing? Why, they’re just resting in an account. Which account? One of the six covered institutions (probably AIB, Bank of Ireland or Irish Life and Permanent but potentially Anglo, EBS or INBS). And what interest is the NTMA receiving on these deposits? It won’t say, it’s our money and borrowings yet the NTMA feels it should shield us from that truth. But the betting is that banks won’t pay very much more than the 1.25% they pay to the ECB for non-standard liquidity funding. That being the case, we will have incurred the best part of €500m in interest costs so far this year on these funds, which are just resting in an account. Yes the government has deferred the bank recapitalisation but the likelihood is that we have flushed the best part of the 2011 cost of the Jobs Initiative down the toilet. So we might tut-tut and argue about the €240,000 bonus waived by the chief executive of the NTMA, but truth be told these bonuses are insignificant compared to the consequences of current financial decisions.

(2) Changing the maturity date for the funding. At the end of May 2011, the NTMA borrowed €3.6bn from the European Financial Stability Mechanism 10-year money at 6.48%. These funds are repayable in May 2021, half a decade after our deficit is to be eliminated. The reason the interest rate is relatively high is because the longer the period of borrowing, the higher the rate. Why isIreland borrowing for such long periods when on paper at least the funding requirement will have ended years before the maturity of this borrowing. You can understand a contingency of a couple of years, but up to 2021?

(3) Deferring the bank recapitalisation. As of today there are bondholders literally praying that Minister Noonan fulfils his commitment to shovel up to €24bn (looking more like €20bn after the various subordinated bondholder action) into the banks by the end of July 2011. You might recall that the original plan under the bailout was to recapitalise the banks in February 2011, and then the late Minister for Finance, Brian Lenihan decided that he didn’t have a mandate to effect the recapitalisation in the middle of a general election, and left the task to the new administration (though he did offer at the time to complete the task early if the leaders of Labour and Fine Gael wrote to him in those terms, which they didn’t). And upon assuming power, Labour and Fine Gael pointed to their election promise to wait until the end of March 2011 when the stress test results were to be published, before recapitalising the banks. And then when the stress test results were published, Minister Noonan considered the €24bn cost and the plans to extract a contribution from subordinated bondholders and he decided to wait until the end of July 2011 before injecting €24bn (less the subordinated bondholder contribution) into the banks. And here we now are, to use the late Brian Lenihan’s words “at the gates of Hell itself”. Can the Minister delay the recapitalisation any longer, say until “the autumn” and after his talks with the ECB to extract a contribution from non-guaranteed senior bondholders at Anglo? Or can he wait until October 2011, which is the present end-date for the ECB’s non-standard liquidity programme, the ending of which will have catastrophic consequences for Irish banks. When Minister Noonan signs the cheque to recapitalise the banks, he is crossing the Rubicon because at that point the sovereign State picks up the tab for the banks. It is not a decision to be taken lightly.

(4) Change the mix of creditor funding. In personal finance, a standard piece of advice is, when paying down unsecured debt, prioritise the higher interest rate debts. So you pay more off a store card charging 25% per annum than your credit card charging 15%. It’s basic advice and you might expect the “mid-career” financial geniuses at the NTMA to have grasped that principle. The interest rate charged by the bailout creditors ranges from 4.77% charged by the IMF for 7.25 year money to 5.54% charged by the EFSM for 5 year money to 5.9% charged by the EFSF for 5.5 year money. Common sense might tell you to secure as much as possible from the IMF in the above circumstances but the IMF comprises one third of the total funds so far drawn down.

(5) Renegotiate the deal with the IMF. Remember we do still have some freedom of action with the deal. At the time it was signed, we were assured that should Ireland not need the earmarked funds, then there was no obligation to draw down the funds. At this point, you might ask why Ireland doesn’t seek 100% of the bailout from the IMF and show our European partners, who will profit to the tune of €9bn from the bailout, the door.Ireland seems to be a guinea pig for IMF/supranational bailouts and we are suffering as a result. Remember it is the IMF that pressed for a haircutting of senior bondholders, it was the IMF that recommended a European solution to over-indebted nations, it is the IMF that supports Ireland’s corporation tax arrangements, it is the IMF that is charging us a standard interest rate which to quote Minister Noonan, you can look up on their website – “it’s standard”. It is our European partners that are scalping us to the tune of €9bn, our European partners that are insisting on changes to our corporate tax arrangements and our European partners insisting thatIreland assume the full burden of bank senior bondholder debt.

(6) Seek a specific funding package for the banks. The ECB is funding our banks to the tune of €150bn at present, either directly or through the Central Bank of Ireland. This is week to week money, and the ECB element is set to end in October 2011, though it has now been extended several times since being introduced in the financial crisis in 2008 and the betting is that it will be extended again in October 2011. Ireland depends on this Eurosystem funding, our banks are unable to secure funding from the market and the ECB has stepped up to the plate as a substitute. It’s not quite lending of last resort and the ECB has indicated it does not consider Irish banks to be solvent. And as a result of this funding the ECB has apparently with “a nod and a wink” (not)threatened Ireland that if senior bondholders are burned then the Eurosystem funding of Irish banks will end, and our banking system would consequently collapse. According to the governor of the Central Bank of Ireland, Patrick Honohan, “the calculations” mean it is better to comply with the ECB’s wishes than to defy them. Really? So if, and it would be a big “IF”, Ireland could secure €150bn of funding elsewhere (€130bn if we confine the funding to Irish domestic banks), Ireland could then burn up to €60bn of senior bondholders (yes there would need to be a revocation of a guarantee, some choreography to “unsecure” secured bondholders to get to €60bn). Is that €150bn feasibly available elsewhere? The IMF? World Bank? Bilateral loans (China?)? We could offer very high interest rates because we would presumably be free to save 40% of the value of the bailout by burning bondholders.

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