“Ireland is a friend in need and we are here to help” – an analysis of the bilateral bailout agreement between the UK and Ireland

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.