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Archive for July 21st, 2011

In recent days, Taoiseach Enda Kenny has been mimicking German chancellor Angela Merkel’s position so much on the financial crisis, that it has seemed Enda is hiding behind Angela’s skirts. Truth be told, Irelandis but a small player in the unfolding crisis and we must be sensitive to the Small Dog Syndrome we sometimes understandably exhibit in Europe. The financial crisis has had a major impact on our country, but in a EuroZone with 330m people and a GDP of €9,200bn, our 4.6m population and €150bn GDP is miniscule. And we shouldn’t be too indignant that the EuroZone’s two biggest economies,France andGermany (population 150m and GDP €4,300bn) have met a day before a plenary summit of EuroZone leaders. And that later today the leaders of the smaller economies, includingIreland, will be presented with a fait accompli. So maybe it makes good diplomatic sense after all for Enda to row in behind one of the big players; and after Enda’s “Gallic spat” with French president Nicolas Sarkozy, perhaps behind Angela’s skirts is the only practical position for Enda to take (and that’s not meant as a criticism)

The detail of what was agreed in Berlinyesterday by Angela and Nicolas has not been revealed (though the Financial Times here seems to have some well-informed speculation). But here are the mooted changes to the bailouts for countries already in receipt of loans or at risk of needing a bailout, alongside the impact of such changes onIreland.

(1) Lowering of bailout interest rates so as to give rescuers just a 1% profit margin on their loans, rather than the current 2-3%. An important aspect of this for Ireland will be whether any reduction applies to all of the EU bailout, or just the part of the EU bailout that has yet to be drawn down. Remember that this is a EuroZone solution so any interest rate reduction will not apply to the IMF element of the bailout (a maximum of €22.5bn) or to the so-called “bilateral loans” from the UK, Sweden and Denmark (totalling €5bn approximately*). So the maximum loans to which an interest rate reduction would apply would be €40bn (remember the total EU element of the bailout is a maximum of €45bn). And of that €41bn, we have to date drawn-down €15bn. So a 1% reduction would be worth a maximum of €402m a year toIreland if it applied to the entire EFSF/EFSM** bailout, or just €251m a year if it applied to the undrawn-down portion. You could double these figures for a 2% reduction. It is not totally clear what impact an interest rate reduction would have in the all important 2011-2013 period because we have yet to draw down the majority of the bailout, but likely to be €500-1,000m in total across the three years. Worthwhile, but not game-changing.

(2) Extending the maturity for the repayment of bailout funds. It is mooted that the bailout period might increase from an average of 7.5 years to 30 years. Since there are no scheduled repayments inIreland’s case between 2011-2013, this change is irrelevant. Also an extension of maturity dates might be accompanied by an increase in interest rate, so not only might this development not be helpful, it might in fact be detrimental to us in 2011-2103.

(3) Using the EFSF and EFSM to buy back bonds in bailout countries. This might be significant for Ireland, and it is the reason I attribute the slide in our bond rate from 14.2% to 13% in the past 24 hours. The EFSF and EFSM together have a capacity of €500bn, and it is mooted that contributions might be demanded from EU states to actualise that €500bn, and that some of this might be used to buyback bonds in bailout countries. So a €1,000 Greek bond might be bought by the EFSF, say, for €400 today. When the bond matures,Greece might pay the EFSF €400 which means the EFSF breaks even on the deal, and of courseGreece receives a 60% debt write-off. Nice! Now if only EU countries can be convinced to pony up €500bn to buy Greek/Irish/Portugese and other bond debt. And then convince bondholders to sell their bonds. And then for Greece not to default on a 70% debt:GDP (172% projected less 60%). In terms of Ireland, the €12bn sovereign bond maturing in January 2014 might be bought for €6bn which might seeIreland have a debt write-off of €6bn on that one bond alone. If the buybacks were to extend to bank bonds, we might see 20% written off the total outstanding as the bonds are presently trading at a discount, in anticipation of some default/haircut. This development might indeed be worthwhile forIreland, but plainly there are many details to be ironed out. And the biggest obstacle might be investors who simply refuse to sell their bonds, emboldened by the probability that the bonds will be repaid in full.

(4) A levy on bank profits. Our two “pillar” banks are projecting to make losses of €1.7bn in 2011-2012 according to last Friday’s EBA stress tests. So a levy is unlikely to have any major impact.

(5) Greece’s second bailout. We had already contributed €375m to the first Greek bailout last year before getting into difficulty and needing a bailout ourselves, after which our contributions were suspended. Presumably Ireland will not be called upon to contribute to a second Greek bailout. The Financial Times speculates that the second Greek bailout will have an overall total of €120bn, with perhaps €71bn coming from the IMF/EU.

There will be coverage here later as further details emerge. Enda Kenny has echoed Angela Merkel’s words over the past week that a summit would only have been worthwhile if there was a prospect of agreeing a European solution. So expectations today are quite high, and at last Ireland may see some easing of the interest rate charged on its bailout. And developments with buying back bonds might reduce our burden. So the hope on here is that Enda will not return tomorrow, yet again, with a “vewy, vewy sad” but might at last return with something concrete and beneficial.

* bilateral loans from the UK (€3.8bn ), Denmark (€0.393m) and Sweden (€0.598m) – the UK loan is denominated in sterling so its euro value will fluctuate, the sterling value is €3,226,960,000.

** EFSF/EFSM : the European Financial Stability Fund (EFSF) and the European Financial Stability Mechanism (EFSM) are the two existing collective funds in Europe used to pay for Ireland’s and Portugal’s bailouts (Greece has an odd funding arrangement which pre-dates the creation of the funds). EFSF is the EuroZone fund with a maximum capability of €440bn and the EFSM is the EU fund which includes non-euro countries like the UK and has a maximum capability of €60bn. In 2013 both will be replaced by a different fund called the European Stability Mechanism.

UPDATE: 21st July, 2011. The Summit statement is available here. It seems that the cost of new lending from the EFSF is to fall to cost (presently about 3.52%) and the statement makes reference to 3.5%. That compares with the 5.9% charged on the first tranche drawn down by Ireland from the EFSF. See below table. It appears to apply to new lending only so would be worth a max of 2.4% on €14bn per annum or €340m per annum. However the Taoiseach has just told RTE 9 o’clock News that it was worth €600-800m which would imply a principal of €32m. There is no word on the EFSM or the bilateral loans. The relevant clause in the statement is at paragraphy 3 “We have decided to lengthen the maturity of future EFSF loans to Greece to the maximum
extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. In this context, we will ensure adequate post programme monitoring. We will provide EFSF loans at lending rates equivalent to those of the Balance of Payments facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost. We also decided to extend substantially the maturities of the existing Greek facility. This will be accompanied by a mechanism which ensures appropriate incentives to implement the
programme.” However it appears that concessions were extracted from the Taoiseach in respect of Corporation tax. Paragraph 10 “The EFSF lending rates and maturities we agreed upon for Greece will be applied also for Portugal and Ireland. In this context, we note Ireland’s willingness to participate constructively in the discussions on the Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured
discussions on tax policy issues in the framework of the Euro+ Pact framework”

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