“the key objectives of policy must be to support domestic confidence and begin the process of restoring international confidence in our economy” – introduction to briefing notes given to Minister Noonan in March 2011
Will Irelandneed a second bailout? It will depend on domestic economic growth which in part depends on global economic growth, investor attitudes towards Europe and how interest rates charged by investors on any new bond issuances compare with rates from available bailout funds. With present official projections, it is hoped that by 2013 at latest, Ireland will be able to return to the sovereign bond market and obtain lending at interest rates which are comparable to those available from bailout funds, and thus not need a second bailout.
This week began with a “man with some slides”, the Citigroup chief economist Willem Buiter saying that Ireland should begin planning for the possibility of a second bailout; it’s worth repeating that – “Ireland should prepare for the possibility of needing a second bailout”. What domestic politicians and not a small number of media outlets heard was “we will probably/definitely need a second bailout”. Willem’s words ignited a wildfire of reporting and prompted political intervention, notably Minister for Finance, Michael Noonan saying the notion of Ireland needing second bailout was “ludicrous” and An Taoiseach Enda Kenny who was emphatic in replying to a question in London on Thursday when he “absolutely” ruled out a second bailout. And in Brussels, a spokesman for the European Commission described talk of a second bailout as “unhelpful”. I can’t help but recall the heavily redacted briefing notes given to Minister Noonan in March 2011 when he took up his new role – at the fore, the notes said “the key objectives of policy must be to support domestic confidence and begin the process of restoring international confidence in our economy”. Willem’s intervention is plainly an attack on that confidence in the eyes of our political leadership.
It should be said that Ireland will need to borrow money, regardless, beyond that available in the IMF/EU bailout. That is agreed by all, as our country will have a deficit at least until 2015 on current projections and we also have debt (sovereign bonds mostly) which will be maturing and we’ll need to repay the lenders. When we borrow from the bond market however, we don’t give the investors a say in how our country is governed. As we know, with a bailout on the other hand we have so-called conditionality, the IMF/EU call the shots in line with the bailout agreement. So the brouhaha during the week was not about whether Ireland needs to borrow more money – we already know we will – but about the source. And without meaning to insult anyone’s intelligence by stating the bleeding obvious, if we are unable to borrow from the bond market at rates comparable to those available from bailout sources, then we will tend to opt for a second bailout.
On Friday last the NTMA said it was planning to go back to non-bailout sources of funds in 2012 with a first phase a return to the Treasury Bill market – eg: 3 month duration – in mid year with a view to moving to longer term debt auctions late this year/early next year, subject to continued progress on the bailout programme and resolution of EuroZone crisis.Irelandis already borrowing small amounts with short durations but that is not done by auctions but by request. That’s what the NTMA said. What the media heard was “Irelandwill return to bond markets in 2012”. That’s not what the NTMA said, and it was careful to attach caveats.
Now we need funding for three main headings
(1) Day-to-day expenses of the State: we’re spending more on public sector and social welfare than we are taking in, in taxes. The resulting deficit needs to be funded from somewhere. We are working to get the deficit down and by 2015 to less than 3% of our GDP, which is seen as sustainable – that’s the official line. 2015 is four years away so who knows, but from this perspective, the absence of any growth stimulus as recommended by the ECB and many economists will make growth targets in 2013-2015 challenging.
(2) Bailing out the banks. A lot of this has already happened. But there is still nearly €3bn per annum for nearly 15 years that will need to be paid in cash for Anglo/INBS’s losses.
(3) To pay maturing debt. Even back in 2007,Irelandhad borrowings of about €40bn, and that has increased substantially since. These borrowings need to be repaid as they come due. So when we talk about a 10-year Irish bond, that is a bond issued to an investor for 10 years, we pay the investor interest on the bond each year and after 10 years, we redeem the bond, that is, we pay the investor the amount he originally gave us.
Of those three headings, (3) is pretty certain, (2) is based on stress testing in our banks and some say that the losses that might arise with mortgage defaults, loss-making tracker mortgages, legacy property lending which wasn’t transferred to NAMA may all mean that further bailout costs are incurred. (1) is probably the most uncertain, it depends on economic growth and the Government successfully bringing in measures to bring the deficit down. Based on current projectionsIrelandwill not need any more funding (or a second bailout) between now and the end of 2013. Could that change? Yes certainly, for example if our economy contracted 5% in 2012 and the deficit grew because of weak taxes and high social welfare payments, then yes we would need more funding before the end of 2013, but from this perspective that’s not considered likely.
But the big uncertainty is whether or not the interest rates demanded by lenders in bond markets will be low enough by the end of 2013, so that we are able to return to the bond markets. If interest rates remain elevated compared with rates available from bailout funds, the IMF and the European funds, then yes,Irelandwill need look at bailout options. That seems obvious, right? But this is what caused all the bother during the week.
It is certainly the case that Ireland’s notional cost of borrowing has declined considerably in the last six months, and at the close of business Friday, the notional interest rate on our bonds redeemable in 2020 was 7.84%, that compares with 14%-plus in July 2011 – however most of the decline happened last August in the wake of the EU summit in July which saw our bailout interest rates reduced. However it is still considerably higher than the 3.7% average interest rate which now applies to our bailout. On the other hand, funds from a bailout diminish our sovereignty and it may be preferable to obtain funding on the open market, even if rates are higher there. How much is the sovereignty premium worth? At least 300 basis points or 3% it seems in the case ofItaly which has in recent weeks been paying 7% for relatively small amounts of long term funding. Others suggest that anything above 6% is unsustainable. What are the chances of our funding costs falling from 7.84% to 7% or 6% in 2013?
Too early to say in an such a fast-changing environment; in the short term it looks unlikely as we lurch from one crisis to another in the EuroZone. We can certainly hope that rates demanded by the open market will come down to what is judged a sustainable level. And that is probably why Willem’s comments attracted such robust political responses – Minister Noonan and An Taoiseach have absorbed the advice given in their briefing notes in 2011, and by dismissing talk of a second bailout believe they are “instilling domestic confidence and restoring international confidence” whereas entertaining the notion of a second bailout is seen as doing the opposite – undermining confidence. But as France, like many others before, has found, no matter how much you attack the messenger/commentator, markets, ratings agencies and economies will tend to pursue their own paths.
Yes.
It was actually good advice and “free”,always easier to negotiate with a back up.Not sure if there is a “stand by fee” or costs associated with not drawing it down,but why not.Its certainly preferable to middle of the night decisions,or inane amateurish kitchen table chats while chewing garlic with a newspaper pundit and media hoor.Capital or bond traders have no conscience,considering how noble and honorable or naive you guys have been with bondholders,there may be strong demand.
Interesting that WB went off message,Citi is one of the primary dealers for NTMA and provides treasury functions to NAMA.
“Irish Government bond auctions are held on the Bloomberg Auction System and are confined to recognised Primary Dealers. The thirteen Primary Dealers currently recognised by the NTMA are: Barclays Capital, BNP Paribas, Calyon, Citigroup, Davy Stockbrokers, Deutsche Bank, HSBC, ING Bank, Nomura International plc, J P Morgan, Royal Bank of Scotland, Société Générale and UBS.”
http://www.ntma.ie/GovernmentBonds/schedule.php
And Citibank and all the others should prepare for a Boycott!
All this is financial warfare. We should never patronize a business exploiting us through fractional reserve banking, interest and even refusing to lend and thus destroying the economy.
http://realcurrencies.wordpress.com/2012/01/14/financial-warfare-2012-boycott-all-banks/
I have some very sad news. Ireland, like everybody else, is getting the whipsaw of their lives. The rating agencies are the handmaidens of the Big Boys. They did nothing during the credit run up but are now ever vigilant. They are being used to pound the poor serfs into oblivion through a death spiral of “austerity”, mainly in the form of governmental cuts and layoffs and an overall shrinking world economy. Do you really think the agencies have all of a sudden found an independent streak? The real fun starts when the US and Japan get whacked. It won’t be long. Welcome to the dark ages.
If there is any consolation for Ireland, it is the fact that in the grand scheme of things it is about as important to the world economy as a mosquito bite on the rear of an elephant.
Of course Ireland will need a second bail out….. and a third …. and a…..
Ever since tax cheat Timothy Geithner said that we had to pay bondholders multiple billions of euro that we didn’t owe.
This from a amoral tax cheat that didn’t pay Social Security and Medicare taxes for several years while he worked for the International Monetary Fund, and who also employed an immigrant housekeeper who “briefly” lacked proper work papers.
And he tells us what we must do. And nobody questions it – nobody. Talk about sniveling wimps……. Our pathetic politicians. To paraphrase the bard “A leader, a leader! My kingdom for a leader!”
@ WSTT
The phony public servant/GS fifth column, Timmy Geithner is one of the Big Boys. His father was mother Obama’s controller. The $190,000 he is paid is merely walking around money. Timmy’s chicken shit tax cheating exploits you so aptly describe remind me of the joke about why academia is plagued by rampant back stabbing, because the stakes are so small. Obviously, if his “housekeeper” did not have papers, he was not paying her social security.
Yes, Timmy is the one who royally screwed the little Emerald Isle.
Because the stakes were so small.
[…] of these ‘bailouts’ is discovering the source of funding the IMF taps since the ‘agency‘ is nigh […]
Ireland’s State debt is by far and away the highest per capita debt in the EU and Ireland’s Household debt is by far and away the highest in the Eurozone and second highest in the EU.
A second bailout will be necessary and indeed will be a good thing, because the interest rate that is paid currently and will be paid in the future will be far below market rates. Does anyone think we could afford to pay say 5.5% on a debt of say 125% of GDP. If the money is available at between 3 & 3.5% why not take it with both hands?
@Niall, see the first decade of the rosary here (no religious offence intended)
https://namawinelake.wordpress.com/2012/01/16/ten-reasons-why-we-should-be-praying-daily-for-a-second-bailout/
@ NWL If you deliberately take in too little in taxation compared to your neighbours , then of course you will have a substantial gap if you continue to spend at a similar rate to them.
PRSI contribution rates were set at a rate far below the required sustainable rate and far below the rates applicable in other EU countries.
Any effective property taxes were removed.
We wiped out the inheritance tax base with crazy levels of relief.
Bailouts, emergency funds, all these are for rainy days not torrential Biblical floods. If you keep adding air to a flat tire, guess what? It goes flat again until you fix the problem causing the tire to go flat. Nothing has been or is going to be fixed. Politicians refuse to take their medicine and that “The Hit” necessary to turn things around and get it fixed. No one is willing to stop the car, get out and fix the flat because it will soil their suit or make them look bad.
If all factors remain as they are today, Ireland would need a second bailout. My view is that a significant portion of debt is to lenders with preferred creditor status. So a private buyer of Irish debt would have to factor in higher loss severities in the event of a default. Given the flight of capital to Germany, the quoted yields for Irish debt seems low. It’s hard to see enough willing buyers.
But the chances of factors remaining as they are today is close to zero. What happens with Greece over the coming weeks will be significant. So much so that it sense to wait and see what happens over the next couple of months.