“When you have to tackle a deficit, you have two levers, spending and taxes. I can’t believe that our Irish friends, in full sovereignty, won’t look at both since they have more room for maneuver given that their tax rates are lower.” Former French president Nicolas Sarkozy in November 2010. What will the French position be in 2014 if we have to rely exclusively on the ESM?
Whilst the debate continues over the source of Ireland’s funding needs from 2014, it remains the case that the European Stability Mechanism (ESM) looks like the main show in town – sure, the IMF may provide very limited funding with very strict conditions and we might be able to extend our programme with the existing EU bailout fund if we apply before July 2013, and of course there exists the possibility that we’ll be able to access the traditional bond markets. But despite the official line that a second bailout is “unlikely” or even “ludicrous”, the position on here remains that it is more than likely that we will need a second bailout from official sources, and that from 2014 that will mean the ESM. So if we vote “no” on 31st May, we may well have to run another referendum in 2013/4 to vote “yes”. There is a view that the ESM will be available to us even if we vote “no” because Europe won’t let us fail, particularly if we are complying with the terms of the first bailout, and that view may be correct. However both roads lead to the ESM and this blogpost examines why the ESM is not a Golden Goose for so-called “programme countries”.
The latest version of the ESM Treaty was signed on 2nd February 2012 by EuroZone countries, and it was later signed by de facto heads of state, including our own Taoiseach Enda Kenny on 2nd March 2012. The current version of the ESM Treaty is here, the old version from July 2011 is here and a summary of the changes is here. The press release from the European Council president announcing the new version is here.
There are two concerns on here regarding the terms of accessing funding from the ESM
(1) The cost. The old version of the Treaty made the pricing transparent. Programme countries would pay a margin on the cost of funds, and that margin was 2% for funding up to three years and 3% for longer-term funding. So if the ESM borrowed funds at say 2%, then Ireland would be charged 5% for 3-year plus funding which is our likely requirement. However the new version of the Treaty doesn’t provide an upfront pricing menu at all; it merely says “1. When granting stability support, the ESM shall aim to fully cover its financing and operating costs and shall include an appropriate margin. 2. For all financial assistance instruments, pricing shall be detailed in a pricing guideline, which shall be adopted by the Board of Governors. 3. The pricing policy may be reviewed by the Board of Governors.”
In recent days, there has been commentary from economists and others supporting a “yes” vote in the forthcoming referendum on 31st May, and a perception has emerged that the ESM would provide funds at cost. That is not correct, at least based on the wording of the current Treaty.
(2) The terms. Cast your minds back to November 2010 when we obtained the first so-called bailout. Remember the dreary November days, the rumours and denials. But do you remember the anxiety that any bailout might be conditional on Ireland agreeing to raise its corporate tax rate from 12.5%? Remember the French and Germans angling for corporate tax to be brought onto the negotiation table? No, then these articles might refresh your memory here and here and here and here.
Of course in the end, there was no conditionality which might have jeopardised our corporate tax rate in the Memorandum of Understanding. But that could be attributable to the moderating influence of the IMF. What will happen in 2014 when we will probably need a second bailout exclusively from the ESM? And we won’t have the IMF on our side? Bye-bye 12.5% corporate tax rate?
The above is not meant to be dismissive of the ESM – the view on here is that it is likely to be the main, and probably only, show in town – but it is a reality-check and highlights the fact that we will pay for a second bailout, and pay handsomely. And we may again feel pinned to the collar by other European interests who have not disguised their ambitions with respect to our corporate tax arrangements. And this time we may not have the IMF to stand shoulder-to-shoulder with us.
Sobering.
NAMA Wine Lake 
It seems a little disingenuous of you to say
“but it is a reality-check and highlights the fact that we will pay for a second bailout, and pay handsomely.”
By your own admission we have not idea what the funding margin will be or indeed if there will be one. We went from paying 6%+ to 3%+ on our EFSF/EFSM loans in a very short space of time and it seems a little myopic to suggets it is nailed down in stone.
Saying all that, I actually had let the perception that the loans would be provided “at cost” enter my mind recently as fact.
@Rob, the extract from the current ESM Treaty shown above says we will pay a rate which covers the financing and operating costs and “shall include an appropriate margin”. What the margin will be, we do not know, but last July when v1.0 of the ESM Treaty was signed, the interest rate was set at “cost plus 3%” for longer term – 3-year plus – funding. You might also recall the deterrent nature of EU funding – it was never intended to be so cheap that it would undermine moral hazard, countries needed to be incentivised not to manage their economies in a way which would lead them to need a bailout.
Yes it is sobering. I’m inclined to vote ‘No’ in the hope that it will accelerate the sobering-up process. As long as Dept of Finance think they have a safety net under them they will continue to waffle about how growth will cure all ills in the fulness of time.
“But that could be attributable to the moderating influence of the IMF.”
I agree with your view of the role of the IMF. But there is a ‘WTF’ to this. Just how crap are Irish negotiators that the IMF has to bat for you? Are our negotiators protecting the interests of citizens or are they more concerned with where their next pay cheque is coming from? There are times when brinksmanship is required. Something which seems to have escaped the minds of elected and permanent government.
Is the ESM the Man who swaps magic beans for a Cow?
The beans seem to be getting ‘magicer’, I wonder are there any more Cows in the Haggard?
where do we get the alleged €11B to give to the ESM to borrow back from the ESM to pay the ESM extra interest on… They’ll have to tax the bovine slurry tanks as well…. Magical realism.
@JR, just to clear up the Irish contribution to the ESM.
It’s a good point to make on this day when we’re wondering if we will ever again see the €273m we gave to Greece in early 2010!
According to Minister Noonan
“The ESM treaty will enter into force as soon as Member States representing 90% of the capital commitments have ratified it. The Treaty provides that the ESM will have total capital of €700 billion composed of €80 billion of paid in capital with the remaining €620 billion as callable capital. Ireland’s share of the paid in capital is 1.592% which requires an actual amount of €1.27 billion, payable in installments starting in July 2012. This contribution is payable by all ESM members. Membership of ESM requires ratification of the ESM Treaty. Primary legislation will be required to ratify it, and the ESM will become operational as soon as possible and a target date of July 2012 has been set, which is a year earlier than originally planned”
http://www.kildarestreet.com/wrans/?id=2012-03-08.774.0
And
“Therefore Ireland’s share of the €80 billion of paid in capital will be just above €1.27bn to be paid in five equal instalments, of approximately €254 million each, starting in July 2013. Ireland’s share of the €620bn callable capital will amount to €9.87bn.”
What is supposed to happen is the ESM collects €80bn in cash from ESM members including €1.27bn from Ireland. This cash is used as collateral to borrow €500bn from the markets which can then be lent to ESM members in difficulty. ONLY IF the capital of the ESM gets wiped out will members will liable for the callable capital, in Ireland’s case €9.87bn.
So to answer your question, we have €1.27bn budgeted already to hand over to the ESM. Where did this come from? It comes from our cash balances which include the bailout funding from the Troika and receipts from taxation and the like.
We shouldn’t have to pay over anything else as long as the ESM members to whom cash is advanced pay it back.
One of the strands to Deputy Thomas Pringle’s case at the High Court is that Ireland is theoretically exposed to a contribution of up to €11bn which is one third of our total annual tax-take, and accordingly the whole ESM Treaty should be put to the Irish people in a referendum because of the potential size of the commitment.
and as everyone knows there’s plenty of growth in magic beans….
The beans reference is apt.
What about the hill of beans, which is what the negotiating will of Enda & Co. amounts to?
Just having a look at Income taxation Personal Allowances for UK, France, Germany and Ireland.
UK Personal Income tax allowance = 8105 pounds
Franch Personal Income tax allowance = 5963 euro
German Personal Income tax allowance = 7664 euro
Not to mention that in France the high rate of tax 41% only comes in above 70K euro.
Contrast this with Ireland.
Irish Personal Income Tax allowance = 3300 Married, 1650 single.
Irish high rate band starts at 32800 @ 41%
Obviously nobody told Mr Sarkozy these facts.
I have mentioned it before, but those Irish ministers / civil servants in the Dept of Finance need to wake up, Ireland is in the Big Pond swimming with the BIG Fish.
It galls me that Irish allowances are lower than many other EU countries, and despite this we are labeled as a low tax country.
How much more black propaganda, falsehood, calumny and lies does Ireland have to have rubbed into its face.
Ireland has a low corporate tax rate.
When the chattering classes talk about Ireland having a low tax rate, they have in mind the people who matter (i.e. multinationals, company owners, high-net-worth individuals, etc.)
@ Sporthog The UK, French & German figures are allowances, the Irish figure is a tax credit. Therefore an Irish person becomes liable to Income Tax at 1650 Personal Credit plus 1650 Employment Credit = 3,300 or after €16,500 income.
In the case of a one income married couple the figure is 3300 plus employment tax credit 1650 = €4,950 or €24,750.
Irish Social Insurance contribution rates are less than half of those of France.
Is the difficulty with voting ‘no’ that it delays the inevitable; correspondingly is the difficulty with voting ‘yes’ that it accelerates the inevitable? Hobson’s choice?
very well explained NWL, I was aware of the detail. Doesn’t this sound like ‘investing’ you savings @ circa 10% and borrowing circa 90% so as to ‘invest’ in geared schemes, we know where our geared property schemes got to.
However ‘unlikely’ the downside appears, if it exists as a liability if should be counted as such, i.e. on the countries books, or is it a SPIV (special purpose investment vehicle) which negates it being counted. Which of course if it were counted would worsen our economic data figures and mean it would be more likely that we would be penalised under this latest referendum.
Not to worry about the 1.25’ishB though as minister Coveney said we have already borrowed it from the 1st bailout deal… so we borrow from the troika (plus others, England etc.) at circa 5% (rate seems to vary), give to the ESM in order to borrow it back from them again at an additional interest rate. Shoot yourself in the foot through your knee.
I bet Bertie never appreciated just how ‘Boomier’ the ‘Boom’ could really get, although in fairness I think he had a different definition of boom in mind
@ jr
I think you’ve got it the wrong way. If the ‘inevitable’ means that our debts (sovereign and banking) are unsustainable and some type of default will have to happen eventually or else we will be in fiscal and political ICU for (perhaps) a generation, then voting for the Fiscal Compact delays the inevitable but voting against accelerates the inevitable.
I’m increasingly of the view that it is a waste of time voting. I don’t know how the whole mess is going to resolve itself but I’ve a feeling that the powers in Europe will continue to find more and more roads on which to kick the can. I can’t think of a single major party in whose interest it is for the EURO or European economies to implode. It is not in the interest of the Chinese, the BRICs, the US, the UK, or any other country/region.
On a separate note, this whole crisis has been a great leveller in the sense that absolutely no one has a monopoly on wisdom. My views on the crisis and those of Paul Krugman, the Secretary General of the Department of Finance, Mario Draghi, Wolfgang Schauble, David McWilliams, Constantin Gurdgiev, Michael Noonan, David Begg, Frau Merkel, the man on the Clapham omnibus, and the local village idiot are all equally valid. None of us can predict the endgame. Some of the aforementioned get paid a lot though for giving the impression they do know something.
It should be noted, the “appropriate margin” could quite easily, and i would say most likely, be zero. Its simply a flexible term. The moral hazard issue of pricing so as to make it unattractive has long since disappeared. The experience of the Greeks is enough to deter its usage regardless of how cheap it would be. We’re getting closer and closer to outright QE, it would be idiotic to continue charging margin on loans like this in that atmosphere. Eventually Greece will probably start to get no or nominal interest loans so long as they stay on plan and remain in the EZ.
@Eoin, fair points though given Ireland may be ratifying the ESM Treaty and may become a “customer” in 2014, it would be helpful to know the basis upon which “appropriate margin” would be determined. After all, it might cost us a few billion.
Agree with you on QE though I would expect to first see 3-year LTRO #3 , perhaps as early as June and another €1tn pumped into EU (EZ and non-EZ banks).
by inevitable I meant ‘politicians doing sums’ – how can it end anywhere else than an unholy mess. Bankers must be laughing their heads off. 1 set of rules for all businesses and a different set of rules for banks, some PIIGS are more equal than others!
A divided country voting on a fractured union… makes me want to sing the Star Spangled Banner
http://wp.me/p28tG9-gy