Bail out

handlemaster

"The EU Commissioner for Economic Affairs, Olli Rehn, has said that it would not be advisable for any new government in Ireland to attempt to renegotiate either the interest rate on the EU/IMF loan or the use of the National Pension Reserve Fund in repairing the banking sector"

Its bad enought we haven't got a good deal its now been told to us that is "not advisale" for the new government to try and renegotiate parts of the deal they feel are not good enought. I don't know about the generally feeling out there on this but i'm pretty annoyed at the self serving, dictitorial attitude of the EU. The bail out is all about the rest of Europe. We will be suffering along time if they get their way

WIZE

They Got their way

bladespin

Not advisable, yeah right, wishful thinking on Mr. Rehn's part. Hopefully our next government will have the balls to stand up to the EU a little more than the current bag of onions.

Dorcha

Not advisable, but not impossible; it's still there to do. I think Mr Rehn is worrying about the markets' reaction, and considering the illogical way they behave, I'm not surprised at this. Since any renogations will be about the sources of savings rather than the overall objective, I can't see any problem.

dahamsta

Can anyone answer this very simple question: a few weeks ago we were told, repeatedly, that we don't have to go back to the bond market until March. If that's the case, why are we rushing into a contract now? Has that much changed?

Scofflaw

The EU is willing to provide a bailout because it may help stop instability spreading - but we need the bailout because we currently have a huge hole in the banks and unsustainable government spending. We need to borrow €50bn over the next four years to subsidise the government deficit, and currently if we went to the bond markets to borrow that they'd charge us northwards of 8% interest rates for the privilege.

As it is, of the €67bn 'external support' we're being loaned, €50bn is for the government deficit - three quarters of the money. Further, our banks don't owe the German banks "€130bn" - €100bn of that figure is loans held by German banks in Ireland, not owed by Irish banks to German banks, according to the German banks themselves. This isn't about German banks - it's about the gap between Irish government spending and tax take. We're not screwed because of the bailout - we're getting the bailout because we're screwed.

regards,
Scofflaw

dahamsta

Some might argue that we'll be further screwed by the bailout.

I'm not sure you've answered my question though. Do we need to borrow now? What happened to "March"?

Tim Robbins

Scofflaw wrote: »

The EU is willing to provide a bailout because it may help stop instability spreading - but we need the bailout because we currently have a huge hole in the banks and unsustainable government spending. We need to borrow €50bn over the next four years to subsidise the government deficit, and currently if we went to the bond markets to borrow that they'd charge us northwards of 8% interest rates for the privilege.

As it is, of the €67bn 'external support' we're being loaned, €50bn is for the government deficit - three quarters of the money. Further, our banks don't owe the German banks "€130bn" - €100bn of that figure is loans held by German banks in Ireland, not owed by Irish banks to German banks, according to the German banks themselves. This isn't about German banks - it's about the gap between Irish government spending and tax take. We're not screwed because of the bailout - we're getting the bailout because we're screwed.

regards,
Scofflaw

If we didn't have to prop up the banks, the bond markets would have far more confidence in us and give us a better rate and we could borrow from them.

I was convinced biggest problem was deficit, but now I see it as a debt problem. If the IMF / EU were really concerned about deficit the public sector would have been burnt as they were in Latvia and as we were all expecting to happen.

So much of the analysis is speculative because no-one knows exactly who the senior bond holders are. But the way the EU are acting, it is as if it's them.

Bob_Latchford

Tim Robbins wrote: »

If we didn't have to prop up the banks, the bond markets would have far more confidence in us and give us a better rate and we could borrow from them.

I was convinced biggest problem was deficit, but now I see it as a debt problem. If the IMF / EU were really concerned about deficit the public sector would have been burnt as they were in Latvia and as we were all expecting to happen.

So much of the analysis is speculative because no-one knows exactly who the senior bond holders are. But the way the EU are acting, it is as if it's them.

Completely agree. By absorbing the bank debts onto the state and tax payer. The risk of the sovereign debt goes up forcing bailout. we could borrow at less than 5.8 for sovereign debt if banks & state were seperated, in my opinon

Do we have any figures about total bank debt the state has took on?

sensibleken

Does anyone else get annoyed by this term 'Bail out'. Its a loan, a loan we have to pay back at a rediculous interest rate which the lenders stand to make a killing on, plus seccuring their own investments in the troubled banks. Bail out makes it sound like charity.

hiorta

Would it be advisable to lump all bank debt together in a separate account in the National Profit and Loss and let the banks reduce it asap by tying it into THEIR Balance Sheets?
This would reveal a far truer picture of National finances and show the drag that the Irish people have been unwillingly burdened with.

No bonuses or handouts to banks until they have paid their debts off.

Bob_Latchford

hiorta wrote: »

Would it be advisable to lump all bank debt together in a separate account in the National Profit and Loss and let the banks reduce it asap by tying it into THEIR Balance Sheets?
This would reveal a far truer picture of National finances and show the drag that the Irish people have been unwillingly burdened with.

No bonuses or handouts to banks until they have paid their debts off.

Not really this is what the bond markets are saying i think. Its like giving your wife/husband your debt when all they are interested in is wether the household can pay. We need a messy divorce

Also, NAMA was supposed to reveal the true debts, but banks lied and obstructed it

jmayo

sensibleken wrote: »

Does anyone else get annoyed by this term 'Bail out'. Its a loan, a loan we have to pay back at a rediculous interest rate which the lenders stand to make a killing on, plus seccuring their own investments in the troubled banks. Bail out makes it sound like charity.

Yeah to me the words "bailout" conjures up the image of us sitting in a sinking canoe and someone giving us a pot to help us bailout the onrushing water.
The actual agreement our government made with EU/ECB/IMF conjures up the image of them handing us a pot to help us empty some of the water from our sinking canoe, but the pot has holes in it and they have also dumped some lead into the canoe.
We will try like hell to bailout the canoe, but after much expended effort we are still going to sink.
Meanhwile they will have untied their boats from our sinking canoe and sailed off into the sunset. :rolleyes:

BTW at the moment we don't have a paddle or a pot to pi** in thanks to our inept government. :mad:

Oh and has anyone cared to ask the expert, bertie, whether this is a loan, a bailout or a dig out ?

Bob_Latchford

jmayo wrote: »

Yeah to me the words "bailout" conjures up the image of us sitting in a sinking canoe and someone giving us a pot to help us bailout the onrushing water.
The actual agreement our government made with EU/ECB/IMF conjures up the image of them handing us a pot to help us empty some of the water from our sinking canoe, but the pot has holes in it and they have also dumped some lead into the canoe.

Concrete Life jacket.

zig

jmayo wrote: »

Yeah to me the words "bailout" conjures up the image of us sitting in a sinking canoe and someone giving us a pot to help us bailout the onrushing water.
The actual agreement our government made with EU/ECB/IMF conjures up the image of them handing us a pot to help us empty some of the water from our sinking canoe, but the pot has holes in it and they have also dumped some lead into the canoe.
We will try like hell to bailout the canoe, but after much expended effort we are still going to sink.
Meanhwile they will have untied their boats from our sinking canoe and sailed off into the sunset. :rolleyes:

BTW at the moment we don't have a paddle or a pot to pi** in thanks to our inept government. :mad:

Oh and has anyone cared to ask the expert, bertie, whether this is a loan, a bailout or a dig out ?

nice analogy!

K-9

Tim Robbins wrote: »

If we didn't have to prop up the banks, the bond markets would have far more confidence in us and give us a better rate and we could borrow from them.

I was convinced biggest problem was deficit, but now I see it as a debt problem. If the IMF / EU were really concerned about deficit the public sector would have been burnt as they were in Latvia and as we were all expecting to happen.

So much of the analysis is speculative because no-one knows exactly who the senior bond holders are. But the way the EU are acting, it is as if it's them.

Portugal have "only" a deficit of 7%, we are running double that, never mind the banks.

There seems to be a perception out there that the reason the IMF/EU are here is the banks. Looking at Portugal and Greece, I don't think that is the case. They'd be here anyway but the banks are just the cherry on the top and still unknown.

Bob_Latchford

The bank debt is of similar size to the deficit.

One or the other we could deal with but seems not both.

Tim Robbins

K-9 wrote: »

Portugal have "only" a deficit of 7%, we are running double that, never mind the banks.

There seems to be a perception out there that the reason the IMF/EU are here is the banks. Looking at Portugal and Greece, I don't think that is the case. They'd be here anyway but the banks are just the cherry on the top and still unknown.

Our economy is far more open than Portugal. We all speak English. We have a thriving tech sector. We have tonnes of multi-nationals.

If the IMF / EU were really worried about the deficit, they would have slashed the public sector pay like about half of us here were predicting (and many of us hoping). Fact is many of us were wrong - it's time to face the music and re-evaluate what the F is going on.

They are not worried about the deficit. Our economy will bounce back when the world economy bounces back. In the interim slight tax adjustments and slight austerity measures ensure the deficit doesn't get out of control.

They are terrified about the banks. The banks are how 2% of the population of Europe can affect the other 98%. The deficit is just our problem. The other 98% do not have give a cr*p about it.

K-9

Tim Robbins wrote: »

Our economy is far more open than Portugal. We all speak English. We have a thriving tech sector. We have tonnes of multi-nationals.

If the IMF / EU were really worried about the deficit, they would have slashed the public sector pay like about half of us here were predicting (and many of us hoping). Fact is many of us were wrong - it's time to face the music and re-evaluate what the F is going on.

They are not worried about the deficit. Our economy will bounce back when the world economy bounces back. In the interim slight tax adjustments and slight austerity measures ensure the deficit doesn't get out of control.

They are terrified about the banks. The banks are how 2% of the population of Europe can affect the other 98%. The deficit is just our problem. The other 98% do not have give a cr*p about it.

I'm not disagreeing that the banks are a huge concern for the markets, but so was our low levels of growth this year and GNP still negative.

We took out €3 Billion in the last budget and it affected growth negatively, this budget wasn't going to reassure the markets.

Scofflaw

dahamsta wrote: »

Some might argue that we'll be further screwed by the bailout.

I'm not sure you've answered my question though. Do we need to borrow now? What happened to "March"?

November 2011 even, that being the next time a tranche of Irish state debt is due for payment/rollover.

The timing of the bailout isn't directly related to when we needed to borrow - which is why the government made a song and dance about it. It's related to the market turmoil after Merkel suggested that bondholders should take losses, the spreading likelihood that Portugal and maybe even Spain will also need bailing out in the near future, the wish of the ECB to move zombie Irish banks off their life support system. Overall, you could say that the rest of Europe is clearing its decks for battle with the financial markets, and they don't want to have Ireland adding to the instability while they do so. We've therefore been given a facility we can draw against which caps the maximum rate we have to pay to service our debts.

Since we don't need the money right now, we haven't simply taken on a large loan. Instead, we've been given the equivalent of a private bond market, with rates much lower than the rates the public bond markets are currently offering (9.5%), but high enough that we'll return to the public bond markets the moment their rates settle down to what we would usually expect to pay (4-5%).

As I said, we're not screwed because of the bailout. Without the bailout we would still be borrowing that €50bn to fund government spending over the next 4 years, because that's the size of the hole in the state finances over that period. The only way we could avoid borrowing that money is if we cut the state deficit by €20bn in the upcoming Budget instead of cutting it gradually over the next 4 years. And if we default, we also have to do that, because we won't be able to borrow, even at the 9.5% the bond markets are charging.

This is the position we're in:

1. the gap between tax take and state spending is currently €20bn annually. If we did nothing to correct that, the government will run up €80bn in extra debt over the next 4 years.

2. the government have put forward a 4-year plan that involves cutting that deficit by €6bn this Budget, and €3bn in each of the three subsequent Budgets.

3. that means the deficit next year will be €14bn, then €11bn, €8bn, and €5bn - the total of which is €38bn

4. over the same period, €28bn of current Irish state debt will fall due

That means that over the next 4 years, there's a total of €66bn the Irish government has to find, leaving aside the banks entirely, and assuming it can pass the necessary Budgets, bailout or no bailout. Over that period the tax take will be in the region of €120-130bn total, all of which is already accounted for without that extra €66bn.

Without the 4 year plan, or if the necessary Budgets cannot be passed, or are not passed by the next government, that figure will rise in the direction of €108bn (€20bn annual deficit plus the €28bn of existing debt).

So we're being given a facility to draw against - if we need to - because the likelihood is that we will need to, because currently the bond market rates are a good deal higher than the bailout facility. If we can get a better rate on the markets than the rate offered by the bailout facility, we're free to do that - if we can't, we use the bailout facility. In the absence of the bailout facility, we would still need to either borrow that money or slash the government to half its current size.

The bailout fund is not an imposition on an Ireland that doesn't need to borrow, or even a consolidated loan we have to take all of - it's a 'private bond market' which caps our exposure to rising bond market rate for money that we would be borrowing anyway.

The only other option is defaulting - and if we default, we cannot borrow money from anyone over at least the next four years. That means that instead of a €6bn budget cut this year, we need the whole €20bn cut up front, because we will not be able to run any state deficit at all. Analysts are already concerned that €6bn is too much to cut all in one lump as it it - cutting more than three times that amount would throw the Irish economy into freefall.

cordially,
Scofflaw

zig

Scofflaw wrote: »

N
The only other option is defaulting - and if we default, we cannot borrow money from anyone over at least the next fou years. That means that instead of a €6bn budget cut this year, we need the whole €20bn cut up front, because we will not be able to run any state deficit at all. Analysts are already concerned that €6bn is too much to cut all in one lump as it it - cutting more than three times that amount would throw the Irish economy into freefall.

cordially,
Scofflaw

If you defaulted could you not apply for a bailout directly from the IMF? And if not why not?
Also , another point which seems to go unnoticed, it is massively in the interest of countries like England to offer us a bilateral loan, otherwise you may have a serious domino effect, so there are some countries that I believe would help ease the pain of a default, possibly even to the point that we could stick to the 4 year plan, maybe it would have to become a 2/3 year plan. But the 'plan' is happening either, the deficit has to met either way. I hate to use the age old phrase at this stage but all were doing is kicking the can down the road at the moment.

Another question, I have heard you mention in another post debt restructuring, could you explain what you mean by this? Im still not sure what this option entails, if it meant helping us get out of heavy pointless growth restrictive debt then id certainly love to hear more.

cheesehead

I'm attempting to come up to speed with the bailout implications. With interest, I've read Scofflaw's analysis above.

I've read some additional analysis regarding the bailout earlier this evening and was wondering your thoughts:

“Most people believe that without some kind of debt writedown it will not work, but once again the bail-out is proceeding nonetheless”.

"Ireland chooses to accept bail-out (At least the head of their government did). Germany force feeds punitive interest rates onto bail-out loans (over 6%). On a total debt that is probably greater than what they can afford. Its a liquidity solution in a solvency situation."

"Extend and Pretend actually worked in the States when banks could finance debt at zero percent; which makes the costs of extending free. Trying extend and pretend at 6% will fail rather quickly. The Irish will emigrate and the tax base will be destroyed."

Tim Robbins

K-9 wrote: »

I'm not disagreeing that the banks are a huge concern for the markets, but so was our low levels of growth this year and GNP still negative.

We took out €3 Billion in the last budget and it affected growth negatively, this budget wasn't going to reassure the markets.

We have a deficit problem I agree. However, because we guarenteed the banks who are in massive debt, it means the deficit problem becomes far worse.

For example, say the guarentee ends up costing us 100 billion (I am simplfying here), at 5% interest, that means the deficit problem has got 5 billion worse every year.

Now, the problem is no-one knows exactly how much money will end up going to the banks. We get a different figure every 6 weeks. Because we have guarenteed thes banks. the markets can't make any sort of accurate calculation how bad are deficit will be. Massive uncertainty.

Whereas at least without the banks, you know exactly what the deficit is, you have plenty of levers for dealing with it. So it is much easier to do risk analysis.

Bob_Latchford

Morgan Kelly on primetime at time of the guarentee said Irish banks had loans to builders and developers totalling 110bn

http://www.youtube.com/watch?v=11CCxv2ueiQ

8mins 50s

As Lenihan might say you do the maths

Kelly says typical US retail bust 20% lost, so looking at very very large losses of 10-20bn in 2008

I would say you could easily double that loss since to 30-40bn. But we dont know, as the numbers are so horrific they are being kept away from the public. Also because of its size it has become "structural" the cost of paying the interest is very significant

Does anyone have figures for total cost of banking debt to the Irish state?

dahamsta

Thanks for the detailed post Scofflaw, I appreciate it. (Just to be clear, I didn't argue that we're screwed because of the "bailout", I said we'd be more screwed because of it.)

And I'm afraid that although I accept all of your points, I don't think I can agree with them. I don't accept that these loans - not a bailout of course, I really wish everyone would stop using the term - are the answer, particularly now it's looking increasingly likely that europe is going to be thrown into further turmoil with Portugal next and Spain a big blot on the horizon.

I'm also confused why the likes of David McWilliams still maintain that a default is the way forward. I understand that people are skeptical, even critical, of McWilliams, but the fact remains that he called this recession fair and square, no ifs ands or buts. And he's not the only person saying we should default, for example:

http://www.irishtimes.com/newspaper/opinion/2010/1202/1224284564382.html

adam

Scofflaw

zig wrote: »

If you defaulted could you not apply for a bailout directly from the IMF? And if not why not?

The IMF are lending us money, though - €22.5bn. However, IMF lending rates are dependent on how much of a multiple of 'quota' the country is borrowing - where 'quota' is the amount of money the country has put into the IMF. As far as I recall, our current borrowing from the IMF is already something like 2,320% of our quota, so I'm not sure how much more the IMF would lend.

zig wrote: »

Also , another point which seems to go unnoticed, it is massively in the interest of countries like England to offer us a bilateral loan, otherwise you may have a serious domino effect, so there are some countries that I believe would help ease the pain of a default, possibly even to the point that we could stick to the 4 year plan, maybe it would have to become a 2/3 year plan.

Again, we're already getting those bilateral loans - UK, Sweden, Denmark - and the EFSF, which is a multilateral body, consists largely of the rest of the countries that have an interest in our stability.

zig wrote: »

But the 'plan' is happening either, the deficit has to met either way. I hate to use the age old phrase at this stage but all were doing is kicking the can down the road at the moment.

We'd be kicking the can down the road if we weren't doing anything about either the deficit or the banks. As it is, though, we are doing something about them - the 'plan' is happening - so it's not a case of just kicking the can down the road. It's a case of being lent the time to implement it.

zig wrote: »

Another question, I have heard you mention in another post debt restructuring, could you explain what you mean by this? Im still not sure what this option entails, if it meant helping us get out of heavy pointless growth restrictive debt then id certainly love to hear more.

Ha - "debt restructuring" is a nice polite way of saying "partial sort of default". It means moving the debt repayment schedules around, delaying payment rather than simply refusing it.

As far as I know, though, we don't start repayments on the "bailout" facility funds the minute we draw them down - certainly the IMF facility we're looking to tap has a four-year initial non-repayment period, but a maximum period for repayment of 10 years.

cordially,
Scofflaw