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Can A New Govt. Reject IMF?

  • 15-12-2010 2:14pm
    #1
    Registered Users, Registered Users 2 Posts: 10,673 ✭✭✭✭


    I was just elaboratly pondering on something I read somebody else say bout the IMF, EMF etc...

    Apparently this union of of institutions feel it is imperitive that all parties accept the bail out, and subsequently, all it's citizens absorb the debt.
    Not just for the good of our contry, but for the good of Europe, as the fall out from the banks collapsing, would criple Ireland. This, in turn would apparentely criple the Euro, and wreak havoc for Europe.

    I'm no economist so I can't form much of an opinon on this.
    But I can't help but wonder, if SF or the Socialists did enter into govt. next year, could they reject the bailout altogether?

    Surely if there was a huge risk of the Irish collapse spreading to the rest of the Eurozone, the EMF etc... would have to intervene and guarantee the banks themselves?
    Basically cutting out the middle man of the Irish exchequer, and pass the debt onto the banks themselves, sparing the Joe Soaps of this country from carrying the debt.

    Is that possible or complete poppy cock?


Comments

  • Registered Users, Registered Users 2 Posts: 20,397 ✭✭✭✭FreudianSlippers


    Can they: yes and no; Will they: probably not.

    The way I see it, those opposing the IMF/EU bailout are doing so because it's what some people want to hear. It is riling up their base.
    But the question therefore I put to them is "then what?"

    Ok, let the banks and economy fail... then what?

    I want to see more than:

    Step 1: Let banks fail
    Step 2: ????
    Step 3: Profit


  • Registered Users, Registered Users 2 Posts: 10,673 ✭✭✭✭senordingdong


    Well that's kinda what I'm asking.

    Would these pan europe/pan global financial institutions have to step in themselves to save the banks while the rest of the country fell into complete disarray?


  • Registered Users, Registered Users 2 Posts: 20,397 ✭✭✭✭FreudianSlippers


    I have no idea. I suppose if you trust the invisible hand, there would be new companies to enter and take over our failing banks (i.e. they'd be purchased by a larger, Chinese bank).

    Realistically though, the whole IMF/EU "bailout" hype is fully misunderstood.
    We're taking a loan. We were always going to re-enter the markets at some point. We're just taking a loan from a fund that was set up to help countries that need money as opposed to going on the bond markets with ridiculous interest rates.
    Essentially, getting the loan from IMF/EU is saving us money in interest as opposed to going on the open markets.

    Now, then the question takes a turn. Part of the loan we're taking is to "bail out" the banks in trouble. Should we be doing this? Probably not. But I am a libertarian... I think the markets will take care of the banks. The strong banks will survive and those that are weak will be incorporated into the stronger ones or bought by foreign interests.
    Then the issue takes yet another turn. Do we want Chinese investments in our banks? Can we let our banks fail?

    IMO we're in a fecked if you do, fecked if you don't situation.

    We either bail out the banks with our own borrowed money, or we let the banks be purchased by foreign interests.
    There is so much cross debiting and crediting on the account sheets of our banks that one bank violently leaving the market would take down the others too IMO.
    We'd be taking a big gamble IMO in letting it ride and seeing what happens.

    While I'm not a huge fan of the idea of bailing out the banks I don't really see a clear alternative.
    I'm even more confused why economically left parties would be advocating a highly economically right move other than they think it is what the people want to hear.

    I would gladly listen to anyone who has a real idea of how we would proceed if we weren't to bail out the banks. Genuinely, I really want to know! Let them fail is a shortsighted thing to say and while the bailout may not be the best idea, we know that it may work and we can see how it will play out.

    Finally, the IMF/EU thing is a bit of a generalisation. We would be taking a relatively large loan even if we weren't bailing out the banks, just to keep the country running.
    IMO it would be a huge gamble to let the banks and our economy fail. It's unrealistic to say leave the Euro as well.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    Slightly more accurately, we're not 'taking a loan' - we've been given a facility that allows us to take out loans if and when we need them, of a size that reflects the debt we expect to acquire over the next 4-5 years with or without it. If we can get a better rate elsewhere, we're free to take it, and if we don't need any part of the money in the bailout facility, we don't have to take it. The details of the programme are flexible as long as the agreed targets are met, and the broad outline of reducing the deficit is something pretty much everybody agrees with. The bailout is a backstop, not an obligation, and one priced at a level where the government will not be tempted to use it to prop up unsustainable actions, but also at a good deal below what the markets will lend to us at - and if the market rate drops, we can use the markets instead.

    Frankly, that's what makes voting against the bailout - as a bailout - completely idiotic, but as far as I can tell that's what a lot of people want the Opposition to do.

    cordially,
    Scofflaw


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Scofflaw wrote: »
    Frankly, that's what makes voting against the bailout - as a bailout - completely idiotic, but as far as I can tell that's what a lot of people want the Opposition to do.

    Indeed. The final score was 81-75.

    Although it must be acknowledged that the real (indeed worthwhile) opposition appears to be to the interest rate being charged on the facility.

    http://www.rte.ie/news/2010/1215/imf.html


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  • Registered Users, Registered Users 2 Posts: 11,205 ✭✭✭✭hmmm


    There are two important comment pieces in the FT today. One was from the main opposition leaders in Germany and the other from Mohamed El-Erian discussing solutions to Europe's sovereign debt funding problem and by implication what to do with Ireland. It's a sign of how bad the Irish media is when these conversations which are going to determine our future are not reported.

    El Erian
    The situation this time suggests good economics should play a greater role. Rather than simply doubling up on a faltering liquidity approach, the time has come for Germany to lead a more holistic solution focused on addressing the periphery’s debt overhang and competitiveness problems.

    Frank-Walter Steinmeier and Peer Steinbrück
    The required solution is a combination of a haircut for debt holders, debt guarantees for stable countries and the limited introduction of European-wide bonds in the medium term, accompanied by more aligned fiscal policies. These measures would only work together; none alone would restore stability.

    For example, we need a haircut for holders of Greek, Irish, and Portuguese debt. But we also must ensure that solvent member states, such as Spain and Italy, are not drawn into the downward spiral of financial speculation. We therefore must simultaneously guarantee the entire outstanding eurozone debt of stable countries, backed by an enhanced rescue fund. Here, eurobonds would send the message that Europe is strong, united and willing to deal jointly with whatever *critical market situation emerges. But these bonds should only be launched with co-ordinated fiscal policies ensuring common minimum standards.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    later10 wrote: »
    Indeed. The final score was 81-75.

    Although it must be acknowledged that the real (indeed worthwhile) opposition appears to be to the interest rate being charged on the facility.

    http://www.rte.ie/news/2010/1215/imf.html

    Not really - that's more posturing, to be honest. The IMF set their rates by formula, the EFSM sets them equal to the IMF rate, and the EFSF matches whatever rates are being used by its co-lenders, which is why we have three equal tranches. All of those mechanisms are explicitly part of those institutions' lending policies.

    cordially,
    Scofflaw


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Scofflaw wrote: »
    Not really - that's more posturing, to be honest. The IMF set their rates by formula, the EFSM sets them equal to the IMF rate, and the EFSF matches whatever rates are being used by its co-lenders, which is why we have three equal tranches.
    Excuse me if I am wrong, but The EFSF doesn't match the rate, it adds a service and maturity BP fee.

    The money the raised on the capital markets, furthermore, is not completely onlent - rather the interest rate is 'onlent' to Ireland, but some of the reserve is kept as a fungible investment and the rest as a cash reserve.

    I am aware that we agreed to all of this a few months ago, by the way, I'm just saying that the opposition is not totally without merit on the subject.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    later10 wrote: »
    Excuse me if I am wrong, but The EFSF doesn't match the rate, it adds a service and maturity BP fee.

    The money the raised on the capital markets, furthermore, is not completely onlent - rather the interest rate is 'onlent' to Ireland, but some of the reserve is kept as a fungible investment and the rest as a cash reserve.

    I am aware that we agreed to all of this a few months ago, by the way, I'm just saying that the opposition is not totally without merit on the subject.

    There seems to be a certain amount of uncertainty on the EFSF rate - the EU Commission appear to be saying explicitly that matching the IMF rate was what was agreed:
    When setting-up the EFSM and EFSF in May 2010, Member States (therefore including Ireland) agreed that terms and conditions of the loans should be equivalent to those of the IMF, so as to ensure a prompt return to the market. This is why there is a margin added to the borrowing cost. This was a sine-qua-non condition for the Member States to accept such an instrument.

    That's from the Commission's Irish office: http://ec.europa.eu/ireland/press_office/news_of_the_day/financial-aid-ireland_en.htm

    Now, while that certainly true of the EFSM, which is the Commission fund, the EFSF seems instead to state that it provides loans on a similar pattern to the Greek bailout loan, which was cost of borrowing plus 300 bps (3 years) plus an additional 100 bps per year over that - which is what we're charging Greece. Despite that, it ends up in the same ballpark as the IMF rate anyway:
    The Ecofin Council when setting up the EFSM and EFSF made provisions that affect the cost of lending by these institutions (Ireland participated). On the one side, the Council conclusions of the meeting on 9/10 May state that activation of the EFSM is subject to strong conditionality, in the context of a joint EU/IMF support, and will be “on terms and conditions similar to the IMF”.

    On the other side, the EFSF Framework Agreement state that the financial support shall be provided by EFSF in conjunction with the IMF and shall be "on comparable terms to the stability support loans advanced by euro-area Member States to the Hellenic Republic”.

    The first time a margin for assistance to Member States has been used was the case of Greece. This is an intergovernmental loan not a Community instrument. The margin applied to Greece is 3% for the first 3 years and 4% thereafter, equal to the IMF margin.

    Implicitly or explicitly, there doesn't seem to have been very much wriggle room on the rates, despite all the speculation, and the differences in rates (even the rates themselves) seem to some extent to be an artefact of the different loan mechanisms.

    cordially,
    Scofflaw


  • Registered Users, Registered Users 2 Posts: 14,387 ✭✭✭✭jimmycrackcorm


    hmmm wrote: »
    There are two important comment pieces in the FT today. One was from the main opposition leaders in Germany and the other from Mohamed El-Erian discussing solutions to Europe's sovereign debt funding problem and by implication what to do with Ireland. It's a sign of how bad the Irish media is when these conversations which are going to determine our future are not reported.

    El Erian


    Frank-Walter Steinmeier and Peer Steinbrück

    These appear to be very workable and sensible comments, but I fear that the only way they can come into play is if Spain or Italy come under pressure from the bonds markets.


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  • Registered Users, Registered Users 2 Posts: 1,842 ✭✭✭Rob A. Bank


    Surely there are other sources of money on the planet besides the IMF/ECB.

    The Chinese and the Russians are flush with money at the moment.

    I notice Portugal's finance minister is in Beijing to try to persuade Chinese authorities to buy Portuguese government bonds.
    http://www.bbc.co.uk/news/business-11987147

    We could offer them a useful north Atlantic base for their navy... unless the Portuguese have beaten us to the punch.

    Time for our finance minister to knock on doors in Moscow and Bejing methinks.


  • Registered Users, Registered Users 2 Posts: 1,842 ✭✭✭Rob A. Bank


    hmmm wrote: »

    There are two important comment pieces in the FT today. One was from the main opposition leaders in Germany and the other from Mohamed El-Erian discussing solutions to Europe's sovereign debt funding problem and by implication what to do with Ireland.

    El-Erian is the CEO and co-CIO of PIMCO, the world’s largest bond investor with over US$ 1 trillion of assets under management as of 2010.

    He is the leading member of the bond market vigilantes who ruined us in the ongoing quest to destroy the Euro. He is less than a disinterested party and everything he says must be viewed in that light.


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Scofflaw wrote: »
    Implicitly or explicitly, there doesn't seem to have been very much wriggle room on the rates, despite all the speculation, and the differences in rates (even the rates themselves) seem to some extent to be an artefact of the different loan mechanisms.
    Indeed, if we were to accept that the money must come through the IMF and the EU by way of the EFSM, and the EFSF with incorporated bilateral loans, cash reserves and the fungible reserve mechanism, then you are quite correct to say that there was little wiggle room.

    However I do wonder how the interest rate might have been different if the 7 billion UK loan and other bilateral loans were to be transferred totally and directly under bilateral agreements and not for example steered through the EFSM. George Osborne has apparently announced that in the current mechanism, the UK will make a £400m profit from the total bilateral loan. While profit itself is justified and reasonable, I think that 400m figure is a hard one to swallow. As is the EFSF cash reserve and investment bundle upon which we are paying interest as well as the specific Irish loan itself. It's all just a bit much.

    Basically, I am trying to say that i do not believe the Government explored every option in lowering the interest rate (or the bundle thereof) as low as it would possibly go. In doing so, they have given the opposition a reasonably justified cause for voting against the bailout.

    However, that is not to say that I believe that some of the interest rate figures being dreamed up by the likes of Morgan Kelly (who I believe was hoping for something in the region of 2%) were ever remotely achievable.


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    He is the leading member of the bond market vigilantes who ruined us in the ongoing quest to destroy the Euro.
    Could you explain this 'bond market vigilantes' comment please?

    bond market investors are businessmen who lend money in exchange for bond issuances. They have nothing to do with fiscal or corporate banking policy. the Euro was compromised from the inside - inside irish homes, on European high streets, in national legislatures and inside banking institutions.

    It was not compromised by Mohamed El-Erian, who by the way, has a commentary article in today's FT criticising Germany despite it's bondholder policy.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    later10 wrote: »
    Indeed, if we were to accept that the money must come through the IMF and the EU by way of the EFSM, and the EFSF with incorporated bilateral loans, cash reserves and the fungible reserve mechanism, then you are quite correct to say that there was little wiggle room.

    However I do wonder how the interest rate might have been different if the 7 billion UK loan and other bilateral loans were to be transferred totally and directly under bilateral agreements and not for example steered through the EFSM. George Osborne has apparently announced that in the current mechanism, the UK will make a £400m profit from the total bilateral loan. While profit itself is justified and reasonable, I think that 400m figure is a hard one to swallow. As is the EFSF cash reserve and investment bundle upon which we are paying interest as well as the specific Irish loan itself. It's all just a bit much.

    We'll be making a profit on the money we loaned to Greece, through exactly the same sort of margin (300bps) that's on the EFSF loan, and those loans were purely bilateral intergovernmental loans.

    The direct part of the UK loan doesn't look particularly cheap, particularly when you consider that it will be loaned in sterling with us bearing the exchange risk:
    1. Commitment Fee:0.5 per cent. per annum on the undrawn commitment for the next year.

    2. Margin:2.29 per cent. per annum.

    3. Interest on loans:The rate of interest payable on a loan will be at a fixed rate per annum equal to the aggregate of:
    (a) the Margin; and
    (b) the Sterling 7.5 year swap rate at the date of disbursement.
    Interest will be payable on 15 June and 15 December in each year.

    4. Default interest:Interest on overdue amounts will be increased by 2 per cent. per annum.

    Source: http://www.hm-treasury.gov.uk/d/key_terms_bilateral_loan_ireland.pdf
    later10 wrote:
    Basically, I am trying to say that i do not believe the Government explored every option in lowering the interest rate (or the bundle thereof) as low as it would possibly go. In doing so, they have given the opposition a reasonably justified cause for voting against the bailout.

    However, that is not to say that I believe that some of the interest rate figures being dreamed up by the likes of Morgan Kelly (who I believe was hoping for something in the region of 2%) were ever remotely achievable.

    Again, if we take the IMF rate as the basis, we were certainly never going to get that sort of rate (and one has to ask why anyone would extend us a facility which offered rates well below the market, apart from wishful thinking).

    Looking at the UK loan, I don't see that increasing the bilateral part of the package would have had much beneficial effect, either.

    cordially,
    Scofflaw


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Scofflaw wrote: »
    We'll be making a profit on the money we loaned to Greece, through exactly the same sort of margin (300bps) that's on the EFSF loan, and those loans were purely bilateral intergovernmental loans.
    Yes but that was then and while I do apologize for using the verbal equivalent of puréed donkey balls, we are where we are, now. The nature of the Greek bailout was different to the current bailout mechanisms in place, ours being the first drawdown of the emergency funding, so the two cannot be directly compared (in my opinion).
    The direct part of the UK loan doesn't look particularly cheap, particularly when you consider that it will be loaned in sterling with us bearing the exchange risk:
    My point was that it may have been possible to have greater control over the terms of the UK bilateral loan if it had all been done on a bilateral basis. The bilateral loan as it stands is not cheap, but perhaps a cheaper rate may have been negotiated. There is no mechanism that I am aware of that would have prevented a lower interest rate approval, subject to the bilateral negotiations having been successful.
    Again, if we take the IMF rate as the basis, we were certainly never going to get that sort of rate (and one has to ask why anyone would extend us a facility which offered rates well below the market, apart from wishful thinking).
    Well, we have been offered a rate well below the market rate, so it is not all wishful thinking. However, I accept your point that you make here.
    Looking at the UK loan, I don't see that increasing the bilateral part of the package would have had much beneficial effect, either.
    Wouldn't it would have reduced the EFSF aggregate principal loan by 3 billion? Furthermore the Government, presumably, had some sort of sway in what the EFSF was to hold as a cash buffer (an amount upon which, of course, we pay interest as part of the aggregate sum), and the lower that was, the lower the amount of the principal loan. The lower the size of these various retentions, the greater the ratio of our net disbursement amount to aggregate sum would have been, and in my opinion, the more manageable the loan would have become.

    Like I said, these are only reasonable grounds for objection, they are not earth shattering. However, I do think that the failure of the state to push forward on these issues has left us paying more in interest than would necessarily have been necessary.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    later10 wrote: »
    Yes but that was then and while I do apologize for using the verbal equivalent of puréed donkey balls, we are where we are, now. The nature of the Greek bailout was different to the current bailout mechanisms in place, ours being the first drawdown of the emergency funding, so the two cannot be directly compared (in my opinion).

    Except that they are, after all, intended to be similar:
    The structure of financial assistance provided by EFSF to a Euro Area Member State in difficulty would be comparable to the aid package provided to Greece, that is to say, an interest rate combining funding costs and a fixed margin. However, whereas the Greek package is based on variable-rate loans (Euribor + 300/400bp margin according to maturity), the EFSF will use long-term references plus a margin. There is also a one-off 50 basis points service fee. Whilst the EFSF margin may differ from Greece, the overall interest rate would be still be comparable.
    later10 wrote: »
    My point was that it may have been possible to have greater control over the terms of the UK bilateral loan if it had all been done on a bilateral basis. The bilateral loan as it stands is not cheap, but perhaps a cheaper rate may have been negotiated. There is no mechanism that I am aware of that would have prevented a lower interest rate approval, subject to the bilateral negotiations having been successful.

    Well, we have been offered a rate well below the market rate, so it is not all wishful thinking. However, I accept your point that you make here.

    Wouldn't it would have reduced the EFSF aggregate principal loan by 3 billion? Furthermore the Government, presumably, had some sort of sway in what the EFSF was to hold as a cash buffer (an amount upon which, of course, we pay interest as part of the aggregate sum), and the lower that was, the lower the amount of the principal loan. The lower the size of these various retentions, the greater the ratio of our net disbursement amount to aggregate sum would have been, and in my opinion, the more manageable the loan would have become.

    Like I said, these are only reasonable grounds for objection, they are not earth shattering. However, I do think that the failure of the state to push forward on these issues has left us paying more in interest than would necessarily have been necessary.

    The UK loan I gave rates for is a bilateral loan direct from the UK to Ireland - it's not part of EFSF or EFSM, and there is no requirement that it match the EFSF rates. It's being counted as part of the 'EFSF' third of the funding at the lowest level of detail, but it's not being done through the EFSF, which is why it's split out when you see the listing in more detail. And it's at 6% - maybe the government could have negotiated a better rate there.

    cordially,
    Scofflaw


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Scofflaw wrote: »
    The UK loan I gave rates for is a bilateral loan direct from the UK to Ireland - it's not part of EFSF or EFSM, and there is no requirement that it match the EFSF rates. It's being counted as part of the 'EFSF' third of the funding at the lowest level of detail, but it's not being done through the EFSF, which is why it's split out when you see the listing in more detail. And it's at 6% - maybe the government could have negotiated a better rate there.
    Indeed it very possibly could have had negotiated a lower rate. The fact that the UK is hoping to make a £400m profit on the loan, despite the fact that it has an obvious common interest in aiding the Irish economy, not least through RBS, is as i have said, difficult to swallow

    Now I understood a further 3.1bn euro (approximate) contribution by the UK to have been a voluntary contribution of that jurisdiction towards the EFSF, however I am mistaken on that, as the money is actually a (presumably GNI proportionate??) EFSM contribution. You are correct to point out that the total UK loan does not impact upon the EFSF principal loan, and so I retract my point in relation to that.

    However, I think it is also reasonable to be dissatisfied with the belief that the EFSM rate will be equal to that of the IMF rate, considering that:
    At the request of the debtor Member State and where circumstances permit an improvement in the interest rate on the loans, the Commission may refinance all or some of its initial borrowings or restructure the corresponding financial conditions. These operations may not have the effect of extending the average duration of the borrowing concerned or increasing the amount of capital outstanding.
    http://europa.eu/legislation_summaries/economic_and_monetary_affairs/institutional_and_economic_framework/l25005_en.htm

    I also think it is not unreasonable for a state like Ireland to renege on the EFSM surcharge agreement, despite the fact that we originally agreed to it last May.

    Moreover it appears that the EFSF facility as it applied to Ireland was on the whole unreasonable, particularly in light of what appear to be discretionary retentions deducted from the aggregate principal sum raised by the EFSF without clear or justifiable economic or financial reasons.


  • Registered Users, Registered Users 2 Posts: 11,205 ✭✭✭✭hmmm


    later10 wrote: »
    However, that is not to say that I believe that some of the interest rate figures being dreamed up by the likes of Morgan Kelly (who I believe was hoping for something in the region of 2%) were ever remotely achievable.
    Not unless we were to be subsidised by the other Euro countries and I don't see political will to give us free money.

    Munchau had an article not so long ago looking at the mechanics of the EFSF mechanism - the interest rate situation is not at all simple.

    http://www.ft.com/cms/s/0/081efd02-c9b1-11df-b3d6-00144feab49a.html#axzz18J9ky1D8
    So what is the interest rate? The borrower essentially pays the sum of the EFSF’s funding costs, an administration margin and a lending margin. The triple A rating should ensure that the funding costs for the EFSF are not extremely high, but I doubt that the EFSF could obtain a funding rate as cheap as that available to the European Investment Bank. The EFSF is not a sovereign investment bank, but a rather complicated and not very transparent structure, right out of the textbook of modern finance. One of the reasons the EIB was not eager to run the bail-out fund itself was precisely because it did not want its own credit rating tainted. I would thus assume that the EFSF’s funding costs exceed those of the EIB by a good margin.

    Let us assume the EFSF raises the €1bn at an interest rate of 4 per cent. With administration charges and lending margins of 350 basis points, the effective interest rate to the borrower would be 7.5 per cent. What about the cash buffer? The EFSF must reinvest the buffer in the best triple A rated securities in the market. So if its own funding costs are 4 per cent, and if it invests the cash buffer into German bonds at a hypothetical yield of 2 per cent, there is a loss of 2 percentage points. This also has to be paid for by the borrower. This comes on top of the 7.5 per cent interest. It is not all that hard to conceive of a situation in which the borrower would end up paying a total interest rate of 8 per cent. Of course, the actual interest rates will depend on several factors: the EFSF’s own funding costs, the size of the lending margin, the gap between funding costs and reinvestment proceeds and probably several more factors. But no matter how you twist this, it is hard to construct a cheap loan out of this.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    later10 wrote: »
    Indeed it very possibly could have had negotiated a lower rate. The fact that the UK is hoping to make a £400m profit on the loan, despite the fact that it has an obvious common interest in aiding the Irish economy, not least through RBS, is as i have said, difficult to swallow

    Now I understood a further 3.1bn euro (approximate) contribution by the UK to have been a voluntary contribution of that jurisdiction towards the EFSF, however I am mistaken on that, as the money is actually a (presumably GNI proportionate??) EFSM contribution. You are correct to point out that the total UK loan does not impact upon the EFSF principal loan, and so I retract my point in relation to that.

    However, I think it is also reasonable to be dissatisfied with the belief that the EFSM rate will be equal to that of the IMF rate, considering that:

    http://europa.eu/legislation_summaries/economic_and_monetary_affairs/institutional_and_economic_framework/l25005_en.htm

    It's quite explicit in the Council Decision establishing the EFSM:
    Third, we have decided to establish a European stabilisation mechanism. The mechanism is based on Art. 122.2 of the Treaty and an intergovernmental agreement of euro area Member States. Its activation is subject to strong conditionality, in the context of a joint EU/IMF support, and will be on terms and conditions similar to the IMF.
    later10 wrote: »
    I also think it is not unreasonable for a state like Ireland to renege on the EFSM surcharge agreement, despite the fact that we originally agreed to it last May.

    We can't, though - or, rather, it would be meaningless to do so except by way of refusing to pay that surcharge, which would be a default.
    later10 wrote: »
    Moreover it appears that the EFSF facility as it applied to Ireland was on the whole unreasonable, particularly in light of what appear to be discretionary retentions deducted from the aggregate principal sum raised by the EFSF without clear or justifiable economic or financial reasons.

    Again, those retentions - the EFSF raises 120% of the amount to be loaned, and retains 20% as a 'cash buffer' - are part of the EFSF Framework Agreement, and their purpose is clearly spelled out. The additional 20% is guaranteed to the original lenders by the EFSF - that is, if the EFSF raises €10bn, it issues guarantees worth €12bn in exchange. The purpose was to ensure the fund the highest possible credit rating.

    The problem for both the EFSM and the EFSF is that they have to be seen to be the safest possible backing for any eurozone country in trouble - and that means their lending and loan-raising policies have to be absolutely the most conservative and prudential policies possible. They cannot afford to lend on anything other than the basis of real need, they have to insist on overpayment, and they cannot be run as a kind of charitable cheap money bucket for the irresponsible, which is what Ireland would really like, because that defeats the whole purpose of the funds.

    People are calling for Ireland to default, and to trim the state deficit to as close as possible to zero as swiftly as possible - but if we can trim the state deficit in that way, we can avoid use of these funds anyway. If the next government has no incentive not to use the funds, it will use the funds, and we really will be 'kicking the can down the road'.
    hmmm wrote:
    But no matter how you twist this, it is hard to construct a cheap loan out of this.

    And yet we have come a lot closer to a cheap loan than Munchau's 8%.

    cordially,
    Scofflaw


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  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Scofflaw wrote: »
    It's quite explicit in the Council Decision establishing the EFSM:
    Third, we have decided to establish a European stabilisation mechanism. The mechanism is based on Art. 122.2 of the Treaty and an intergovernmental agreement of euro area Member States. Its activation is subject to strong conditionality, in the context of a joint EU/IMF support, and will be on terms and conditions similar to the IMF.
    Explicit about what exactly?

    That document, nor that part of the document which you quote, is not explicit about matching the I.M.F. interest rate (which is of course the case anyway). I have read the other document put out in rebuttal to the criticism at the EFSM rate which says that it had been agreed to establish equivalent terms and conditions. However I have not seen the word equivalent used anywhere else. As far as I can see, the official documentation simply indicates that it would be on Ts&Cs similar to the IMF support, not that the two must charge identical interest rates specifically.

    Such a situation would suggest that there is indeed a maneuverable position on the EFSM interest rate. I'm not really sure how these points could be contested, but it is entirely possible that there is something I am missing here, and that somewhere we did agree to establish equivalent rates, so I remain open to persuasion on that.
    We can't, though - or, rather, it would be meaningless to do so except by way of refusing to pay that surcharge, which would be a default.
    I'm not really talking about refusing a surcharge, which you are correct to say would be akin to a default.
    Firstly, the opposition had grounds to oppose the bailout in light of the fact that it may never have agreed with the surcharge in May, which would inevitably increase interest rates, therefore they have no reason to agree to it in principle now either. Indeed, to change their opinion now would be, arguably, rather hypocritical.
    Secondly, I am pointing out that perhaps there was maneuverability on amending the EFSM agreement given that the crisis has deepened further since the mechanism was established.
    Again, those retentions - the EFSF raises 120% of the amount to be loaned, and retains 20% as a 'cash buffer' - are part of the EFSF Framework Agreement, and their purpose is clearly spelled out. The additional 20% is guaranteed to the original lenders by the EFSF - that is, if the EFSF raises €10bn, it issues guarantees worth €12bn in exchange. The purpose was to ensure the fund the highest possible credit rating.
    As far as i am aware, the requirement is for up to 120% as described in article (5), section (2) part (a)/ page 11 of the EFSF Framework Agreement.

    I don't think your assessment is quite correct - i.e. that the EFSF raises 120% and keeps 20% as the cash buffer.
    The EFSF raises the principal aggregate sum, it then deducts the 50bp service fee and the appropriate margin. That amount is the fungible cash reserve. You refer above to the cash buffer. The buffer is another thing entirely.

    The buffer is loan-specific and the magnitude is not, as far as I am aware set out in the EFSF framework agreement. This is the retention that I am talking about. I am suggesting that the Irish Government negotiators may have negotiated a lower loan specific buffer volume than was eventually agreed. This would, as I say, give the opposition reasonable grounds for putting forward a claim that the government did not get the best possible deal that could have been realistically offered.

    Furthermore, I would also ask why Ireland did not become a stepping out guarantor of the EFSF from the outset, and as far as I know, has still, for our own good, not applied to become a stepping out guarantor, given that it is inevitable.

    This, combined with bilateral rate agreements, causes some questions about how unreasonable the opposition really were in opposing the deal.
    they have to insist on overpayment, and they cannot be run as a kind of charitable cheap money bucket for the irresponsible, which is what Ireland would really like, because that defeats the whole purpose of the funds.
    I don't think that 'overpayment' in itself can seriously be challenged, rather it is the degree of overpayment that is the issue.
    People are calling for Ireland to default, and to trim the state deficit to as close as possible to zero as swiftly as possible - but if we can trim the state deficit in that way, we can avoid use of these funds anyway.
    I agree and I'm not calling on Ireland to default or refuse the funds or anything crazy like that - I'm merely pointing out that there are reasonable grounds to be dissatisfied with the outcome of the negotiations in contradiction of what you claimed earlier.
    And yet we have come a lot closer to a cheap loan than Munchau's 8%.
    Indeed. But Irish bond prices on the secondary markets have already dipped below 8% (yes, yes, the ECB) - if that were the case, we'd be better off without the deal.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    That document, nor that part of the document which you quote, is not explicit about matching the I.M.F. interest rate (which is of course the case anyway). I have read the other document put out in rebuttal to the criticism at the EFSM rate which says that it had been agreed to establish equivalent terms and conditions. However I have not seen the word equivalent used anywhere else. As far as I can see, the official documentation simply indicates that it would be on Ts&Cs similar to the IMF support, not that the two must charge identical interest rates specifically.

    Such a situation would suggest that there is indeed a maneuverable position on the EFSM interest rate. I'm not really sure how these points could be contested, but it is entirely possible that there is something I am missing here, and that somewhere we did agree to establish equivalent rates, so I remain open to persuasion on that.

    One can argue that 'similar to' is not the same as 'equivalent to', and that insofar as the word 'similar' was used rather than 'equivalent', there was some wriggle room on the rates. I'd accept that, but I don't think it offers very much wriggle room.
    As far as i am aware, the requirement is for up to 120% as described in article (5), section (2) part (a)/ page 11 of the EFSF Framework Agreement.

    I don't think your assessment is quite correct - i.e. that the EFSF raises 120% and keeps 20% as the cash buffer.
    The EFSF raises the principal aggregate sum, it then deducts the 50bp service fee and the appropriate margin. That amount is the fungible cash reserve. You refer above to the cash buffer. The buffer is another thing entirely.

    The buffer is loan-specific and the magnitude is not, as far as I am aware set out in the EFSF framework agreement. This is the retention that I am talking about. I am suggesting that the Irish Government negotiators may have negotiated a lower loan specific buffer volume than was eventually agreed. This would, as I say, give the opposition reasonable grounds for putting forward a claim that the government did not get the best possible deal that could have been realistically offered.

    I'll obviously have to review my understanding of the points you raise, but is the amount of the buffer stated in the MoU?

    I have to say that I don't think the opposition can have no grounds for opposing the deal, only that I don't think they have grounds commensurate with the level of criticism they've offered. Still, that's politics, of course.

    cordially,
    Scofflaw


  • Closed Accounts Posts: 11,299 ✭✭✭✭later12


    Scofflaw wrote: »
    is the amount of the buffer stated in the MoU?
    Is there an EFSF MoU? I must admit I didn't even know such a thing existed in the public domain. However there is this

    http://www.efsf.europa.eu/attachment/faq_en.pdf

    Section C (5) describes the three different requirements under discussion


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