Interest Rates on the EU Loan

UglyBolloxFace

Hello,

I have a quick query about the EU loan to Ireland, what with all the talk on restructuring and reduction in the interest rate.

When Joe Higgins spoke to Barroso in the EU parliament about the bail-out, Barroso retorted by basically exclaiming 'Ireland got itself into this mess, we the EU are here to sort it out, for the good of Ireland and for the good of Europe'.

(if a video of said exchange is needed, I will provide one).

Now, the part I don't get is - if the bail-out is truly to help Ireland out of this mess, then why are we being charged any interest rates at all? Why can't they provide an interest-free loan?
If my friend was in a spot of financial bother and required a loan, I would wholeheartedly provide the loan without any thought of charging interest, so why is it happening here?

Of course, you could say that you can't compare a loan to your friend with a loan between a nation and a large organisation like the EU, but why not?..I don't see anything wrong with the analogy.

If the EU truly wanted to help us out of this rut, then they wouldn't charge interest. It, to me, appears that they are using this as a means to make profit.

Your views?

Scofflaw

UglyBolloxFace wrote: »

Hello,

I have a quick query about the EU loan to Ireland, what with all the talk on restructuring and reduction in the interest rate.

When Joe Higgins spoke to Barroso in the EU parliament about the bail-out, Barroso retorted by basically exclaiming 'Ireland got itself into this mess, we the EU are here to sort it out, for the good of Ireland and for the good of Europe'.

(if a video of said exchange is needed, I will provide one).

Now, the part I don't get is - if the bail-out is truly to help Ireland out of this mess, then why are we being charged any interest rates at all? Why can't they provide an interest-free loan?
If my friend was in a spot of financial bother and required a loan, I would wholeheartedly provide the loan without any thought of charging interest, so why is it happening here?

Of course, you could say that you can't compare a loan to your friend with a loan between a nation and a large organisation like the EU, but why not?..I don't see anything wrong with the analogy.

If the EU truly wanted to help us out of this rut, then they wouldn't charge interest. It, to me, appears that they are using this as a means to make profit.

Your views?

Extending the analogy to cover the actual situation helps. In fact, you have several self-employed friends who have got themselves and their businesses into serious financial hot water speculating on property - despite your well-intentioned advice and warnings. The amounts they owe, in total, are very large indeed, and you're not made of money. You've been approached by one of your friends for a digout - not for a few quid, but for tens of thousands. You don't have tens of thousands in ready cash (and you have your own business and your own family to consider), and you'll have to borrow the money yourself - your mate can't, because he's not welcome as a borrower anywhere. Not only will you have to borrow the money, but everybody knows you're borrowing it for your insolvent mate, and so they don't want your insolvent mate's assurances that the money will be paid back, but your personal guarantee as well as various other commitments to assure them they won't lose their money.

So to borrow the money to lend your mate, you have to assure the creditors you'll pay it back if his can't - and there's a good chance he can't. Behind him are several other of your insolvent mates, needing even bigger digouts - which you'll also have borrow for, and put your personal guarantee on. The total sum is enough to drag you down along with them if they can't pay back the money and you have to. And you're answerable to your family (aka your national taxpayers and voters).

You're saying you would hand over the cash as soon as you've borrowed it, pay back the interest on the borrowings yourself, pay back the principal as well if he can't, and not charge him anything for the privilege. And having seen the deal you've given your first mate, how likely is it that your other mates will came and tap you for cash on the same basis rather than trying to sort things out themselves? How will you refuse them the same deal - even though the sum total of all their needs is far more than you can realistically afford? How will your family feel about your bailout of your mate's business at their expense?

Stepping away from the analogy - the minimum rate that can really be charged is the rate at which the money is borrowed in the first place, but the various extra commitments made by the EFSF countries do raise that somewhat. The margin on top of that is supposed to be dissuasive, because it's not a rate for Ireland, but a rate for borrowing from the facility, so it applies to Portugal, Spain, Italy etc as well. If the loan were interest-free, or even just at the same rate as the money was borrowed by the EFSF, it would be cheaper than the market rate - what incentive then is there for the PIIGS countries to reduce their borrowings? Why not just borrow as much as possible, blow it all on PS wages because the unions would know the cash was there, and then turn around in four years time and say "sorry, we're out of money (again)".

cordially,
Scofflaw

UglyBolloxFace

Scofflaw, thank you very much for your extremely informative reply.
Having read it, I now think I have a deeper understanding of the situation. And taking this into account with the majority of your other posts I can now say with certainty that you, sir, know a lot about stuff:cool::pac:

Cheers.