Why is our bailout part funded by the EU?

DoubleBogey

Considering the IMF appear to be a lot more sympathetic to Irelands plight and focused on economic stability and recovery rather than punishment and domestic electoral pandering, why is it that we are partly funded by the EU? Could we not cut them out of the deal and go direct to the IMF?

later12

I think this is a very fair question, since the IMF standard lending rate, is lower than the European rate. There are two problems, though

(i) The IMF and the Eurozone agreed in 2010 that they would co-operate on crisis mechanisms within the Eurozone area. Therefore, co-operation with the Eurozone was going to be a feature of any appliucation that Ireland made to apply for IMF assistance.

(ii) Ireland actually does need Europe on this: especially in relation to our banking system and the assistance made available by the ECB, both in terms of how it bought up our sovereign bonds on the secondary markets and in its provision of Emergency Liquidity Assistance.
Now there is also an argument there - a valid one - that having Ireland go to the IMF on its own would be unhelpful for the Eurozone. They needed us to co-operate with their crisis mechanism, and not an external one. However, because of point (i) above, that was never going to happen. Even in the absence of that agreement, the IMF were never going to provide a programme whereby nobody on either side of the table had control over monetary policy - in that light, the ECB had to be involved in our bailout. So the argument is a little circular.

One has to, on the face of it, find the thought of going where the rates are cheapest the appealing option. However, it is not to be. I cannot see how we could envision doing such a thing without leaving the EU and the Eurozone, and for various reasons that is probably a far more unpalatable option than suffering some percentage points on our EFSF-EFSM lending rates.

The real question, if the question of the lending rate cannot be tackled to our satsifaction, is (i) of the principal being borrowed or on its maturity proifile (restructuring/ reprofiling/ possibly write downs) or (ii) the establishment of an alternative means of funding for the sovereign (European sovereign bonds, special vehicle for peripheral bank debts in Europe).

In summary, resort to the IMF as a result of frustration with the European crisis mechanism is an attractive idea on the face of it, but in reality it is unworkable. Therefore an alternative means of improving our debt sustainability is called for.

spank_inferno

It may have been in the optimistic hope that a sense of solidarity would prevail from our EU brothers and we would get a competitive loan rate with no meddling terms & conditions.

5.8% average interest rate and Mr Sarkozy on his own personal vendetta to raise out taxes have put paid to that!

In retrospect we should have just gone to the IMF only or even the chinese!

later12

spank_inferno wrote: »

we should have just gone to the IMF only or even the chinese!

There is no motive for any Chinese assistance. The Chinese want to see a strong Euro to pull on the dollar as a global reserve. It is the Chinese who are perhaps most direct in their enthusiasm for the Euro in buying up EFSF bond issues.

Unilateral assistance for Ireland by China could destroy the European banking system, and the Euro itself. And given its interest in the Euro, why would China want to do that? In fact, I cannot think of any major power capable of such funding who would benefit from the destruction of the Euro.

Scofflaw

It should be pointed out that while the rate of the IMF loan is theoretically lower, the currency conversion required from the IMF's SDR currency means that it is effectively about 5.7%, much the same as the other loans.

As to the margin on the European loans - those were agreed by Ireland well in advance of us turning out to need them. I agree that they could be reduced - as indeed does everybody bar France and Germany. We have the Commission, the IMF, the OECD, and 25 of the 27 countries on board, but since the operation of the funds is by unanimity, it's sufficient for one country to oppose us for any rate reduction to be blocked.

The margin on the loans is not simply there for profit. It is there partly to ensure that the funds receive AAA ratings despite the fact that not all parties to them are AAA rated (few, in fact) and partly to absorb some of the risk that the lenders are taking on in lending to us. If, at this stage, we default or restructure, we will be defaulting on them (and on the ECB, so they have a double exposure).

Finally, while we may be able to negotiate an interest rate reduction on the European loans, there is no corresponding possibility of negotiating a reduction on the IMF loan, because the rate is calculated solely with respect to our contribution to the IMF (in that sense, and absolutely no other, it's a bit like a mutual society). So there are pros and cons - no electioneering by some kind of IMF Sarkozy, but no re-negotiation possible anyway.

cordially,
Scofflaw

Icepick

Other EU countries want to see that Ireland is taking steps to lower its spending before they agree to a higher risk/reward ratio.

Prakari

Without easy prey like Ireland, the IMF would be bankrupt. Interest payments from Ireland will be funding Lagarde's salary.

Icepick

Prakari wrote: »

Without easy prey like Ireland, the IMF would be bankrupt. Interest payments from Ireland will be funding Lagarde's salary.

Poor Ireland, colonized again.
If only true Irish statesmen and patriots had a chance to run this state!