Irish Economy EU-IMF Bailout: Hope, anger and denial on Ireland's Day of Infamy
By Michael Hennigan, Founder and Editor of Finfacts
Nov 29, 2010 - 6:13 AM
Minister for Finance Brian Lenihan appears to be reading the capitulation terms at the Ecofin special meeting of EU27 finance ministers which approved a bailout for Ireland, Brussels, Nov 28, 2010.
EU-IMF Bailout: Hope, anger and denial were common emotions on Ireland's Day
of Infamy, Sunday, November 28, 2010, when European Union finance ministers
approved terms of an €85bn aid package that will be subject to quarterly
European Union and bilateral European lenders, including the UK, Denmark and
Sweden, have pledged a total of €45.0bn and Ireland will contribute €17.5bn from
the national pensions reserve fund and cash reserves. The International Monetary
Fund's (IMF) contribution will be about €22.5bn, representing 2,320% of
Ireland's quota, under the Extended Fund Facility (EFF).
said on Sunday: "If drawn
down in total today, the combined annual average interest rate would be of the
order of 5.8% per annum. The rate will vary according to the timing of the
drawdown and market conditions."
Greece is paying
5.2% interest rate on its €110bn bailout. Ireland's support package
includes loans that range from 3 to 7 1/2 years, longer than the Greeks'
"If you were forced to take the loan, how
come you agreed to such a high interest rate?" was a question asked this
morning in Kuala Lumpur.
The Fund has been kinder than the European task
masters who are calling the tune on the bulk of the funding.
The IMF said on Sunday that the choice of an EFF
offers Ireland a facility with a longer repayment period, with repayments to the
Fund starting after four and a half years and ending after 10 years. The IMF
charges member countries a uniform interest rate on nonconcessional loans, which
is a floating rate based on the SDR (Special Drawing Rights -- the IMF's
internal currency) interest rate, which is updated weekly. (The SDR interest
rate is a weighted average of yields on three-month Treasury bills for the
United States, Japan, and the United Kingdom, and the three-month Euro repo
rate.) For amounts up to 300% of quota, the lending interest rate is currently
1.38%, while the lending rate on amounts over 300% of quota includes a surcharge
that is initially 200 basis points and rises to 300 basis points after three
years. At the current SDR interest rate, the average lending interest rate at
the peak level of access under the arrangement (2,320% of quota) would be 3.12%
during the first three years, and just under 4% after three years.
Taoiseach Brian Cowen said in Dublin that the
assumptions underlying the plan mean that, at its height, the burden of debt
will be 102% of GDP (gross national product), roughly where it was in 1992/1993
at the dawn of Ireland's Celtic Tiger period.
He said in 1985, the debt burden was
considerably worse than it would be under the EU-IMF programme for Ireland
announced last night.
In the past week, news reports suggested that senior bank bondholders could be
subject to 'haircuts' - - a term for forced cuts in their debts.
However, while anger that the burden on taxpayers
has not been reduced, given the fears of destabilisation in other fragile
markets, the expectations were unrealistic.
German and French
leaders Angela Merkel and Nicolas Sarkozy, European Central Bank president
Jean-Claude Trichet, European Council president Herman Van Rompuy, Jean-Claude
Juncker, head of the Eurogroup and European Commission president José Manuel
Barroso held telephone conversations on proposals for a new rescue mechanism for
Eurozone countries, also on Sunday, the EU said in a statement.
A proposal to make
private-sector creditors bear part of the burden of future economic woes was
agreed by the leaders.
Germany has been strongly pushing for a permanent crisis resolution mechanism
since the Greek crisis earlier this year.
The plan would take effect from 2013 and the issue of whether a country is
insolvent would be subject to a vote of Eurozone finance ministers, after a
technical analysis by officials from the EU, the International Monetary Fund and
the European Central Bank.
A new permanent
rescue fund will replace the existing €440bn European Financial Stability
Facility (EFSF) which expires in 2013.
The French government had opposed an automatic
“insolvency mechanism'” favouring a case-by-case situation but Germany won
agreement to have rules developed that would be based on International Monetary
The new system is expected to be phased in gradually after 2013 and it may take
up to eight years for the majority of a country's public debt to have been
issued from 2013.
The Eurozone needs to implement further stress tests followed by a recapitalization program, says Russell Jones, global head of fixed income strategy at Westpac Institutional Bank. He speaks to CNBC's Karen Tso, Bernard Lo & Sri Jegarajah:
Following the Ecofin meeting of EU27 finance
ministers Minister for Finance Brian Lenihan said junior bank bondholders would
be subject to steep losses but senior bondholders would not be hit.
“In the course of these negotiations I did raise the issue of senior debt
and the unanimous view of the European Central Bank and the Commission was no
programme would be possible if it were intended by us to dishonour senior debt
because such a dishonouring of senior debt would have huge ripple effects
throughout the euro system,” the Minister told reporters.
Lenihan said the joint efforts by German chancellor Angela Merkel and French
president Nicolas Sarkozy to compel private investors to assume sovereign
bailout costs had weakened Ireland’s position.
The Aftermath: Denial, anger and hope
Last week's four-year budget plan brought some realism but also reflected
continuing failures to tackle sacred cows.
If the annual real GDP does not reach an average of 2.75% in the period
2011-2014, the debt level will rise.
Besides as Finfacts has stated many times, there is no credible jobs
While Ireland will soon be paying 20% of its tax revenues in interest on its
national debt compared with 28% in 1991, the net cash receipts from Europe in
1991 at 6.2% of GDP (gross domestic product) more than offset the interest
burden. In 2013 we will become a net contributor to the EU budget for the first
time since 1973 after receiving over €40bn in aid.
In 1987, Ireland's debt to GDP ratio was 125%
and the spread on Irish 10 year bonds with the German bund was 700 basis
points (bps) or 7%. On joining the European Exchange Rate Mechanism (ERM)
the spread began to fall, and was down to 100bps in 1992. Before joining the
euro in Jan 1999, the spread was 10-20bps.
Employment in the foreign-owned sector which accounts for 91% of Ireland's
tradeable exports, is back to 1998 levels while the global economy’s centre of
gravity is moving to Asia. We can only benefit from emerging markets indirectly
but Ireland as a manufacturing base for multinationals is not in a favourable
location relative to Asia.
Jobs growth in the exporting sectors has been concentrated in International
Financial Services Centre (IFSC) firms; as discussed in an op-ed article today,
growth in pharmaceutical exports,
has coincided with job shedding.
Spending billions on university research will never create a jobs
engine; startups need local markets to gain traction before entering export
markets. Besides, the standard venture capital exit in Ireland, is a trade
sale to a bigger American firm.
One of the first high tech clusters in
Europe was in the UK in the area around Cambridge University. It is called
Silicon Fen and has five times more research and development jobs than the
UK average. There are more than 30 leading research institutions across the
East of England, and the area is said to be characterised by a culture of
science-based start-ups and university spin-outs. After 30 years,
Cambridgeshire has about 30,000 jobs in technology companies and the
majority of firms employ less than 10 people.
Enterprise Ireland said last July that
investment in over 800 start-up companies over a 20 year period (1989 -
2009) yielded only about
14,000 jobs. Since the agency started funding the commercialisation
of academic research over 10 years ago, 140 spin-out companies have been
created employing over 1,000 workers -- an average of 7 employees per firm.
ETH Zurich, one of Europe's top science
universities could only produce less than 1,000 jobs from over 100 spinouts
in a decade.
Finfacts is arguing for realism not to
scrap the science budget; we have a European market on our doorstep and a
great opportunity for using R&D to develop the food and drinks industry.
Policy focused on waiting for a Google, Facebook, Apple or Microsoft, is
doomed to fail. Besides all these giants were not pioneers in their sectors.
They improved on others' ideas.
Despite the economic woes,
slow-motion reform in the public sector is matched by business as usual
among the big players in the protected private sector.
wrote last week of sick pay doubling in the public sector since the
1980s with the average civil servant taking 11 days sick leave in 2007.
Payments to barristers by the DPP rose 11% to €15.2m in 2009 despite an
8% cut; the Irish Times reported last April that its own columnist Noel
Whelan was the 5th highest earner at €234,766 (inclusive of VAT); Lawyers become multimillionaires on the public payroll investigating
corruption which of course is confusing and besides reform of the underlying
cause of one aspect of corruption, land rezoning, is a taboo issue.
The Competition Authority (CA) says the legal profession in
Ireland is organised into a highly rigid business model: access to barristers
for legal advice is limited to a few approved clients, barristers cannot
form partnerships or chambers or represent their employers in court; there is no profession of “conveyancers”
in Ireland, as
in other common-law countries, and this limits competition in conveyancing
services; the title of Senior Counsel is inclined to distort rather than
facilitate competition; junior counsel generally charge a fee equal to
two-thirds of the senior counsel’s fee, regardless of the work done by each
barrister, despite the fact that this practice was identified as
anti-competitive in an independent report on the legal profession 16 years ago;
establish objective criteria for awarding the title of Senior Counsel.
The level of solicitors’ fees in the High Court increased by 4.2% above general
inflation annually over the period 1984 to 2003 while the level of senior
counsel fees in the High Court increased by 3.3% above general inflation
annually over the same period.
The public sector is the biggest customer of the legal
profession as with other professional services.
If not now, when will it change?
Transparency and political will to clear the dust from several
CA reports is all that's needed.
Decisions regarding the destination of most Irish exports are not even made
in Ireland; besides, why isn’t the UK enjoying an export boom after a 20%+ trade
weighted devaluation since 2007?
Let's hope the IMF will speed both governance and economic reforms as we
are in a world with emerging giants and as we should realise after yesterday
that there is no such thing as a free lunch.
Businessman John Barrett says economist Joseph Stiglitz brilliantly describes
the 'failure of agency' in his lecture 'The road to ruin' where rewards and the
consequences for failure have become divorced in corporate America and most
especially in this financial crisis. "The decision makers who led us to this
pass are largely insulated from the worst of the consequences to come, protected
by a particularly dysfunctional set of Irish rules of agency...."
Nov. 26 (Bloomberg) -- Iceland's President Olafur R. Grimsson
about the country's progress since receiving a $4.6 billion International
Monetary Fund-led loan. He speaks with Mark Barton on Bloomberg Television's
"On The Move."
across 12 advanced countries of government-guaranteed debt
issued by banks is about 6% of GDP. Ireland was the outlier in 2009
with a sovereign exposure of 55% of GDP.
The issue of ECB President
Jean-Claude Trichet and the
Irish State bank guarantee of Sept 2008, is reminiscent of arguments about London-Dublin
cable traffic during the Treaty negotiations in 1921. The main story
of course was why the head of the revolutionary government had
decided to stay in Dublin not communication problems.
There was no
official ECB policy in Sept 2008 on issuing blanket guarantees and
neither had EU finance ministers promoted it.
Ireland was the ONLY Eurozone country to issue a blanket
guarantee and a week later Denmark made a similar move.
According to the IMF, the median across 12 advanced countries of
government-guaranteed debt issued by banks during the crisis or in
the case of Denmark/Ireland including existing debt, was about 6% of
In ascending order, US (2.5% of GDP), Germany (3%), Portugal, Spain,
France, Austria, Sweden, Netherlands, UK, Australia, Denmark and
Denmark’s exposure was 20% of GDP and
Ireland was the outlier
with an exposure of 55% of GDP — all the others had an exposure
The news on the Irish guarantee was presented as a fait accompli
to the ECB, Ecofin and Eurogroup heads on the morning of Sept 30,
coinciding with the issue of the news to the markets.
Once the announcement was made, it would have been very difficult
to reverse it.
As regards the Lenihan-Trichet phone conversation
a week before the guarantee was issued, I doubt if Trichet gave the go-ahead on a blanket bailout.
Unlike his gaffe-prone predecessor, he is always measured when
speaking on policy issues.
This story is akin to a unit of a multinational making a major
decision without any consultation with headquarters but assuming
that everything would be grand because of a conversation a week
before with the CEO.!
Decisions made in a panic situation seldom turn out right.
The banks had access to the ECB’s emergency liquidity program
which was in place since Aug 2007.
The unlimited deposit guarantee could have been issued and the
issue of guaranteeing debt could have been discussed with the ECB in
a calmer atmosphere.
If the blanket guarantee was issued to save Anglo, it was an
absolutely reckless move to make in the absence of detailed
information on the state of the bank.
Remember the context - - yes the crisis had intensified in the
previous 2 weeks after the collapse of Lehman - - but it had been 13
months since the onset of the credit crunch; the world’s biggest
insurer had to be rescued by the US government and the prospects of
an Irish soft landing had evaporated and what did the Department of
A Sept 18th PowerPoint presentaion prepared by Anglo and the
financial regulator chanting his mantra on ‘resilient’ banks