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Tuesday 16 September 2014

Wrong signals by Coalition could sink IMF loan deal

Published 17/08/2014 | 00:00

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Minister for Finance Michael Noonan with Enda Kenny (right)

First the good news. The Department of Finance and NTMA have come up with a crafty scheme that could save the Exchequer €375m every year in interest payments on the €22bn it owes the IMF from the bailout.

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The bad news is that because of the nature of the Troika bailout, securing this will require approval from all 27 EU states, and could even involve parliamentary approval in some countries.

It is not impossible but it is quite difficult. As we have learned through the crisis, when it comes to dealing with Europe and our EU partners, when they give something, they like to get something back in return.

Securing a deal of this kind could see us having to cash in that rather vague commitment Enda Kenny secured on Ireland being a special case when it came to recapitalising the banks.

This acknowledgement looked like a chip that could be cashed in at some point in the future. Unfortunately, since then the Irish Government has not been able to find a cashier anywhere. Several ministers in EU governments have shot down the idea of Ireland getting back some of the money that was put into AIB and Bank of Ireland.

The Irish State looks set to make a profit on its Bank of Ireland shares. A plan is forming to float off part of AIB, which would return at least some of the €20bn that went in there.

Even though early payment of IMF loans and the recapitalisation of banks are completely separate, it is hard to imagine that our EU partners will cut us some slack on both of these issues.

The IMF situation should be straightforward. Ireland is paying just under 5pc interest on around €18bn of the €22bn we owe the IMF as part of the bailout programme. It has to be noted that we are paying the IMF a margin on the money it lent us of around 3pc.

We paid 0.5pc in fees as particular tranches were drawn down. This mechanism saw Ireland hand over around €240m between the end of 2010 and the end of 2012 in handling fees alone. The interest bill on the IMF money is costing around €1bn per year to service.

Given that Irish government bond yields are down around 2.3pc, there is an opportunity to raise the money elsewhere, pay off the IMF early and save €20m to €25m per year on every €1bn paid back to the IMF. This, of course, assumes that much money could be raised on international markets at these very low rates.

Unfortunately, the EU and ECB funds are tied into the IMF money. The IMF has said we can pay it back early if we want, but under the terms of the bailout programme, this will automatically trigger a payback of the others too.

The EU money is cheaper so there is no real saving in raising tens of billions in the market to pay back everybody. Hence, each EU country would have to agree to amend the terms of the deal to allow Ireland to pay back the IMF first.

It is common sense. The reason loans are tied together is to make sure one creditor (the EU and/or ECB) is not disadvantaged by having another paid back first (IMF).

The more Ireland can reduce the interest rate bill on its national debt, which last year amounted to a staggering €8bn - the less risk Ireland poses of not paying back the Troika money. It's a no-brainer.

But Europe is about politics. The more good news EU countries hear about Ireland's recovery, the less they are likely to go out on a limb to help. We could really undermine our case by talking so publicly about public sector pay increases at a time when we still need to borrow €8bn a year just to balance the books. This is completely the wrong message to send out and it will not play very well across Europe.

Some countries are naturally more sympathetic to Ireland than others and for them it shouldn't be a problem. But it is a tricky mix. Once again, we may end up relying on the kindness of strangers in this economic crisis.

Hence, the likelihood they will want to see the other issue of retro-active recapitalisation of the banks taken off the table. If this happens, it might never be publicly announced, as one is not directly linked to the other. But it may end up as some kind of tacit understanding. The kind of understanding the EU is full of. It is probably a battle Ireland has already lost anyway, so it may be inevitable.

It is extraordinary to see just how much the Troika powers stand to make from the Irish bailout. Estimates suggest that if all the money was paid back on time and not early, it would be worth several billion euro.

Ironically, the entity taking the lowest profit margin on loans to Ireland is our old enemy the UK. The British government is charging just 0.18pc service fee or margin on the €3bn it has lent Ireland, compared to 3pc at the IMF and around 1pc with the EU and ECB.

The public has seen the painful impact of austerity cuts that save the Exchequer just a few million euro per year. Look at the cuts to medical cards for children with serious illness or disability. The final tightening of that scheme, which caused so much hardship, was due to save just €20m. Dismantling the entire town council system is expected to save about €4m per year.

Yet, the slightest adjustment to one aspect of the bailout programme or the structure of Ireland's national debt, can save hundreds of millions per year.

Because Ireland's sovereign debt is now just under €200bn per year, a saving of just half of one per cent by re-financing part of it, is worth €1bn per year.

This is where the action will be in the coming years. Our interest bill on the national debt last year was €8bn. Let's put that in context. In Ireland last year there were about 1.88m people working. Together they paid €17.8bn in income tax. Ponying up the €8bn interest on the national debt amounted to the income tax paid by around 850,000 workers.

The annual saving Finance Minister Michael Noonan is targeting through the early payment of the IMF loans could be about €375m, or the income tax paid by 40,000 workers per year.

Noonan and Enda Kenny have a big role to play convincing 27 governments to make this technical amendment to the troika deal. But after that, the NTMA has the really big role to play.

They are all highly paid experts down at the NTMA. And they need to be, because the decisions they make can save or cost the State billions in an instant. For example, they had to weigh up how much money to raise on the bond markets when Ireland first exited the bailout programme.

They chose to play it safe and reduce risk down the road by borrowing more upfront than we actually needed. It was prudent but probably very expensive, because bond yields fell substantially afterwards.

But then again yields might not have fallen 
so much if the NTMA 
had not ensured the country was already well funded at that stage. If on balance, they chose the safer and more costly option, they 
will have multiple chances 
in the future to find other ways of clawing back those losses. It's 
all about very expensive swings and roundabouts at the NTMA.

There is a big prize here. The Government must not blow it.

Sunday Indo Business

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