Thursday 14 December 2017

Rescue-deal clause halts government move to pay off IMF loans

Willem Buiter, chief economist at Citi Group Inc.
Willem Buiter, chief economist at Citi Group Inc.
Donal O'Donovan

Donal O'Donovan

The Government cannot replace expensive IMF bailout loans with cheaper market funding without triggering a clause in the original rescue deal that would wipe out the benefits of such a move, the Irish Independent has learned.

Analysts including global bank Citi's chief economist Willem Buiter have raised the possibility of the Government refinancing the IMF share of the €67.5bn bailout to reduce borrowing costs.

The yield, or implied borrowing cost, for 10-year Irish government bonds closed below 3pc on the markets for the first time ever on Thursday.


On the markets, Ireland can borrow two-year debt at an annual interest rate of around half a per cent. The interest on five-year bonds is 1.4pc, and even 10-year debt can be raised for less than 3pc at current prices.

The average lending rate on IMF loans to Ireland is 3.04pc if the loan is outstanding for less than three years, rising to 3.85pc for longer term loans.

The €22.53bn of IMF loans amounts to around a third of the overall 2010 bailout, so the savings from replacing the debt would be substantial.

IMF loans can be repaid at any time by borrowers without any penalties. In theory, it would be financially more favourable to borrow cheaply on the markets and use the lower interest bonds to repay the debt.

However, the Irish Independent has learned that paying back the IMF early would trigger automatic repayment of a share of the bigger, and less onerous, EU share of the bailout. It makes it an uneconomic prospect, an analyst said.

Under the little-known clause in the original deal, any repayment by Ireland of loans from either the EU or IMF would trigger automatic repayment of an equal portion of the other bailout debts.

European agencies supplied two-thirds of the bailout so, for example, paying off 'just' €10bn of IMF loans would trigger a need to repay €20bn of the European Financial Stability Facility (EFSF) and European Financial Stabilisation Mechanism (EFSM) loans.

In absolute terms the need to raise such huge sums could drive up borrowing costs for the country.

Even if that was not an issue, the EU loans are less onerous on taxpayers. Crucially, extensions to the original terms of the bailout mean the loans have terms of, in one case, more than 30 years.

Having long-term debt locked in at a relatively low price is highly desirable from a debt management perspective, so any move that would trigger early repayment of those loans is regarded as unattractive.

Irish Independent

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