Saturday 16 December 2017

The bailout choices and what they could mean for country

Emmet Oliver

1. Full-scale bailout

The IMF/EU would lend directly to the Government at rates of interest below those available in the bond market.

The State currently must raise around €80bn between 2011 and 2014. The IMF could simply provide the funding instead of the bond market, which should lower the cost of debt interest for the Exchequer and remove all market uncertainty for Ireland for four years. In this example, the banks would be able to have their capital increased collectively by €20bn over four years, boosting their capital adequacy ratios dramatically.

The exact instrument the IMF/EU would use to top up the bank's capital is not clear yet.

Pros: Cheaper than trying to borrow in the market in current climate.

Cons: Banks get nationalised, leaving them the property of the Government or the outside agencies.

2. Government bailout, halfway house for the banks

The Government takes a loan from the IMF/EU, but the banks don't actually draw down any money for now. Instead, the banks are provided with cash if their existing reserves run out. The availability of this money is meant to give the markets assurance that no matter how bad losses become there is enough capital available to mop them up.

Pros: The State doesn't have to nationalise the banks upfront.

Cons: Banks may do everything to avoid taking the extra capital, so may not own up to bad loans.

3. Government borrows with guarantee

The Government's normal borrowing would be guaranteed by the IMF and EU. The guarantee would lower the cost of borrowing. It would effectively be one last chance for the Government to convince the bond market, with the added benefit of a guarantee from two well resourced bodies.

Pros: Keeps Ireland in the bond market.

Cons: The use of guarantees is now frowned upon.

4. Bank bailout plus government borrowing

The majority of the funds go to the banks, with the IMF/EU taking over the ECB's role in providing money to the banks. The Government would also take a loan to give it a second source of funding.

Pros: The banks' addiction to the ECB is cut and market access remains.

Cons: Dependence on the ECB is simply replaced by dependence on the IMF/EU.

5. Bailout promise

The IMF and the EU could design a package where both the Government and the banks don't draw down a single cent. The IMF, for example, offers so-called "precautionary access" to funds. Such arrangements are used when countries do not intend to draw on approved amounts, but retain the option to do so should they need it.

Pros: Less humiliation and loss of sovereignty involved.

Cons: The markets are unlikely to be convinced by this and it doesn't deal with the funding challenges in the banks.

Irish Independent

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