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Seamus Coffey: A second bailout? Not a very helpful or relevant contribution from Willem Buiter


Willem Buiter. Photo: Damien Eagers

Willem Buiter. Photo: Damien Eagers

Willem Buiter. Photo: Damien Eagers

WILLEM Buiter, the chief economist with Citigroup, has suggested that Ireland needs to negotiate a second bailout in advance of the conclusion of the current programme at the end of 2013. While it seems very likely that Ireland will need continued official funding into 2014, it is not clear why he thinks such a complete bailout negotiation is necessary.

Ireland is fully funded until the end of 2013. Over the next two years the Exchequer Deficits will come to €34 billion and there is around €12 billion of maturing government bonds that need to be repaid. Ireland needs €46 billion of funding to get to the end of 2013.

There is about €34 billion of the original EU/IMF set of loans that has yet to be drawn down so this will provide the bulk of our funding needs over the next two years. The average interest rate on Ireland’s EU/IMF loans is now 3.5pc, down from nearly 6pc last summer.

The State Savings Schemes have seen a significant inflows of funds and over the past four years an average of €1.8 billion a year has been raised by Prize Bonds, Savings Bonds and latterly the National Solidarity Bond. It is forecast that these will raise a further €3 billion over the next two years at an average interest rate of around 3pc..

Even with the EU/IMF loans and the money raised through the State Savings Schemes there will still be a shortfall of around €9 billion to get Ireland through to the end of 2013. Rather than being in a bind, Ireland has actually has two options to source this money.

Firstly, we can attempt to go back to bond markets and try to raise this money privately. The government’s plan is that we will “dip our toes” in bond markets either late in 2012 or early in 2013. This will likely see some short-term debt issued such as six-month Treasury Bills.

This exercise will simply be to gauge the demand for Irish government debt rather than put the country in a secure funding position. If demand proves stronger than current conditions imply some long-term debt could be issued but Ireland is unlikely to be able to meet its medium-term funding needs solely from private sources.

The second option to meet our funding needs to the end of 2013 is to use our existing resources. Although it does not get much attention, the Exchequer Account had a positive balance of more than €13 billion at the end of 2011. It may be perceived that Ireland is broke but we still have €13 billion of cash in the bank (with an additional €5 billion still remaining in the National Pension Reserve Fund).

With €9 billion required to get us through to the end of 2013 it is clear that Ireland can get the €46 billion needed to get to the end of 2013 very easily. In fact, if Ireland raised no private funding over the next two years there would still be €4 billion of cash in the Exchequer Account at the end of 2013.

However, that would not leave us in a very strong position going into 2014. In fact, we would face a crunch just two weeks into that year. On the 15th of January 2014, there is a €12 billion government bond due to mature. This 4pc bond was issued by the NTMA in January 2009. With only €4 billion of cash remaining we would not be able to repay this bond on our own if we have no access to private funding.

There will also be an Exchequer Deficit of around €10 billion to be funded in 2014. Ireland will not run out of money before 2013 but more than €20 billion if funding is required just to get through 2014. This is money that we do not have. Conditions could change over the next two years that would see us in a position to raise this money from market sources but at this remove that seems unlikely.

After January 2014, Ireland does not have a government bond maturing until April 2016 and the Exchequer Deficit is forecast to be down to €7 billion in 2015. If Ireland can get through 2014, and January 2014 in particular, the pressure on funding eases significantly.

It is analysis such as this that prompted Buiter to make the comments he made this week. However, they appear to be somewhat exaggerated. At the EU summit on the 21st July last year, the following was was agreed by EU leaders: “We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes.”

Official support for Ireland is due to expire in 2013, but if we do not have the ability to raise the funds independently further support will continue be provided by the EU. Ireland is not about to run out of money any time soon and official funding will be provided to get us through the crucial period in early 2014 if we need it.

Buiter is right to suggest that Ireland needs to make provision for continued support once the current programme expires. He is wrong to indicate that this requires the negotiation of a whole new bailout. We just need a continuation of the existing programme.

Unless you are opposed to the programme as it stands, there is no additional cost from this continuation or “Bailout 2” if you wish. The EU are currently lending to us at less than 3%. If we borrowed from markets, and we could try to do so at any time, we have to pay in excess of 8% interest to raise money. If we are to stick to the terms of the programme, and the government have made clear that this is their intention, there seems little point in turning away from the borrower that is providing the cheapest source of funding.

The conditions under which this continued support promised by the EU leaders are not entirely certain. If conditions of the current programme are extended we can expect to borrow money at around 3% as long as we continue to reduce the budget deficit to the 3% of GDP target by 2015.

However, the paragraph in the EU statement that begins with the above quote does mention Ireland’s willingness to “participate constructively in the discussions on the Common Consolidated Corporate Tax Base draft directive” but it is not clear what this actually means.

In his comments Buiter emphasised that Ireland was not Greece and he also added that, in his view, Ireland was not Portugal. He expects Portugal to join Greece in requiring a debt restructuring and to default on some of its sovereign debt. Buiter puts Ireland in a different category and believes that Ireland can avoid a sovereign debt restructuring. Buiter does not believe that Ireland will default.

He does argue that some additional external support will be required. As well as continued funding he argues that the €31 billion of Promissory Notes provided to Anglo Irish Bank and Irish Nationwide need to be refinanced. This is a complicated issue but it is not clear that substantial savings can be generated if this is done. There would be some funding benefits in the medium term but the capital amount on the Promissory Notes would remain at €31 billion.

Ireland will get the external funding support after the end of the current programme in 2013. Changes to the Promissory Notes have been discussed for over a year now but there is little sign of any progress on that issue.

Ireland does not face a problem of running out of money and trying to create a debate about this issue merely serves as a deflection from the true problems we face. If all the banking related debts and repayments are omitted Ireland will have a general government deficit in 2012 of around €13 billion.

The banking crisis has created massive problems for this country but we do not need to be looking for false external foes. There are still huge domestic issues to be overcome but if we can resolve these we will get the external support to get us through this crisis.

Seamus Coffey is a lecturer in economics at UCC and a blogger at http://economic-incentives.blogspot.com