The IMF Arrives. The Greens Leave.

By Eoin Fahy , Monday, 22nd November 2010 | 0 comments
Ireland’s formal application for EU/IMF assistance is a historic development, and today's Green Party call for a general election is a further significant though not totally unexpected move. Below I answer some of the most commonly asked questions about the package and today's developments.
 
Q: What are the implications of the Green Party's call for an election in January?
 

 

A: Obviously the Government cannot remain in office without the Greens, so it is now all but certain that there will be an election in January if not before. At this stage the key question for the markets, the EU and the IMF will be whether the Government can remain in office for another couple of weeks, in order to pass the Budget. At the time of writing this seemed likely, but not certain. Will all Fianna Fail backbenchers and government-supporting independents support the Budget, in the knowledge that they will have to defend the cuts in the Budget just a few weeks later?
UPDATE: Two independent TDs have announced that they too are withdrawing their support for the Government and the Budget. It remains unclear how the Budet can now be passed unless the Opposition suppport it.
 
Q. Why does Ireland now need an extra €80-90bn in borrowing?
A. The amount that Ireland will borrow over the next three years has not changed significantly as a result of this deal. It is who it will borrow from that has changed. Instead of borrowing from “the markets”, it will borrow it from other EU countries and the IMF.
 
There is one exception to this though. Until last week the government thought it would not need to borrow any more money to prop up Irelands banks. But recently, it has become clear that the banks need substantial extra capital. So this amount –  of say up to €20bn? – is indeed extra borrowing.
 
Q. How much will Ireland pay for this funding?
A. This has not yet been agreed, but it is likely to cost around 5% to 6%. This compares to a cost of around 6.5% if Ireland had tried to borrow from the markets (for the same three year period) before the announcement of the deal (assuming it could have!).
 
Q. Why did Ireland need to get EU/IMF help when it has enough cash-on-hand to last until next summer?          
A. It’s true that the Irish Government has enough money in cash and in the National Pension Reserve Fund to keep paying its bills for up to a year from now. But the Irish banks do not. They have seen substantial deposit outflows and the ECB has become very reluctant to provide “emergency” funding to replace those outflows. Since the Government has guaranteed all bank deposits, the banks’ problems become the Government’s problem, and so Ireland needed international help.
 
Q. Why do the Irish banks need more capital, as well as more liquidity?
A. Firstly, there’s an international trend towards expecting banks to have much more capital to protect the banks and more importantly the banks, governments and tax payers, if something goes wrong. So the level of capital that the Irish banks seemed to need just a few months ago now seems too low compared to banks in other countries. Secondly, the markets are strongly questioning the “official” estimates of how much losses the banks will make, as a result of bad loans. And if the losses turn out to be bigger than estimated, that raises the level of capital that the banks need.
 
Q. How big will the package be?
A. This has not yet been confirmed, but various sources have suggested about €60-90bn. This seems reasonable, if a little on the high side.
Over the next three years, Ireland will need to borrow roughly €40bn to finance its large deficits. On top of that, over the next three years there is about €23bn of existing borrowing that matures, and will need to be renewed. That gives a maximum requirement for the Government of, say, €63bn. On top of that is whatever amount of funding is required for the banks, and that is an extremely difficult number to estimate. We also need to remember that the government does have very substantial cash reserves, which could be offset against the above amounts.
 
Q. Will the money actually be used?
A. Possibly not.  Ifthe banks’ losses are no larger than the official estimates and ifglobal financial markets return to stability, and ifthe government uses its existing cash reserves and the money in the National Pension Reserve Fund, then theoretically Ireland might not need to borrow a single cent. But that is a lot of ‘ifs’, and it is more likely that funding will be drawn down soon, as least in part.
 
Q. Will the EU/IMF enforce much tougher cuts on Ireland?
A. Until the negotiations conclude, and the details are announced, we can’t say for sure. But it seems likely that the IMF/EU will in practice not make significant extra demands. The government has already announced that it will cut the deficit by €6bn next year. That’s a very large number and it’s hard to see how either the IMF or EU could ask for much more. They may, however try to improve measures which would arguably help Irish competiveness but which would be very unpopular, politically. One example would be to cut the minimum wage.     

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