Details of Ireland’s €85 billion bail-out agreed

As RTÉ reports, European Union finance ministers have agreed the €85 billion bail-out for Ireland.

Of the total package €35bn is to be used to support the banking system. Of that €10bn will be used immediately to inject fresh capital as a buffer against expected loan losses.

The remaining €25bn will be made available as a contingency fund, effectively a massive overdraft facility, to be drawn down by the banks as and when required.

And the other €50billion?  The Irish Government’s “budgetary financing needs”.

The BBC report adds

[European finance ministers’ chairman Jean-Claude Juncker] said: “Ministers concur with the [European] Commission and the European Central Bank that providing a loan to Ireland is warranted to safeguard financial stability in the euro area and in the European Union as a whole.”

From the Irish Government statement

The State’s contribution to the €85 billion facility will be €17.5 billion, which will come from the National Pension Reserve Fund (NPRF) and other domestic cash resources. This means that the extent of the external assistance will be reduced to €67.5 billion.

The purpose of the external financial support is to return our economy to sustainable growth and to ensure that we have a properly functioning healthy banking system.

The external support will be broken down as follows: €22.5 billion from the European Financial Stability Mechanism (EFSM); €22.5 billion from the International Monetary Fund (IMF); and €22.5 billion from the European Financial Stability Fund (EFSF) and bilateral loans. The bilateral loans will be subject to the same conditionality as provided by the programme.

The facility will include up to €35 billion to support the banking system; €10 billion for the immediate recapitalisation and the remaining €25 billion will be provided on a contingency basis. Up to €50 billion to cover the financing of the State. The funds in the facility will be drawn down as necessary, although the amount will depend on the capital requirements of the financial system and NTMA bond issuances during the programme period.

If drawn down in total today, the combined annual average interest rate would be of the order of 5.8% per annum. The rate will vary according to the timing of the drawdown and market conditions.

I’d like to see how that “average interest rate” was calculated.  Considering that the Irish Government are effectively lending €17.5 billion to themselves… from the National Pension Reserve Fund and “other domestic cash resources”.

Calling Frau Bundeskanzerlin, Frau Bundeskanzerlin, come on…

Adds  From the updated BBC report

Details of the 85bn euro plan include:

  • an interest rate on rescue loans of an average 5.83%
  • the 35bn euros allocated to Irish banks is divided into 10bn euros for “immediate recapitalisation measures” and 25bn euros as a contingency fund
  • the Irish Republic itself will contribute 17.5bn euros to the overall fund
  • the EU will contribute 45bn euros, including direct bilateral loans from the UK, Sweden and Denmark
  • the IMF will contribute 22.5bn euros
  • allows the Irish Republic to delay by one year to 2015 its deadline for reducing its budget deficit to 3% of GDP.

The Irish government has also said that interest payments on all state debt will account for more than 20% of tax revenues in 2014.

and from the updated RTÉ report

The Taoiseach said the loans would allow Ireland to fund budgets over the coming years.

The duration of the programme is for three years while the average length of the loans is up to seven and a half years.

Mr Cowen said people should understand that the loans are necessary to fund our budgetary requirements over the coming years.

He said this was money we would otherwise have got from the markets, but it would have been at higher prices.

Mr Cowen repeated that the four-year plan stood but the extended 2015 target for deficit reduction simply allowed for some scope if growth did not reach targets.

Update  Some more information about that “average interest rate”.  Via a post at The Irish Economy, here is the joint statement from EU Commissioner Olli Rehn and IMF Managing Director Dominique Strauss-Kahn.  And, more significantly, from the IMF press release

The choice of an EFF offers Ireland a facility with a longer repayment period, with repayments to the Fund starting after four and a half years and ending after 10 years. The IMF charges member countries a uniform interest rate on nonconcessional loans, which is a floating rate based on the SDR interest rate, which is updated weekly. (The SDR interest rate is a weighted average of yields on three-month Treasury bills for the United States, Japan, and the United Kingdom, and the three-month Eurepo rate.) For amounts up to 300 percent of quota, the lending interest rate is currently 1.38 percent, while the lending rate on amounts over 300 percent of quota includes a surcharge that is initially 200 basis points and rises to 300 basis points after three years. At the current SDR interest rate, the average lending interest rate at the peak level of access under the arrangement (2,320 percent of quota) would be 3.12 percent during the first three years, and just under 4 percent after three years.

Perhaps an economist, or someone else, could use that information to work out what the other interest rates should be to get the overall “average” of 5.8%?

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