28 Nov 2010

Ireland Bailout: European authorities have blinked

The big headline from tonight is that, contrary to speculation in the Irish press, if you are a senior bondholder in Irish banks you are safe. 100 per cent safe. Some might argue that you have got away scot free. The only burden-sharing for the people that fuelled the banks that fuelled the disastrous Irish credit boom will be for junior bondholders, of so-called subordinated debt, and as I have been blogging, that process is already happening, so it’s not news.

The European authorities have blinked, and do not want to risk another Lehman.

That will help prevent some contagion, but fighting against that is the underwhelming size of the programme. This is not an 85 billion euro package. It is a 67 billion euro package, with the remainder coming from Ireland itself. Ireland has its own national rainy day fund. As far as I can see, that will all be drained to help recapitalise the banks.

So in terms of tomorrow’s market reaction, the safety of senior bond holders may be weighted against the smaller than expected size of the package.

As for Britain, well it could be joked that our Anglo-Irish Chancellor has made a £3.2bn Anglo-Irish loan to bail out the misdeeds of a bank called…. Anglo-Irish.

That loan will have an interest rate of about 6 per cent. And that will be on money the UK borrows on the international markets at roughly 3 per cent. Very neighbourly. And I understand that Mr Osborne took Ireland’s side in negotiations over the interest rate on European facilities. There is a further £3.4bn of exposure to potential loss from European Union and IMF guarantees.

None of this will add to the UK’s already huge annual deficit. But the £3.2bn bilateral loan will be added to our national debt. The deficit is unaffected because it is classed as a “financial transaction” because the UK will receive an IOU from the Irish state. All in all, this is pretty small stuff, but it might create presentational difficulties for the Chancellor as austerity bites Britain.

To that end he will present this is as one part of a two-sided deal whereby Britain gets an opt-out from the Permanent EU bailout mechanism that will start in 2013. Fine, but what about the fact that the Ireland programme has already used up 40 per cent of the European Financial Stability Mechanism to which we are definitely exposed? Will that not have to be expanded?

And as for Ireland, it is difficult to argue that Ireland’s sovereignty is tonight severely impaired. It will face, regardless of the results of the election, several years of quarterly checks on spending and other policies by the IMF and European officials. This is quite harsh on Ireland because it is clear that Ireland was not particularly fiscally profligate, until it decided to guarantee everything in sight in the 2008 banking crisis. I said at the time to people describing this as a “masterstroke” that it was a straightforward socialisation of banking risks by the Irish government. Today they pay the price.