Market Sentiment Lifted in the Near-term as Irish Bailout Deal Finalized

By: Milla Shaw in Forex Consultant on Nov. 26, 2010

Ireland and EU/IMF reached a bailout agreement over the weekend. The financial package will cover financing needs up to 85B euro but unusually 17.5B euro of it will come from Irish government cash reserve and from the national pension fund. Several terms are favorable for Ireland. For instance, senior bondholders of Irish banks are not subject to haircuts, there is no condition that Ireland must raise its 12.5% corporation tax and Ireland has been given one extra year, to 2015, in order to reduce its budget deficit to below 3% of GDP. Meanwhile, the Eurogroup also agreed on ways to deal with post 2013 bailouts and collective action clauses would be part of all new euro area government bonds starting in June 2013.

Statement by the Eurogroup and ECOFIN Ministers, the rescue package for Ireland will cover financing needs up to 85B euro, including 10B euro for immediate recapitalization measures, 25B euro for contingent support for banking system and 50B euro for budget financing needs. Half of the banking support measures (17.5B euro) will be financed by an Irish contribution through the Treasury cash buffer and investments of the National Pension Reserve Fund. The remainder of the overall package should be shared equally amongst (22.5B euro each) 1) the European Financial Stabilization Mechanism (EFSM), 2) the European Financial Stability Facility (EFSF) together with bilateral loans from the UK, Denmark and Sweden, and 3) the IMF.

The package rests on 3 pillars: 1) An immediate strengthening and comprehensive overhaul of the banking system, 2) An ambitious fiscal adjustment to restore fiscal sustainability, including through the correction of the excessive deficit by 2015, and 3) Growth enhancing reforms, in particular on the labor market, to allow a return to a robust and sustainable growth, safeguarding the economic and social position of its citizens.

We believe the bailout plan will lift market sentiment in the near-term, especially given some favorable conditions for Ireland. For instance, senior debt holders of Irish bank paper will be protected as they will not be imposed with haircuts. Meanwhile, loans will be over a 7.5-year period although the duration is around 3 years. The IMF stated that repayments of its 22.5B euro can start 4.5 years later and end 10 years later. At current SDR rates, the interest rate being paid would be 3.12% during the first 3 years and remains below 4% after 3 years. Concerning conditionality, Ireland has been given an extra year to 2015 to trim its budget deficit to 3% of GDP and it’s not required to raise its competitive corporate tax rate of 12.5%.

The Eurogroup also outlined a permanent crisis mechanism- European Stability Mechanism (ESM)- to safeguard the financial stability of the Eurozone. European Financial Ministers agreed that ESM will be ‘based on the European Financial Stability Facility capable of providing financial assistance packages to euro area Member States under strict conditionality functioning according to the rules of the current EFSF’. Rules will be ‘adapted to provide for a case by case participation of private sector creditors, fully consistent with IMF policies’. Collective action clauses (CACs) will be included in the terms and conditions of all new euro area government bonds starting in June 2013. Those CACs would be consistent with those common under UK and US law, including ‘aggregation clauses allowing all debt securities issued by a Member State to be considered together in negotiations’. This would enable the creditors to ‘pass a qualified majority decision agreeing a legally binding change to the terms of payment in the event that the debtor is unable to pay’.

Financial ministers mentioned little about Portugal and Spain but they are supportive about Portugal new budgetary framework and welcomed Spain’s decision to increase transparency on the country’s public debts and cajas (saving banks).

Similar Posts:

Share

Post comment