Monday, 21 May 2012

Ireland and EFSF access

Tom McDonnell: It was pointed out on this blog a few weeks ago that Ireland would be able to obtain access to new funding from the EFSF provided the Government applied for that funding before 1 July 2013. Ireland would also need to negotiate a new Memorandum of Understanding.

It is the position here that Ireland will need to access further official lending beyond the current 'bailout' programme and that the Government should make an application in the first half of 2013.

The Minister for Finance appeared to acknowledge last Tuesday in the Dáil that Ireland would indeed have access to further EFSF funding in the event the Government applied before 1 July 2013. The discontinuation of the original Greek programme, and its replacement with a new programme, suggests that countries in existing programmes do not have to wait until their current programme finishes before beginning a second programme.


Paul Hunt said...

So it's safe to vote 'no' in the referendum? Yippee! That seems to remove the ESM blackmail threat which is the main plank in the 'yes' campaign.

It all gets curiouser and curioser. This is a contest between those who exercise and enjoy economic and political power and wish to protect their bubble-era gains and those who have some political and economic power, but who desparately want more - and who also want to protect their bubble-era gains; with the vast majority of citizens as innocent and confused by-standers who run the risk of incurring collateral damage irresepective of which side wins.

It would be wonderful if both sides could lose; and for the majority of people to win. But, unfortunately, that's not on offer.

Tom McDonnell said...

Hi Paul,

My intent is not to advance either side of a debate that is merely a sideshow in the context of the greater crisis. The real debate and decisions are being made at places like the G8.

I do however think it is vital to puncture the myth that we will not have access to funding next year.

This is a particularly important point given the potentially destabilising uncertainty caused by the perception of a possible disorderly default. Would you agree?

Paul Hunt said...

Who has the perception of a possible disorderly default? Who is experiencing the potentially destabilising uncertainty? If Ireland votes 'no' the relevant IMF staff and Eurocrats will simply groan and get on with the mechanics of developing a second support package. Most bond market participants won't probably care either way, as they are unlikely to be invited to invest in ireland for some time. The 'credit' players might have some temporary fun and games, but they can engineer these at any time with the debt outstanding.

The principle difference is likely to be that the terms and conditions might be more onerous under any alternative to the ESM. But then again we don't know.

It is perfectly appropriate to seek to remove this ESM 'blackmail' plank from the Government's (and the main part of Official Ireland's) campaign. But, inadvertently or otherwise, it is conveying a signal that it is safe to vote 'no'.

This, in my view, is both disingenuous and dangerous.

Nighwatchman said...

I am amazed that such an overblown phrase as "puncture the myth" about access to sovereign funding is used by a professional. It is all the more amazing considering the claim links to a reply by the Minister of Finance in which he says nothing of the kind. Firstly, he says nothing about Ireland's EFSF access, he simply outlines the rules of access. That access is subject to agreement, "conditional upon the relevant euro-area Member States entering into a Memorandum of Understanding (MoU) with the European Commission, acting on behalf of the euro-area Member States. Any MoU entered into will be subject to conditionality, such as budgetary discipline, economic policy guidelines and their compliance with the terms of such an MoU."
Now why would the Member States agree to such an MOU when an alternative permanent mechanism is available? And the only reason we'd need the EFSF was because we refused to sign up to a contract of budgetary discipline by rejecting the Fiscal Treaty? Further, for the EFSF idea to work, it would require borrowing in advance of actual requirement which is not provided for in our MOU and quite obviously not the intention of the Fund.

Mr Hunt is right, it is dangerous to suggest that EFSF access is a certainty when in fact the only circumstance in which it would happen would be a second economic disaster over the next 12 months.

Tom McDonnell said...

Ireland's need for access to EFSF/ESM funding in 2013 or 2014 is not contingent on a second economic disaster, merely a continuation of the status quo. Unless bond yields fall to a sustainable level (and it is certainly possible that they might fall given the mooted introduction of new European policy instruments) then we will need access, albeit on a smaller scale than for the first programme. There would of course be conditionality.

There is an understandable desire on the part of euro area leaders for the ESM to maintain its €500 billion shield for as long as possible, particularly given the insufficient size of the ESM. One way to help achieve this is for countries to instead access the EFSF for programme funding to the greatest extent possible.

In truth a credible Lender of Last Resort (LOLR) must have sufficient funds available to completely erase the possibility of a disorderly default by a country that is willing to take action to fix its primary balance over the medium term. This is generally taken to mean infinite access to funding. Indeed it is likely the current structure of the EFSF and ESM will have to be radically altered and this (I suspect and hope) is understood by most euro area governments. The longer term institutional structure for eliminating the multiple equilibria problem that is fuelling the sovereign debt crisis in Europe, is likely to involve providing the ESM with a banking licence, or alternatively creating one of the many proposed variants of Eurobonds e.g. blue bonds or ESBies.

Are there other reasons why one might want to vote yes? There certainly are. But I do not think loss of access to the EFSF is one of them.

Paul Hunt said...

@Tom McDonnell,

I would love to see more from the progressive-left about the reasons why one might want to vote yes. As I've mentioned, it is perfectly appropriate to excoriate this ESM 'blackmail' threat, but there is a compelling positive case to be made for voting yes.

The Fiscal Pact is actually the first new instituional and procedural development in response to this crisis. It is the first of many profoound institutional and proecedural developement. All that has happened up to now are largely modifications of procedures and institutions - and temporarly arrangements such as the EFSF - under the existing treaties. It is being driven by a requirement in the creditor countries to secure the informed democratic consent of voters there.

Having been misled by their governing politicans about the nature of the arrangements underpinning the Euro project they are justifiably angry and cranky. The re-emergence of this requirement to secure informed democratic consent - something which was almost entirely ignored when the Euor project was being developed - should be welcomed by all. But it is delaying implementation of the steps required to resolve this crisis.

Ireland has placed itself in a psoition where it has to appeal to the self-interest of others to secure the help and support it requires. It would be wise for irish voters to bear this in mind when they come to vote.