ECONOMICS: Greece was the test case and the conditions applying to that country are no different to those agreed for Ireland

A FEELING that we were hard done by underlies much of the recent negative comment on the bailout, and this has been accompanied by the unusual spectacle of the IMF being portrayed as the “good cop”, something that surely won’t last.

Things came to a head earlier this week when the European Commission rebutted “inaccurate reporting in some sections of the Irish media concerning the interest rates charged on the . . . rescue plan for Ireland”.

It is a fact that the margin being paid is close to 3 per cent. However, the notion that we are being singled out for special treatment does not stand up to serious scrutiny.

The story starts in early 2010 with the Greek bailout. Initially, there was a strong feeling that Europe could and would sort out its own problems. However, the realisation rapidly dawned that the IMF had considerable expertise as well as significant resources, and so the troika of the EU, European Central Bank and IMF was formed. The IMF was involved from the start and the conditions, including the interest rates charged, reflect standard IMF practice.

Greece was the test case and the conditions applying to Greece are no different to those agreed for Ireland.

There are two EU pieces to the jigsaw. In May, the European Council adopted a European Financial Stabilisation Mechanism (EFSM) under Article 122 of the treaty which allowed the commission to borrow, in its own name, up to €60 billion for lending to member states in difficulties caused by exceptional circumstances beyond their control.

The IMF is like a credit union whose members have access to a common pool of resources for times of need. It thus has the ability to lend cheaply to low income countries which it does from time to time, including to countries in Eastern Europe.

It has a different approach for developed countries, and this was the determining factor adopted by the EU. The EFSM conditions are modelled on IMF practice. That is why the illustrative rates calculated by the NTMA when the bailout was announced were identical at 5.7 per cent for both the fund (€22.5 billion) and mechanism (€22.5 billion) portions. There is a penal element in both, and the commission states this was “a sine qua non condition for the member states”, probably led by Germany.

The IMF lends in Special Drawing Rights (SDRs), a kind of artificial currency whose value is posted on the IMF website each day. Initially, the SDR, like the euro, was equivalent to $1. Nowadays, the SDR is a basket of the euro, the yen, sterling and the dollar, with their weights revised every five years.

The SDR interest rate, in turn, provides the basis for the “interest rates charged to members on IMF loans”. It is an average of the three-month rates in the four countries. This week, the SDR rate is 0.34 per cent. Interest rates are low everywhere, but particularly low in the US and Japan.

The IMF then adds a margin to get its actual lending rates. The spread is three percentage points, rising to four percentage points for amounts outstanding beyond three years. In addition, each drawing is subject to a one-off small service charge.

These are the IMF’s standard terms and they are the terms that were applied to Greece. The EU facilities for Greece, which complemented the IMF ones, produced an illustrative rate of 5 per cent on April 5th last. The cost of funds in this case was three-year fixed which was around 2 per cent at the time.

Whereas Greece initially borrowed for three years, the Irish loans have an average 7.5 years’ duration, pushing the cost up to 5.7 per cent according to the illustrative calculation published on November 22nd. The extra cost reflects the longer duration as well as interest-rate movements in the meantime. The longer term seems like a good idea, and Greece is now proposing to copy us.

However, there was some fine-tuning during the Irish negotiations. My interpretation of how things went is as follows. The IMF provided the benchmark. Their standard loan is a variable-rate one, much like a house mortgage, as opposed to the longer-term fixed-rate debt that Ireland wanted.

When the IMF rate was converted into a fixed 7.5 year term, it emerged at 5.7 per cent. The EFSM rate was then set at 5.7 per cent and the margin became a residual. The 7.5-year swap rate (cost of funds) on the day in question was just below 3 per cent, and so the margin became 2.925 per cent according to the council decision of December 7th. This is three-quarters of a percentage point below what it would have been had the IMF standard mark-ups been applied to the EU’s cost of funds. The EFSM rate could, thus, be depicted as favourable rather than penal, in that the margin on it is less than the standard IMF one.

The European Financial Stability Facility (EFSF) is the other piece of the EU jigsaw. It was set up in June to assist euro area member states in difficulty. It can borrow up to €440 billion under guarantee from the euro states and will lend €17.7 billion to Ireland (the remaining €4.8 billion comes from Britain, Denmark and Sweden).

Its arrangements are too complicated to go into; suffice to say that they, too, appear to have changed during the Irish negotiations.

I understand that the 6.05 per cent rate quoted by the NTMA as the illustrative cost of EFSF funds was what Greece would have paid for 7.5-year money on November 22nd last, based on cost of funds plus the standard IMF margins. Thus, it does not allow for the overcapitalisation and other features of the EFSF that would have resulted in a significantly higher rate; instead, the EFSF margin has been pulled back to 2.47 per cent, the lowest of the three major lenders.

Finally, the UK produced yet another set of figures for its €3.8 billion facility. Here, the margin will be 2.29 per cent and the rate 5.9 per cent.

The troika has always said that the details of the package can be renegotiated provided the broad parameters are respected. The question that arises is whether the interest rate is a detail or a broad parameter. As I see it, the bottom line is that the cost of funds shall not be lower than that charged by the IMF; anything else would have global ramifications.