IMF / EU Fund Interest Rate could be higher than 7%

Cassandra Syndrome

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This is insanity. Up to 50% of our tax receipts will be interest alone on servicing all the sovereign debt after this bailout. Simply unsustainable.

Karl Whelan calculates

Effective Interest Rate = 1.2*(3-year swap rate + Margin + Annualised Cost of Once-Off Service Fee)

which worked out at the time as

Effective Interest Rate = 1.2*(1.57 + 3.0 + .167) = 1.2*4.737 = 5.68.

The three-year swap rate is now 1.9%, which would give

Effective Interest Rate = 1.2*(1.9 + 3.0 + .167) = 1.2*4.737 = 6.08.

The government’s most recent projections show the debt-GDP ratio peaking at 106%. This is prior to the admission that large amounts of additional money will be borrowed to recapitalise the banking sector. Piling on an interest rate of even 6.1% onto the likely debt levels would greatly reduce the prospect of Ireland avoiding sovereign default. An interest rate of 7% would be grossly unacceptable.

Put simply, if these reports are true, the government needs to refuse any deal based on such a high interest rate. Indeed, unless the government feel compelled to play their role in a morality play in which Ireland is used as cautionary tale, they should refuse any deal featuring a rate higher than the 5% rate that Greece obtained.

Update: As commenter Tull points out, while we’re drawing down the money over three years, the relevant maturity for the interest rate would be length of time before we have to pay it back. Plug in seven years, for example, and we’d get

Effective Interest Rate = 1.2*(2.67 + 3.0 + .167) = 1.2*4.737 = 7.044.
Karl,

If you price it off the 10 year swap rate of 2.9% and you get to 7.2% by my calcs.
The Irish Economy » Blog Archive » EFSF Charging 7%?
 


Social Conscience

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So what you are saying is on a loan of €85 BILLION our interest alone each year will be €10.2 BILLION or 1/3 of our complete tax take?
 

TradCat

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Isn't that kind of rate the reason we "withdrew" from the bond market? We are going to have to stop acting irresponsibly and start defaulting.
 

vanla sighs

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It can't be done, simple as that. Even if it was a 5% interest rate it still couldn't be done. Some stupid pr!ck on Newstalk, lecturer @ NUIG, Glaway trying to tell us everything is ok. FFS. The dogs in the street know what's happening. This is an impossibility, it won't work. We need to default on bank debt.
 

Malbekh

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We've said before, realistically it needs to be between 2 and 3% based on project growth over the next three years to be sustainable. They do want a sustainable Irish economy don't they?

Don't they?
 

Cassandra Syndrome

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So what you are saying is on a loan of €85 BILLION our interest alone each year will be €10.2 BILLION or 1/3 of our complete tax take?
Well existinng Government bonds, bills, papers and NAMA interest will be at least €9 Billion. Then add on the interest of this loan.
 

Mister men

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The bailout must be resisted. The future of the country is at stake.
 

Social Conscience

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Well existinng Government bonds, bills, papers and NAMA interest will be at least €9 Billion. Then add on the interest of this loan.
Wow - so our figure is at €20 BILLION interest per annum. Am I wrong in thinking the reason the Irish people have taken two harsh budgets in 2008 & 2009 was because there was a gap of €20 BILLION between our tax intake and our public expenditure?
 

hammer

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The first thought I had this morning CS was that the austerity adjustments of €15 billion will do little :(

There will be fewer people, working harder, & earning less to repay interest :(

All income tax gone :(
 

adrem

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It's an 85bn facility - it won't be all drawn down immediately - which means we don't pay interest on the whole facility

The rate calculation adds a 1.2 multiplier i.e. 120% of [the relevant swap rate + a 3% margin + a cost). He doesn't post the source of this - that would help

The rate will be lower than he is suggesting. The DoF latest projections (pre bailout announcement) assumed a cost of funds of 6.5% for 2011.

The final rate from the bailout will be lower than this 6.5% figure and will end up closer to 5%.
 

Clanrickard

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If the rate is really 7% then this is not a bailout and it will not calm the market.
It is likely to be around 5%. Still too high but 7% would mean default.
 

Aindriu

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The bailout must be resisted. The future of the country is at stake.
Agreed. The only problem is that FG & LAbour are going to be FF patsies on the budget vote. They will either vote in favour or abstain, which both have the same result - it passes!

This is what happens when the countries political parties are full of Doctors, lawyers and teachers! Not one business brain or economist amongst them!
 

polcol2

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I hope to God you are right. Within the last hours a lot of people have become very afraid.
 

Freedom front

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CRAZY

We cannot afford to borrow more money to bail out the banks , how are we going to repay the interest on the 260 billion Sovereign debt, that will amount to 12/13 billion in interest payments each year, when we only collect 31 billion in taxes per year.?

Current Sovereign debt including promissory notes : 160 Billion
New bailout fund +/- : 100 Billion
Total Sovereign Debt: 260 Billion


We cannot afford to pay 12/13 billion per year in interest, we have to stop this madness, save the people & our country - Default Now - Time to stock on tinned food
 

orbit

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John Fitzgerald on MI today said 5% would be the kindness of relatives, whereas 7% would be the kindness of strangers and not really kindness at all.

But he thinks it will be 5% because they actually want it to succeed. Makes sense to me.
 

smitchy2

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John Fitzgerald on MI today said 5% would be the kindness of relatives, whereas 7% would be the kindness of strangers and not really kindness at all.

But he thinks it will be 5% because they actually want it to succeed. Makes sense to me.
John Fitzgerald has been proven wrong on many occasions.
Was he not predicting rapid economic growth less than a year ago.

Surely he knows we cannot sustain a €10bn annual interest bill.
 

Cassandra Syndrome

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It's an 85bn facility - it won't be all drawn down immediately - which means we don't pay interest on the whole facility

The rate calculation adds a 1.2 multiplier i.e. 120% of [the relevant swap rate + a 3% margin + a cost). He doesn't post the source of this - that would help

The rate will be lower than he is suggesting. The DoF latest projections (pre bailout announcement) assumed a cost of funds of 6.5% for 2011.

The final rate from the bailout will be lower than this 6.5% figure and will end up closer to 5%.
Says the spoofer that stubbornly claimed less than 2 months ago that we were ok until July of next year, despite having all the facts illustrated to him.

Ever see what happens to overdraft extensions in circumstances of distress borrowing? It gets mauled. There is nothing structural or capital investment about this bailout, it is a fire fighting exercise to save the global financial system from collapse.
 

Super8

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Default and take full state ownership of gas fields and any natural resources we have.
 


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