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Last updated: November 29, 2010 7:50 pm
Ireland’s €85bn rescue package from the European Union and the International Monetary Fund is both more and less than it seems. The level of external assistance is only €67.5bn, since the Irish themselves are contributing €17.5bn from cash reserves and from the 10-year-old national pension reserve fund, which has been repeatedly raided in this crisis. That is a questionable use of state resources originally intended for other purposes.
Yet the cost of the bail-out is less than the exorbitant level suggested last week. Funding from the programme will carry an average interest rate of 5.8 per cent – pour décourager les autres, presumably, especially Portugal. But that is a misleading headline figure. The IMF tranche of €22.5bn carries an effective interest rate of between 3 and 4 per cent, and in any case interest will be payable only on funds drawn down.
Greece is paying an average interest rate of about 5 per cent on its €110bn bail-out agreed in May, but that is separate from the mechanisms used to part-fund the Irish package. While Ireland will probably have to draw down every cent, the bail-out is effectively 10-year money. Irish 10-year bonds were yielding over 9 per cent early on Monday. Go figure.
This package should address Ireland’s immediate problem – which is a banking crisis. An immediate capital injection of €10bn will be accompanied by €25bn in liquidity support. That will bring the total cost of Ireland’s bank rescue (so far) to a possible €85bn – about 50 per cent of gross domestic product. The bail-out is humiliating and onerous – the exorbitant price of extreme and unconscionable folly. It also avoids the issue of whether bank creditors should share the burden. An Irish default is surely now only a question of when, not if.
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