Monday, December 6, 2010

Breaking down the "bailout"

Phoenix magazine had a very clear breakdown of the "bailout" in its most recent issue. (I couldn't find it online - you need a subscription - so I'll just quote some of the key points here)

Total borrowing involved in bailout: 60.5bn euro (the remainder comes from Ireland's own funds - pension reserve and whatever cash the NTMA has stored up).

Of this:

- 22.5bn is from IMF at interest rates of around 3-4%

- 17.5bn from the European Financial Stability Facility

- 22.5bn from the European Financial Stability Mechanism

EFSF is mainly German and French money. It's a special vehicle set up to fund EU members in need of restructuring funds. It operates in conjunction with the German Debt Management Office.

According to the framework agreement which set up the EFSF, the interest rate to be charged is "intended to cover the cost of funding incurred by EFSF and shall include a margin [ie a profit] which shall provide remuneration for the guarantors". On top of this there is a service fee to cover operational costs and various fees, which is charged upfront at 0.5% of the total loan (ie 88m).

The rate applied is based on "the rates corresponding to swap rates for the relevant maturities" (today approx 2.7%) plus "a charge of three percent for maturities up to three years and an extrra one percent per year for loans longer than three years" (ie 6.7% - making a profit for the EFSF of 4bn over the lifetime of the, ahem, "bailout"!!!).

It gets worse.

"The anticipated margin that would accrue on each loan to its scheduled maturity date shall be deducted from the cash amount to be remitted to the borrower in respect of loan. The service fee and the net present value of the anticipated margin ... will be deducted from the cash amount remitted to the borrower in respect of each loan but shall not reduce the principal amount of such loan that the borrower is liable to repay and on which interest accrues under the relevant loan". [that quote also comes from the framework agreement].

(ie they take their 4bn of the 17.5bn they are lending us before the money ever gets to Dublin, while charging interest on the full amount!).

EFSM money will be charged at 5.7%, if we draw down the full amount. (Greece paid 5.2%).

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