The Treaty on Stability, Coordination and Governance builds on already existing EU legislation, therefore it is worth considering which aspects of the Treaty’s Fiscal Compact are new. This article examines the provisions contained in the Fiscal Compact. The first half of this article considers the four fiscal rules and shows that none are new. The second half considers the enforcement mechanisms in the Treaty and finds that some new and some are not new. A summary of what’s new and what’s not is detailed in Table 1 below.
|The rule that Debt-to-GDP ratio should be 60% or less||Expanded use of reverse qualified majority voting|
|The rule that Government deficits should be 3% or less||The requirement for the introduction of automatic correction mechanisms on a national level|
|The rule that Government structural deficits should be 0.5% or less||The requirement to transpose the fiscal rules into national law|
|The rule that if the debt-to-GDP is “significantly below 60% and where risks in terms of long-term sustainability of public finances are low” the structural deficit can be up to 1.0%||The role of the Court of Justice of the European Union in ensuring that these rules are transposed into national law|
|The allowance for temporary deviations from a country’s medium term objectives in ‘exceptional circumstances’||The provisions to ex-ante report on public debt issuance|
|The requirement for a 1/20 reduction in debt per year if a country has a debt to GDP ratio over 60%||The creation of budgetary and economic partnership programmes|
|Reverse qualified majority voting on sanctions|
Table 1: What’s new and what’s not in the Fiscal Compact?
Most of the provisions contained in the Treaty on Stability, Coordination and Governance concern fiscal policy. These provisions are contained in Title III of the Treaty, which is entitled the ‘Fiscal Compact’ and are probably the most widely discussed aspect of the Treaty.
It is worth noting that the Treaty’s rules on fiscal policy do not say anything about what governments can or should spend on, nor about how much a government can or should spend. The rules only relate to the size of the government deficit and the size of the country’s debt burden.
Although the provisions on fiscal policy are so important that some have referred to the Treaty as the Fiscal Compact, attention should also be paid to Title IV and Title V of the Treaty. Title IV comprises provisions for increased economic policy coordination and convergence and Title V sets out new rules for the governance of the Eurozone. This article will only address Title III, the Fiscal Compact.
The purpose of this article is to give some background to the provisions contained in the Fiscal Compact, as many of them are not new. It demonstrates that even those measures that are new are, by-and-large, relatively minor changes to existing law.
I: The Four Fiscal Rules
The Fiscal Compact contains both a number of restrictions on budgetary policy and details of how these restrictions are to be enforced. The four main restrictions are
1. Debt-to-GDP ratio should be 60% or less;
2. Government deficits should be 3% or less;
3. Government structural deficits should be 0.5% or less
4. If the debt-to-GDP is “significantly below 60% and where risks in terms of long-term sustainability of public finances are low” the structural deficit can be up to 1.0%
None of these restrictions are new.
The 60% debt rule and the 3% deficit rule
The 60% debt rule and the 3% deficit rule are long established. They constitute one of the four ‘Convergence Criteria’ contained in the Maastricht Treaty, which came into effect on 1 November 1993. The Convergence criteria are criteria that European Union Member States have to fulfill in order to adopt the euro as their currency.
Article 104c of the Maastricht Treaty also states “Member States shall avoid excessive government deficits”. The Maastricht Treaty also requires that Member States exercise “compliance with budgetary discipline on the basis of the following two criteria: (a) whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value… (b) whether the ratio of government debt to gross domestic product exceeds a reference value… The reference values are specified in the Protocol on the excessive deficit procedure annexed to this Treaty.” The reference values are the 60% debt rule and the 3% deficit rule.[i]
These rules were further advanced four years latter in the Stability and Growth Pact (SGP). The SGP was a set of agreements made in 1997 between the Member States of the EU. It has since been developed substantially. The aim of the SGP was to ensure that the economies of the EU remained in healthy fiscal positions. It was believed that this was necessary for the stability of the Euro, which was to be introduced two years later. The two main provisions of the SGP were, once again, that countries should have a budget deficit no higher than 3% of GDP and a debt to GDP ratio no higher than 60% of GDP.
The SGP was set out in a European Council resolution in June 1997 and in two major pieces of legislation: regulations[ii] 1466/1997 and 1467/1997[iii]. Regulation 1466/1997 is known as the Stability and Growth Pact’s ‘preventative arm’ because it sets out a multilateral surveillance system through which country’s budgetary positions are observed in order to prevent countries from developing deficits greater than 3% of GDP or debt to GDP ratios greater than 60%. A significant part of this is that it requires each country to specify a medium term budgetary objective.
Regulation 1467/1997 is known as the Stability and Growth Pact’s ‘corrective arm’ because it sets out how a country should correct their fiscal position if they have deficits greater than 3% of GDP or debt to GDP ratios greater than 60%. It provides for an ‘excessive deficit procedure’ that should be implemented if countries are not achieving the aims of the SGP.
Revisions to the Stability and Growth Pact
The Stability and Growth Pact has been developed significantly since 1997. The pact was heavily amended in 2005 to allow for deviations from a country’s medium term objectives. The post-2005 SGP is often referred to as ‘the Revised Stability and Growth Pact’.
Over the last year a further series of reforms to develop the SGP has been going through the EU institutions. Firstly there was the six pack. The six pack contains five regulations and one directive. The six pack came into effect on 13 December 2011.
Secondly there is the Treaty on Stability, Coordination and Governance. This is currently in the process of ratification and uniquely the Irish people are being asked to vote on it on 31 May.
Finally there is the two pack. The two pack contains two regulations proposed by the European Commission on 23 November 2011. However, they are awaiting adoption by the Council and it is expected that they will be adopted following any amendments that the European Parliament may put forward. The two pack provides for stronger surveillance of Eurozone countries’ national budgets and more oversight of the economic policy plans of those in financial difficulties.
It is worth emphasising that the six pack, unlike the Treaty on Stability, Coordination and Governance and the two pack, is not currently being debated. It is already law and has been in force since December 13 2011.
The 0.5% and 1% Structural Deficit Rules
The 0.5% and 1% structural deficit rules are contained in both the Treaty on Stability, Coordination and Governance and in the six pack.
The Treaty on Stability, Coordination and Governance commits those who ratify the Treaty to a ‘balanced or in surplus government’ budget. The Treaty says this commitment is respected “if the annual structural balance of the general government is at its country-specific medium-term objective, as defined in the revised Stability and Growth Pact, with a lower limit of a structural deficit of 0,5 % of the gross domestic product at market prices.” Furthermore, it states that this medium term objective can be no higher than 0.5% of GDP. Importantly this provision is not new. It is contained in Regulation 1175/2011, one of ‘the six pack’ that were agreed in Winter 2011. Regulation 1175/2011 amends Regulation 1466/97; the ‘preventative arm’ of the SGP mentioned above. Just as the 0.5% deficit rule is not new, the 1% structural deficit rule is not new. The 1% deficit rule is contained in the Treaty on Stability, Coordination and Governance where it states that if a country’s debt to GDP is “significantly below 60 % and where risks in terms of long-term sustainability of public finances are low” the structural deficit can be up to 1.0%.
Both the 0.5% and 1% structural deficit rules, are contained in Regulation 1175/2011, where it amends articles 2(a) and 5 of Regulation 1466/97, the ‘preventive arm’ of the SGP. As emphasized above, this regulation is already law.
What’s new in the four main restrictions?
Given the European legislation already in place, it is worth considering what aspects of the Treaty on Stability, Coordination and Governance’s four restrictions on fiscal policy are new. The answer is none. The 60% debt rule and the 3% deficit rule have a part of EU Treaty law since the Maastricht Treaty came into force in November 1993 and the 0.5% and 1% structural deficit rules have been in force since December 2011.
Of course this does not mean that nothing in the Treaty is new. However, the novelties in the Fiscal Compact relate to how the fiscal rules are enforced, not to their content.
II: Enforcement of the Four Fiscal Rules
Transposition of the Budget Rule into National Law and the Court of Justice
Probably the most significant original piece of law in the Fiscal Compact part of the Treaty, and perhaps in the entire Treaty, is the requirement for national governments to transpose the fiscal rules into their national law. The Treaty establishes an “obligation to transpose the "balanced budget rule" into their national legal systems, through binding, permanent and preferably constitutional provisions”. The Treaty also provides for an independent body at national level to be established to monitor their implementation.
Also new is the role of the Court of Justice of the European Union (CJEU) in this process. There is much confusion on this topic but the issue is relatively simple. The Treaty states that if a country fails to transpose the balanced budget rule into national law they can be brought before the CJEU and directed to do so. If the country fails to comply with the court’s directions, as a last resort, the country can be fined up to a maximum of 0.1% of GDP. (Note that the CJEU is not given a remit in the Treaty to decide if a country has breached the fiscal rules.)
In the Event of Deviations from the Medium Term Objective
The Treaty on Stability, Coordination and Governance follows on from previously existing law, specifically Article 5 of the preventative arm of the SGP, Regulation 1466/97, in allowing for temporary deviations from the medium term objective. These temporary deviation are only allowed in the “exceptional circumstances” of “an unusual event outside the control of the Contracting Party concerned which has a major impact on the financial position of the general government or to periods of severe economic downturn as set out in the revised Stability and Growth Pact, provided that the temporary deviation of the Contracting Party concerned does not endanger fiscal sustainability in the medium-term.”
Outside of these “exceptional circumstance” in the event of a ‘significant observed deviation’ from medium term objectives, an automatic ‘correction mechanism’ will be triggered. This provision is new. It states that the correction mechanism will work on a national level “on the basis of principles to be proposed by the European Commission”. The European Commission has yet to propose these principles.
In addition to the above correction mechanism the Treaty has a provision for a 1/20 reduction in debt per year if a country has a debt to GDP ratio over 60%. This provision is not new. It is the exact same as that provided for by Regulation 1467/97 as amended by Regulation 1177/2011.
Excessive Deficit Procedure
There are also a number of new provisions on the operation of the excessive deficit procedure in Treaty on Stability, Coordination and Governance.
Reverse Qualified Majority Voting
One issue that has received some commentary is the introduction of reverse qualified majority voting in the Treaty. Reverse qualified majority means a qualified majority needs to vote against something to stop it from happening as opposed to a qualified majority voting for something to make it happen. Some have expressed concern about the legality of the reverse qualified majority voting provisions, with Peadar O’Broin stating, “The use of reverse majority is not provided for in the EU Treaties. This alteration directly by-passes the Treaty change procedures contained in Article 48 TEU, and may therefore be held inconsistent with the EU Treaties in case of a legal dispute.”
However, reverse qualified majority voting is not new. It has been introduced for a number of issues under the six pack, but the Treaty on Stability, Coordination and Governance makes its use slightly more general. The provision regarding reverse qualified majority voting is in Article 7 of the Treaty on Stability, Coordination and Governance. It involves a commitment of Eurozone countries “to supporting the proposals or recommendations submitted by the European Commission where it considers that a Member State of the European Union whose currency is the euro is in breach of the deficit criterion in the framework of an excessive deficit procedure”. However, this obligation does not apply if a qualified majority votes against the proposals or recommendations. Exactly what the ‘proposals or recommendations’ in the article could be is left open. One obvious example would be a proposal to impose sanctions.
The six pack provides for the use of reverse qualified majority voting for the imposition of sanctions. Regulation 1173/2011 on the effective enforcement of budgetary surveillance in the euro area, states “When taking decisions on sanctions, the role of the Council should be limited, and reversed qualified majority voting should be used.” On this basis the regulation details a number of sanctions that where reverse qualified majority will apply. These include, in order of severity and imposition, lodging “with the Commission an interest-bearing deposit amounting to 0,2 % of its GDP in the preceding year”, lodging an non interest-bearing deposit in the same manner and of the same amount and having a fine imposed of the same amount,
Similar rules regarding sanctions and reverse qualified majority voting apply in Regulation 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area. This regulation “lays down a system of sanctions for the effective correction of excessive macroeconomic imbalances in the euro area” and only applies to countries in the Eurozone. It enables the council to impose sanctions of an interest-bearing deposit and an annual fine by reverse qualified majority voting.
A further example of reverse qualified majority voting exists in Regulation 1176/2011 on on the prevention and correction of macroeconomic imbalances. The Commission can make recommendations on establishing that a country has not complied its recommended actions to correct its macroeconomic imbalances. These reccomendations are “deemed to have been adopted by the Council, unless it decides, by qualified majority, to reject the recommendation within 10 days of its adoption by the Commission.”
Provisions related to the Two Pack
Finally, there are two provisions that relate to provisions in the two pack. The first is a commitment that “Contracting Parties shall report ex-ante on their public debt issuance plans to the Council of the European Union and to the European Commission” with a view to better coordinating the planning of their national debt issuance. This relates to the proposal for a regulation on ‘common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area’. This proposed regulation is one of the two pack and lays out detailed plans for increased coordination of the budgets of Member States in the Eurozone.
The second provision is the creation of ‘Budgetary and Economic Partnership Programmes’ which, the Treaty says a country in excessive deficit procedure will put in place. This is a new provision. The Treaty states, “The content and format of such programmes shall be defined in European Union law”. The legislation that will define the ‘content and format of such programmes’ has not yet been brought into effect. It is likely that the Budgetary and Economic Partnership Programmes in the Treaty on Stability, Coordination and Governance will relate to the ‘Macroeconomic Adjustment Programmes’ provided for in the proposal for regulation on ‘common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area’. This proposed regulation is one of the two pack and lays out plans on operation of ‘enhanced surveillance’ and the operation and surveillance of countries in ‘Macroeconomic Adjustment Programmes’.
What’s new and what’s not
So in conclusion: What’s new and what’s not?
The 60% debt rule, the 3% deficit rule, the 0.5% and 1% structural deficit rules are not new. The allowance for temporary deviations from a country’s medium term objectives in ‘exceptional circumstances’ is not new. The 1/20 rule is not new. Reverse qualified majority voting is not new but its use is expanded slightly under the Treaty. The requirement for the introduction of automatic correction mechanisms on a national level is new but the principles that will form the basis of these mechanisms have not yet been proposed. The requirement to transpose the fiscal rules into national law is new, as is the role of the Court of Justice of the European Union in ensuring that these rules are transposed into national law. And finally the provisions to ex-ante report on public debt issuance and the creation of budgetary and economic partnership programmes are both new but are related to the two pack proposals.
Many of the provisions contained in the Fiscal Compact are not new. None of the four restrictions on fiscal policy are new. And, by-and-large, those measures that are new are relatively minor changes to existing law.
[i] This protocol still exists as Protocol (No 12) on the Excessive Deficit Procedure. It is annexed to the founding treaties of the EU. The founding treaties are the Treaty of European Union and the Treaty on the Functioning of the European Union. They form the core of EU primary law.
[ii] Regulations are one of the main forms of secondary EU law.
[iii] The Regulations linked to here are not the original regulations. They are the regulations as amended by the ‘Revised Stability and Growth Pact’ in 2005 and the ‘six pack’ in 2011.
At the informal dinner of Heads of State or Government on 23 May 2012 Franco-German differences on eurobonds figured highly. Chancellor Merkel argued eurobonds were illegal under current EU law, and others have expressed concern about their legality under German law. However, the French President, Francois Hollande, has insisted that eurobonds remain on the table, although he acknowledged “a number of countries were totally hostile, others considered this in the long term and yet other countries considered that it could be feasible at a closer date.” This was echoed by An Taoiseach, Enda Kenny, stating, “people were clear that [developing eurobonds] would be a very long process indeed”.
The proposed eurobonds are bonds issued jointly by all 17 Eurozone Members States. They are proposed as a tool to be used in dealing with the eurocrisis. Calls for the creation of eurobonds have been growing stronger. Last summer Reuters conducted a poll and found that 41 out of 59 economists polled believed that eurobonds would be a good ‘long-term solution to resolving the crisis’, although a smaller number expected euro zone leaders to agree to their establishment. Calls for eurobonds have come from a wide variety of places. The Economist points out that former EU Commissioner, Mario Monti, investor George Soros, former German Finance Minister and prominent member of the opposition, Peer Steinbrück, have all called for them. More recently, here at the Institute of International and European Affairs, Charles Dallara, Managing Director of the IIF, has called for their creation, as did Professor Maurice Obstfeld of the University of California, Berkeley.
Opposition to eurobonds has been very strong in Germany. Hans Werner Sinn, President of one of Germany’s largest economic research institutes and a very prominent economic commentator in Germany, went as far as to say “eurobonds would destroy the euro zone”. Opinion polls show that German’s overwhelmingly oppose the proposed eurobonds.
The intransigence of German opposition has meant that, until recently, negotiations on eurobonds at a European level have not made much progress. The major exception to this is the publication of a Green Paper by the European Commission on eurobonds on 23 November 2011[i]. It is likely that this paper will be the basis of any future negotiations on the issuance of eurobonds.
With the election of Francois Hollande as President of France, calls for eurobonds have been given a real boast. His support adds to a growing majority of European states that are in favour of the creation of eurobonds. Mario Monti, the Italian Premier, said of this week’s informal meeting, “A majority of countries said they were in favour of eurobonds, even those not in the Eurozone, like Britain”. The momentum for a change in European policy concerning eurobonds has been further boosted by calls from the OECD for their creation and with signs from last weeks G8 conference in Camp David that Obama is getting behind Hollande in his disagreement with Merkel.
However, the Franco-German conflict should not be overstated, nor should Germany’s isolation on this issue. Germany has been supported in their opposition to eurobonds by Netherlands, Finland and Austria. Despite the divergence of opinions on eurobonds, Merkel described the negotiations as balanced. “We spoke differently about eurobonds. I said we need greater economic co-ordination in Eurozone and that we see considerable difficulties when we think of the fiscal treaty what possibilities exist to shape the treaties,” she said.
On this point European Central Bank President, Mario Draghi, supported Merkel saying eurobonds made sense “only when you have a fiscal union”. This sentiment echoed comments last August by European Council President, Herman Van Rompuy. “We could only have eurobonds the day when there is truly a real budgetary convergence, the day when everyone is running a balanced budget or practically a balanced budget. That’s when we could have a eurobond. But not before,” he said.
Instead of eurobonds, Germany is supporting the proposal for project bonds. Project bonds are a proposal for the EU to support specific investment projects. The European Investment Bank would invest in the riskiest element of privately issued bonds thereby making the rest of the debt appear safer and allowing it be securitised at an investment grade. Notable progress has been made on project bonds recently. President of the Commission, José Manuel Barroso, said that “concrete action for targeted investment, project bonds” had been discussed and that these discussion went much further than in October 2011, when many were against a similar proposal. He said that on Tuesday, 22 May 2012, “an agreement between the Council and the Parliament to launch a pilot phase for project bonds” was reached.
However, Enda Kenny has not shown much enthusiasm about the project bonds proposals. The Irish Times reports he “described proposals for the creation of project bond as fine, but warned that they needed to be flexible for smaller countries and should not just be confined to trans-continental projects.”
Despite the changes and development on eurobonds, no real change in policy took place at this week’s informal dinner. Nor was it intended for any real change to be achieved, the aim was rather to facilitate communication in advance of the European Council on 28/29 June, where the Greek situation and eurobonds will be discussed.
[i] In this document eurobonds are referred to as ‘stability bonds’.
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A controversy has developed in the media regarding Ireland’s potential access to IMF funding should the Irish people reject the Treaty on Stability Coordination and Governance (TSCG) in the forthcoming referendum.
The April 29 Irish edition of The Sunday Times led with a story titled: “Treaty no bar to IMF bailout”. The article argued that a rejection of the TCSG would be no obstacle to Ireland getting an IMF bailout should one be necessary.
The article has received a strong response from both the Minister for Finance, Michael Noonan TD, and the IMF. Minister Noonan said that the IMF had made it "crystal clear" in negotiations that that "unilateral assistance" would not be provided to Ireland should it reject the TSCG. Mr Noonan said that the IMF would only be willing to partake in a future bailout of Ireland "if Europe takes the lead". As such, he argued, the European Stability Mechanism (ESM) “will be the only source of bailout funds when the programme ends".
The IMF said that the Sunday Times article "misinterprets remarks from an IMF spokesman which were a factual statement about fund lending procedures in general and not about Ireland or any country specifically". Further, Donal Donovan, a former Deputy Director of the IMF and Adjunct Professor at the University of Limerick, has said he does not believe it is likely that Ireland would have access to IMF funds if a second bailout is required.
However, Mary Lou McDonald TD, of Sinn Fein, has argued that the government was creating confusion regarding Ireland’s access to emergency funds. She noted the Sunday Times article, saying "Today we see the IMF statement that a No vote would not prevent us applying for its funds if we need them in future."
This point was conceded by an Tánaiste, Eamon Gilmore TD. He said that Ireland could apply for IMF funding, but that he did not know (a) if the application would be successful, or (b) how expensive an IMF loan would be if it were successful.
Two things need to be be kept clear in this discussion. Firstly, there is a large difference between applying for IMF funding and receiving that funding. Secondly, the issue under debate is if Ireland would be able to borrow from the IMF should it need a second bailout. No major party to the debate is arguing that the IMF would punish Ireland because it voted no to the Treaty. Rather, the issue is if it votes no to the Treaty Ireland will not have access to the ESM should it need it. So supposing Ireland votes no and needs a second bailout, is there anywhere Ireland can get money from? Could Ireland get money from the IMF?
It is obvious that Ireland can apply for funding from the IMF. The question is whether that application would be successful, and there are real reasons to believe that it would not. Even if it was successful, the interest charged by the IMF on the loan would be punitive and the conditions tied to the loan would almost certainly involve increased austerity.
Composition of IMF portion of current bailout
Since December 2010, Ireland has been part of an EU/IMF programme of support. The programe runs until the end of 2013. As part of the programme, the IMF has agreed to provide Ireland with 19,466 million SDR which at todays rates is equal to €22,981 million. (SDR is the accounting currency in the IMF and is, as of May 2, 2012, equal to €1.18.) As of March 31, 2012 Ireland had already drawn down 13,836 million SDR which at todays rates is equal to €16,340 million.
This money is provided to Ireland through the IMF’s Extended Fund Facility (EFF), which provides funds to countries ‘experiencing serious medium-term payments imbalances because of structural impediments in production and trade.’ The EFF is one of many loan arrangements (called ‘facilities’ in IMF jargon) available to members of the IMF. Each ‘facility’ has its own rules about how a country might access it. Normal access to the facilities is generally limited to a multiple of a country’s ‘quota’. A country’s quota is the amount that it has contributed to the Fund. An explanation of the the IMF’s various facilities can be found here.
The IMF explains access to the Extended Fund Facility (EFF) noting that "the size of borrowing under the EFF is guided by a member country’s need for financing, capacity to repay, and track record with use of IMF resources."
The EFF can be accessed either via Normal Access or Exceptional Access. The funding Ireland has received is through Exceptional Access.
In terms of Normal Access to EFF, there are two measures of how much Ireland could access. The first is "600 per cent of quota of total credit outstanding (net of scheduled repayments)". Ireland’s credit outstanding is 13,836 million SDR and its scheduled repayments are 16,492 million SDR. This gives Ireland a negative balance of -2,655 million SDR. Ireland therefore has no access to this normal funding via this measurement. The second measure of how much funding Ireland could receive via normal access it is "200 per cent of a country’s IMF quota". Ireland’s quota as of March 31, 2012 is 1,257 million SDR. 200% of its quota is 2,515 million SDR. This pales in comparison with the funding Ireland currently receives through the EFF, which, as of the end of March, is 13,836 million SDR.
It is worth noting that Ireland is expected to draw down further IMF funds over the remaining period of the EU/IMF programme. It is estimated that by the end of 2013 Ireland will have received funding equal to 19,466 million SDR or 1,548% of of its quota. (See Table 9, p. 33) Needless to say 1,548% of Ireland’s quota is a very dramatically larger sum of money than 200% of the same quota.
The question of Ireland’s potential future IMF borrowing then needs to be understood in light of the extraordinary size and extraordinary nature of the IMF’s loan to Ireland under the current programme.
Jacob Funk Kirkegaard of the Washington D.C. based Peterson Institute for International Economics has presented a strong argument that Ireland will not have access to unilateral IMF funds. He asks the pertinent question "why did Ireland receive this exceptional access in late 2010—far beyond any previous program ever granted by the IMF to any country outside the euro area?" The answer he gives is clear: "the only real reason the IMF agreed to give Ireland (as well as Greece and Portugal) an IMF loan worth more than twice the normal maximum for an EFF assistance program is that the European Union participated with a two-thirds share of the funding that was still junior in creditor status to the IMF."
The only reason the IMF was willing to lend Ireland so much was because it was part of a much larger package where 2/3 of the funds were provided to Ireland by it’s EU partners[i], but the IMF was still the most privileged creditor. In other words, if Ireland defaults on any of the loans it has received under the EU/IMF programme, the IMF is protected until all of the EU loans have been defaulted on. This is an extremely unlikely scenario.
However, as Mr Kirkegaard points out "if Ireland votes no, effectively cutting off additional euro area funding, the risk profile of the IMF’s exposure to Ireland—already exceeding its standards—will suddenly look a lot riskier." As such, he argues, "the belief that the IMF would somehow, in these circumstances, agree to lend Ireland even more money beyond the 1,300-plus percent of Ireland’s IMF quota is delusional. The chance of that happening is precisely zero."
Professor Karl Whelan of University College Dublin makes similar points to Jacob Funk Kirkegaard, but he does not agree with Mr Funk Kierkegaard that it can be said "definitively that the IMF would refuse to lend any further money to Ireland without European support".
Prof Whelan also notes the importance of the contribution of Ireland’s EU partners as being a major factor mitigating the risks to the IMF of such exceptional lending. He refers to the ‘Assessment of the Risks to the Fund and the Fund’s Liquidity Position’ prepared by the IMF in advance of the December 2010 bailout. It is worth quoting the relevant section in full:
Overall, the proposed access would entail substantial risks to the Fund. The Fund would be highly exposed to Ireland in terms of both the stock of outstanding credit and the projected debt service, for an extended period and in a context of high overall debt and debt service burdens. The associated risks would be still larger should any of the risks to the outlook discussed above materialize. However, current circumstances are highly exceptional, requiring a strong sign of support from the international community in light of the high risk of international systemic spillovers. While Ireland’s capacity to repay its obligations to the Fund, and other creditors, rests crucially on its ability to mobilize sizeable resources from the private sector in the medium term, the financial terms of Fund assistance, the authorities’ commitment to their comprehensive adjustment program, the strong support of their European partners, and the Fund’s preferred creditor status all serve to mitigate the financial risks to the Fund.
Although Prof Whelan does not agree with Mr Kirkegaard that the IMF will definitely not lend any further to Ireland he does note "any programme approved would provide Ireland with far less funds than a second EU-IMF programme. This will mean more austerity not less."
Assuming then that Ireland is able to get funding from the IMF the funds available to Ireland would be far smaller than those provided in the first bailout and those that would be available via a bailout partially or fully funded through the ESM. A further issue with an IMF bailout is, as Karl Whelan has pointed out here and here, an IMF bailout would involve a forced default on Irish debt. The IMF would restructure Ireland’s debt in order to ensure that it gets repaid on the loans it gives Ireland. This may seem like a positive outcome to people who believe Ireland should default on its debt. However, the argument for default is generally based on a belief that a default would help end austerity, whereas this default would be part of an austerity programme. Further, whatever the merits of a call for default in 2009/10, today billions of euro have already been paid to bondholders in order to secure a good credit record for Ireland. A default at this stage would render pointless all the previous sacrifice made to avoid default.
A final problem with getting funding from the IMF is that it would simply be more expensive. The interest rate charged on an IMF loan under the EFF is non-concessional.[ii] As Phillip Lane, Professor of International Macroeconomics at Trinity College Dublin, points out "the IMF charges a penalty premium of 200/300 basis points on large loans, whereas the premium has been dropped from EU loans, as decided at the July 2011 summit." In other words, what was perhaps the current government’s most significant achievement in its attempt to renegotiate the Irish bailout, namely the reduction on the interest rates, would be lost. It is worth noting that the interest rate cut is estimated to save the state in the region of €10 billion.
The question then turns to other options, aside from the IMF. Would bilateral loans be a feasible alternative? Would Ireland’s EU partners lend to it outside of the ESM?
Mary Lou McDonald has noted that the EFSF is "available to us up until the middle of next year". However, this is largely irrelevant as the main worry is over what will happen if Ireland need a second bailout after the current EU/IMF programme ends at the end of 2013. By this time the EFSF will no longer exist. It is perhaps possible that should Ireland need a second bailout that the life of the EFSF could be extended. It was in response to the Greek crisis that the EFSF was set up so perhaps should Ireland go back into a crisis similar to that experienced in winter 2010, its European partners would find some means of lending to Ireland. However, this is entirely speculative.
It is impossible to know what would happen if Ireland needed a second bailout and did not have access to the ESM. But it is extremely difficult if not impossible to imagine a realistic scenario where Ireland would (a) need a second bailout, (b) have voted no to the TSCG and therefore be excluded from access to the ESM and (c) be able to get a bailout with terms and conditions and at a cost that would not be dramatically worse than those available from the ESM.
[i] The funding from Ireland’s EU partners amounts to €45 billion. This consists of €22.5 billion from the EFSM, €17.7 billion from the EFSF, and bilateral lending support from the United Kingdom (€3.8 billion), Sweden (€0.6 billion), and Denmark (€0.4 billion).
[ii] The IMF provides concessional loans to Low-Income Countries (LICs) but not to developed economies such as Ireland.