view infographic – The Billion Dollar Question
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.