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Germany wants punitive interest rate for Ireland

Robert Peston | 16:51 UK time, Sunday, 28 November 2010

European finance ministers are struggling to reach agreement on the interest rate to be paid by Ireland for the €85bn of rescue finance it is set to receive from the EU and IMF - although they appear to have reached a settled position there should not be losses imposed on providers of senior debt to Irish banks.

As I understand it, the German finance minister, Wolfgang Schauble, is arguing that Ireland should pay a higher interest rate of around 7%. His demand is thought to reflect the chronic unpopularity in Germany of the country's participation in bailouts of financially weaker EU states, such as Greece and Ireland.

So the German government feels that any rescue loans should not look like cheap money, but should be charged at an interest rate that contains an element of punishment for the reckless borrowing spree of Ireland's banks, which took the Irish economy to the brink of bankruptcy.

Ireland would plainly want to pay less. And it is thought that the UK is supporting the Irish position, for fear of the damaging consequences for financial stability if the Irish state were burdened with an unaffordable rate of interest.

Although initially Ireland believed it would pay 5%, a compromise of around 6% may eventually be agreed.

A source close to the talks in Brussels told me that the finance ministers' meeting is still at least a couple of hours from finishing - and the wrangling could go on for longer.

"This issue of the interest rate is not proving easy to settle," he said. "There is still a faint chance we won't reach agreement tonight".

As and when the finance ministers reach agreement on the rescue package - which is expected to be worth €85bn in total, of which €50bn would be earmarked for funding Ireland's deficit and €35bn for shoring up its weakened banks - the deal will still not be done. It would still have to be approved by the board of the International Monetary Fund, which could take several days.

Also it will take some days to distribute the €35bn portion between Ireland's needy banks, led by Anglo Irish, Allied Irish and Bank of Ireland.

Owners of billions of euros of bonds issued by these banks that is classified as senior debt will be deeply relieved that "haircuts" - or reductions in what they're owed - will not be imposed on them.

As I understand it, the EU largest economies are deeply worried that forcing losses on these bondholders could shake confidence in many other European banks.

However holders of subordinated debt will be forced to endure formal writedowns of the billions of euros owed to them.

Update 17:45: Rescue deal agreed. Taoiseach to announce details at 18:30. I will file again later.

Comments

  • Comment number 1.

    Excellent. The banks are saved and they don't have to pay! (Except for the bonuses) Even the depositors don't bear the pain.

    6% doesn't sound bad, even 7% for a basket case.

    All smoke & mirrors of course, just to inspire confidence in global markets.

    So who does pay? Well the public of course in a 3rd round of fiscal tightening just to persuade the world that Ireland ain't broke. Hmmm.

    If we have lent 7bn are we getting the 6/7%? I bet we don't - and I wonder if we'll ever get it back.

    No complaint this time about the banks Robert - you going soft or something?

  • Comment number 2.

    Clearly the rate of interest is more of a political issue than a practical one. Ireland wont be able to repay the loans so the debt and probably the interest will be recycled over time and so the ponzi scheme goes on. Who will be next and how quickly? Very sad.

  • Comment number 3.

    By my calculations the interest on the loan at 6% would be around €5,000 per year for the average Irish family. I hope they will appreciate the punishment element.

  • Comment number 4.

    One thing that occurs to me is that whatever you say about poor regulation of the banks (and a lot is valid), the root cause of the banking crisis is the financing of housing. There was a demand for housing and the banks finanaced it. It suited everyone: people got their houses and bankers got their big bonuses for making it all possible and saw an opportunity for making even more money. The problem in the US with sub prime, in the UK with 125% self certified mortgages and loans based on 5x salary, in Ireland, in Spain was all centred on the demand for owning your own house. Solving how you address that problem will solve the banking crisis in the future. Fail to solve that and in a generation all the hard lessons will be forgotten and there will be more Irelands, Spains, UKs and USAs. No I haven't forgotten budget deficeits - look at the figures and you find that a good proportion of these (not all) were due to declining revenue from the collapse in the housing market. Lots of governments got carried away in unsustainable deficeit budgets, but that doesn't take anything away from the demand to own your own home enabled encouraged bankers excesses.

  • Comment number 5.

    I would suggest to Herr Schauble that having pushed Ireland into this position because he feared that the Demon Barber, Herr Kutz, would be visiting all those German banks holding senior positions as well that he contain his punitive urges.

    There is little to be gained from humiliation except more anger and there has been enough of that of late.

    We are in a predicament that by demanding higher rates of interest we are compounding the debt in the first place.

    What seems to be eluding everyone is finding a means of dealing with all this debt. Until everyone confesses there is little that can be done. But for as long as a country such as Ireland identifies their debt, tries to put a bottom under it but are then taken to the cleaners because of what they have tried to do, there is little prospect of resolving this unpleasantness.

    I think I am looking for some political leadership in addressing this crisis. I fear I will be looking for some time.

  • Comment number 6.

    Having already written of the 85 billion before it has even been lent, it makes sense to get as much as you can in repayments.

  • Comment number 7.

    Isn't it time you and other commentators started naming these holders of senior debt?

  • Comment number 8.

    Think of the Euro-zone as a business, think of Ireland as one department or subsidiary of said business. Surely the head office of the business would have some auditing procedures in place to ensure one department did not overrun its budget and bring down the entire business enterprise?
    Or is it a case of the business having an auditing system in place and they call it the FSA? (Financial Services Authority)
    Worrying !

  • Comment number 9.

    This seems a very high interest rate to me and way beyond anything that Ireland might be expected to be able pay; but this sets an example for any other nation that needs help. All of us here expect Ireland not to be the last.

    Why, at this rate, would any nation in the future agree to even start talks about loans? Just sit in their own government buildings and drink tea and say 'go away'. Then watch the response of the markets. I wonder what will happen ....

    Any ideas?

  • Comment number 10.

    ObserverinMonmouth wrote:
    Clearly the rate of interest is more of a political issue than a practical one

    --------------------------------------------------------------------------
    And this from Germany a country that suffered it own politicaly motivated reparations. And people say history doesn't repeat itself.

    https://en.wikipedia.org/wiki/World_War_I_reparations

  • Comment number 11.

    No4. boilerbill

    "There was a demand for housing and the banks finanaced it"

    In Ireland there was demand by a very few to own multiple houses, and we are not talking 2 or 3 here.

    Despite the fact that there are only 4.5 million people living in Ireland, these few people thought that we would need 6 million houses and the banks agreed with them!!!! The politicians thought it was a great idea too.

    These same politicians are now in talks to organize the biggest mortgage in Europe for the biggest load of empty houses in Europe

    God help us all

  • Comment number 12.

    The Irish getting this loan is to save the German banks anyway. The finance ministers are sitting in a room pouring a large brandy discussing a rate that is never going to be achieved on a loan that is never going to be repaid.
    They might as well blindfold one of them and get them to throw a dart at a dartboard to determine the rate. Then they can all walk out with furrowed brows feigning fatigue and deep concern when really they have been discussing what they are going to do when Spain goes belly up. Or has the deal been done where Spain can now only issue bonds as senior debt which they hope will take the ECB out of the equation where Spain is concerned.

  • Comment number 13.

    I believe that the argument about the interest rate is academic.

    There is a sense of inevitability surrounding this crisis.

    Euro Zone 1
    Euro Zone 2

    Maybe.

  • Comment number 14.

    Well you know what I mean that any bonds issued as senior debt comes with an ECB guarentee so therefore would probably have to get permission from the ECB to issue the bonds therefore foregoing soverignty in the process as can't see many takers of subordinated debt.

  • Comment number 15.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 16.

    I want to know who the hell is holding this debt and providing the cash(sorry not cash electronic made up mickey mouse money).Who is going to be holding the knife at the throat of all these millions of hard working people who are caught up in this and will be caught up in this when the next lot goes down and the ones after that.Particulary sickening is that large amounts of this fabricated cash is going on fat cat bonuses at the banks.Take your money out and punish them.its the only way to hurt these leeches.

  • Comment number 17.

    Screw over the peasants. The high life just keeps rolling along for the bankers, creditors, politicians and all the corrupt, greedy lot of them.

  • Comment number 18.

    Sleepydoormouse wrote #9 "Why, at this rate, would any nation in the future agree to even start talks about loans? Just sit in their own government buildings and drink tea and say 'go away'. Then watch the response of the markets. I wonder what will happen ....

    Any ideas?"

    At a rate of 5.8% the cost per Irish family in interest is nearly 5000 Euros per annum ( Michael #3).

    Penal rates of interest are not affordable and the insistence on higher rates will have the opposite effect of that intended. Default becomes a better option at 5.8%. The people of Ireland can hardly be blamed if they say they don't want to pay and won't pay. Equally, the other PIIGS are not going to be reassured that they are going to be helped if and when that help becomes necessary.

    I expect the markets will do the maths and realise that the loan terms are not affordable and that it doesn't offer Ireland a lifeline. They will conclude that similar terms would be offered to the other PIIGS should they require help. They will lose confidence. That will push up loan rates and that will put increasing pressure on Portugal and Spain. The next crisis is now that much closer.

    I believe that the terms of this deal could therefore lead to the breaking of the Eurozone.

  • Comment number 19.

    As someone who lives in Ireland, and as a non-gambler who knows nothing whatever about banking or economics, I'd like to point out that until recently most of us here had no idea that we taxpayers would be paying off gamblers' debts.

    A few years ago, when we went along with the government policy of protecting bankers, most of us were afraid of "a run on the banks" -- as exemplified in scenes from the movie _It's a Wonderful Life_. So we went along with our government's policy to "protect the banks no matter what", thinking we were protecting ordinary decent depositors' money. But turns out we were protecting the way of life of high-rollers and gamblers.

    Meanwhile, the elected members of the Dail ( = Irish parliament) -- who went above our heads and didn't tell us that we were protecting gamblers' money -- have not reduced their own salaries by one iota. The Taoiseach ( = Irish prime minister) earns more than the UK prime minister and the US president!

    If the current Irish MPs (including opposition party members) are not hanging upside down from lamp-posts next week, they should count themselves lucky!

  • Comment number 20.

    18. At 19:21pm on 28 Nov 2010, busby2 wrote:
    --------------------------------------------

    Yes, I agree entirely with your analysis. Portugal or Spain will just sit there and do nothing, agree to nothing. Time will turn the tide against the rest of the european community. Then decisions will need to be made quickly and in a panic. They are most likely to be poor decisions that will haunt all of us for many years.

    If I were young, I think I would seriously consider emigrating to a resource rich country, whether or not the eurozone breaks up.

    BY THE WAY a different question

    I know my deposits in a savings account are guaranteed up to £50,000 [I wish!]
    But assume I want to transfer £1000 from account A to account B in different companies.

    My money is guaranteed, but what happens if either A and/or B gets into problems during the several days my money takes to get moved?

    Is it guaranteed during this process?

    Where is it during the process? Who would I claim against?

    Idle speculation at the moment but I ask because the way this is going in Ireland, chaos is one step nearer and the scenario above seems to me to be just a little more likely. This could affect many of us

    If you know for certain, can you provide the authority for it please - Many thanks.

  • Comment number 21.

    Ah.....the delicate art of the....um...'rescue' package. Sure to be dusted off again over the months ahead. 'Rescue' has such a.....I don't know......life saving sound, doesn't it?

    Right so that's Greece and now Ireland 'rescued'. Next.........(hope the bailout bucket is big enough)

    "Owners of billions of euros of bonds issued by these banks that is classified as senior debt will be deeply relieved that "haircuts" - or reductions in what they're owed - will not be imposed on them.

    As I understand it, the EU largest economies are deeply worried that forcing losses on these bondholders could shake confidence in many other European banks."

    How is this going to work? What proportion of the debt is 'senior debt' and what proportion is 'subordinated debt'? Who are the main holders of each of these debts and what is their exposure to debt elsewhere? Am I missing something or is someone trying hard to protect the Euro? I was interested to read that some folk have recently started to talk up the Euro:

    https://www.bbc.co.uk/news/business-11838596

    emphasize the strength of their economy:
    https://www.bbc.co.uk/news/business-11838365

    vow to bail out anyone who needs it:
    https://www.bbc.co.uk/news/business-11836514

    while denying plans for a bail out of Portugal:
    https://www.bbc.co.uk/news/business-11845046

    Interesting. Or is this whole public process just another delaying tactic to reassure the markets, buying a little more time instead of adresssing the real causes. Mid-2011. Crunch time folks. Rising unemployment, rising costs, falling demand, falling revenues......

    And in China, things are set to get really interesting. Like tighter credit, unchecked inflation and a burgeoning surplus (!?!). Where's that wagon headed I wonder.....

    https://www.smh.com.au/business/world-business/china-sitting-on-inflation-volcano-20101123-1857t.html

    https://news.smh.com.au/breaking-news-business/china-warns-of-growing-inflation-20101125-187qs.html

    https://www.smh.com.au/business/world-business/chinas-current-account-surplus-doubles-to-us102b-20101125-188aw.html

    https://www.smh.com.au/business/world-business/china-says-it-can-curb-inflation-20101123-184hz.html

  • Comment number 22.

    From the Irish Times website
    https://www.irishtimes.com/newspaper/breaking/2010/1128/breaking1.html
    irishtimes.com - Last Updated: Sunday, November 28, 2010, 19:21

    "The European Union has approved an €85 billion rescue package for Ireland which, if drawn down in its entirety today, would attract an average interest rate of 5.83 per cent.

    Of this €10 billion will be used to immediately to recapitalise the banks to bring them up to a core tier 1 capital ratio of 12 per cent, with a €25 billion contingency. Further injections of capital for the banks will take place in the first half of 2011, as needed."

    Better than we have been discussing but still on the high side. Can they repay - I have no idea! So what happens now .........

  • Comment number 23.

    How ironic that Germany, a country bankrupted by unrealistic reparations demands after WWI should now impose similar terms on Ireland. Rather like the Weimar Republic, there is absolutely no chance that Ireland will ever pay this money back. The notion that the population is simply going to accept 20% of all tax revenues being diverted to Germany is nonsensical.

    Sinn Fein won a by-election on Thursday in what was previously not a great area for them (and by contrast a Fianna Fail stronghold). We can be sure that SF are going to take a very populist and nationalistic stance in the general election next year. Don't be surprised to see a surge in support for them. They are the only party not claiming that there is no alternative. Anyone wanting to register a protest will vote SF. I don't see Ireland developing Reich-type tendencies (either military or racial). I do expect SF to run a very anti-European and populist campaign in the election.

  • Comment number 24.

    JayPee wrote #23

    "Sinn Fein won a by-election on Thursday in what was previously not a great area for them (and by contrast a Fianna Fail stronghold). We can be sure that SF are going to take a very populist and nationalistic stance in the general election next year. Don't be surprised to see a surge in support for them. They are the only party not claiming that there is no alternative. Anyone wanting to register a protest will vote SF. I don't see Ireland developing Reich-type tendencies (either military or racial). I do expect SF to run a very anti-European and populist campaign in the election".

    I too was thinking that this crisis is playing into the hands of Sinn Fein.

    I wonder what are the views of Irish bloggers on these boards about the likely support of Sinn Fein in the Irish General Election next year?

  • Comment number 25.

    #24 busby2

    Although I'm British, I live in Ireland (and have done for several years). My guess is that the reason Adams has relocated to Louth and given up his Westminster and Stormont seats, is that SF sense a very real chance of breakthrough in the Republic. They did very badly in local and Euro elections last year, and the leadership in the Republic appears weak. Adams was also very poorly briefed on economic conditions in the Republic before a national televised debate in the Euros I think (or might have been the Lisbon Treaty referendum: definitely one of those!).

    It will take voters a lot to stomach giving SF votes. They are a real "Marmite" party. People love them (and give them their #1 preference vote) or hate them (and do not vote for them at all or give them a very low preference). If SF do make big gains (they lost seats in the 2007 election I think), it will have a dramatic effect in Ireland, where SF has until now been viewed as sympathetically here as it is in Britain (other than in its poor heartlands).

    SF's policies are bonkers. Strip away the nationalistic claptrap, and you are left with a pretty much unreconstructed Marxist party. However, all the other parties are singing the same austerity tune. SF is the only organised alternative. I think we'll also see an anti-EU backlash as a result of this crisis, and SF does have a long history of isolationism and anti-Europeanism, which they will play on.

    At the moment, this is a tough one to call. Donegal SW had many particular circumstances that favoured SF. At the general election, we know that FF's vote is going to collapse. They will probably lose half their seats. Labour look like picking up a lot. They certainly did well last year though, interestingly, maybe did not pick up as many votes in Donegal as they expected. There is a danger for Labour in being too closely aligned with the "there is no alternative" position (they agree Ireland needs €15 billion in cuts, just argue how to do it). SF may be the big beneficiary from any major swing to the left.

    Finally, a bit of a wild card this one, but how about Labour distancing itself from Fine Gael between now and the election; adopting a more challenging stance on the economic plan; and then forming a broad left coalition with SF and the Greens if necessary? Like I say, a wild card. However, the clear message here at the moment is that people think the whole political class is corrupt to its core, and that Fine Gael is no better than Fianna Fail. One thing is for sure. Nobody will enter government with FF after the next election.

  • Comment number 26.

    JayPee #25

    Thank you for your reply.

    I looked at the Irish Times website and in their editorial they said all the major parties are likely to back the budget except for Sinn Fein.

    This would appear to mean that SF will be the natural party of choice for all protest voters, especially if the rescue package doesn't do the job and/or proves as unaffordable as Gerry Adams says it is. The prospect of a surge of support for SF is worrying.

  • Comment number 27.

    #26 Busby

    I think you have to analyse why SF might benefit from a surge in support. They will only do so because people have no other way of registering disgust at the political elite generally. A few years back there was near apoplexy in the EU when Austria elected Joerg Haider's neo-Nazi Freedom Party to power. Of course Austria had not actually turned neo-Nazi, just got utterly fed up with the post war cosy consensus between the Social Democrats and Christian Democrats, and voted for the only real alternative.

    Ireland is the same. The entire elite feels that there is no alternative other than for the entire populace (except the politicians and their property developer friends of course) to pay for the errors of the reckless few. Voting SF is the only way to dispute that argument. It should not be taken as an endorsement of SF or its policies, just a rejection of the policies of everyone else.

  • Comment number 28.

    #27 JayPee

    I agree that SF will benefit from a surge of support "because people have no other way of registering disgust at the political elite generally".

    SF have a track record they can draw upon. They were in the forefront of opposing the Lisbon Treaty and claimed success in the first vote when the people rejected Ireland's establishment and voted NO. I'm not sure what the Irish think of the Lisbon Treaty now but it seems inconceivable that SF's opposition will harm them.

    You wrote

    "Voting SF is the only way to dispute that argument. It should not be taken as an endorsement of SF or its policies, just a rejection of the policies of everyone else".

    Again, I agree. However Sinn Fein came from nowhere in the last election before WW1 when the Home Rulers got the Home Rule Act through Parliament. Home Rule was postponed because of the outbreak of war and the Home Rulers supported Great Britain and the Empire against the Germans. Then in the middle of that terrible war, Sinn Fein launched the Easter Rising in Dublin. The Easter Rising met a great deal of opposition from Dubliners who weren't prepared for rebellion. After the surrender, the Volunteers were hissed at, pelted with refuse, and denounced as 'murderers' and 'starvers of the people'.

    And yet SF ended up winning the hearts and minds of the Irish nationalists over the next 2 years to win the majority of seats in Ireland in the 1918 election. The dominant party in Ireland, the Home Rulers, were all but wiped out. Is it therefore inconceivable that SF won't come from nowhere to become a real political force in the Republic at the next General Election? Before their 1918 victory, they had won by-elections and now SF have won Donegal after coming from nowhere to take the seat and wipe out FF.

  • Comment number 29.

    #28 Busby,

    I don't claim to be an expert on Irish history, so keep that in mind re the following.

    However, I think there is a huge difference between 1916-21 and now. Britain made a major error in purely Irish terms by executing republicans after the 1916 uprising. Of course in a wider context they had to execute them, as they were executing their own for desertion on the Western Front. However, the executions in Ireland immediately allowed SF to attain martyr status. So, any revolution now is going to be peaceful and not violent. That's the first point to note.

    The second point is that, as you note, SF came from nowhere and then disappeared again almost as quickly post-independence. The same will happen should they win a bloc of seats in 2011. SF is a party of protest that represents the disenfranchised. During the boom, they were restricted to pockets of impoverishment in run down urban areas, particularly in Dublin. Now they are the party that everyone that wants to stick two fingers up at the political elite can vote for, pretty comfortable that they won't actually make it into government. That's an interesting one, though, in the event they win a decent bloc of seats (say, over 15). If Fine Gael and Labour do need a third party to form a working majority, who is the least distateful option: Fianna Fail or SF? Not an easy call at the moment. I suspect SF would get the nod on the back of their performance in government in the North.

    There is undoubtedly dissatisfaction with the political elite generally. Fine Gael and Labour did not score well in Donegal. They are seen as part of the same self-serving elite as FF. They just want their "turn" at travelling in the ministerial cars. They are not offering radical change. And a country that needs nearly €100 billion in emergency funding neads more than a bit of tweaking of its institutions. FF is an almost permanent member of government, meaning that the civil service is pretty much an extension of the party, and Ireland is just a one party state with media freedom. There is a need for revolution here, though not of the 1916-20 version. The only way to get that is to vote for maverick parties, of which the only one with the organisation and money is SF.

    I do see SF making gains in the election. Adams will portray this as part of some sort of long march, similar to the North. However, I'm pretty sure that a surge for SF will act as a wake up call and, before the next election in 2015 or 2016, the EU deal will have been renegotiated to make it less onerous for Ireland. Will there be major domestic political and institutional change as well? I'm not so sure. Net emigration has been 40,000+ (ie 1% of the population) for the last 2 years. So the dissillusioned Irish seem more likely to vote with their feet and just leave. There is a huge Irish diaspora to tap from previous migrations.

  • Comment number 30.

    #29 JayPee

    You're right to highlight the differences between now and 1916-21 for Sinn Fein. The executions of he leaders of the Rising was a turning point. The British Govt had no idea that would happen, given that the rebels as they were marched off when they surrendered had to be protected from being attached and lynched by Dubliners! British retribution was confined to the leaders - the volunteers were given short sentences. Given the circumstances of the time, that was a very liberal response and was no doubt intended to help heal wounds.

    As for today, SF are well placed to get the protest vote. They can no doubt also cash in on the peace dividend in the North as being responsible partners in Govt. We live in interesting times.

 

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