Pricing Irish bailout loans is wonky but interesting.
And indeed, trying to figure out the rates at which the €440bn European Financial Stability Facility will lend to troubled eurozone members has been an FT Alphaville hobby for some time. We’re still waiting for details of the Irish bailout, but it’s expected to be a hodgepodge of EFSF funds and IMF/bilateral loans, plus some from the European Financial Stabilisation Mechanism (EFSM), backed by the EU’s budget.
And while the relatively simple EFSM might be the first stop along Ireland’s bailout — since it’s already been used — most of the loans will probably come from the EFSF.
There was some concern earlier this year that because of the overcollateralisation required by the facility’s SPV-structure (to get that all-important triple-A credit rating), EFSF borrowing rates might end up being rather high. Even more than was economically viable — we saw estimates as high as over 8 per cent.
This turned out not to be the case (down to an interest rate margin muck-up — these it turns out, are not spread over the life of the loan, but are one-offs). In fact, the cost now looks closer to about 5 per cent, though the total amount available is still far below the touted €440bn EFSF headline number because of the rating requirements.
That’s about the same rate as for the Greek bailout.
Technicalities aside, the total rate paid by EFSF borrowers is (in basic terms) meant to cover the cost of funding, plus a margin to remunerate other eurozone members.
Watch what happens with any Ireland pricing then — because it could indicate whether or not those members are demanding more compensation for more bailouts.
Check out this commentary from Deutsche Bank’s Mark Wall:
To us, the Greek pricing benchmark is extremely important because politically it will be very difficult for the EFSF to charge a significantly different amount to other borrowers. If the EFSF were to charge a higher rate, it could send the signal that it is good to get into trouble early and be helped at preferential rates. If the EFSF were to charge a significantly lower rate, Greece could at least in theory apply for EFSF funds, which is undesirable, especially now that the rating company requirements have lowered the potential lending amount from the EFSF.
We therefore assume that the Greek pricing benchmark will be used by the EFSF. This view would have to be adjusted if EFSF funding levels were so high that it would be economically unviable to stick to these benchmarks”.
We assume the EFSM pricing would be the same to prevent arbitrage.
As an aside — and returning to that ‘size’ point — the other thing that happens to the EFSF as the number of bailouts increases is the money pot will likely fall in tandem.
And remember, setting aside the cash reserves and overcollateralisation the EFSF needs for its triple-A, the facility already stands at something like just €255bn.
If you take out ‘doubtful’ EFSF contributors — like Austria and Slovakia — and troubled eurozone members that might want to opt out of their guarantee commitments too (a natural step given that the market probably won’t want to buy EFSF-issued bonds backed by say, Irish or Greek collateral) …
… it now looks something like this:
| Germany | 119,390.07 |
| France | 89,657.45 |
| Italy | 78,784.72 |
| Spain | 52,352.51 |
| Netherlands | 25,143.58 |
| Belgium | 15,292.18 |
| Greece | 12,387.70 |
| Austria | 12,241.43 |
| Portugal | 11,035.38 |
| Finland | 7,905.20 |
| Ireland | 7,002.40 |
| Slovakia | 4,371.54 |
| Slovenia | 2,072.92 |
| Luxembourg | 1,101.39 |
| Cyprus | 863.09 |
| Malta | 398.44 |
| Total | 404,143.20 |
Ladies and gentlemen, the incredible shrinking EFSF.
Related links:
How to stop Ireland’s financial contagion – Wolfgang Münchau, FT
The world backs away from Ireland, Spain, Portugal - FT Alphaville