Tuesday, June 19, 2012

Extending the EU loans: Some costs?

There have been reports that the Troika is considering extending the repayment schedule of Ireland’s EU loans.  It is reported that this “could see the country paying back EU loans over an average of 30 years instead of the current 15 years”.  Of course, the report finishes with an emailed statement from a European Commission spokesman who says “'this is simply not true".  However, that is simply in line with the official response to this crisis which holds the view that nothing can happen until it happens.

The repayment of Ireland’s EU/IMF loans is due to begin in 2015 and they actually have an average duration of 7.5 years rather than the reported 15.  Extending the terms of the loans would have medium-term funding benefits for Ireland.  Also, if the loans were extended at lower interest rates than Ireland could access elsewhere there would be lower interest payments for the government. 

This are undoubted benefits if this was to arise but there may also be some costs to extending the terms of the loans.  One potential source of such costs is the draft of the ‘Two-Pack’ regulations currently being negotiated between the Commission and Parliament at EU level.  Here is article 11 on "’Post Programme Surveillance” from Com 2011/819, the first part of the Two-Pack.

Article 11
Post-programme surveillance

1. A Member State shall be under post-programme surveillance as long as a minimum of 75% of the financial assistance received from one or several other Member State(s), the EFSM, the EFSF or the ESM has not been repaid. The Council, acting on a qualified majority on a proposal from the Commission, may extend the duration of the post programme surveillance.

2. Article 3(3) shall apply. On a request from the Commission, the Member State shall also provide the information mentioned in Article 7(3) of Regulation (EU) No XXX 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.

3. The Commission shall conduct, in liaison with the ECB, regular review missions in the Member State under post programme surveillance to assess its economic, fiscal and financial situation. It shall communicate every semester its findings to the EFC or to any subcommittee the latter may designate for that purpose and assess notably whether corrective measures are needed.

4. The Council, acting by qualified majority on a proposal from the Commission, may recommend to the Member State under post programme surveillance to adopt corrective measures.

Under these proposals Ireland will be under ‘post-programme surveillance’ until at least 75% of the EU loans have been repaid.  This surveillance will require EU/ECB review missions each semester (currently set as a calendar year) and, if deemed necessary, the Council may recommend that we adopt some ‘corrective measures’.   Extending the terms of the EU loans will extend the period we will be subject to Article 11 of this regulation (if it comes into force).

Paragraph two says that “Article 3(3) shall apply”.  Here is article 3(3), which deals with a country’s banking system and its response to any macroeconomic imbalances:

3. On a request from the Commission, the Member State under enhanced surveillance shall:

(a) communicate to the Commission,the ECB and the European Banking Authority (EBA) at the requested frequency disaggregated information on the financial situation of the financial institutions which are under the surveillance of its national supervisors;
(b) carry out, under the supervision of the European Banking Authority, stress test exercises or sensitivity analyses as necessary to assess the resilience of the banking sector to various macroeconomic and financial shocks, as specified by the Commission and the ECB, and share the detailed results with them;
(c) be subject to regular assessments of its supervisory capacities over the banking sector in the framework of specific peer review carried out by the EBA;
(d) communicate any information needed for the monitoring of macro-imbalances established by Regulation No XXX of the European Parliament and of the Council on the prevention and correction of macroeconomic imbalances.

The regulation cited in part (d) is Regulation 1176/2011 which came into force as part of the Six-Pack last year as is one of the two regulations that established the Macroeconomic Imbalance Procedure.

Article 11(2) on post-programme surveillance also mentions another regulation.  This is article 7(3) of the other half of the Two-Pack and is currently Com 2011/821.  Article 7 deals with the closer monitoring for member states in the Excessive Deficit Procedure, and paragraph 3 of this says:

Member State shall report regularly to the Commission and to the Economic and Financial Committee or any sub-committee it will designate for that purpose, for the general government and its sub-sectors, the in-year budgetary execution, the budgetary impact of discretionary measures taken on both the expenditure and the revenue side, targets for the government expenditure and revenues, as well as information on the measures adopted and the nature of those envisaged to achieve the targets. The report shall be made public.

The Commission shall specify the content of the report referred to in this paragraph.

This means that even if Ireland is not in the Excessive Deficit Procedure (deficit > 3% of GDP or debt > 60% of GDP with excess not declining by “1/20th” per annum) we could still be asked to produce a report as if we were in the EDP.  For countries that actually are in the EDP this report was formalised into the “budgetary and economic partnership programme” in Article 5 of the Fiscal Compact.  This programme requires the endorsement of the Council and the Commission but countries under ‘post-programme surveillance’ may be requested to submit a similar report.

An extension of the repayment schedule for the €45 billion of EU loans Ireland will receive as part of the current programme may bring some benefits.  However, a dearth of one-armed economists means there may also be some costs that need to be considered.

UPDATE: Some details of the actual repayment schedules for the EU, IMF and bilateral loans agreed as part of the current €67.5 billion programme can be seen in this recent PQ answer from Michael Noonan [HT: Kevin] and this answer has some useful tables on the details of the EFSM and EFSF loans drawn down by Ireland.

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