In defence of the ECB and IMF

January 28, 2011

I know I promised not to focus on Irish economic issues but I think it is only fair to put the European Central Bank (ECB) and International Monetary Fund (IMF) interventions into context. This may be seen as heresy by many people in Ireland at present, particularly some of those on the left but lets get the facts straight.

The question: what is the real opportunity cost to Ireland of borrowing from the ECB/IMF facility compared to a 10-year bond from the international bond markets? This after all is the real benchmark. Lets us focus on the total amount of interest accrued.

So to borrow €10 billion from the ECB/IMF facility at 5.8% over 7 years is €4.06 billion in additional interest payments, a total of €14.06 billion.

Now the real opportunity cost to Ireland of borrowing €10 billion in 10-year bonds on the international market to incur €4.06 billion in additional interest is an annual rate of interest or coupon of 4.06%. Thus, the real opportunity cost to Ireland as compared to borrowing 10-year bonds form the international bond market is actually 4.06%.

Let me translate, if Ireland went onto the bond market and borrowed money at 4.1%, then it would be cheaper for us to borrow the money from the ECB/IMF facility. 10-year bonds need to hit 4% and lower for Ireland to return to the bond market.

Ireland has not ventured onto the bond market since the second half of 2010 and the rates being asked of Ireland for 10-years bonds at Christmas exceeded 9% and is currently in excess of 8%. Thus, the ECB and IMF are lending us money at less than half the cost than is being asked on the open market.

The other point to remember for those who opposed the Lisbon Treaty is that the facilities being currently used to keep the Irish public sector afloat are all the direct result of the Lisbon Treaty. Had Ireland not passed that EU Treaty then we would not be accessing the current funding and would be paying more than twice the amount of interest on the open market.

So maybe we should give the EU and the IMF less of a hard time and reflect on the fact that €50 billion of that €85 billion facility is being made available to cover excessive government spending (nothing to do with the banks). We of course have the option to cut spending and not borrow the bulk of that €50 billion but that would require Ireland to actually exercise its sovereignty rather than moaning about what the EU and IMF are doing on us.

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