Ireland and the IMF After a No Vote

The lead story in today’s Irish edition of the Sunday Times was titled “Treaty no bar to IMF bailout.”  The missing-from-the-web story quotes IMF official Bill Murray (and yes there is a touch of the Groundhog Day about this story) as saying there is “no reason” why Ireland could not ask the IMF for another loan. It then contrasts this with statements from the Taoiseach and Tanaiste that appear to suggest Ireland will not have access to non-market funding if there is a No vote.

This story will most likely be cited in the coming weeks by those who advocate a No vote as somehow supporting their position. In reality, it does nothing of the sort.  I’ll make a few points on this.

1. Less funding equals more austerity: Clearly, Ireland can apply to the IMF if it has no other source of funding. However, Ireland’s current programme from the IMF provides far more funds relative to the country’s quota than is normal for the IMF and it represents a fairly significant fraction of available IMF funds. Look at pages 98-100 of this report from December 2010 describing the decision to grant loans to Ireland.

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 report, however, notes

the strong support of their European partners, and the Fund’s preferred creditor status

as mitigating factors. In other words, as long as there was a lot of European money being provided to Ireland, the IMF was likely to get its money back because of its preferred creditor status.

Also worth remembering is that the IMF is a global organisation and many of its members already resent the use of such large amounts of money to bail out first-world European countries. The use of IMF funds to help a country that thumbed its nose at European bailout funds to then repay the Europeans would be very badly received around the world.

At this point, I would not go as far as Jacob Funk Kierkegaard in stating definitively that the IMF would refuse to lend any further money to Ireland without European support. Murray is correct that no such stipulation would ever be formally set out in advance when considering any country’s application for funds. What is clear, however, is that any programme approved would provide Ireland with far less funds than a second EU-IMF programme.  This will mean more austerity not less.

2. Would an IMF loan mean no sovereign default? The Sunday Times story quotes (I hope mis-quotes) Constantin Gurdgiev as saying:

If Ireland was locked out of the ESM and also the IMF, it would default. That means it would be defaulting on its current IMF loans. That would be a big no-no for the IMF. It is inconceivable that the IMF would not extend the current programme.

This argument is, in my opinion, completely wrong. A sovereign default for Ireland would not mean a default on IMF loans. Not only is a sovereign default not inconceivable, it is exactly what would happen if the IMF were the only providers of funds. They would conduct a Debt Sustainability Analysis and almost certainly conclude that Ireland’s debt was unsustainable. At that point, the IMF would oversee a full-scale debt restructuring to ensure that the Fund was repaid and its preferred creditor status preserved.

The likely default would probably be a bloodbath for private sovereign debt holders. With official debt (first programme loans, promissory notes, ECB holdings) accounting for about €110 billion of Ireland’s €200 billion in gross debt by the end of 2013, a deal to see Ireland’s debt ratio reduced to 80 percent would see these investors lose two-thirds of their investments.

It is also possible that this debt restructuring would see IBRC (and possibly AIB) defaulting on their government-guaranteed debts and this would certainly be cheered by those who resent the EU’s role in insisting that all bank debts repaid. That said, any bank debt write-down wouldn’t see a reduction in the austerity that Ireland would endure. In fact, the IMF would probably require the Irish deficit to be completely eliminated in a year or two to give the country some chance of returning to financial markets. And that’s all before factoring in the implications for credit availability of the sovereign default.

3. Would an IMF loan be cheaper? No. As Philip Lane points out, IMF loans above a certain percentage of a country’s quota carry a fairly hefty 300 basis point premia over the cost of funds (for loans with maturity above three years).  Ireland is already above this percentage, so all future loans from the IMF would be charged this premium. In contrast, loans from European facilities now carry no margin over the cost of funds.

At this point, it appears that some of the No campaigners have forgotten what they’re really campaigning against. What most of the No campaigners are protesting against is fiscal austerity. However, ruling out access to the ESM and relying on whatever the IMF will be willing to provide to Ireland is a recipe for a far harsher near-term austerity than would occur with access to European funds.