A less sadistic statistic from the IMF – but they’re still wrong on substance

Yesterday’s blog entry was entitled: ‘The so-called bail-out: The EU and Ireland in a sado-masochistic relationship’. In fact the support being provided is a mixture of EU, national government and IMF support, and I used ‘EU’ as a short-cut.

However, as more details of the deal emerge, it seems that the short-cut was more literally correct than I imagined. According to an IMF statement issued today, it will lend at an annual rate that, under current conditions, amounts to 3.12% for the first three years. The IMF is stumping up a third of the money. If the overall interest rate is estimated to be 5.8%, then the rate on the other two-thirds, that provided by the EU (and some non-euro-area Member States), must be a whopping 7.14%!

I have not seen any reports of what the EU claims the rate to be, but this is what the maths tells me if you plug in the numbers that are publicly available. That would remove any lingering  doubt I may have had as to whether the term ‘sado-masochistic’ with reference to the EU-Ireland relationship was laying it on a bit thick. I will now, in fairness, at the same time explicitly exonerate the IMF from blame on that score: in fact I think an interest burden of somewhere just above 3% would have been appropriate for the package as a whole.

Having said that, a number of key arguments made in the same IMF statement and by its chief negotiator in an interview do not stand up to scrutiny. There are no sectoral policies to promote “a recovery of domestic demand, thereby supporting growth and reducing long-term unemployment”. The whole point of a bail-out is to underpin credibility and confidence by removing market pressure. Under such conditions it makes no sense to claim: “There is evidence when credibility and confidence are an issue, frontloaded fiscal consolidation [having the bulk of cuts at the start of the process – AW] may be better suited.”

Of course IMF policymakers can ignore my views (or indeed common sense generally), but they  should listen to their own Chief Economist, Olivier Blanchard, whose second (of Ten) commandments on austerity measures reads:

You shall not front-load your fiscal adjustment, unless financing needs require it. For a few countries, frontloading may be needed to maintain access to markets and finance the deficit at reasonable rates—but, in general, a steady pace of adjustment is more important than front-loading, which could undermine the recovery and be reversed.”

The point of the bail-out package is precisely to maintain access to markets at reasonable (or not so reasonable) rates. Under such conditions frontloading is bad policy.

And if you don’t want to believe your own chief economist – look at the reaction of ‘the markets’. The package as announced is a mistake in economic terms. It is also socially unjust (but that argument never cuts much ice.) If the Irish parliament rejects it, which is a distinct possibility, all hell will break loose. In any case the euro area crisis will rumble on (if we are lucky). This is not the way forward.

Update: A few days ago already my colleague Rory O’Farrell pointed out that in another publication the IMF had argued that Ireland had few problems with labour market institutions but massive deficits in infrastructure. This makes the IMF’s support for this plan all the more incomprehensible. Rory’s post is here.


  1. George says


    Doutless you’ve already seen Michael’s Burke’s message confirming your calculation and making the crucial point that if the overall i-rate on Ireland’s ‘bailout’ is 5.8%, they will need a nominal growth rate of GDP in excess of this. Otherwise, the debt-to-GDP ratio will increase, placing ever greater pressure on the country. As Michael says, this is Versailles, not the Marshall plan!