Brussels Blog

Finance ministers MIchael Noonan of Ireland, center, and Vito Gaspar of Portugal, right, with the EU's Olli Rehn at January's meeting.

After Greece last year won a restructuring of its €172bn rescue that included an extension of the time Athens has to pay off its bailout loans, Ireland and Portugal decided they should get a piece of the action, too.

So at the January meeting of EU finance ministers in Brussels, both Dublin and Lisbon made a formal request: they’d also like more time to pay off their bailout loans. According to a seven-page analysis prepared for EU finance ministry officials a few weeks ago, though, the prospect is not as straight forward as it may seem.

The document – obtained by the Brussels Blog under the condition that we not post it on the blog – makes pretty clear that while an extension might help smooth “redemption humps” that now exist for Ireland (lots of loans and bonds come due in 2019 and 2020) and Portugal (2016 and 2021), it’s not a slam dunk case.

The main argument against an extension – aside from the complex legal knots that would have to be untied – is the message it would send to the markets. Since both Portugal and Ireland have had some successes in recent months putting their toes back into the bond market waters, a full-scale, long-term extension might signal that investors’ newfound confidence is misplaced, the paper argues:

The strategy of extending [bailout] loans has a trade-off: if implemented, Portugal and Ireland would have to issue less in the post-programme but would face a heavier refinancing burden in subsequent years. Moreover, while a re-profiling of the debt for a limited number of years is likely to be perceived positively by financial markets, this would likely not be the case for a very long extension of maturities.

The paper argues that both countries are regaining market access “well ahead of what was originally expected”, but warns that optimism could be easily reversed, especially if hiccups occur elsewhere in the eurozone.

Despite their prudent financing strategy and strong programme implementation, risks remain, including those related to the well-known vulnerabilities on public and private balance sheets, and to economic growth. Moreover, market perceptions remain sensitive to developments in the euro-area as a whole. Currently, financial windows for the two countries in financial markets seem to be open. However, since the situation remains largely subject to market sentiment, it cannot be taken for granted that financing opportunities will persist.

For those who want to really dig into the technicalities, the biggest hurdle for an exention to Dublin and Lisbon appears to be the fact that both Ireland’s €67.5bn bailout and Portugal’s €78bn package were agreed under the EU’s formal rescue system, created after Greece’s collapse.

The Greece bailout, after all, remains a bit of a hodgepodge. Its first bailout, which was scraped together in May 2010, was a combination of €53bn in bilateral loans from eurozone member states and €20bn from the International Monetary Fund. Of the €173bn in the second bailout, most (€145bn) is coming from the European Financial Stability Facility, the eurozone’s old €440bn bailout fund. The rest (€28bn) is from the IMF.

Of all those sources, it is the Greek bilateral loans – known as the Greek Loan Facility – that have been the easiest to adjust, since it just takes a legislative act in individual creditor countries. Those loans have been extended repeatedly, and their rates lowered so much that they’re now almost at the cost of borrowing.

But neither Ireland nor Portugal has the equivalent of the Greek Loan Facility, since bilateral loans were no longer needed once the eurozone’s formal rescue system was set up. Both of their bailouts come in equal parts from the IMF, EFSF and the now almost-defunct European Financial Stability Mechanism, a €60bn pot of money backed by the EU’s own budget.

As the leaked note makes clear, it is unlikely the IMF will change the repayment schedule for its loans (it didn’t for Greece). And the EFSM, because it is backed by the EU budget and any extensions would have knock-on effects to what all 27 member states would have to contribute to Brussels, is also extremely complicated.

That leaves the EFSF loans as the most likely place for movement – particularly since Greece got its EFSF loans extended another 15 years, into the mid 2030s. Here, the paper makes no recommendations – only poses questions. As a result, the debate continues. But if any action is likely, expect it in the EFSF loans.