Minister for Finance Michael Noonan was talking on Tuesday about the funding of the Greek bailout and the financial exposure that Ireland would take on. Here is how it would work – in so far as we know.
If the third programme is agreed, then the EU contribution – the bulk of the money – would come from the European Stability Mechanism (ESM), the permanent rescue fund set up in 2012 in the wake of the financial crisis. The ESM will supply the majority of the €80 billion plus which the bailout will amount to - indications suggest up to €50 billion with most of the rest coming from the IMF and privatisations.
This fund has raised €80 billion from euro zone member states. This money was paid in instalments between the establishment of the fund in 2012 and mid 2014. Backed by this paid in capital – and the ability to call on member states to contribute more if needed – the ESM borrows on the financial markets and raises funds, which it then lends on to countries needing help.
Ireland’s contribution in paid in capital to the ESM was €1.27 billion. When Mr Noonan referred to Ireland’s financial exposure to the Greek bail-out, this is what he was referring to. If the ESM extends money to Greece and at some stage in the future Greece defaults in full or in part on this, then the capital put in by the member states would be at risk.
In the case of default, the ESM uses the cash put in by the members to repay the people it has borrowed from in the markets to raise the money in the first place. It would then be likely to seek fresh capital from member states to replenish its capital, meaning we would have to pay in more. On the flip side, if the ESM’s finances are in the black, it is able to pay back dividends to contributing countries.
As the money has been paid by Ireland into the ESM fund already,the Greek bailout has no immediate direct impact on our national finances. Discussions are also underway on how to extend interim financing to Greece to get it through the next few weeks - this could create a liability for Ireland via a different route, depending on the mechanism used, but again unlikely to be one with any immediate budgetary impact. The fuss in Britain this morning is because one of the proposed routes would have imposed a potential liability on their budget.
In summary, if the Greek bailout is agreed, some of our money would be on the line and the cost to us emerges if Greece were to default in future. If that happened – or indeed if a bailout was not agreed – the €347 million we contributed to the first Greek bailout in 2010 would also be at risk. If Greece defaults losses in the European central banking system could also lead to lower profits to our Central Bank and in turn a cost to the exchequer.