A chimera has entered the minds of some Irish commentators concerning Ireland’s options if it votes to reject the new Euro Area Fiscal Treaty, which calls for sweeping commitments to maintain budget balance, in a referendum that has been scheduled by the Irish government. Unlike a rejection of a regular EU Treaty, an Irish no vote would not stop the new treaty itself, provided that 12 other EU members ratify it. Instead a rejection would leave Ireland without access to the funding it needs in the future to maintain solvency from the newly created European Stability Mechanism (ESM).
This Gaelic daydream of a painless rejection conjures up the idea that as Ireland remains a member of the International Monetary Fund (IMF), Dublin could simply approach the IMF for a new bailout in the future independently of the ESM.1 There are numerous legitimate reasons to oppose or at least ask for adjustments to the new fiscal treaty, which was pushed on Europe by Germany and others seeking to avoid the need for future sovereign debt crises. But pushing this cause is not helped by advocating nonsense.
Make no mistake. Ireland will not have any access to any additional IMF money in the future without the ESM also participating. The fifth and most recent IMF review of Ireland’s Extended Fund Facility [pdf] (EFF) makes this clear. All one needs to consider is the scope of IMF funds already disbursed to Ireland, which are laid out on table 9 (page 33). By the end of 2012, Ireland will have received IMF funds equal to 1,315 percent of its IMF quota, a number scheduled to rise to 1,548 percent by the end of 2013 under the current program.
The standard IMF procedure for an EFF program is that a member can only borrow up to 200 percent of its IMF quota annually, up to a total maximum of 600 percent in total outstanding credit.2 Ireland has obviously already greatly exceeded these maximum levels. The IMF may grant “exceptional access” to loan amounts above these limits on a case-by-case basis in urgent circumstances, an option exercised when the original EFF program was negotiated.3
But why did Ireland receive this exceptional access in late 2010—far beyond any previous program ever granted by the IMF to any country outside the euro area? On the Emerald Isle, it might be easy to assume that IMF acted out of a sense of the common global good because Ireland had to be rescued, or perhaps because Ireland should be rewarded for having a generally open and liberal economy. The IMF does espouse open economic policies and tries to encourage them. The notion that its commitment would be open-ended is utterly misguided.
In reality, the only real reason the IMF agreed to give Ireland (as well as Greece and Portugal) an IMF loan worth more than twice the normal maximum for an EFF assistance program is that the European Union participated with a two-thirds share of the funding that was still junior in creditor status to the IMF. (This participation was via the European Financial Stability Fund, or EFSF, and the involvement of several non-euro area members like the United Kingdom and Denmark.) Without this infusion—accompanied by a guarantee of additional funding if Ireland implements its austerity program but still does not attain private market access—the IMF Board would never have risked lending such funds to Ireland.
Obviously, if Ireland votes no, effectively cutting off additional euro area funding, the risk profile of the IMF’s exposure to Ireland—already exceeding its standards—will suddenly look a lot riskier. Consequently, the belief that the IMF would somehow, in these circumstances, agree to lend Ireland even more money beyond the 1,300-plus percent of Ireland’s IMF quota is delusional. The chance of that happening is precisely zero.
Cynical Irish campaigners for a rejection of the treaty might succeed in spreading this mad idea. The IMF is unlikely to state that additional funds for Ireland, a full IMF member, are out of the question in the absence of an actual Irish application. In an election year in the United States, the Obama administration is also unlikely to make shutting the door on Ireland explicit. It might therefore be difficult to drive a stake through this idea.
The Irish people shouldn’t be taken for a ride, however. The luck of the Irish this time is that they quite likely need money and only the ESM will be there to give it to them. Even before considering the effects of a no vote on Ireland’s access to European Central Bank (ECB) liquidity, it is clear that the IMF is not waiting in the wings.
3. Greece and Portugal similarly got exceptional access to loans in excess of the normal quota related limits.