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Michael Noonan speaks with his Polish counterpart Jacek Rostowski in Luxembourg today. The summit of EU finance ministers agreed to remove a 'preferred creditor' clause from the EU's new bailout mechanism. Virginia Mayo/AP
Bailout 2?

Here's how a new deal on EU bailouts could help Ireland escape a second one

A nutshell guide to how an amendment to the European Stability Mechanism could help Ireland get back on its feet.

EUROPEAN FINANCE MINISTERS have today agreed to change the EU’s plans for a permanent bailout fund – in a move that could provide new hope to Ireland in its quest to avoid a second bailout.

So, in short, how will it work?

Well, the current bailouts being given to Greece, Ireland and Portugal are being worked under a temporary agreement which creates two different bailout funds.

Those funds are the European Financial Stability Mechanism (EFSM), which is a fundraising vehicle backed by all 27 EU member states, and the European Financial Stability Fund (EFSF) which is paid into only by Eurozone members.

Because the EU’s member states have now come to realise that they’re not as invincible as they’d like to be, these two funds are being superceded in 2013 – replaced by a single, permanent European Stability Mechanism (ESM), which will take over the functions and loans of the other two.

This was agreed upon last December, but among the conditions created at the time was a clause about ‘preferred creditor’ status. This would mean that if a country was to default, the ESM would get first dibs on recouping its money.

This is best explained in an example. In Ireland’s current bailout, €45bn in loans is being provided by the EFSF and EFSM. Those loans, in 2013, will be taken over by the European Stability Mechanism.

If Ireland was to default, then the ESM would get first dibs on any cash we have left – meaning the IMF, or other bondhonders, would have to wait in line until the ESM had taken back whatever cash it needed.

This, naturally, is a prospect that would put many people off the idea of investing in Irish bonds in the future – why would anyone invest in Ireland if, should Ireland go under, they might not even get any of their cash back?

This would have proven a particular worry for Ireland, which hopes to get back to the international money markets – raising money through means outside of the package – by the end of next year.

Remember, Michael Noonan says the bailout might only get us through to the middle of 2013 – and more than one cabinet minister has discussed the possibility of Ireland needing a second package of EU-IMF loans if we can’t raise money through more everyday means by then.

If Ireland hopes to win back the confidence of international investors, it will need to get its potential interest rates down to a manageable level – and this wouldn’t be easy if investors were scared that, should Ireland go belly-up, the ESM would raid our coffers first.

It is this clause – of the ESM being a ‘preferred creditor’ – that has been removed by ministers in Luxembourg earlier today. Now, should a country default, every creditor will be treated equally.

The removal of this clause, therefore, could be crucial for Ireland’s hopes of getting itself back to a more normal financial situation – and comes as a nice boost as Michael Noonan continues his charge to reduce the interest rate being charged on the current Irish loans.

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