According to the EU/IMF directives, Irish deficit GDP has to be reduced by 9% of GDP (down from 12% to 3% GDP) within 3 or 4 years.

The EFSF cost of funding is currently 2.8%, and the premium Ireland pays over that is 3%. Total: currently 5.8%

Whenever Ireland will manage to reduce its deficit down to 3% of GDP, the country will still have to pay the same punitive 3% premium throughout the lifetime of the bailout regardless of its potentially heroic budgetary performance!

This when every other budget-righteous state (or not so righteous, like Belgium)will not have to pay any such premium.

If the premium remains constant, this will inevitably act as a disincentive to achieve EU/IMF budget & debt objectives. Once a state achieves “Budget-righteousness”, it should not be treated less favorably than other states with comparable debt budget deficit levels.

Seeing as the EU/IMF’s budget and bank de-leveraging targets on the one hand and this 3% premium on the other hand are both of a purely quantitative nature, making the premium automatically commensurate with Ireland’s level of achievement of EU/IMF objectives would allow:
1- to reduce the premium progressively over time, with an incentive to do so
2- France and Germany to save faces as the principle they want to enforce (of making the budget/debt trespassers pay extra interest or fines) would be not only preserved, but actually reinforced, by providing this direct link incentive.

For example, if the budget is reduced by 3% of GDP next year, the premium drops from 3% to 2%, bringing the total down from 5.8% to 4.8%
Conversely, whenever the budget deficit is reduced by the full 9%, down to the 3% of GDP target, the premium would drop down to Zero.

This would not affect the credit worthiness and credit ratings of the EFSF fund, as the quality of the underlying loans (to Ireland) will have proportionally increased as the interest charged (to Ireland) would decrease

Incidentally: this could serve as a blueprint for the future stabilization mechanisms:
A “pay-as-you-offend” mechanism where the offending states pays a premium commensurate with its excessive budget deficits and debt levels.
This would have to come with a maximum threshold level above which Europe could force a default by its member state on its non-EU liabilities.
It may have some drawbacks, but the current proposals of a 0.2% of GDP fine are quite unrealistic anyway due to their lack of constant incentivisation mechanisms once above thresholds.

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