Reports that bailout will attract 6.7% rate rejected

 

The interest rate for a nine-year EU/IMF loan would be lower than the 6.7 per cent being quoted in some reports today, a source involved in the talks has indicated.

The source said the interest rate was still under negotiation but would not be that high.

The loan of €85 billion would come from a number of different funds, some controlled by European Union institutions, others by the IMF. It is understood that the interest rate for the IMF portion of the loan will be in the region of 4.5 per cent, while the interest charged by EU bodies will be considerably higher.

The source accepted that the average interest rate was likely to be higher than the 5.2 per cent charged to Greece when it was bailed out earlier this year. But it was pointed out that the Greek loan was for a period of only three years.

Higher rates of interest are attached to longer loans and the nine-year loan being negotiated on behalf of the State will involve a higher interest rate, as the risk of default is considered to be higher.

Officials in the EU-IMF mission to Dublin are examining how senior bondholders could be compelled to pay some of the cost of rescuing Ireland’s banks.

As talks on the €85 billion bailout deal intensify, the Government is trying to reduce the cost to the State by minimising the interest bill on the emergency loans.

Tánaiste Mary Coughlan said this afternoon it would be “wrong” to speculate on the outcome of the negotiations. But Fine Gael's finance spokesman Michael Noonan said the reports by RTÉ News of a 6.7 per cent interest rate were "very disturbing".

"This rate is far too high and is unaffordable on any reasonable projection of growth," Mr Noonan said.

"The Government must take a hard line in its negotiations. Even though the Government is in its last days in office, it must not abandon the national interest and settle on unaffordable terms in its negotiations.”

The yield on 10-year Government bonds rose again this afternoon, reaching 9.196 per cent, a rise of 0.149 per cent.

Euro zone finance ministers plan to finalise an agreement on Sunday before financial markets open on Monday, a European Union official said on condition of anonymity.

Senior bonds of Allied Irish Banks and Bank of Ireland slumped today amid concern the government will force holders of such debt to share the cost of bailing out its financial system.

Bank shares were mixed on the Irish market, with AIB's shares up 14 per cent to 34 cent and Bank of Ireland gaining 3 per cent to 26 cent. Irish Life & Permanent was down 14 per cent to 51 cent.

Senior Ictu and Siptu representatives held talks with the IMF and EU delegations. The talks were described by union leaders as positive with a frank exchange of views.

“I think in fairness to them they were anxious and interested to hear what we said, particularly in relation to issues around investment and around the way in which the burden is being distributed in the international plan,” Siptu's Jack O’Connor said. “I don’t necessarily believe that we convinced anyone to change their mind, but there was real engagement.”

Ibec representatives also had talks with the IMF and EU officials.

Measures to repair the banking system are expected to be announced over the weekend, although it is unclear whether details would also be unveiled on how the fund would be used to assist the Government’s €15 billion economic recovery plan.

The negotiators are taking legal advice on the steps required to ensure all classes of bank bond investors assume a burden in the restructuring process. One of their prime concerns is to avert the threat of an immediate court challenge from any senior bondholder or a court objection at a later date.

Several proposals are on the table, said a source. At present attention centres on two similar schemes. In the first, bank debt would be converted into equity shares. In the second, bond investors would be given the choice of injecting fresh capital into banks or face a cut in their investment.

The source said there was a “common understanding” between delegations from the EU Commission, the European Central Bank and the IMF that senior and junior bondholders should each pay a share of the rescue costs.

The first step would be to seek to “persuade” senior bondholders to participate in the bailout, said the source. “If that doesn’t succeed, the question is how can you force them in a legally-sound way.”

Fine Gael Enda Kenny said any deal must be flexible enough to allow the next Government to implement its own policies to agree agreed budget targets.

“Fine Gael has made it clear that, if elected to Government we will not be bound by the details of this Government's four-year plan. We will present an alternative that is better for growth, jobs and fairness and one that will allow for real reform of the public sector,” he said. “The public's right to choose between alternative economic platforms in the next election cannot be negotiated away by this Government.”

A source close to the discussions said the three bodies told the parties that specific budget conditions for 2011 would have to be met although conditions would be less specific for the final three years of the programme. A memorandum that will be signed when talks between the bodies and the Government are concluded which will lay down the conditions to which the State must comply if it is to draw down the loan facility of €85 billion.

In the Dáil yesterday Taoiseach Brian Cowen said the Government’s four-year plan would help members of the public to plan ahead for their economic futures. If other parties said changes could be made they would have to make sure their proposals added up and didn’t create more uncertainty at a time when this country critically needed it, he said.

Additional reporting: Bloomberg