Commission backs move to cut cost of rescue loans

THE EUROPEAN Commission has backed moves to cut the interest rate on EU rescue loans, adding a measure of impetus to the Government’s campaign to lower its borrowing costs under the EU-IMF bailout.

A well-placed EU source said the commission had sympathy with the argument that the interest rate applied on emergency European loans should be “rebalanced” to avoid unduly penalising aid recipients.

The source said the commission’s voice in the debate was “not strong” and that the decision rests with euro countries themselves. It is only by a unanimous decision of the single currency members that the rules governing the interest rate can be changed.

“There is a sense that this is a heavy burden,” the source said of the commission’s attitude. The commission “is saying that this needs to be discussed” and is already “in talks” with its partners in the euro group on this question.

The source agreed with the conclusion drawn in diplomatic circles that Ireland faces an “uphill struggle” to achieve a rate cut, but said it was clear that such a manoeuvre was now in play.

According to the source, a parallel debate on the expansion of the scope and scale of the euro zone bailout fund provides an opportunity to revisit its rules. This also meant that the interest rate question would have to be settled at the same time as other fund reforms are agreed, most likely at an EU summit in late March.

The rate of interest on Irish loans – roughly 5.7 per cent on average – cannot be cut unilaterally but Minister for Finance Brian Lenihan asked his euro zone counterparts on Monday night to consider reducing the interest charge on loans to any recipient.

While it is believed that no minister spoke in favour of Mr Lenihan’s argument on Monday, the fact that Germany has not at this point ruled out such a departure is held in some quarters to be significant.

“They killed the eurobond proposal in 24 hours,” the EU source said of a plan promoted late last year by euro group chief Jean-Claude Juncker. Separate sources said Berlin is not, in principle, opposed to the notion of a rate cut.

Greece is said to be quietly supporting Ireland. Its stance is held to be “obvious” in Brussels as any change to the rules governing the Irish rate would lead to a push for a rate cut on Greek bailout loans, which were granted under a separate scheme. There have been discreet signals of support from Portugal, which is trying to avoid a bailout, and Spain, which is in a similar position.

Ireland is receiving emergency loans from a commission fund, known as the European Financial Stability Mechanism (EFSM), and from a separate euro zone fund, known as the European Financial Stability Facility (EFSF).

The interest rate these funds charge was agreed under common rules adopted last year by euro zone governments. Countries such as Germany and the Netherlands insisted that both funds should charge “dissuasive” interest rates to encourage aid recipients to hasten their return to private debt markets.

Dublin has argued that paying a steep interest charge increases its fiscal consolidation challenge and fosters uncertainty in the markets about its prospects. The case is being made that there are serious questions around the “political acceptability” of the EU-IMF deal agreed in November due to the perception that the IMF charges lower interest to other countries.