Decision on Irish bailout interest rate not expected soon

A DECISION on cutting the interest rate on Ireland’s bailout loans is not imminent and talks on this question with other euro zone countries may continue for some months to come.

This reflects sharp differences between Ireland and Germany and France over the latter two’s push for a dilution of the corporate tax regime in return for a lower rate.

Germany privately indicated willingness to accept some other form of a concession, but there is no sign of any easing from France.

While Minister for Finance Michael Noonan will make the case for a lower rate at a meeting with his European counterparts in Budapest, the Government has made it clear that an immediate breakthrough is unlikely.

The two-day meeting, beginning tomorrow, is likely to be dominated by Portugal’s shift towards a bailout. “We do not expect any decision on the interest rate,” a Government spokeswoman said.

Although EU leaders gave a mandate to finance ministers to conclude talks on the interest rate, some sources believe no deal is likely until the next scheduled European summit in June.

Mr Noonan is likely to brief his counterparts on the implications of the finding that the banks require a further €24 billion in capital. The increased recapitalisation will have a big bearing on the State’s debt profile in the coming years and on its requirement to draw down loans from the credit line in the EU-IMF package.

It is likely, therefore, that the Minister will provide an assessment of Ireland’s debt sustainability. He may also argue that the decision not to impose bailout costs on senior bondholders, which increases the cost of the rescue to taxpayers, should be sufficient in its own right to merit a cut in the interest rate.

In an opinion item in the Financial Timestoday, Central Bank governor Patrick Honohan argues against a "zero sum game" in Ireland's talks with Europe as each side seeks concessions from the other. He suggested drawing a link between the bailout interest rate and economic growth.

Ireland would pay more if gross national product grew and less if growth remained weak. “The aim of such GNP-linked bonds . . . must be to restore, through growth, a favourable dynamic to the sovereign debt ratio, putting its sustainability too, like that of the banks, beyond doubt,” Dr Honohan writes.