Euro zone ministers agree rescue fund amendments

 

Euro zone finance ministers meeting in Luxembourg acted today to put a firewall between Greece’s dire financial situation and the destinies of Ireland and Portugal.

The deal came as Minister for Finance Michael Noonan was holding talks today French finance minister Christine Lagarde on the Government’s long campaign for a cut in the interest rate on Ireland’s bailout.

Finance ministers agreed important changes to both its current and future bailout funds, which they hope will reinforce confidence in the euro zone’s struggling economies as the debt crisis in Greece reached new depths.

They agreed to raise their guarantees for bailout loans given out from the current rescue fund to €780 billion from €440 billion, said Klaus Regling, who manages the Luxembourg-based fund.

The European Financial Stability Facility requires significant over-guarantees to get a good credit rating and make the bonds it issues attractive to investors.

On top of that, the ministers also made an important tweak to their future rescue fund, which they hope will help already bailed out countries regain access to debt markets.

The so-called European Stability Mechanism, which will come into force in mid-2013, when the EFSF expires, will not have preferred creditor status when it helps countries that have already been bailed out, said Jean-Claude Juncker, the Luxembourg prime minister who also chairs the meetings of euro zone finance ministers.

Minister for Finance Michael Noonan welcomed the measures, which Ireland believes will ease its progress back into the bond markets. He said it would be impossible for programme countries to get back into the market while the provision remained.

The Department of Finance said the preferred creditor clause in the draft ESM had been identified as a "significant impediment and risk factor" by default buyers of Irish bonds.

Early this morning, the ministers meeting in Luxembourg withheld the release of a €12 billion loan to Athens saying they could not authorise the release of the money until the Greek parliament backed a swingeing new austerity plan. They said it was up to Greece to show concrete progress on plans to cut spending, raise taxes and generate other revenue streams.

Speaking in London today, Taoiseach Enda Kenny said a new bailout for Greece must not have negative consequences for Ireland.

He said Ireland was “not preparing for the destruction of the euro” but discussing its own economy’s return to health within the single currency.

Tánaiste Eamon Gilmore said today Ireland needed to move on from being "bracketed" with Greece and the Government should be granted a reduction in the interest rate applied to the bailout package.

"There should be the reduction in the interest rate. It is not sustainable to continue to withhold that reduction from Ireland," he said in Luxembourg. "It doesn't make sense that the interest rate continues to be withheld from the very country that is implementing its programme and is making progress."

Although certain Dublin sources believe a breakthrough on Ireland's interest rate is “possible” before EU leaders gather in Brussels for a summit on Thursday and Friday, they say the attitude of French president Nicolas Sarkozy will be pivotal to the prospects of a resolution.

The sources believe an effort may be made to dispose of the matter before Ms Lagarde, the prime candidate for the leadership of the IMF, leaves the finance ministry in Paris. Talks intensified in recent days in an attempt to bring the matter to a conclusion soon, they say.

Ireland and France have been at loggerheads for months over Mr Sarkozy’s demand that the Government increase the 12.5 per cent corporate tax rate. Taoiseach Enda Kenny has refused to budge on that, prompting a prolonged standoff with Paris.

Ireland’s offer to constructively engage in talks on a European Commission proposal to develop a common consolidated corporate tax base (CCCTB) is now under examination in Paris.

At the outset of the dispute, Mr Sarkozy was aligned with German chancellor Angela Merkel in their joint effort to prise dilution to Ireland’s corporate tax regime as the quid pro quo for a rate cut. However, Dublin sources believe Berlin’s stance has eased significantly and that a pledge to seriously examine the CCCTB will be sufficient to win German support for the rate cut.

Additional reporting: PA