State may be unable to repay €35bn bailout, says Noonan

THE STATE may be unable to repay the €35 billion bailout being provided by the EU because it is too “expensive”, Fine Gael’s finance spokesman Michael Noonan said.

In an interview with the Financial Times, published today, Mr Noonan also raised the possibility of renegotiating terms with those senior bondholders in the banks whose investments are not covered by the 2008 government guarantee.

He said an incoming government would seek better terms for the EU package, which has been earmarked for recapitalising the banking sector and funding day-to-day State spending.

“We’re pointing out to our colleagues in Europe that if you keep forcing such an expensive solution on to Ireland, despite our best efforts, we may not be able to make it,” Mr Noonan said.

The Republic has signed up to pay a higher interest rate on its EU loan than on the €22.5 billion it is borrowing from the International Monetary Fund, mostly at the insistence of Germany. A possible reduction of the EU rate will be on the table when EU leaders meet at the start of February and again in March.

Of the €85 billion EU loan, the Republic is due €17.7 billion from the newly created European Financial Stability Facility and €22.5 billion from a separate EU fund.

Ireland is “paying too much” on the EFSF money, according to Mr Noonan. The fund completed its first bond auction earlier this week.

“They’ve charged about 6 per cent and they’re borrowing at about 2.8 to 2.9 per cent. So there’s 300-310 basis points of an add on. Even if you were privately borrowing, that’s a hefty management charge,” he said. The Government originally estimated that the EU bailout funds would cost about 5.8 per cent.

Mr Noonan said countries such as Romania, Latvia and Hungary are borrowing from the EU for balance of payments support for 2.55 per cent. He said default was not an option. “Ireland pays its way. That’s the first principle with Fine Gael in government.”

On the senior bank bondholders, he said a new government would attempt to renegotiate with those not covered by the government guarantee.

“There’s about €15 billion out there which in the Irish context is a lot of money,” he said. He did not foresee a restructuring of foreign debt but said it would depend on economic growth. – (Additional reporting: Copyright The Financial Times Limited 2011)