Talks underway on early loan repayment

The Government is in discussions with international lenders about repaying its bailout loans early, in a bid to reduce the debt burden on the state.

Officials have held discussions with its bailout partners about possibly repaying some of the EU-IMF loans early, though no decision has been made.

Ireland will be subject to two post-programme reviews by the EU and IMF until 75 per cent of the country's bailout loans are repaid, which is expected to be around 2031. The government will only begin repaying the principal of the EU portions of the loans in 2027.

Under the terms of the bailout deal, however, any decision to repay some of the loans early would have to apply to both the EU portion of the bailout and the IMF, which charges a higher interest rate.

Today the European Commission published its first post-programme report on Ireland in which it echoes last week's call by the IMF to implement €2 billion in budget cuts. It warns that, while positive economic trends are still evident since the end of the bailout, "further progress is required in several areas", highlighting Ireland's very high level of government and private debt, and the large stock of impaired assets in the banking sector.

“Ireland needs to continue with fiscal consolidation, reduce the private sector debt overhang, and further progress financial sector repair to safeguard and strengthen the momentum of the economic recovery, “ the report states.

It also notes the recent political debate about the level of budget cuts needed in 2015, adding that “these statements can create expectations that may be difficult to manage.”

“Any plans to cut taxes or increase expenditure would need to be compatible with the agreed fiscal consolidation path,” it states.

It says that “expenditure control” is strong in most government departments, though the main downside risk is the implementation of the health budget.

“Renewed momentum and forceful actions are necessary” to implement the Legal Services Reform Bill, the review states, noting that high legal services costs have impeded Ireland’s competitiveness and negatively affected the sme sector.

Ireland could technically be subject to fines if it fails to meet the European Commission's targets, with the government due to submit next year's budget to Brussels for scrutiny by October 15th. However, a number of larger member states, particularly Italy and France, are understood to be pushing for more flexibility regarding EU debt and deficit targets as the next European Commission prepares to take office for the next five-year term.

While the report notes the improving fortunes of AIB and Bank of Ireland which returned to profitability earlier this year, it says the outlook remains challenging for Permanent TSB, which has a large number of tracker mortgages on its books. Its loan to deposit ratio, though falling, still remains elevated at 150 per cent, the report states. While it has reduced its reliance on ECB funding, non-performing loans at the bank increased to 26 per cent of gross loans in 2013, up from 20 per cent the previous year.

Overall, the Commission notes that the banks are proceeding well with loan-restructuring targets, though the level of repossessions still remains low. According to the review, Irish authorities “do not expect major shocks” from the European stress tests which are currently underway, noting that the country’s three main banks have capital buffers above the core tier 1 threshold of 10.5 per cent. Other recommendations suggested by the European Commission are the need to reduce pharmaceutical spending, by negotiating with the industry bodies representing drug manufacturers.

Today’s report follows the first post-programme review mission to Dublin by the troika in April. The next visit is scheduled for November, with the second report to be published in January next year.