BAILOUT TERMS:THE GOVERNMENT stands to gain additional annual savings of €200 million on its bailout after the EU Commission set plans in train to grant the emergency loans it provides to the State at cost price.
The commission’s proposal, still subject to the approval of the 27 EU countries, would bring the overall annual benefit of the interest rate reduction to between €1 billion and €1.1 billion.
At the same time, the EU executive set out how the maturity of Ireland’s loans will be extended and said similar measures will be applied to cut the cost of Portugal’s bailout.
“The improved terms are expected to enhance liquidity and contribute to the sustainability of both countries in support of their strong economic and reform programmes,” the commission said.
The proposal follows a summit of euro zone leaders in July where they agreed to reduce the interest fees charged to Ireland by its sponsors in the euro zone.
Ireland is receiving money from a fund operated by euro countries, the European Financial Stability Facility (EFSF), and from another fund operated by the commission, the European Financial Stability Mechanism (EFSM).
The presumed impact of the decision at the summit was to reduce the annual interest levied on EFSF loans by two percentage points to about 3.5 per cent.
The Government assumed at that time that a similar reduction would be introduced in respect of the stability mechanism.
In a statement yesterday, however, the commission said it had decided not to apply any “margin” over the EFSM’s own borrowing costs when it raises money on markets to lend to Ireland.
This mirrors the provisions which apply to a similar commission initiative – known as the Balance of Payments scheme – in which it can provide emergency aid to non-euro countries.
A Government spokeswoman said this has led the Department of Finance to revise “upwards” its estimate of the savings made to the cost of EFSM loans. Ireland is due to receive a total of €22.5 billion from the stability mechanism under the bailout.
When the EU-IMF rescue was agreed last November, the arrangement for EFSM loans included the application of 2.925 percentage “margin” over the fund’s borrowing costs. This margin will now be reduced to zero.
“The reduction in margin will apply to all instalments, ie both to future and to already disbursed tranches,” the commission said in a statement yesterday.
“Furthermore, the maturity of individual future tranches to these countries will be extended from the current maximum of 15 years to up to 30 years. As a result, the average maturity of the loans to these countries from [the] EFSM would go up from the current 7.5 years to 15 years.”
Euro zone finance ministers will discuss the technical measures required to give effect to the interest rate cut in the case of the EFSF loans when they gather tomorrow morning in Wroclaw, Poland.
They have yet to settle on how the decision made at the summit should be applied.
Given that the EFSF’s own funding costs are determined by the market, recent volatility has potential to increase them.