It’s early days yet but Ireland may agree deal to repay IMF loans early

Europe Letter: Noonan to meet senior EU figures next week in bid to get them on board

Minister for Finance Michael Noonan: scheduled to meet the European Union’s interim economics commissioner Jyrki Katainen in Brussels on Monday before travelling to Luxembourg to meet ESM chief Klaus Regling, followed by meetings with euro group chairman Jeroen Dijsselbloem in The Hague and ECB head Mario Draghi in Frankfurt. Photograph: Reuters/Cathal McNaughton

Minister for Finance Michael Noonan: scheduled to meet the European Union’s interim economics commissioner Jyrki Katainen in Brussels on Monday before travelling to Luxembourg to meet ESM chief Klaus Regling, followed by meetings with euro group chairman Jeroen Dijsselbloem in The Hague and ECB head Mario Draghi in Frankfurt. Photograph: Reuters/Cathal McNaughton

 

travels to various European capitals next week for two days of meetings with senior euro zone figures.

The surprise visit, announced earlier this week, is part of a bid to secure agreement on the State’s early repayment of the IMF portion of Ireland’s bailout loans.

The idea of repaying Ireland’s IMF loans early has been circulating since the spring, with Dublin raising the possibility in various national capitals in the run-up to the summer, in a bid to test the appetite before making a formal application.

The rationale for early repayment is simple: the IMF portion of the bailout loans – originally €22.5 billion of the €64 billion bailout package – commands an interest rate that is twice as high as the EU portion of the loans.

Ireland is paying about 5 per cent on the IMF loans, including the cost of the hedging operations, compared to about 2.5 per cent on the EU portion.

The latter comprises loans from the European Financial Stabilisation Mechanism (EFSM), which applies to all 28 member states, and the European Financial Stability Facility (EFSF), a euro zone fund that has merged into the European Stability Mechanism (ESM). The disparity in interest rates derives in part from the fact that Ireland has benefited from reductions in the interest rate on the EFSF and EFSM loans since they were issued.

Additionally, the IMF has tended in the past to charge relatively high interest rates to discourage countries from relying on its funds.

Where things get tricky is that the bailout agreement stipulates that any decision to repay some of the loans early would have to apply to both the EU portion of the bailout and the IMF.

Unsurprisingly, the IMF is happy to sign off on an early repayment of its loans. It rightly points out that early repayment regularly happens in IMF bailouts. But such an arrangement needs the sign-off of European partners.

Technically, this means that finance ministers must give political assent to the arrangement – most likely at next week’s informal euro group and Ecofin meetings in Milan. In reality, though, the agreement will be thrashed out by Noonan early next week.

High-level meetings

Michael NoonanJyrki KatainenKlaus ReglingJeroen DijsselbloemMario Draghi

Will the European partners agree? Probably. While Spain did not receive IMF assistance as part of its bank bailout package, the euro group agreed in July to allow Spain to pay of €1.3 billion of its €40 billion bailout package early. To this extent, a political precedent has been set.

But euro group finance ministers may be wary of taking on the full risk of the outstanding loans, while their Washington partners unshackle themselves from the debt.

Noonan said yesterday he had the support of Regling. However, Regling has stressed at several points since Ireland’s completion of its bailout programme that, as guardian of the ESM loans, he is responsible for their full repayment.

The fact that a handful of countries, including Germany, may have to secure sign-off from their parliaments may be politically difficult.

A key question is the impact any agreement on early repayment will have on the State’s bid for retroactive direct recapitalisation for its banks.

Significant concession

With the Single Supervisory Mechanism scheduled to come into effect before Christmas, the ESM fund will technically be available for direct bank recapitalisation. Senior euro zone figures have publicly questioned the viability of such a measure for Ireland.

Further, as the banking union has taken shape over the past 18 months, the direct recapitalisation instrument – worth €60 billion of the overall €500 billion ESM fund – is increasingly being viewed as a lender of last resort, to be used only after private market sources have been tapped and a hierarchy of creditors has been bailed in.

Similarly, it is more likely that the ESM direct recapitalisation instrument would first be used to plug any emergency gaps that might be revealed in the bank stress tests, which are due in November, rather than retroactively help a country that is already well on the road to economic recovery.

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