Lenders follow EU lead to cut rate on Irish loan

THE cost of Ireland’s bailout will be cut by over €1 billion a year as other lenders have indicated they will follow the EU’s lead and reduce the interest rate on the entire €67bn loan.

But even as the news for Ireland improved, the markets showed their disillusion with the deal agreed at the summit to stabilise the euro, and Spain’s borrowing costs rose.

Britain’s chancellor George Osborne, announced they would lower the interest rate they were charging Ireland on their €3.7bn contribution, which was the highest of all the rates at 6.08%.

The eurozone cuts “enables Britain to cut its rate on its loan to Ireland ... we will still be more than covering the cost of our borrowing”, Mr Osborne said in a statement. Denmark and Sweden have indicated they will follow suit on their promised loans of about €1bn. A much larger contribution to savings will be achieved when the cost of the €22.5bn raised by the European Commission is reduced.

This has still to be agreed by the 27 member states, but Taoiseach Enda Kenny was confident after receiving positive signals from his fellow leaders at Thursday’s emergency summit.

The total saving means annual interest cost would be cut from over €10bn to around €9bn, close to a quarter of the money the Government has to find by raising taxes and cutting expenditure for next year’s Budget.

However, the Taoiseach said the interest rate reduction would not affect the adjustment of up to €4bn that has to be made in the country’s spending for the next year.

The Government will also push out the repayment time of the €67bn loan to at least 15 years, and could even go to as much as 30 years to sometime between 2025 and 2040.

This will give the country a valuable breathing period, as more than €43bn of other loans will be due for repayment over the three years from 2018 to 2020. Changes to the eurozone’s lending facility, the European Financial Stability Fund (EFSF) also mean that even if Ireland cannot return to the markets to borrow by 2013, the country should be able to get loans from the EFSF without asking for a second bailout.

While the exact phrase “credit line” was removed from the final statement agreed by eurozone leaders in Brussels, officials said they were confident that changes to the EFSF included this facility. There was still some confusion over exactly what had been agreed for Greece’s second bailout yesterday as analysts struggled to decipher the complex arrangement put in place for the banks.

There was general agreement that Greece’s debt burden of 160% of its GDP remains much the same since the 12% reduction in the plan would be matched by a similar increase this year due to interest repayments.

At the same time, the eurozone has to put in place guarantees for the investors to limit their losses and provide €32bn for the ECB to guarantee their continuing funding of Greek banks during a period of the planned default.