Ireland hopes to repeat Spanish deficit move

Ireland is hoping to cut its deficit by moving the interest paid on its bailout off the Government books if Spain succeeds in winning the same concession.

This year, Ireland will pay close to €1bn in interest on money borrowed to bail out the banks — and all this currently goes on the deficit, increasing it about 0.6%.

The Government has committed to getting the estimated deficit of 8.3% for this year down to 3% within three years, which means cutting budgets by around €3bn per annum.

Each country has a veto which it could use, but European Commission officials admit it is unlikely any country would be bold enough to use it, and was not optimistic that Ireland and the other programme countries could achieve their aim.

Portugal and Greece are committed to supporting the Spanish move.

Michael Noonan, the finance minister, will be supporting his Spanish colleague when he seeks this concession over the next two weeks.

He is also hoping that at the next finance ministers’ meeting on Jun 21, the commission will again raise the issue of changing the permanent bailout fund, the ESM, to allow it directly fund banks rather than routing it through the Government.

However, this is a matter of timing, and Irish and EU officials admitted the priority was again on stabilising the euro, so Spain and Greece were likely to take all the attention.

Claims that Spain got a better deal than Ireland were being denied by all sides yesterday as officials pointed out that the terms of the bank bailout say such countries must fully abide by the decisions and recommendations to correct their excessive deficit.

So, even though the funds are for the banking sector, they are conditional on Spain complying with the terms of the plan to cut its deficit to around 3.5% next year.

The commission has already acknowledged this is a big ask since Spain overshot its deficit target of 6% last year, returning an 8.5% deficit instead. They offered to allow Spain take an additional year in return for a revised programme.

The way the loan is priced will be the same as the loans to Ireland — the cost to the EFSF of raising the money on the markets at the time plus a small management fee. For Ireland it is around 3%, but costs have increased since the EFSF was downgraded from AAA to AA+.

Amadeu Altafaj, a spokesman for economics commissioner Olli Rehn, said they expected Spain to make a request for funds shortly to go on the country’s debt, which is around 80% now and would increase to 90%.

Currently, the plan is that the money would be given from the EFSF but when the ESM comes into being in July, funding would instead come from this.

Spain will have to contribute to its own bailout from the EFSF because it is considered just a partial bailout. Ireland has been exempted from contributing to the bailouts, including its own.

Ireland will, however, have to contribute its share to the ESM of €1.2bn over two years, contributing €250m in both July and October.