Noonan to begin talks on changes to bailout package

FINANCE MINISTER Michael Noonan will begin discussions with the European Commission and the European Central Bank today on a package to ensure sufficient funding to keep Irish banks afloat, cut interest rates on the EU loan and agree concessions on some element of company tax.

Taoiseach Enda Kenny asked for breathing space at Friday night’s turbulent EU summit when France put him under pressure to cut the country’s 12.5% corporation tax rate, explaining that he was only three days in power and needed time.

Other countries, including the Netherlands, were not as adamant as France about reducing the rate itself and said Ireland was being asked to offer some concession in exchange for a 1% cut in the interest rate on the EU’s €44.5 billion portion of the loan.

After the meeting, when Mr Kenny described his clash with French President Nicolas Sarkozy as “not quite a Gallic spat,” he said he hoped to be in a better position to forge a deal when he has more information on the true state of the banks and economy.

He spoke briefly to ECB president Jean-Claude Trichet at Friday’s summit and plans to meet him again over the next two weeks before the final summit on March 24/25.

The leaders agreed that the Irish should work with Mr Trichet and the Economics Commissioner Olli Rehn to go through the various problems and come up with a deal.

This would then be put to the summit at the end of the month with assurances it would allow Ireland to carry out the austerity programme and meet the budget deficit targets.

The Government is hoping to resolve a number of issues in this, including getting assurances from the ECB that they will continue to provide funding for the banks in the medium term. This will allow more time to downsize the banks, as agreed in the bailout programme, and prevent money-losing fire sales that add to the burden of the taxpayer.

They also need to find a way of re-capitalising the banks. The new Government now has a good idea of the amount of extra money needed to do this with the bank stress tests well under way.

It is expected that the full €35bn, which includes the €10bn due to the banks at the end of February and the €25bn seen as contingency funding, will now be required.

Mr Noonan will be exploring how to fund this extra re-capitalisation, which many believe will involve making the bank senior bondholders suffer losses. According to the Central Bank senior unsecured, unguaranteed bonds in the Irish banks are worth about €16.5bn.

An EU diplomat said the focus was not exclusively on the issue of the corporation tax rate. “It is a matter of asking Ireland what alternative is on offer. This will be discussed with the commission and the ECB and they can return to the table and say what they have agreed means the programme will achieve its targets.”

The reduction of 1% on the interest rate would be automatically extended once this was achieved. But in the meantime Mr Kenny is adamant he will not agree to harmonise tax rates but will have to come up with some concession such as adopting a common tax base, which would mean companies would be able to assess their tax liability according to exactly the same rules in whatever country they had branches located.

This would be different to the consolidated tax base which the commission is to propose on Wednesday and to which Ireland is vehemently opposed. The more simple version would not mean that profits in one country could be offset by losses in another and it would not affect the repatriation of profits.