Bailout rate cut delayed for two weeks

IRELAND will have to wait at least two more weeks to get the cut in interest rate on its EU-IMF loan, but Taoiseach Enda Kenny appeared confident of getting it following his second EU summit.

In the meantime the Government and the Central Bank are in high-level negotiations with the European Central Bank over reducing taxpayers’ exposure to the banks, which could include forcing bondholders to take losses.

EU leaders agreed to let finance ministers deal with reducing the interest rate from 5.8% to 4.8% and saving Ireland €450 million a year. Mr Kenny made it clear they could not expect any major concession from Ireland in exchange, stressing the country had absorbed three years of austerity measures.

The issue will be dealt with at the same time as the fallout from the Irish bank stress tests, which are due to be released on Thursday. They will also have before them the first three-monthly report from the EU and IMF on how the austerity programme is working.

Last night the main focus switched to Frankfurt where the ECB was looking at the latest Irish bank figures produced by the independent consultants BlackRock, the world’s biggest asset manager, and deciding on the final details of the stress tests.

The Government is hoping to reduce the potential losses of the four banks under scrutiny (Bank of Ireland, AIB, Irish Permanent and EBS) by persuading the ECB not to force them to sell off non-core assets now, but to hold them until prices increase.

They are hoping the ECB will commit to providing funding for the banks over the medium term, about seven years, to improve confidence and encourage investors to deposit money, reversing the outflows of the past few years.

Mr Kenny said he had spoken to almost every leader on the sidelines of the summit over the last two days. “We will intensify that level of interaction when the stress tests come up,” he said.

Sources suggested that persuading the ECB to exchange the current two-week emergency funding of the banks for a longer term commitment and taking the pressure off to fire sale bank assets “could be a game changer” for the State. They stressed that the rescue of the banks could not put the State in danger and that it was essential to find a balance that would restore confidence in both.

They have a deadline of just a year to cut the huge costs of Irish borrowing on the markets as the EU-IMF money runs out in 2013.

The Taoiseach said that Finance Minister Michael Noonan will move the issue forward now. “When the figures are clear we will put them to the governments of other countries and ensure they are happy with what we are doing,” he said.

Mr Noonan will continue discussions with ECB president Jean Claude Trichet when the tests are out, and will discuss the issues at the informal finance ministers’ meeting in Budapest in two weeks’ time. The question of the interest-rate cut will be dealt with then too, or at their next formal meeting in May.

There were none of the sparks flying at Mr Kenny’s second summit and he made clear he had buried the hatchet with French President Nicolas Sarkozy, who demanded a cut in Ireland’s corporation tax rate two weeks ago.

“The Gallic spat we had is concluded and we shook hands several times,” he told journalists.

Portugal’s Prime Minister José Sócrates, who was resigning his position last night, said: “Portugal does not need a rescue fund. I know what it meant to the Greeks and to the Irish.”