Taxpayers to save up to €1.5bn in interest

TAXPAYERS will save up to €1.5 billion a year in interest payments on the bailout funds from the EU — although the savings will not mean an easier budget this year.

The European Commission, which is contributing one third of the €67.5bn loan, agreed to cut the interest on what it pays for the money when it borrows it on the markets.

This follows the decision in July by the eurozone to cut the cost of loans totalling €17.7bn made through the European Financial Stability Facility (EFSF) following a long battle over demands to raise the corporation tax rate.

The repayment period for both loans has also been extended from a maximum of 15 years to 30, although government sources say most loans are for a five-year period and no decision has been taken yet on changing this.

That the new rate would also apply to the money already drawn down was a welcome surprise to the authorities, as they were unclear if it would just apply to sums following July’s meeting.

This means that over the lifetime of the loan the eurozone countries and the commission are giving up an estimated €10bn profit they were expected to make at the punitive rates they were charging.

The savings on the money already drawn down is significant given that the EU has handed over more than €15.6bn to Ireland so far.

Britain, Denmark and Sweden, which have offered loans totalling about €4.8bn, have indicated they will follow suit, cutting the average rate of around 6% close to 3.5% — depending on the market rate at the time of borrowing and the period of the loan.

EU leaders will have to approve the commission’s decision to cut the loan costs to both Ireland and Portugal and this is expected to happen at their next summit in mid-October.

Fine Gael MEP Sean Kelly, who had threatened legal action against the punitive interest rate being charged, welcomed the cuts.

“It makes sense to enable Ireland to repay the loan by easing pressure on our budget with more reasonable terms,” he said.

Dermot O’Leary, chief economist at Goodbody Economics, estimated the cut in the commission’s loans could save the country as much as €700m a year.

“Assuming that the reduction does apply to EFSF and bilateral loans, the saving could amount to €1.5bn or 1% of GDP, relative to an estimated saving of 0.7% of GDP — aiding Ireland’s efforts to return to fiscal sustainability,” he said in a statement.

It is not expected to lead to an easier budget in the short term since the repayments will not begin immediately.

The Department of Finance has revised upwards its estimated savings, putting it at about €1.1bn a year, which they agree may be conservative.

The IMF interest rate on its €22.5bn contribution is not expected to change. So far the country has drawn down a total of €23bn from the EU and IMF.

The new conditions are the same as those given to non-euro Lithuania, Hungary and Romania by the EU before a number of countries including Germany insisted that an extra charge be made for “moral hazard” to discourage countries from running up debts.