Noonan defends €1.2bn payment to new EU bailout fund

Michael Noonan has defended Ireland’s decision to contribute €1.27bn to the EU’s permanent bailout fund even though the country is living on borrowed money.

The finance minister said paying into the European Stability Mechanism would ensure Ireland had a “negotiating position” on how the fund was used.

The ESM will be introduced next month as the permanent successor to the temporary bailout fund, the EFSF, from which some of Ireland’s bailout loans are being drawn.

Ireland did not contribute to the EFSF given the fact that the country required a bailout. In EU parlance, Ireland “stepped out” of the facility. However, Mr Noonan told the Oireachtas finance sub-committee yesterday that there would be “downsides” to stepping out of its successor, the ESM.

“If you step out, you have no negotiating position.”

Mr Noonan suggested it was better for Ireland to have a say when decisions were being made on the ESM’s use.

That way, if a more advantageous deal was given to a country requiring a future bailout than that afforded Ireland, the Government could make its case for similar terms.

The ESM is being set up as a €700bn fund with an effective lending capacity of €500bn (the remainder being reserved as a “cushion”).

Member states will pay in only €80bn upfront. The ESM will use this as collateral to borrow the money on the markets, which it will lend to countries requiring assistance.

The €80bn figure includes Ireland’s €1.27bn, which will be paid in five equal instalments, the first next month and the last in 2014.

In theory, Ireland’s contribution would increase if countries which received bailouts from the ESM defaulted on their loans.

In that case, the remaining €620bn would be “called in” from member states, and Ireland’s contribution would then rise to a maximum of just over €11bn.

Sinn Féin TD Pearse Doherty and People Before Profit TD Richard Boyd Barrett both questioned the logic of this, given Ireland’s financial plight.

Mr Doherty said Ireland would have to borrow the money if it was obliged to pay the €11bn in full, thereby adding to the country’s already enormous debt.

Mr Boyd Barrett said signing up to the ESM was akin to signing Ireland’s “economic death warrant”.

Mr Noonan dismissed their comments as “horror stories” that were “frightening the children”, and said Ireland would be called upon to pay the €11bn only if the ESM’s €500bn capacity was lent in full and then entirely defaulted upon. He said it was “impossible to imagine” such a situation.

Asked if he was confident Ireland could still get a better deal on its bank debt, despite recent setbacks, he said he had a policy to “never say never” about EU affairs.