Europe loan offer cuts bailout cost

Ireland has cut the cost of its crippling bailout loans by €1.1bn after Europe offered to lend some of the money at cost price.

Finance Minister Michael Noonan said the saving was further evidence that the Government is delivering on commitments to get a more credible deal on the rescue package.

In the first day back in the Dáil since the summer break, Taoiseach Enda Kenny said the reduced costs are “of genuine benefit to the country”.

The European Commission revealed a special fund being tapped for €22.5bn is slashing top-up interest charges and offering the money at the same price it paid to borrow.

That gesture will save about €650m a year on paper.

The saving is on top of an interest rate cut of about 2%, yet to be finalised, on another swathe of the €85bn package backed by eurozone states.

Mr Noonan signalled the combined cuts in borrowing from the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF) could total €1.1bn.

However, the final charges are likely to change depending on whether all of the bailout is drawn down, how long it takes Ireland to repay and what rates are charged for borrowing individual tranches of the package.

The same deal offering cost price loans from Europe under the EFSM has been given to Portugal.

“The loans are provided by the EU under the European Financial Stabilisation Mechanism (EFSM) as part of financial assistance packages to the two countries,” the Commission said.

“The improved terms are expected to enhance liquidity and contribute to the sustainability of both countries in support of their strong economic and reform programmes.”

The proposals on the EFSM are expected to be approved by the European Council in the coming weeks. The interest rate cut on loans through the EFSF will be finalised at a subsequent meeting of European finance ministers.

Under the new arrangement, Ireland has also been given up to 30 years to repay these debts to the EFSM.

The cost-price deal will also be applied to the entire EFSM package, including the three tranches of loans already paid – €5bn in January, €3.4bn in March, and €3bn in May.

The Commission said: “In addition to the substantial cash savings for Ireland and Portugal, the new financial terms will bring benefits such as enhanced sustainability and improved liquidity outlooks.

“Moreover, indirect confidence effects through the enhanced credibility of programme implementation should result in improved borrowing conditions for the sovereign as well as the private sector.”

Fergal O’Brien, chief economist with business lobby group Ibec, said the Commission had gone further than expected.

“The reduced cost of debt servicing will make the overall debt burden much more manageable. While efforts to correct the public finance must continue, we are now much better placed to overcome our economic challenges than we were only a few months ago,” he said.