IRELAND HAS FORMALLY AGREED the terms of an €85bn bailout with the European Union and International Monetary Fund, in a deal described by Taoiseach Brian Cowen as “the best available deal for Ireland”, but condemned by the opposition for its raiding of the National Pension Reserve Fund.
€17.5bn of the total €85bn package is coming from within Ireland’s own reserves, with the remaining €67.5bn coming from the International Monetary Fund, the European Financial Stability Facility Fund contributed to by the other EU member states, and central European Commission and bilateral loan funding.
Of the overall package, €10bn will be made available immediately, with another €25bn provided on a contingency basis to support the banking system. The remaining €50bn is earmarked for public expenditure including social welfare payments, education, health, and pensions, and will be dipped into when the government runs a budget deficit.
As part of the deal, Ireland has been granted an extra year to meet its 3% budget deficit target – meaning the terms of last week’s four year budget plan may now be extended over five years.
The average interest rate for the bailout package, if all of the funding was drawn down immediately, would be 5.83% – roughly equating to an annual interest repayment of €3.91bn. Taoiseach Brian Cowen said, however, that the government ”did not envisage” drawing down all of the available money straight away.
The Irish Examiner suggests that when combined with the interest rates for Ireland’s currently outstanding debts, the deal will see Ireland stump up to €10bn a year in interest payments – accounting for an enormous chunk of any future government’s annual expenditure.
Asked about the option of defaulting on Ireland’s outstanding debts at a press conference last night, Cowen said Ireland had an obligation to pay its debts and defaulting would have had an impact on the whole EU banking system. He also said that leaving the euro was not an option.
He said the money being borrowed was funding Ireland had already planned to borrow from the markets over the coming years, and it would now be available to Ireland at cheaper rates than would have been available on international markets.
The Taoiseach said that Ireland’s banks will be downsized and capitalised to the “highest international standards”, while Central Bank governor Patrick Honohan said the agreement would give Ireland’s banks a chance to start downsizing immediately.
A further Central Bank statement last night confirmed that the four banks covered under the bank guarantee scheme would require a further €8bn in recapitalisation, in order to meet the new capital requirements announced last week – meaning that the banks now require €13.17bn before the end of the year to meet the Financial Regulator’s capital targets.
€5bn of this money will come from the state’s own cash reserves, while the state will draw down most of the €10bn banking fund to meet the remainder.
EU ministers divided: report
Minister for Finance Brian Lenihan travelled to Brussels to meet with the other Eurozone finance ministers before a second meeting with ministers from each of the 27 member states.
The interest rate for the financial package was expected to be finalised during that meeting – though the BBC’s Robery Peston reported today that EU ministers struggled to reach agreement on that rate, and Germany pressed for a rate of around 7%.
Peston said Germany feels that the interest rate should be punitive because “any rescue loans should not look like cheap money”. He suggested 6% could be settled on as a compromise.
Speaking to reporters upon arrival at the meeting in Brussels, Britain’s Chancellor of the Exchequer George Osborne said the ministers would be discussing all of the details involved in the bailout package.
Osborne said Britain’s bilateral loan to Ireland would also be discussed. The details of that loan are expected to be announced tomorrow. Cowen said that there was a €5bn facility from the UK, Sweden and Norway, but didn’t want to specify how much each would contribute.
European leaders have been pushing to stablish the European economy as investors fear Ireland’s banking and debt problems will spread to other eurozone countries such as Portugal or Spain. On Friday, Spain’s prime minister said his country would not need a bailout and goaded investors short selling Spain, saying they “are going to be wrong”, according to the FT.
Additional reporting by Gavan Reilly.
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