The Government may eventually realise savings of some €2.1 billion on the deal to pay off International Monetary Fund (IMF) loans early, roughly €600 million more than the savings mooted by Minister for Finance Michael Noonan.
In a report last week for European Union member states on the repayment proposal, the EU-ECB-IMF troika that funded Ireland’s bailout concluded the Government would derive big savings from the plan in each of the next three years.
The Government’s basic aim is to pay off the relatively expensive IMF portion of the bailout debt, which carries an average annual effective interest rate of 3.47 per cent, with new debt raised on private markets, where the annual 10-year borrowing cost is less than 2 per cent.
The anticipated savings were calculated on the basis of the 1.88 per cent average yield on Irish 10-year bonds in the 30 days to September 10th.
The Government expects to issue new 10-year bonds to refinance some €
6.1 billion of Ireland’s €22.5 billion IMF debt at the end of this year.
Two further €6.1 billion tranches of the IMF debt would be refinanced in mid-2015 and at the end of 2015. The remaining €4.2 billion in IMF would not be paid off early as the relevant rate of interest – just above 1 per cent – is lower the than current market rate.
The troika’s analysis, published last night by the Department of Finance, said net savings from the refinancing transactions would taper off after 2017. Savings after 2020 would be negligible, it added.
Savings on interest
“The absolute (non-discounted) amount of savings on government interest expenditure would amount to €2.1 billion or 1.2 per cent of 2013 GDP, of which 0.22 per cent of GDP would accrue in 2015, and 0.34 per cent and 0.28 per cent in 2016 and 2017.”
Mr Noonan had suggested that the saving would be €1.5 billion, so the new gain may be larger than anticipated.
The troika report said an early repayment of IMF credit could generate “significant” interest savings for the State.
“If the estimated savings on government interest expenditure were fully used for deficit and debt reduction, Irish government debt would, everything else equal, decline to about 103 per cent of GDP in 2020, about 1 percentage point of GDP lower than without early repayment,” it said.
