ANALYSIS:With Portugal set for a less penal price on its aid, Dublin's struggle to renegotiate is lessened
THE INTEREST charge on Portugal’s €78 billion bailout may not be known until European finance ministers sign off on the deal the week after next, but all signs point to a lower rate than on Ireland’s loans.
While that would boost the Government’s case for a rate cut, the battle is not yet won.
When Greece was rescued a year ago, German chancellor Angela Merkel and other leaders insisted bailout loans should come at a punitive, dissuasive price. The idea was to discourage any other country from seeking an easy bailout instead taking painful fiscal measures to reassert control over their public finances.
EU leaders have since relented a little, concluding the ignominy suffered by Greece and then Ireland would be sufficient to deter any claim for aid as a substitute for difficult domestic reforms. Three times recently, they have accepted the argument for lower bailout costs. That points the odds in favour of Portugal achieving a lower rate, something which would strengthen Ireland’s moral and economic case. Hundreds of millions of euro in annual interest payments are in play.
Crucial here is to understand how bailout interest is calculated. This is done by adding a three percentage point “margin” to the borrowing costs of the euro zone’s temporary bailout fund – the European Financial Stability Facility (EFSF) – when it raises money on the markets for aid recipients. Hence the Government pays about 6 per cent if the EFSF borrows at some 3 per cent. The same applies to money drawn from the European Commission’s rescue fund, the European Financial Stability Mechanism (EFSM).
The EFSF will be replaced in 2013 by a permanent fund known as the European Stability Mechanism (ESM).
EU leaders have already resolved that the ESM “margin” should be two percentage points over the fund’s own borrowing costs. They established the principle of lower interest costs for the long term, even if an additional one percentage point “surcharge” will be levied on loans after three years.
There is more. EU leaders have reduced the interest rate they charge Athens by a percentage point. This happened at the same summit at which Taoiseach Enda Kenny ran into an onslaught from French president Nicolas Sarkozy over Ireland’s corporate tax regime. Indeed, the Taoiseach’s counterparts agreed then that the Irish rate should be cut by one percentage point. The cut did not take effect, however, because Mr Kenny refused to yield on corporate tax. The standoff continues.
Official sources in Brussels say Ireland’s argument about the effective rate of corporate tax in France is well-made. Silence from Paris is seen as a good thing.
While Kenny says he is not for turning on demands to increase the tax rate, he may yet have to swallow the common consolidated corporate tax base.
He has dismissed that as the back door to harmonisation, but it may ultimately have to be accepted as a lesser evil.
Portugal’s rescue introduces an important new dynamic into this debate.
