Long flagged changes to the structure of the International Monetary Fund (IMF) have led to small reductions in the interests rates to be paid on Ireland’s bailout loans from that source.
The IMF announced that the average lending interest rate, when the €22.5 billion in IMF lending is fully drawn down, will be 3.04 per cent on credit outstanding for less than three years. This is down from 3.17 per cent previously.
The new rate on credit outstanding for longer than three years will be 3.85 per cent. This is a reduction from 4.04 per cent.
The calculation of interest rates on bailout funds from the IMF is complicated and based on a range of factors. One of these factors is the relative size of members economies from which each country's IMF "quota" is determined.
The larger the quota, the larger the annual subscription.
A larger quota also allows countries greater access to cheaper funding. Yesterday's change came about because Ireland's quota was raised in the framework of all members having their quotas reassessed.
Provisional agreement on further changes to all members' quotas has been reached. If this agreement comes into effect next year as scheduled, a further reduction in Ireland's interest rates will take place.
In a note this morning, NCB Stockbrokers cautioned that the lower interest rate would only impact the €22.5 billion IMF portion, with the €45 billion EU component unaffected.
"It was known that Ireland's quota at the IMF would change, causing the rate to fall. This change was part of the regular review of the IMF quota system and is technical not political in nature," NCB said. "Any reduction is welcomed, but 20bps on one-third of the package is not going to change Ireland's outcome. The big story is still ahead of us in March when the Euro heads of state meet."
Incoming taoiseach Enda Kenny has said he that he will push German chancellor Angela Merkel to cut the rates on the EU portion of the bailout package. However, Mrs Merkel has increased her resistance to cutting rates on bailout loans, indicating that he may have a tough time trying to persuade certain states to renegotiate the terms in any significant way.
"The Irish package was negotiated just a few months or weeks ago. I can't say today whether we even need to make a change in that package," she said.
Finnish finance minister Jyrki Katainen has also signalled he opposes lowering Ireland's average loan rate of 5.8 per cent. Mr Katainen said indebted countries shouldn't expect concessions if they agree to further measures to boost their competitiveness and stabilise their finances. "The concession is that those countries' credibility in the markets will improve," he said.
Authorities are drifting away from making big changes to the rescue effort that they'd indicated earlier this year, Colin Fan, head of credit trading at Deutsche Bank AG in London, said in a note today.
As the EU's end-of-the-month deadline for a reinforced plan to aid debt-strapped countries looms, German officials are showing more reluctance to forge a grand bargain to protect the euro. The European Central Bank's hints of rate increases as soon as April add yet more urgency to fix the finances of peripheral euro states.
The ECB's indication of a rate rise "is a shock to us," said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London. "The risks assigned to such a decision are high in a context of the periphery situation remaining under stress."
The Finnish talks, which begin this evening, are billed as an opportunity for European People's Party heads to discuss strategy before an EU summit on March 11th. A second summit will take place on March 24-25th.
Additional reporting: Bloomberg, Reuters
