EUROPEAN GOVERNMENTS expect to endorse an €85 billion EU-IMF bailout for Ireland this weekend as negotiators try to strike agreement on the package before markets reopen on Monday.
Diplomatic sources say a teleconference of EU finance ministers has been provisionally scheduled for tomorrow afternoon, but several key questions remain outstanding.
These centre on the reorganisation of the banks, the treatment of their senior bondholders in a “severe” restructuring process and the rate of interest to be applied on the emergency loans. The situation was said last night to be “fluid” as the negotiation entered the “last mile”.
The average annual interest rate payable on the bailout is expected to be in the region of 5.5 per cent, but a higher rate will apply to any loans repayable over more than three years. However, the interest rate for any nine-year EU-IMF loan would be lower than the 6.7 per cent reported by RTÉ last night, according to a source involved in the talks. He said the rate for any such loan was still under negotiation but would not be as high as 6.7 per cent.
The loan of €85 billion will come from a number of different funds, some controlled by European Union institutions and others by the IMF. It is understood that the interest rate for the IMF portion of the loan will be in the region of 4.5 per cent, while the interest charged by EU bodies will be considerably higher.
The source accepted that the average interest rate was likely to be higher than the 5.2 per cent charged to Greece when it was bailed out earlier this year. But it was pointed out that the Greek loan was for a period of only three years. Higher rates of interest are attached to longer loans.
Fine Gael’s finance spokesman Michael Noonan described the suggestion of a 6.7 per cent interest rate as “very disturbing”. “The Government must take a hard line in its negotiations. Even though the Government is in its last days in office, it must not abandon the national interest and settle on unaffordable terms in its negotiations,” he said.
A Government source in Dublin said the negotiations had been intense and the timetable was tight, but the indications were that the deal would be brokered by tomorrow.
Late last night, Taoiseach Brian Cowen, Minister for Finance Brian Lenihan, Governor of the Central Bank Dr Patrick Honohan and chief executive of the National Treasury Management Agency John Corrigan were present in Government Buildings working on the deal.
The package is expected to include details of the portion of the bailout that will be allotted in fiscal support to the State and how much will be given to the banks. According to another Government source, more than half the sum will be given to the State, with the remainder going to recapitalise the banks.
Although the EU-IMF mission to Ireland has taken legal advice on the implications of compelling senior bank bondholders to pay some of the cost of rescuing Ireland’s banks, it remains unclear as to whether they would push to include such measures in the final deal.
The disclosure yesterday by The Irish Times that such moves were on the table led to sharp declines in the value of senior debt in Allied Irish Banks, Bank of Ireland and Anglo Irish Bank. Credit default swaps, a form of insurance against the risk of default, rose by almost 50 per cent at both Anglo and AIB.The EU-IMF negotiators believe burden-sharing mechanisms could vary between different institutions, but they are wary of potential legal challenges against any move to impose bailout costs on senior bondholders.
There was renewed turmoil in sovereign debt markets yesterday as bond yields for Irish, Greek, Portuguese, Spanish and Italian debt remained close to record levels.