Interest accrued: Even if he settles his debts at this late stage, Taoiseach Bertie Ahern will have saved almost €100,000 in interest by availing of his friends' generosity.
Mr Ahern told the Dáil yesterday that the unpaid interest accrued on the €50,000 he borrowed from his friends stood at around €20,000. This was based on an interest rate of 3 per cent per year disclosed in the course of his comments in the Dáil.
This figure is significantly lower than the interest rates prevalent when Mr Ahern's friends dipped their hands into their pockets. Irish short-term interest rates in 1994 stood at around 6.4 per cent while long -term interest rates were around 8.4 per cent. The actual rates charged by banks to retail customers would have been significantly higher, reflecting the margin charged by banks.
The loan taken out by Mr Ahern from AIB, which was paid off with the funds lent by his friends, would most likely have attracted an annual interest rate of around 10 per cent or more.
Interest rates have varied significantly over the last 13 years and are now at historic lows, but it is a reasonable assumption that retail lending rates for unsecured loans would have averaged about 10 per cent a year over this period.
Assuming Mr Ahern had borrowed €50,000 at commercial rates averaging 10 per cent and not made any repayment, his interest bill would now stand at something in the region of €122,613, or almost 2½ times the actual amount borrowed.
Using the same compound interest formula, the rolled up interest on the €50,000 borrowed for 13 years at 3 per cent per annum is €23,426.
This suggests that the kindness of Mr Ahern's friends has benefited him to the tune of almost €100,000 in interest saved. But of course this assumes that Mr Ahern would not have made any repayments on a loan from a bank on commercial terms, which is very unlikely.
It is up to the Revenue Commissioners, if they so choose, to decided whether or not the interest saving constitutes some form of tangible, and thus taxable, benefit for Mr Ahern, assuming they have not already done so.
When assessing the value to Mr Ahern of the loan extended by his friends, it is necessary to take into account inflation. Crudely speaking, €50,000 in 1994 would be the equivalent of €70,000 in today's money when the annual rate of inflation - the increase in the price of goods and services - is taken into account.
Another, equally crude way of assessing the value of the money lent in today's terms is to look at purchasing power, or how much you would need today to buy what €50,000 could get you back in 1994. This suggests a figure of around €90,000.
