Monday, 29 November 2010

Ireland To Be Crippled By €10bn A Year Interest...

THE country is facing crippling interest payments of €10 billion a year after the European Union and IMF agreed to an €85bn rescue package to fund the economy for the next three years.

The bulk of the money, €50bn, will be used to pay for the day-to-day running of the country.

The banks will receive €8bn immediately to restore their cash reserves; €2bn will be on standby and a further €25bn will be available if and when they need it.

The money will come from the IMF, our Euro area partners and loans from Britain, Denmark and Sweden.

In addition, the country has been told to take €12.5bn from the National Pension Reserve Fund and use €5bn the NTMA had already borrowed to pay for early 2011.

The expected average interest rate for the bailout will be 5.83%.

By 2013 the national debt is expected to rise above €200bn and by then almost a quarter of all taxes raised will be used to pay interest service costs.

At the end of the term this is expected to have climbed to €9.66bn a year if the banks have drawn down the full amount of capital. In return, Ireland has not been ordered to raise its corporation tax and it has been given an extra year to get its borrowing levels back within targets for the eurozone.

Senior bondholders in the banks will not have to absorb any losses, after this proposal was blocked in Europe because it was feared the move would undermine the stability of the entire financial system.

Taoiseach Brian Cowen said the agreement was "the best available deal for Ireland".

He said the interest rate was cheaper than Ireland could have got on its own and the deal was "necessary to allow us to fund our budgets over the coming years".

Fine Gael finance spokesman Michael Noonan said the interest rates meant the country was "sold out" in the negotiations.

Labour leader Eamon Gilmore said the IMF and EU walked over a Government without backbone or authority.

The details first emerged in Brussels at 6.15pm yesterday when Luxembourg’s Prime Minister Jean Claude Juncker announced the deal between Europe’s finance ministers had been struck.

Twenty minutes later Mr Cowen addressed a press conference at Government Buildings and spelled out how Ireland would be funded up to 2013.

The agreement demands that Ireland broadly sticks to the terms of the four-year plan announced last week, introduces a property tax and raises the pension age.

A fiscal responsibility law will have to be imposed on Government and an advisory council on budgetary affairs established.

The minimum wage will have to fall by €1 an hour and employers will be given greater scope to plead an inability to pay.

Future governments will also be restricted during the lifetime of the deal. If they raise any revenue not budgeted for, it will have to go towards paying debt rather than additional services.

In terms of the banks, €10bn will be made available straight away. Of this €8bn will be channelled into the institutions directly and €2bn as a short- term contingency fund.

From the immediate €8bn pot the Central Bank said Allied Irish Bank will get €5.2bn, Bank of Ireland €2.2bn, EBS €438m and Irish Life and Permanent €98m.

A further €25bn will be available for the banks to be drawn down when they require and after the Central Bank enforces new capital requirements.

The amount of money the banks take from the remainder of the fund will be added to the national debt and this will increase interest costs.

The breakdown of the rescue package means that €12.5bn will be taken from the National Pensions Reserve Fund and €5bn from our own cash reserves. The European Commission’s stabilisation fund will supply €22.5bn.

The Euro area’s emergency stabilisation fund will also lend us €17.7bn; Britain will offer €3.8bn; €390m will be given by Denmark and Sweden will lend us €598m.

The IMF will provide €22.5bn in a term of up to 10 years, with a minimum interest rate of 3.1% based on the current market. Head of the IMF team in Ireland Ajai Chopra said he was confident the Government will pass the budget on December 7.

He also said the open and flexible nature of our economy meant it was in a "much better situation than many others to rebound quickly".

Report by Conor Ryan, Paul O’Brien, Ann Cahill and Brian O’Mahony - Irish Examiner

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