The programme for Government states that the Government would seek to improve the terms of the EU-IMF programme. We did so during the first programme reviews by the troika. Last week, we were also successful in achieving a reduction in the interest rate on the funds we borrow under the programme and in getting more flexibility in the instruments available to the European Financial Stability Facility, EFSF.
This was against a backdrop of financial market confidence in the euro area which has deteriorated significantly over the past 18 months. I made the point to my colleagues in the eurozone at recent meetings that the solution to the crisis required was not only for the member states, including those in programmes, to pursue and deliver appropriate policies to safeguard sustainability but that we also needed a solution to the systemic problems affecting the euro area. While the sovereign debt crisis began in Greece, it quickly morphed into a euro area-wide crisis with both Ireland and Portugal losing access to market-based funding over the past year. The crisis moved into a new phase earlier in the summer when it became apparent that a new financial assistance programme was necessary for Greece and that the participation of the private sector would have to form part of such a programme. One of the main credit rating agencies subsequently downgraded the creditworthiness of Portugal and Ireland on the basis that such private sector involvement operations in Greece would provide a template for similar operations in other programme countries. The spread between interest rates on Spanish and Italian government paper and their German equivalent rose to their highest levels since the introduction of the single currency, threatening the financial stability of the euro area.
Against this background, euro area Heads of State and Government met in Brussels last week to formulate a credible, comprehensive, area-wide policy response to address the growing threat to financial stability in the eurozone. Specifically, Heads of State and Government agreed important policy-measures designed to improve the sustainability of Greece's public debt, to reduce the risk of contagion within the eurozone and to improve the eurozone's crisis management framework.
A new financial assistance programme for Greece will be put in place covering the period to the middle of 2014. This successor programme will address not only liquidity or cash flow issues but also Greece's high burden of public debt. The official sector, comprising the euro area member states and the IMF, will contribute an estimated €109 billion. The gross contribution from the private sector, which is on a voluntary basis, will be approximately €54 billion over the period of the Greek programme to 2014 or approximately €135 billion over the period to 2020. It involves a range of options including debt rollover and debt exchange.
On the basis of discussions with participating financial institutions, the net present value loss for the bondholders over the period to 2020 is around 21%. Crucially, the agreement makes it abundantly clear that private sector involvement is limited to Greece, given its unique and exceptional circumstances. In addition, the pricing of future loans to Greece will be reduced significantly while the maturity of loans will be extended. The Greek authorities have agreed to implement an ambitious fiscal consolidation programme including a privatisation programme amounting to approximately €50 billion, the proceeds of which will be used to retire debt.
The Heads of State and Government also agreed to implement several important structural improvements to the euro area's financial architecture. In particular, the revised pricing and maturity of loans to Greece will apply to all programme countries. In addition, the toolbox of the EFSF is to be expanded to facilitate precautionary assistance, recapitalisation of banks, including in non-programme countries, and secondary market operations in certain circumstances.
This greater flexibility and improved loan terms will help to ring-fence the crisis and limit contagion. The clear and unambiguous text in the communiqué to the effect that burden-sharing with the private sector is confined to Greece is also designed to contain spillover effects.
Agreement was reached to enhance the euro area's economic governance framework. Member states will work with the EU Presidency and the Parliament so that the legislative package on strengthening the Stability and Growth Pact and the new macroeconomic surveillance process can be finalised. In addition, concrete proposals on how to improve working methods and enhance crisis management are to be presented to euro area Heads of State and Government by October.
What was agreed last week is positive and welcome from an Irish and euro area perspective. Addressing the design flaws in the EFSF will contribute, in no small part, to financial stability in the euro area. It has helped reassure markets, which is evident from the fact that interest rates on peripheral government debt fell noticeably subsequent to the announcement. While interest rate spreads remain elevated, the commitment of member states to continue to reduce their deficits and to put their debt-to-GDP ratios on a declining path will have a positive impact over the medium term.
The pricing of EFSF loans to Ireland will be significantly reduced to a rate close to the cost of funds for the EFSF. The precise details are yet to be settled. For the moment, we are working on the basis that this amounts to a reduction of approximately two percentage points in the rate at which we borrow from this facility. I expect the final rate to be close to this but I cannot be exact at this moment.
Moreover, my understanding is that this will apply not only to moneys yet to be drawn down but to future interest payments on existing loans. For illustrative purposes, on the basis that we were to get a two percentage point reduction, that it applies to all future interest payments for loans with an average maturity of 7.5 years and that it applies to full drawdown not only from the EFSF but to the European financial stabilisation mechanism, EFSM, and to all the bilateral loans which have yet to be agreed, the savings could be approximately €900 million per annum in due course. Obviously, if these assumptions change, the savings figure would change too.
This interest rate reduction is in line with our long-held view that the terms and conditions of external financial support should not penalise a country experiencing short-term difficulties. Instead, the terms should be consistent with supporting a country regaining market access. As the troika recently confirmed, Ireland is delivering on its programme and it is important that we get the recognition in terms of reduced interest costs.
Last week's outcome is a positive one in that it reduces the cost of our debt, thereby, lightening the burden on the taxpayer. This will further underpin the sustainability of our debt and boost investor confidence. Ireland also borrows under the EFSM. While it is a matter for all 27 member states to agree, I expect the reduced rate will apply to borrowings from this source also in due course.
Regarding the bilateral loan from the UK, when I spoke with the UK Chancellor of the Exchequer, George Osborne, last Friday, he confirmed a rate reduction on its loan. The chancellor has also offered me much support on the interest rate issue during our various meetings in Brussels. He has consistently argued that the interest rates charged for euro area loans were excessive.
The final part of the interest rate jigsaw relates to the bilateral loans being provided by Sweden and Denmark and the Government will also seek a reduction in these rates.
The Government made no concessions on corporation tax. However, we have indicated our willingness to participate constructively in the ongoing discussions on the common consolidation corporate tax base draft directive. The Government is not opposed to greater co-operation within the European Union on tax policy matters but we favour focusing on targeted solutions to clearly identified barriers to the workings of the internal market. While we are sceptical about many aspects of the CCCTB we are willing to work constructively with the Commission and other member states on the issue, so long as the principle of unanimity is fully respected.
The European Commission has the right of initiation in terms of bringing forward legislative proposals for member states to consider and there is nothing to be gained from refusing to actively engage on the issue. In fact, the opposite is the case. It would be a gross diminution of our responsibilities not to actively and constructively engage on the issue of the CCCTB. Only in that way can we absolutely ensure that all of the arguments that favour our position are brought to the table.
I also believe that Ireland will benefit substantially from the greater flexibility of the EFSF. In particular, the new precautionary arrangements mean that once we continue to meet our requirements, we can continue to borrow from EU official sources if market access is still restricted.
The outcome of last week's summit is a positive step forward but we all know that we have a difficult journey ahead of us if we are to get back to where we want to be. We must still meet our commitments under the EU-IMF programme and, in particular, put our public finances on a sustainable footing. This will not be easy, but it is vital if we are to get back into the markets and back in full control of our own economic destiny.