There have been a number of improvements to the terms and conditions of our Programme of Financial Support, including the loans, since it was initially agreed in late 2010. For example, we have agreed the reversal of the minimum wage cut, and also on the use of up to half of the proceeds of asset sales for investment in projects of a commercial nature. Changes to the programme loans have included reductions of the interest rates and, in the case of the EU facilities, extension of maturities. In addition, we have negotiated the replacement of the Promissory Notes issued to the Irish Bank Resolution Corporation (IBRC) with a series of longer term, non-amortising floating rate Government bonds. When the programme was initially agreed in late 2010, the average interest rate on the €67.5 billion available to drawdown from the external sources was estimated by the EU Commission to be 5.82% on the basis of market rates at that time. The average life of the borrowing was initially set at 7.5 years.
In July 2011, the Euro Area Heads of State or Government (HOSG) agreed to reduce the cost of the European Financial Stability Facility (EFSF) loans, and similar reductions were subsequently agreed for the interest rates on the loans provided by the European Financial Stabilisation Mechanism (EFSM) and also by the bilateral lenders (UK, Sweden, Denmark).
In the case of the EFSF, which is providing a total of €17.7 billion in funding to Ireland, the changes to the interest rates removed the interest rate margin, which was 2.47%. The revised pricing structure for the EFSF loans incorporates a guarantee commitment fee of 0.1% per annum and a service fee to cover the cost of operations of the EFSF. It also provides that EFSF lending done after that point will be done on a floating rate basis. The overall reduction in the interest rate margin which Ireland pays to the EFSF is estimated to be in the region of 2.7 to 2.8 percentage points which includes the margin and other structural changes. The original weighted average maturity of Ireland’s EFSF loans was increased to 15 years at this time.
For the EFSM facility, in October 2011 the EU Council of Ministers approved an EU Commission proposal to eliminate the margin of 2.925% on the facility which, when fully drawn, will amount to €22.5 billion. This applied to EFSM disbursements back to the date upon which they were issued. The actual cost of funding depends on the prevailing market rates at the time of each drawdown. The original weighted average maturity of EFSM was extended from 7.5 years to 12.5 years at this time.
The United Kingdom bilateral loan of GBP 3.3 billion has been re-negotiated to remove the interest rate margin of 2.29% although the base interest rate has been changed from a GBP interest rate swap level to the UK Debt Management Office cost of funds plus a service fee of 0.18%. The bilateral loans with Sweden and Denmark, which will amount to total disbursements of €1 billion by the end of the programme, were negotiated after the interest rate margin reductions on both the EFSF and EFSM facilities and their interest rate is floating three month EURIBOR plus a margin of 1.00%.
Given these interest cost changes, the total savings on the original EU facilities, based on the original average maturity of 7.5 years, is some €9 billion, or approximately 5.5% of 2012 GDP. This reduces the annual repayment on these loans by an average of €1.2 billion per year over the initially envisaged 7.5 years.
In April of this year, EU Finance Ministers agreed in principle to further extend the maximum weighted average maturities on our EFSF and EFSM loans by up to 7 years, over and above the extension agreed in 2011. This further maturity extension removes a refinancing requirement of some €20 billion for the Irish State in the years 2015 to 2022. This extension of maturities has a number of significant benefits for Ireland, including smoothing our redemption profile, improving long term debt sustainability and it also has a positive impact on the cost of Exchequer borrowing through creating further downward pressure on our borrowing costs.
As you are aware the Euro-Area Heads of State or Government agreed on 29th June 2012 to break the vicious circle between banks and sovereigns, and that when a Single Supervisory Mechanism is in place involving the ECB, the European Stability Mechanism (ESM) could recapitalize banks directly. The Euro-Area Heads of State or Government confirmed this position and mandated EU Finance Ministers to prepare an operational framework by mid-2013.
A considerable amount of work has been undertaken at technical, senior official and Ministerial level on the ESM’s Direct Bank Recapitalisation Instrument (DBR). This work culminated in agreement on the main features of the operational framework for the ESM’s DBR Instrument at the June 20th Eurogroup meeting of Euro-Area Finance Ministers in Luxembourg.
We have succeeded in having specific provision for retrospective recapitalisation included in the framework, which states that “The potential retroactive application of the instrument should be decided on a case-by-case basis and by mutual agreement.” There is still a lot of negotiation to be done on this but the agreement now in place keeps the possibility to apply to the ESM for a retrospective direct recapitalisation of the Irish banks open for us, should we wish to avail of it.
This overall framework builds upon the agreement secured on the 29th of June 2012, and is an important step in the Euro Area’s efforts in this regard.
It is expected that the earliest date that the ESM Direct Bank Recapitalisation Instrument can come into effect will be around mid-2014, given the need to satisfy national procedures, and also the requirement to have the Single Supervisory Mechanism in place and operational beforehand.
In February this year, the successful conclusion of negotiations with the ECB facilitated the replacement by the Irish Government of the Promissory Notes issued to IBRC with a series of longer term, non-amortising floating rate Government bonds. This has resulted in significant benefits to the State including spreading the cost of the Promissory Notes from a weighted average life of c.7-8 years to c.34-35 years at a lower funding cost for the State, resulting in significant annual interest savings.
There have been no renegotiations of the bank guarantee at EU/ECB/IMF level and therefore no savings arise. It may be said, however, that the general improvement in financial stability that the Government has brought about through the actions that it has taken, facilitated the ending of the bank guarantee for new liabilities from 29 March, 2013, onwards.
