Dáil Éireann Debate, Wednesday - 23 March 2011
12 Deputy Brian Lenihan asked the Minister for Finance asked the Minister for Finance the way he has progressed the work of the past Government in regard to the reduction of the interest rates applicable to facilities available under the EU-IMF agreement in respect of the proposed 1% reduction in the facility rate; and the projected savings in the interest bill on an annual basis and over the lifetime of the loan. [5518/11]
Amharc ar fhreagraThere is now a general appreciation of the importance of debt sustainability considerations in the pricing of EU and euro area financial assistance loans to member states.
In this regard, the Heads of State and Government of the euro area decided on 11 March that the pricing of the EFSF — loans — should be lowered to better take into account debt sustainability of the recipient countries, while remaining above the funding costs of the facility, with an adequate mark up for risk, and in line with IMF pricing principles.
The Council also decided that the interest rate on the loans to Greece will be adjusted by 100 basis points. The position in regard to the pricing of Ireland's loans was also considered in the context of wider political discussions and the Council did not take any decision in the matter. Following the meeting of euro area Heads of State and Government on 11 March, finance Ministers are now considering arrangements for the implementation of the changes announced on pricing. The meeting of eurogroup finance Ministers on Monday agreed the term sheet for the European Stability Mechanism, ESM, which will replace both the EFSM and the EFSF from June 2013. This term sheet includes a pricing formula, similar to the IMF approach for ESM loans. The pricing formula provides for a lower margin than currently applies for either the EFSF or the EFSM.
It is not possible at this stage to provide definitive estimates on the level of savings which would arise if reductions were agreed in the pricing of the EU loans to Ireland. However, I understand from preliminary analysis undertaken by the NTMA that a 1% target reduction in the interest rate could yield overall savings of the order of €725 million over the life of the €12.6 billion EFSM and EFSF loans which have been committed to so far. The estimated equivalent annual savings would be of the order of €130 million.
That is the saving on the amount drawn down so far but the fund reaches to €85 billion so we are talking about savings on the drawdown of €12.6 billion.
I emphasise that these are estimates based on the amounts committed to or drawn down to date. The actual savings that would arise from any interest rate reduction secured would depend on the total amount of funds drawn down and on the maturity profile of any such loan. We have yet to decide how much we will draw down and the schedule for any such drawdowns.
Does the Minister accept that at the time of his accession to office, the Commission already strongly supported this reduction but that his difficulty has been in persuading the other sovereign states participating in the EFSF arrangement of the validity of our case? That is where matters lay when the Minister took up office and they have not really changed since. There is still a difficulty with other member states using the fact that sovereign consent is required for the facility moneys; essentially that would impose further conditions on the State.
The Minister gave a figure of €130 million as the annualised sum involved. I take it that is on the basis of a current envisaged drawn-down, or is it on the basis of a current actual draw-down?
It is the actual draw-down. The Deputy will recall that when I became Opposition spokesperson for finance at the start of the autumn session, this became an issue. At the time the advice was that a reduction in the interest rate was not possible. That changed as we came to Christmas and Commissioner Ollie Rehn in particular seemed to move his position. I know the Deputy had discussions with him at the time. The Commission was moving in advance of the politicians, which is usually the way in Europe if progress is to be made. The Commission proposes but the political people make decisions.
After Christmas the process began to move to the political side and very significant progress has been made. Considering the drafting of the communiqué after the meeting of the heads of state, it is indicated that a 1% reduction will be given on the Greek loans and the term will be extended in return for a €50 billion privatisation programme in Greece. It is also indicated that the pricing on the EFSF will be reduced by 1% but the only country availing of that is Ireland. The Greek arrangements were in place before the EFSF was introduced. It is agreed by the 27 members that there will be a 1% reduction. There have been interventions on the quid pro quo involving Ireland but there is no quid pro quo written into the communiqué; there is a reduction in the price of moneys drawn from the EFSF, with Ireland the only country drawing down from it. I hope this will be resolved in the coming weeks but it is difficult to know what will happen in the next few days in Europe as there are many other issues.
Does the Minister accept that the amount of the reduction does not impact significantly on the question of debt sustainability in the future and the risks which the Minister has identified in that regard?
It is helpful and will become increasingly helpful as draw-down increases both on the sovereign side and with any potential additional draw-down on the banking side. A 1% reduction is a significant amount of money. This has also influenced the pricing on the new European stability mechanism, which will apply from 2013. There is a complex pricing blend but it ends up at approximately 1% less than the EFSF fund. That is progress and we need the price to be low for the bail-out as a whole. My major policy position is that whatever the negotiations are, the policy objective is to reduce the cost in total of the bail-out, whether on the sovereign or banking side.
