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News : Irish Economy Last Updated: Nov 29, 2010 - 6:08:12 AM

EU finance ministers agree €85bn bailout for Ireland at 5.8% rate; Germany/France agree new rescue mechanism from 2013
By Michael Hennigan, Founder and Editor of Finfacts
Nov 28, 2010 - 3:15:12 PM

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Christine Lagarde, France's Minister of Economic Affairs, Industry and Employment and Germany's Federal Minister of Finance Wolfgang Schäuble, at the special meeting of the Eurogroup finance ministers of the Eurozone, Brussels, Sunday Nov 28, 2010

EU/IMF: EU finance ministers today agreed an €85bn bailout deal for Ireland at a meeting in Brussels, at an interest rate of 5.8% based on current conditions. Meanwhile, German and French leaders Angela Merkel and Nicolas Sarkozy agreed on the terms of a new rescue mechanism for Eurozone countries, which will take effect from 2013.

Minister for Finance Brian Lenihan was in Brussels to finalise the terms of the rescue package and a meeting of the Eurogroup, comprising finance ministers of the Eurozone was followed by a meeting of finance ministers from all 27 EU member states.

Eurogroup chairman Jean-Claude Juncker confirmed the rescue package would total €85bn with €10bn to be used to recapitalise the banks with a €25bn contingency and the remaining €50bn to be used to fund the budget deficit while the State will remain absent from international bond markets.

Juncker said the funds were being provided on the basis of a programme negotiated with the Irish Government. This includes three elements: strengthening and restructuring of the banking system; budgetary measures to bring Ireland's deficit to the EU target of 3% of GDP; and reforms, in particular in the labour market.

As part of the deal Ireland has been given an extra year – until 2015 – to meet its target of reducing its budgetary deficit to 3% (see Government statement below).

Under the terms of the deal the State will contribute €17.5bn, which the Government said in a statement would come from the National Pension Reserve Fund and “other domestic cash resources”.

The statement says the interest rate payable on the rescue package will vary according to timing and market conditions.

The Government said: "If drawn down in total today, the combined annual average interest rate would be of the order of 5.8% per annum. The rate will vary according to the timing of the drawdown and market conditions."

Greece is paying 5.2% interest rate on its €110bn bailout. Ireland's support package includes loans that range from 3 to 7 1/2 years, longer than the Greeks' three-year deal.

The funding for Ireland will be provided in quarterly tranches on the achievement of agreed quarterly targets.

There was no agreement on 'haircuts'/discounts on bank bond debt.

New Eurozone rescue mechanism from 2013

German and French leaders Angela Merkel and Nicolas Sarkozy, European Central Bank president Jean-Claude Trichet, European Council president Herman Van Rompuy, Jean-Claude Juncker, head of the Eurogroup and European Commission president José Manuel Barroso held telephone conversations on proposals for a new rescue mechanism for Eurozone countries, earlier today,  the EU said in a statement.

A proposal to make private-sector creditors bear part of the burden of future economic woes was agreed by the leaders.

Germany has been strongly pushing for a permanent crisis resolution mechanism since the Greek crisis earlier this year.

The plan would take effect from 2013 and the issue of whether a country is insolvent would be subject to a vote of Eurozone finance ministers, after a technical analysis by officials from the EU, the International Monetary Fund and the European Central Bank.

A new permanent rescue fund will replace the existing €440bn European Financial Stability Facility (EFSF) which expires in 2013.

The French government had opposed an automatic “insolvency mechanism,"
favouring a case-by-case situation but Germany won agreement to have rules developed that would be based on International Monetary Fund principles.

The new system is expected to be phased in gradually after 2013 and it may take up to eight years for the majority of a country's public debt to have been issued from 2013.

Irish economic outlook

Yields on 10-year Irish government bonds rose above 9% this week and the Government announced  a four-year €15bn adjustment plan of spending cuts and tax rises, designed to reduce the annual budget deficit to 3% of GDP by 2014.

On Tuesday, Ireland's government debt was downgraded by Standard & Poor's.

On Friday, ten European economic institutes said in a report that the Irish government has already implemented an fiscal adjustment of 2.4% of GDP in 2010 made up of cuts in expenditure and increases in taxes.

The intention of the Government is to introduce the Budget on December 7th, which will implement cuts or tax increases of €6bn for 2011. It is also assumed that the 2012 Budget will have cuts or tax increases  amounting to €4bn, with the rest of the adjustment taking place in 2013-14.

Using the ESRI’s HERMES model of the Irish economy it is estimated that an illustrative package of expenditure cuts and tax increases of €15bn would have a range of effects on the economy.

GDP would be reduced by a cumulative 4% over the 4 years with higher unemployment and emigration as a consequence. The effect on the government deficit would be a reduction in the range of 4½ to 5½ per cent of GDP which would be sufficient to bring the deficit to close to the 3% target by the middle of this decade.

This analysis signalls that the negative impact of the 2011 €6bn adjustment upon our growth rate is likely to be about 1.5%, and in each of the following three years about 0.75%.

Over the four-year period of the Government's plan, nominal GDP is forecast to grow by over 16%, or almost 4% per annum and real GDP growth will expand at a rate of 2.75% each year.

Government Statement on the announcement of joint EU - IMF Programme for Ireland.

Minister for Finance Brian Lenihan arriving in Brussels today for the finance ministers' meetings.
The Government today agreed in principle to the provision of €85bn of financial support to Ireland by Member States of the European Union through the European Financial Stability Fund (EFSF) and the European Financial Stability Mechanism; bilateral loans from the UK, Sweden and Denmark; and the International Monetary Fund's (IMF) Extended Fund Facility (EFF) on the basis of specified conditions.

The State's contribution to the €85bn facility will be €17.5bn, which will come from the National Pension Reserve Fund (NPRF) and other domestic cash resources. This means that the extent of the external assistance will be reduced to €67.5bn.

The purpose of the external financial support is to return our economy to sustainable growth and to ensure that we have a properly functioning healthy banking system.

The external support will be broken down as follows: €22.5bn from the European Financial Stability Mechanism (EFSM); €22.5bn from the International Monetary Fund (IMF); and €22.5bn from the European Financial Stability Fund (EFSF) and bilateral loans. The bilateral loans will be subject to the same conditionality as provided by the programme.

The facility will include up to €35bn to support the banking system; €10bn for the immediate recapitalisation and the remaining €25bn will be provided on a contingency basis. Up to €50bn to cover the financing of the State. The funds in the facility will be drawn down as necessary, although the amount will depend on the capital requirements of the financial system and NTMA bond issuances during the programme period.

If drawn down in total today, the combined annual average interest rate would be of the order of 5.8% per annum. The rate will vary according to the timing of the drawdown and market conditions.

The assistance of our EU partners and the IMF has been required because of the present high yields on Irish bonds, which have curtailed the State's ability to borrow.

Without this external support, the State would not be able to raise the funds required to pay for key public services for our citizens and to provide a functioning banking system to support economic activity. This support is also needed to safeguard financial stability in the euro area and the EU as a whole.

Programme for Support

The Programme for Support has been agreed with the EU Commission and the International Monetary Fund, in liaison with the European Central Bank. The Programme builds on the bank rescue policies that have been implemented by the Irish Government over the past two and a half years and on the recently announced National Recovery Plan.

The Programme lays out a detailed timetable for the implementation of the measures contained in the National Recovery Plan.

The conditions governing the Programme will be set out in the Memorandum of Understanding and the Government will work closely with the various bodies to ensure that these conditions are met. The funding will be provided in quarterly tranches on the achievement of agreed quarterly targets.

The Programme has two parts - the first part deals with bank restructuring and reorganisation and the second part deals with fiscal policy and structural reform.

The requirement for quarterly progress reports covers both parts of the programme. When the documentation on the Programme is finalised, it will be laid before the Houses of the Oireachtas.

Bank Restructuring and Reorganisation

The Programme for the Recovery of the Banking System will be an intensification of the measures already adopted by the Government. The programme provides for a fundamental downsizing and reorganisation of the banking sector so it is proportionate to the size of the economy. It will be capitalised to the highest international standards, and in a position to return to normal market sources of funding.

Fiscal Policy and Structural Reform

The Ecofin has acknowledged the EU Commission's analysis that a further year may be required to achieve the 3% deficit target. This analysis is based on a more cautious growth outlook in 2011 and 2012 and the need to service the cost of additional bank recapitalisations envisaged under the programme.

The Council has today extended the time frame by 1 year to 2015.

The Programme endorses the Irish Government's budgetary adjustment Plan of €15bn over the next four years, and the commitment for a substantial €6bn frontloading of this plan in 2011.

The details of the Programme closely reflects the key objectives set out in the National Recovery Plan published last week.

The adjustment will be made up of €10bn in expenditure savings and €5bn in taxes.

The Programme endorses the structural reforms contained in the Plan which will underpin a return to sustainable economic growth over the coming years.

The Government welcomes the support shown to Ireland by our Eurozone partners and in particular by the United Kingdom, Sweden and Denmark who have expressed their willingness to offer bilateral assistance.

The Government also welcomes the assistance of the IMF.

As part of the Programme, Ireland will discontinue its financial assistance to the Loan Facility to Greece. This commitment would have amounted to approximately €1bn up to the period to mid-2013.

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