Last updated: November 28, 2010 7:43 pm

Ministers sign off on €85bn Ireland deal

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George Osborne and Christine Lagarde

George Osborne, chancellor, with his French opposite number Christine Lagarde in Brussels on Sunday

European Union finance ministers last night signed off on a €85bn bail-out package for Ireland and approved the outlines of a new permanent mechanism for dealing with debt crises in the eurozone, in a bid to head off further contagion affecting borrowing for Portugal and Spain.

In a surprise move, proposals for the permanent mechanism were dramatically accelerated from a December deadline, after a flurry of weekend telephone conversations between Berlin and Paris and top officials in Brussels and at the European Central Bank.

The plan would replace the present €440bn eurozone rescue fund, due to expire in 2013, with a permanent “European stabilization mechanism”. At the same time, private creditors would be involved in any future debt rescheduling or restructuring through collective action clauses attached to eurozone government bonds after 2013 – in line with current International Monetary Fund practices.

“We are applying a doctrine based the experience of the IMF at a global level,” said Jean-Claude Trichet, president of the European Central Bank.

EU leaders are hoping that the moves will calm bond markets in the 16-country eurozone. EU monetary affairs commissioner Olli Rehn said the aim was to “clarify once and for all!” private sector involvement in future government debt crises.

Under the Irish package, EU countries and the International Monetary Fund will provide up to €85bn in total, which may be drawn down over a period of up to 7½ years.

About €50bn is aimed at bolstering Ireland’s public finances while it implements a €15bn austerity package over the next four years. Of the remaining €35bn, €10bn will be used to recapitalise Ireland’s stricken banks, while another €25bn will be a contingency fund to help support the banking system if necessary.

The Irish government itself will contribute €17.5bn towards the bank contingency fund, while the IMF will put €22.5bn towards the overall package. This will also include three bilateral loans from the UK, Sweden and Denmark, with the British contribution being around €3.8bn.

Interest rates will vary on different parts of the package but Mr Rehn said that the rate faced by Ireland generally would be “close to” 6 per cent.

But opposition parties in Ireland have already raised concerns that, by closing off short-term bank borrowing from the European Central Bank to Irish banks and replacing this by the longer-term bank assistance, EU institutions were effectively shifting risk between themselves and leaving Ireland with a higher interest bill.

Michael Noonan, finance spokesman for Fine Gael, the largest opposition party, said any incoming government would accept the fiscal targets in the austerity package, but “not the ways and means” and would want to renegotiate those terms.

EU ministers also said that loan maturities in the Greek package, agreed earlier this year, would be extended in line with the Irish terms.

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