Bitter pill for Government as Noonan bids to dampen expectations
Published 08/06/2011 | 05:00
FINANCE Minister Michael Noonan appeared to move yesterday to dampen expectations that he will be able to swing a cut in the interest rate charged on the €85bn bailout.
Failure to secure such a deal will be a bitter pill for the Government which repeatedly claimed before the election that such a cut was possible and claimed after the election that such a cut was imminent.
The European Commission has repeatedly supported a reduction but any decision will not be made by the Commission; it will be made by the heads of state and then ratified by their parliaments.
That is a tall order at the best of times and this is not the best of times; Europe is divided and nothing can be taken for granted.
How much money could be saved by such a measure would depend on the reduction obtained and the date it was obtained. The interest rate can only be reduced for money that has not yet been drawn down and nobody knows what sort of interest rate would replace the present one.
The existing mechanism is poorly understood by most politicians and economists. In a dazzling submission to the Dail recently, Prof Karl Whelan of UCD showed that the interest rate charged on the bailout fund could in fact rise if world interest rates trend upwards.
The interest charged on the IMF part of the loan depends on a basket of currencies while nobody, not even Prof Whelan who has spent weeks trying to the understand the EU component, fully understands what might happen to that part of the loan. It is perfectly possible for rational people to come to completely different conclusions.
In truth, Mr Noonan's optimism was never well founded. France has been implacably opposed to a reduction in the interest rate without compromise on corporation tax while Germany has blown hot and cold. In Finland, the electoral success of the True Finn party made it almost impossible for the Finnish parliament to agree to a lower interest rate and we needed to get the thumbs up from all EU member states before securing a reduction.