EU to book a hefty profit on Irish bailout
Published 06/01/2011 | 05:00
The European Commission will book a hefty profit on its bailout loan to Ireland after it raised €5bn at an interest rate of just 2.59pc yesterday by selling bonds.
The EU will lend the funds to Ireland at an interest rate of 5.51pc. The bonds are part of the solution to the European debt crisis but risk making it worse if demand for the low-risk bonds makes it harder for countries to borrow.
A spokesperson for the Commission said the "profit" that the EU makes by lending to Ireland will be invested back into the EU budget and will be distributed to EU members at the end of each financial year.
"The deal went really well," said Gary Jenkins of Evolution Securities. But he said there is a significant risk of unintended consequences.
"The deal was done because countries like Ireland cannot borrow and there is a risk investors will think 'I'd rather have this new product than an Italian or Spanish bond', making it hard even for countries that have been able to borrow to access the market," he said.
The €5bn raised last night is the first part of the contribution the EU is making through the European Financial Stability Mechanism (EFSM) -- set up after the Greek bailout last year.
The bonds will be used as part of the €22.5bn contribution the EFSM is making to the €67.5bn Irish rescue package.
A second body, the European Financial Stability Fund (EFSF) will contribute a separate €22.5bn to the Irish rescue. The EFSF will raise the first part of that contribution with its own bond deal later this month.
The EFSM debt is guaranteed by all 27 EU members. The guarantee means the debt has a solid AAA rating.
The EFSF will expect to pay a slightly higher yield when it borrows later this month. Its debt is guaranteed by the 17 members of the eurozone.
As far as most bond investors are concerned, both sets of bonds are ultimately guaranteed by Germany and France. The yield on five-year German debt was less than 1.8pc yesterday and 2.08pc for France.
The €5bn deal was sold in less than an hour after receiving orders for three times the amount offered.