French stance puts cut on bailout in jeopardy
Hard line on corporation tax queers the pitch for interest rate easing
THE Government was last night highly pessimistic of securing a reduction in the interest rate on the bailout due to continuing French demands for a higher rate of corporation tax.
The ongoing insistence by France that Ireland increase its corporation tax in return for the rate cut has resulted in a stalemate in negotiations.
Finance Minister Michael Noonan was expected to secure the rate cut at a meeting of his EU counterparts this month. But it must have the unanimous support of all 27 EU countries.
Yesterday, Mr Noonan was playing down the value of the interest rate cut and insisting that there would be no surrender on corporation tax.
Mr Noonan told the Dail that "too much" was being made of the possible reduction in the interest rate charged on the €85bn bailout.
Coalition sources said the Government had not given up on securing the rate cut but that it was "not clear what more we can do to secure it, given the French focus on our corporation tax rate".
Despite previous estimates that the rate cut would be worth up to €450m a year, Mr Noonan said it only be worth €150m to €200m.
"Those that are opposing us and trying to force us to change our corporation tax rate, I can tell them once more today they have no negotiating position because the amounts of money are so small in relation to the adjustments we require to make, that we're going to hang out, we're not going to concede," he said.
Fianna Fail public spending spokesman Michael McGrath said the minister had given the clearest signal yet the interest rate cut was "now as far away as ever".
Irish 10-year bonds widened as the comments stoked concern over the debt crisis. This country's 10-year yields climbed 10 basis points to 10.77pc, while similar Greek yields added two basis points to 15.86pc.
Economics Commissioner Olli Rehn said the matter remained to be decided and "requires unanimity".
The change in tone came as the European Commission hopes to finally arrive at some sort of comprehensive solution to the debt crisis at a meeting of European leaders which begins on June 23.
Meanwhile, in Strasbourg, European Commission president Manuel Jose Barroso warned that the Greek crisis may prevent Ireland from returning to the bond markets next year as planned.
"Sometimes the markets react not only to a situation in one country, but they make some kind of generalisation, and so in fact some risks exist," Mr Barroso told reporters in Strasbourg.
In the Dail, Mr Noonan reiterated that the State would resume borrowing late next year. Still, he denied that any failure to return to the markets would force the country to beg for another bailout, saying the country would not run out of money until the second half of 2013.
While repeating that the country wanted to "put its toe in the market" next year, Mr Noonan said this depended on international developments over the next 15 months.
Mr Barroso was speaking after the commission published individual reports on the economic progress of each of the European Union's 27 members.
It warned that Ireland appeared to be at high risk with regard to the long-term "sustainability of public finances" while saying that implementation of the EU-IMF programme was "broadly on track" and the macroeconomic scenario underpinning the budgetary projections in the programme was "plausible".
At a joint press conference with Mr Barroso, Economic and Monetary Commissioner Olli Rehn said it made sense for Ireland to pay the same rate on its bailout loans as Greece and Portugal but declined to guess when this might happen.
"I'm only a commissioner, not a forecaster," he said.
Both Mr Barroso and Mr Rehn suggested that this month may see the beginning of the end of the present crisis and a lasting solution to the problems in Greece.
The size of a second bailout package for Greece had not been decided yet, French Finance Minister Christine Lagarde said in New Delhi.
"There is no final number at this time," she said. "The package will include privatisation, voluntary private sector involvement, an added rescue package that will be borne by the members of the eurozone, the IMF, and clearly the guidance of the European Central Bank."
Turning to the rest of Europe, the commission warned that Spain and France might miss targets for deficit reduction because projections rely on overly optimistic growth assumptions.
It endorsed Italy's austerity programme, pushed Belgium and Austria to make deeper cuts and urged Germany to ensure that it does not neglect economic growth.
In a new process dubbed the "European Semester", the EU put out the warnings to identify the cracks in next year's budgets ahead of time and build a firewall against the spread of the debt crisis.
"Many member states have to show more ambition when it comes to fiscal consolidation while -- let me emphasise this point -- maintaining investment," said Mr Barroso.
The EU is relying on peer pressure to enforce the recommendations, to be made final by national leaders at a June 23-24 summit.
No new recommendations were given to Greece, Ireland and Portugal beyond following existing plans drawn up by the EU and the IMF.