Tuesday 21 October 2014

IMF charges twice as much as Europe for Irish bailout

Published 22/07/2014 | 02:30

IMF chief Christine Lagarde
IMF chief Christine Lagarde

THE International Monetary Fund (IMF) has added a percentage point on to the interest being charged on Ireland’s bailout loan.

The State is now paying an estimated 4.99pc interest on the €22.5bn loan from the Washington-based lender – more than twice the cost Ireland is currently being charged to raise 10-year money on the international markets.

At 4.99pc of €22.5bn, the interest bill is €1.12bn.

The yield on Ireland’s 10-year-bond yesterday afternoon was 2.25pc, another record low and below both the UK and US. The State can borrow seven-year debt for 1.2pc per year. The IMF loan has an average maturity of about seven years.

At 1.2pc, the interest bill on €22.5bn would be €270m.

While that full saving would likely never be achieved, it shows the scale of the potential savings.

The IMF imposes a surcharge on the loan because of its scale.

That charge was 200 basis points, or two percentage points, but the IMF increased this in mid-January to 300 basis points, or three percentage points, because of the loan duration – pushing up the overall rate of interest.

It would be financially more favourable to borrow cheaply on the markets and use the lower interest bonds to repay the debt before it was due. 

But the Government cannot replace the expensive IMF loan with cheaper market funding without also repaying other bailout debt, thereby wiping out the benefits.

Paying back the IMF early would trigger automatic repayment of a share of the bigger, and less onerous, EU portion of the bailout.

Any repayment by Ireland of loans from either the EU or IMF would trigger automatic repayment of an equal portion of the other bailout debts.

The estimated interest rates on the EU share of the loans from the European Financial Stability Facility and European Financial Stabilisation Mechanism range from about 2.3pc to just over 3pc.

Fianna Fail’s finance spokesman Michael McGrath, who obtained this information via a parliamentary question, said a strong case needs to be made to the troika to lift the restrictions on paying the IMF debt early.

“There is a potentially very significant gain which would substantially ease the pressure on the public finances,” he said.

“It is very much in the interests of the European authorities that Ireland’s debt position is improved. They should be willing to facilitate us in taking full advantage of the current low yields on Irish bonds.”

The IMF portion of the €67.5bn bailout loan falls due for repayment on selected dates between July of next year and the end of 2023.

About €45bn was borrowed from European bailout pots.

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