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State saves €6bn on recapitalising estimate

YESTERDAY'S agreement to sell a substantial stake in Bank of Ireland to fewer than ten investors means that the State has now shaved around €6bn off the cost of recapitalising the banks -- savings which can now be used for other purposes.

The Government and the bailout partners had originally planned to set aside €24bn to prop up the banks following the latest stress tests in March, known as PCAR and PLAR.

After deciding to burn some junior bondholders and shaving as much as €1.1bn off the cost of recapitalising Bank of Ireland yesterday, the final bill for the last stage of the bank bailout looks closer to €18bn.

The Government had originally set aside €17.5bn from its own resources to rescue the banks while the European Union and IMF were expected to shell out the remaining €6bn or so from their €67.5bn contribution.

Changes to the bailout rules in April allow the money saved from the bank rescue to be used elsewhere, although the Government does not have to borrow the money and could, instead, attempt to live within its means.

Voter pressure

Fearing pressure from voters and trade union leaders for an easier budget than was originally planned, Government sources were quick to play down the significance of new investors in Bank of Ireland for the country's exchequer deficit, which is forecast to hit €18bn this year.

By borrowing €1.1bn less than originally forecast, the State could save around €50m a year in interest payments, a source noted.

"Today's news also means that the entire cost of the PCAR/PLAR will be met from the State's own resources (the National Pension Reserve Fund and cash balances) with no borrowing from the EU/IMF," Davy Stockbrokers economist Conall MacCoille said in a note to clients yesterday.

The net result is that there will be no overall impact from this final bank bailout on Ireland's gross general government debt position, he added.

Mr MacCoille added that the State's relatively small stake in Bank of Ireland (which cannot now exceed 32pc of the shares in issue) means that the markets are more likely to believe that the stake is liquid and could be sold at a future date.

This could have a positive effect on how the State's debts are calculated. If the stake is seen as liquid, it could be included among the State's assets, he noted.

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Irish Independent