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State to save over €1bn a year after new rate cut

New proposals to cut the interest rate that Ireland is paying for its bailout loans could save the State €600m per year.

Added to cuts already agreed with the Government, the new plan from the EU Commission could reduce the burden on Irish taxpayers by more than €1bn a year.

The savings will be made if all EU countries back the commission's plan for bigger-than-expected cuts in the interest being charged for the rescue loans. The plan was announced last night.

The commission is also proposing to abolish any extra premium for Ireland and Portugal on top of what it cost Europe itself to raise the financing for the loans. The first bailout loans carried a 3pc premium, which the Government lobbied to have reduced.

Under the new plans, the zero premium means that, in practice, the two countries will be charged the same interest rate to borrow from Europe as Europe pays to borrow in the markets.

With European funds currently borrowing at around 3pc per year that means a 2.9pc reduction in Ireland's borrowing costs -- €200m more than even the Government was hoping for.

New proposals

These new proposals go even further than the much-hyped interest rate reduction secured by the Government in July.

Yesterday's announcement came as a welcome surprise even to the Government and had not been flagged in advance.

The call to cut the interest rate has been expected since July, but the Government thought the reduction would be around 2pc from the current 6pc.

Analysts were also pleasantly surprised to see that the lower interest rate would apply to all borrowings -- both in the future and to funds already paid out.

The commission proposal, as well as offering Ireland a zero premium, also includes longer maturities for the loans to Ireland of up to 30 years.

As a result, the average length of time allowed to repay loans would rise from 7.5 years to 12 years.

The commission said it thought the better terms would contribute to the sustainability of both Ireland and Portugal and support "their strong economic and reform programmes".

The move was seen as an attempt by the commission to restore its place in EU policy-making. In another dramatic gesture, commission president Jose Manuel Barroso said he was close to proposing options on so-called "euro bonds" -- something fiercely opposed by the German government.

Under the terms of the Irish bailout, the Government borrows money from three sources -- the IMF, the European Union's European Financial Stabilisation Mechanism (EFSM) and the euro area's European Financial Stability Fund (EFSF).

Yesterday's proposal only

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