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UK slashes its interest rate on our £7bn bailout loans

THE UK government has cut the interest rate it charges Ireland for bailout loans -- with the Government now set to pay dramatically less to borrow from our nearest neighbour.

The loans were announced back in 2010 as the UK's commitment to the Irish bailout.

When the bailout deal was announced, the UK, Denmark and Sweden agreed to make direct loans to Ireland as their bailout contribution. Euro area countries make loans through the euro bailout funds.

In July last year the euro bailout funds slashed the interest rates charged on emergency loans to Ireland, Greece and Portugal -- from 6pc to around 3.5pc -- with the new rate based on the funds own borrowing costs.

At the time the Irish Government said the lower rates could save the State as much as €10bn over the life of the bailout, if the UK and other lenders follow suit.

Yesterday Mark Hoban, minister of state in the UK treasury, confirmed that Britain had now "significantly" cut its interest rates following the eurozone reduction.

Under the new pricing the UK will charge Ireland just 0.18pc above its own borrowing costs for the bailout loans, and the new rate applies to all past and future loans.

Under the original structure of the UK deal, repayments were calculated by adding 2.29pc to a formula known as the sterling seven-and-a-half-year swap rate -- meaning an interest rate of 4.5pc.

The new formula will be based on the average yield on UK government debt in the six months before a loan is made, plus the 0.18pc charge.

The UK has seen its borrowing costs plunge in recent months as investors flee the eurozone and opt to lend to countries including the UK that are not part of the common currency.

Last night the 'yield' or interest on 10-year UK bonds was 1.68pc and an additional 0.18pc would mean Ireland could borrow from the UK at less than 2pc.

The UK advanced £3.25bn to Ireland last year, with the rest of the money available to through the main bailout funds up to the end of 2013.

Irish Independent