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Britain to slash interest rate on bailout loan to Ireland for second time

BRITAIN will slash the interest rate on its bilateral loan to Ireland for a second time, the Westminster Treasury has said.

We will now pay a lower interest rate of 0.18pc above the cost of funding, UK financial secretary to the Treasury Mark Hoban said in a written ministerial statement.

British Treasury sources said the interest rate had been cut "significantly" after it was agreed in principle last July.

The UK lent Ireland about £3.25bn (€4bn) in a bilateral loan last year as part of a £7bn contribution to the country's international bail-out package following the near collapse of its banking system.

Mr Hoban said: "Following the agreement last year, the Treasury have now in principle agreed the new, lower interest rate on the bilateral loan to Ireland. The new rate will represent the UK's cost of funds plus a small service fee of 0.18pc."

UK Chancellor George Osborne has always insisted Ireland should not be forced to pay punitively high interest rates.

But the UK's interest rate had to be kept in line with the deal set out by the European Council for repayments on a euro €67.5bn bailout loans as part of a much larger rescue package.

Following a deal last October, these rates have now been slashed, allowing the UK Treasury to cut the interest rate on its own bilateral loan to Ireland.

Under the original structure of Britain’s deal, repayments were calculated by adding 2.29pc to the sterling seven-and-a-half-year swap rate.

A typical rate was 4.5pc.

But the UK Treasury has now changed the way the interest rate on the loan will be calculated.

It will now be based on the cost of funds defined as the average yield on gilt issuance in the six months prior to the disbursement of a tranche.

Given how low interest rates are at the moment, the UK Treasury admits the cost of the loan to Ireland will be reduced dramatically.

A Westminster source said: "It has gone down significantly. This was agreed in principle last July but we were just waiting for the timing to be right."