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Euro boss backs Irish interest rate cut but Greece vote focus

European Commission president Jose Manuel Barroso is personally behind the institution’s support for a 1pc cut in the interest on Ireland’s bailout loans in a bid to ease the pain of the austerity measures being imposed on the country.

He said he is “very clearly in favour” of a cut in Ireland’s bailout interest rate although it’s not on the agenda of an EU leaders’ meeting this Thursday.

“The position of the Commission is that we believe there should be a reduction of the interest rate paid by Ireland, also for the credibility of the [bailout] programme,” Mr Barroso said at a press conference in Brussels today.

“It’s a way of reducing the pain, but also because it’s a way of increasing our assessment of debt sustainability in Ireland.”

Ireland and France have been at loggerheads over the issue since a summit in March during which Taoiseach Enda Kenny became embroiled in a heated exchange with French president Nicolas Sarkozy over the latter’s demand that Ireland hike its 12.5pc corporate tax rate in exchange for a concession on the bailout.

More recently, Germany has indicated that it is coming round to the 1pc on the European aspect of the €67.5bn in loans to Ireland while government ministers and civil servants have since been trying to defuse tensions between the two countries and broker a French climbdown.

And so far both the European Commission and the International Monetary Fund have supported the cut leaving just the European Central Bank to state its position. Commenting on the Greek crisis, Mr Barroso described the next week, including tonight's confidence vote in Prime Minister George Papandreouas a “moment of truth” for Greece.

International investors remained edgy before a key confidence vote in Greek later today.

The vote is key for proving political backing for austerity measures demanded by international lenders and a failure by Mr Papandreou would raise doubts over a €12bn lifeline which would save Greece from near-term default

However, even If the prime minister survives, traders say relief would be short-lived as the debate over how to involve the private sector in a second bailout package will continue.

German banks also hinted today that they want incentives before they agree to take part in a rescue of Greece, saying they have €10bn to €20bn invested in the country's bonds while rating agency Fitch ratings warned again today that it would regard a voluntary rollover of Greece's bond maturities as default.

And Irish 10-year bond yields remain above 11.4pc compared with 2.95pc in Germany with the cost of insuring debt against default also reaching all-time highs in Greece and Portugal.

This would suggest that Ireland will have to continue to borrow from the ESM rather than enter the open markets over the medium term despite recent changes to rules regarding preferred status for European loans.