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Interest rate on rescue deal was 'a slap in face'

EU countries have "run out of sticks with which to beat Ireland", and the interest rate being levied on the €85bn bailout fund is no more than a "slap in the face", one leading international economist has said.

Several other leading financial commentators have said this weekend that the EU should halve the interest it is charging Ireland on the bailout or risk condemning the country to continued economic turmoil.

Eminent Citigroup economist and commentator Willem Buiter declared in Dublin that the "crazy feature" of the European Commission, ECB and IMF bailout for Ireland was the 5.8 per cent interest rate imposed by our partners in Europe.

"To have a near six per cent interest rate on a facility provided to you by your friends is a bit of a slap in the face," he said.

Mr Buiter said that in the absence of a "carrot" from the EU to encourage Ireland, there was very little encouragement for the country not to restructure and possibly default on the debt.

The only thing that is keeping Ireland in the euro club is a desire to be 'good European citizens' but "since Europe isn't being particularly nice to Ireland in all this" that argument would not gain as much support as it would if there had been "a greater generosity of spirit" from our European masters.

His comments seem to be reflected among Europe's finance ministers who are now preparing to discuss the penal 5.8 per cent rate.

Although European officials were said to be "cautious" about such a reduction, there is a growing realisation that Ireland simply cannot survive if it has to pay the huge reparations on the loans demanded by Europe.

"In my judgment it is extremely unlikely that both the sovereign and the banking sector can get out of this without a restructuring of the debt," added Mr Buiter who also worked with the IMF.

He predicted that the next government would have to tackle the issue "quite soon after they come into office" and this would involve an element of 'burden sharing' for senior unsecured creditors of the banks.

"The political pressures to let the creditors of the banks and indeed the creditors of the government share the pain that taxpayers and the beneficiaries of public spending have felt for this two years-plus now, is going to be very hard to resist.

"My view is if you are going to restructure . . . then the time to do it is as quickly as possible, because you take away the debt overhang problem," Mr Buiter said.

Elsewhere, Europe should halve the interest rate on emergency aid to Ireland when revamping the financial backstop meant to stem the euro-area debt crisis, said David Mackie at JPMorgan Chase & Co.

Ireland faces an average charge of about 5.8 per cent for the rescue package offered in November, by a group led by the EU.

The cost threatens to increase the debt load for an economy that the IMF predicts will grow less than one per cent this year and below two percent in 2012.

Ireland's 5.8 per cent interest rate is based on planned average loan maturities of seven and a half years.

That's less than the 7.9 per cent yield on similar maturity Irish debt in secondary markets.

The first tranche of the bailout, €5bn from the European Financial Stability Mechanism at a cost of 5.51 per cent to the State, was transferred over last week.

The interest rate is the result of the 2.59 per cent the EU paid on a five-year bond to fund the aid, plus a "penal" margin of 2.925 per cent under a formula reflecting IMF practices. The rate on loans by the European Financial Stability Fund, which plans to sell its first bond for Ireland later this month, will be based on a similar model.

"Europe should be able to cut the borrowing rates by around half, or 250 basis points," said Mr Mackie, JPMorgan's head of western European economic research, by telephone from London.

"If you want to exit the crisis without government debt restructuring, the current rates will not do it.

"The borrowing rate is critical given that economic growth will be moderate for some time due to the magnitude of the fiscal tightening that is needed."

Sunday Independent