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Dan White: EU should listen to FG and cut bailout rate

Fine Gael leader Enda Kenny and his finance spokesperson Michael Noonan are in Brussels today on a crunch mission.

They're seeking to persuade the EU Commission to lower the penal 5.8pc interest rate Ireland is paying on the €45bn the EU is lending us through the European Financial Stability Facility (EFSF).

The usurious EFSF rate compares with the 3.1pc interest rate which the IMF proposes to charge on the €22.5bn which it has pledged to lend Ireland.

Meanwhile, the EFSF borrowed the first €5bn of the money which it plans to lend to Ireland at an interest rate of just 2.89pc this week.

Clearly a situation where the EFSF is lending to Ireland at twice the interest rate at which it borrowed that money on the financial markets is not just downright unfair but economically unsustainable beyond the very short term.

Ever since the EFSF was first wheeled out as part of the €110bn Greek bailout in May 2010 the mechanism has been bedevilled by politics.

The Germans, desperate to avoid being lumped with most of the cost of bailing out the peripheral eurozone economies, insisted that countries forced to tap the EFSF for funds pay a penal interest rate.

While that may make for good politics in German, it makes for lousy economics in the PIGS -- Portugal, Ireland, Greece and Spain.

With the bond markets already closed to Greece and Ireland and getting ready to pull down the shutters on Portugal and possibly Spain, these countries have had no choice but to go cap in hand to Brussels for emergency funding, no matter what the interest rate.

This is a situation that can't continue for any length of time.

As Greece has already discovered, and we are now in the process of finding out, penal interest rates makes sovereign debt crises worse.


This is because the extra interest cost pushes up a country's borrowings faster than its economy can grow to service the added debt.

This means that, far from rescuing a country from defaulting on its debts, penal interest rates, such as are currently being charged by the EFSF, make a default virtually certain.

While Fianna Fail profess to dismiss Fine Gael's trip to Brussels as some sort of electoral stunt which is doomed to failure, there is almost certainly more to it than that.

Fine Gael has always been by far the most pro-European of the major Irish political parties.

What this means is that if Fine Gael is objecting so strenuously to the penal interest rates, then Brussels would do well to pay heed.

Unless the EU wants to have to deal with a second, much more serious, phase of the Irish financial crisis, with possibly catastrophic consequences for the eurozone, it would be well-advised to quickly lower the penal interest rates.

Kenny and Noonan are politely asking for a lower rate. Our new government, whatever its composition, might not be so courteous.