Question to the Minister for Finance (Michael Noonan, TD)
To ask the Minister for Finance the changes to the EU/ECB/IMF programme of financial support he has secured since taking office; the amount of savings generated by each change; the cost to the State had each change to the programme not been achieved; and if he will make a statement on the matter. – Jerry Buttimer
For WRITTEN ANSWERS on Tuesday, 20 January 2015.
There have been a number of improvements to the terms of our EU-IMF Programme loans since they were initially agreed in late 2010. These changes have included reductions of the interest rates and, in the case of the EU facilities, extensions of maturities. While not part of the EU-IMF Programme we have also negotiated the replacement of the Promissory Notes issued to the Irish Bank Resolution Corporation (IBRC) with a series of longer term, non-amortising floating rate Government bonds. In addition, we have recently made an early repayment of a large portion of Ireland’s IMF programme loans and further early repayments are planned.
The savings arising from these measures are set out below. These savings are equivalent to the cost of not having achieved these measures.
When the programme was initially agreed in late 2010, the average interest rate on the €67.5 billion available to drawdown from the external sources was estimated by the EU Commission to be 5.82% on the basis of market rates at that time. The average life of the borrowing was initially set at 7.5 years.
In July 2011, the Euro Area Heads of State or Government (HOSG) agreed to reduce the cost of the European Financial Stability Facility (EFSF) loans, and similar reductions were subsequently agreed for the interest rates on the loans provided by the European Financial Stabilisation Mechanism (EFSM) and also by the three bilateral lenders (UK, Sweden and Denmark). It is estimated that the interest rate reductions on the EU funding mechanisms and the bilateral loans are worth of the order of €9 billion over the initially envisaged 7½ year term of these loans. As of end-December 2014 the all in euro equivalent cost of our EU IMF programme loans is estimated to have been 3.3%.
Also in 2011, the average maturity of the EFSM and the EFSF loans was extended to a planned 12.5 and 15 years respectively.
In April 2013, EU Finance Ministers agreed in principle to further extend the maximum weighted average maturities on our EFSF and EFSM loans by up to 7 years, over and above the extension agreed in 2011. This further maturity extension removes a refinancing requirement of some €20 billion for the Irish State in the years 2015 to 2022. This extension of maturities has a number of significant benefits for Ireland, including smoothing our redemption profile, improving long term debt sustainability and it also has a positive impact on the cost of Exchequer borrowing through creating further downward pressure on our borrowing costs.
While not part of the EU-IMF Programme, it is also worth mentioning that in February 2013, the Irish Government replaced the Promissory Notes issued to IBRC with a series of longer term, non-amortising floating rate Government bonds. This has resulted in significant benefits to the State, including increasing the weighted average life from c.7-8 years for the Promissory Notes to c.34-35 years for the floating rate notes.
The most recent initiative we have undertaken is the early repayment of up to €18.3 billion of our IMF loans.
Following completion of all necessary approval procedures by our EU and bilateral lenders in November 2014, Ireland repaid the first €9 billion tranche to the IMF over two dates in December 2014. The €9 billion repayment represents almost 40% of Ireland’s IMF loan facility.
This repayment transaction is estimated to reduce the interest bill by approximately €750 million over the lifetime of the loans.
By reducing the interest bill on the national debt we reduce the amount of resources that go towards servicing the debt. This frees up resources for investment in activities that will grow the economy, create jobs and opportunities. This has knock on benefits across the economy and can lower the cost of debt for businesses and families.
Further early repayments of up to €9.3 billion are planned. .
Total estimated interest savings in excess of €1.5 billion are expected to be achieved when the early repayment to the IMF is completed. The actual interest savings will depend on a range of factors including the timing of, and interest rate on the bonds issued as well as the timing and volume of early repayments to the IMF.