Olli Rehn, the European commissioner for economic and monetary affairs, said on Monday (28 February) that the issue of the rate could be examined as part of a discussion of the way that loans made by the European Financial Stability Facility (EFSF) are calculated. Rehn said: “I expect that this issue of pricing policy will be looked at from the overall European perspective of safeguarding financial stability in the euro-area and ensuring debt sustainability of all its members.”
Patrick Honohan, the governor of Ireland’s central bank, said on Tuesday (1 March) that there could be “movement” on the rate. Speaking in Dublin, Honohan said: “I want the rate to be lowered.” He added: “There could be movement on those terms.”
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Under the terms of the €85bn bail-out agreed with the International Monetary Fund (IMF) and its eurozone partners, Ireland pays a rate of 6% on €22.5bn of loans from the European Financial Stabilisation Mechanism. The rate is determined by the operating rules of the EFSF and includes a 3% premium on market lending rates. The rates on other parts of the loan, from the European Commission and the IMF, are slightly lower.
Reducing the rate on the EFSF loans would be easier than on the other sources of funding for Ireland. Changing the rate from the IMF would require a renegotiation of the fund’s rules with its 187 members, for example.
Enda Kenny (pictured above), the Fine Gael leader who is almost certain to be the next prime minister, said that he would raise the rate issue with other European countries. “We are going to move on this next week,” he said, referring to talks with European leaders at a meeting of the European People’s Party in Helsinki (see left).
The government argues that the high interest rate makes it harder for Ireland to cut its deficit. Economists have calculated that a rate that was 1% lower, the largest reduction thought possible, would save the country €225 million over the seven years that Ireland has been given to repay the loans. In addition to the financial benefit, a lower rate would also be of enormous political value to the new government.
EU officials say that agreement to change the rate would have to be part of an overall deal on measures to protect the stability of the eurozone. EU leaders are scheduled to agree these measures at a summit on 24-25 March.