State averts €200m UK penalty amid bailout refinancing

The Government has averted a €200 million penalty by deciding not to repay its UK bailout loans early, as it moves ahead with plans to refinance its remaining International Monetary Fund debt as well as bilateral borrowings from Denmark and Sweden.

Taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe said on Thursday they plan to execute an early repayment of the remaining €4.5 billion owed to the IMF and €1 billion given to the State in 2010 by Denmark and Sweden. The move depends on all European Union states agreeing to waive the right of two EU bailout facilities, which gave Ireland €40.2 billion during the crisis, to seek early repayment at the same time.

Meanwhile, a spokeswoman for the Department of Finance told The Irish Times that paying the UK's £3.23 billion (€3.5 billion) credit line early would trigger a €200 million penalty under a break clause attached to the facility.

This would more than wipe out the €150 million interest saving the National Treasury Management Agency has estimated will be achieved by repaying the remaining IMF, Danish and Swedish loans ahead of schedule.

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Support

The UK loans are scheduled to be paid back between 2019 and 2021 and Mr Donohoe told reporters on Thursday that the UK chancellor of the exchequer, Philip Hammond, has indicated his support for the blueprint.

“The only reason we are not repaying this money [early] to the British government and British people is that it is not in our economic interest to do so – and Brexit and other considerations have not played any role in it,” he said.

The Minister said that plan will have “no impact” on Budget 2018.

The State, which received a total €67.5 billion rescue package in December 2010 as it struggled with the rising cost of shoring up the country’s banks and budget shortfalls, repaid some €18 billion out of its €22.5 billion of IMF loans between 2014 and 2015.

Refinancing those borrowings in the bond markets at the time was designed to save the exchequer about €1.5 billion in interest costs. The decision to continue to owe €4.5 billion to the IMF was down to the fact that these were less costly and the fact that EU creditors to Ireland wanted the Washington-based fund to remain part of a post-bailout surveillance team, according to sources.

Reviews

With the Government now set to repay the remaining IMF borrowings as market borrowing costs have fallen further since 2015, the IMF has agreed it could accompany the troika during their six monthly reviews of Ireland in future. However, this would be in a downgraded manner and only if required by the EU lenders.

The NTMA had €20 billion of cash and liquid assets at the end of August. However, the agency signalled that if it turned to the bond markets to help refinance the IMF, Danish and Swedish loans, this would leave more Irish government debt in the market that would be eligible for the European Central Bank’s quantitative easing programme.

The interest bill on the Government’s debt peaked at €7.5 billion in 2014 and is likely to fall below €6.3 billion this year and declined further to €6 billion by the end of the decade.