State to contribute €17.5 billion

The State will contribute €17.5 billion to the €85 billion package of financial support with an interest rate of around 5.8 per cent, Taoiseach Brian Cowen confirmed tonight.

Announcing details of the joint EU-IMF programme, Mr Cowen said it “represents the best available deal for Ireland” and provided “vital time and space” for the State to address its unprecedented economic problems.

“A programme of assistance for Ireland totalling €85 billion has been agreed. This includes external assistance of €67.5 billion, comprising €45 billion from the European Union and bilateral loans from the UK, Sweden, Denmark, and €22.5 billion from the IMF,” Mr Cowen said.

“The estimated average interest rate of the loans is in the order of 5.83 per cent per year based on current market conditions.” Mr Cowen described the interest rate as “blended”.

Mr Cowen also confirmed the remaining €17.5 billion would be funded from the State’s own resources, with €12.5 billion from the National Pension Reserve Fund (NPRF) and €5 billion from “our cash reserves”.

There would be no change to the corporation tax rate of 12.5 per cent, he said.

Mr Cowen said he wanted to make it clear that the option of requiring subordinated bondholders to share the burden of bank losses was fully explored by the Government during the negotiations.

The Taoiseach described the programme as “absolutely essential” for the country.

“The Government’s agreement to it follows very involved and tough negotiations over recent days...We have carefully considered all available policy options,” he said.

“This agreement is necessary for our country and our people. It is in the best interests of Ireland and of the European economy on which our future prosperity depends.”

He said loans were now available to Ireland at a cheaper interest rate than if funds were borrowed from the markets, and without them tax increases and spending cuts would be more severe.

Mr Cowen said a large portion of the loans, some €50 billion, would go towards paying for social welfare payments, pensions, health and education “as we manage the transition to a sustainable deficit and debt position”.

He said the programme endorsed the proposed adjustment of €6 billion next year and €15 billion over the next four years, while recognising the timeframe for reducing the deficit to three per cent of GDP should be extended to 2015. This did not alter the target but provided room for manoeuvre if economic growth was lower than expected.

Referring to the reform and restructuring of the banking system, he said the programme provided for a “fundamental downsizing” of the sector.

“We have had a banking system that has been too big for the size of the economy we have and it has to be downsized and exposures have to be reduced.” He said he was indicating there would be a greater degree of public ownership of the banking system.

Asked about the possibility of requiring senior bondholders to share the burden of bank losses, Mr Cowen said there was no agreement from the European Union for such a proposal because of the impact it would gave in elation to the stability of the entire financial system.

There was no “political or institutional support” for the idea, he added.

Mr Cowen said leaving the euro was “not an option for this country”. He said the idea that there would be no costs associated with defaulting was incorrect. “We are not an irresponsible country,” he said. Ireland wanted to contribute to stability and recovery.