BANK FUNDING:THE GOVERNMENT has been cleared by Eurostat in Brussels to take a two-year "interest holiday" in relation to the repayment of almost €31 billion in promissory notes being provided to Anglo Irish Bank, Irish Nationwide and the EBS building society.
This will lower the budget deficit to under 10 per cent next year – a key psychological barrier at a time when international investors are becoming increasingly sceptical about Ireland’s ability to manage its own way out of the economic crisis and reduce its deficit to 3 per cent by 2014.
The promissory notes will be paid in equal instalments over the next 10 to 15 years, with borrowings of €3.1 billion annually until the full principal sums and interest payments have been met.
Based on an assumed rate of interest of 6.5 per cent, the State would have had to pay interest of about €200 million in 2011. The cost in 2012 would have been €150 million, based on an assumed rate of 4.7 per cent.
Availing of this accounting dispensation from Eurostat means the Department of Finance has estimated that the deficit will be between 9.25 and 9.5 per cent in 2011, and between 6.75 and 7.25 per cent in 2012.
“The Irish authorities have confirmed with Eurostat that . . . no interest will be recorded on the promissory notes in those years [2011 and 2012],” the Department of Finance stated in a technical note yesterday.
“This means that the general government balance for 2011 and 2012 will be unaffected by interest payments relating to the promissory notes.”
These notes are to be repaid by 2025, by which time Ireland will have incurred cumulative interest costs of €2.15 billion.
Anglo is to get €25.3 billion in promissory notes, Irish Nationwide €5.3 billion and EBS €250 million.
These and €200 million in special investment shares in Irish Nationwide and EBS will be shown in budget figures – giving Ireland a headline deficit of 32 per cent. When these payments are stripped out, the underlying deficit is expected to be 11.9 per cent of GDP.