Leo Varadkar (Dublin West, Fine Gael)
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Question 141: To ask the Minister for Finance if he will clarify the issues around the interest rate that will be paid by Ireland as part of the International Monetary Fund-EU loan facility; the different rates for the IMF, European Financial Stability Fund, European Financial Stabilisation Mechanism and bi-lateral loans from the UK, Denmark and Sweden; if money will be drawn down from different funds at different times and at different rates or will it all be aggregated; his views on claims in a magazine (details supplied) that Ireland will have to pay interest on money even before it is drawn down; and if he will make a statement on the matter. [47855/10]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The Government agreed on 28 November 2010 to the provision of a €85 billion financial support programme for Ireland in the context of a joint EU-IMF Programme. The State's contribution to the programme will be €17.5 billion while the external support will amount to €67.5 billion. The external assistance being provided is as follows:

- €22.5 billion from the European Financial Stabilisation Mechanism (EFSM)

- €22.5 billion from the European Financial Stability Facility (EFSF) and bilateral loans from the UK, Sweden and Denmark.

- €22.5 billion from the IMF.

The average interest rate on the €67.5 billion available to be drawn from these three external sources under the EU-IMF programme is 5.82 per cent on the basis of market rates at the time of the agreement. The actual cost will depend on the prevailing market rates at the time of each drawdown. The average life of the borrowings, which will involve a combination of longer and shorter dated maturities, under each of these sources is 7.5 years and the interest rates applying to borrowings from each are set out below based on market rates at the time of the agreement. EFSM The interest rate on the EFSM loan will be 5.7% which is comparable to IMF rates. Under Council Regulation (EC) No. 407/2010 of 10 May 2010 the rate is made up of the cost of borrowing by the European Commission and a margin which is charged to the Member State concerned. The margin which has been agreed for the EFSM loan to Ireland is 2.925% within the overall interest rate of 5.7%. EFSF The interest rate on the EFSF loan is 6.05%. The EFSF borrows on the international capital markets on the strength of guarantees provided by Euro area countries (excluding Ireland and Greece). In order to obtain the top AAA rating from the credit rating agencies it was necessary for the EFSF to put in place certain enhancements in the form of collateral and the cost of these arrangements are reflected in the interest rate charged by EFSF on its lending. IMF The interest rate on the IMF loan is 5.7%. IMF lending is denominated in the Fund's unit of account, Special Drawing Rights (SDRs). The SDR comprises a basket of four currencies, Euro, Sterling, the US Dollar and Japanese Yen. The IMF's lending rate is based on the three month floating interest rates for the currencies in the basket. The interest cost on the IMF loans is expressed as the equivalent rate when the funds are fully swapped into fixed rate Euro of 7.5 years duration. This expresses the interest rate in terms which can be compared with the cost of borrowing from EU sources. UK bilateral loan The interest rate on the UK loan is 5.9%. The amount lent to Ireland by the UK will be the sterling equivalent of €3.8bn. The interest rate is based on a 7.5 year period. The rate on each tranche will be a fixed rate, set by adding a fixed margin to the sterling 7.5 year swap rate at the time of disbursement. The interest charge is aligned with international rates and is between the EFSM and EFSF rates. Bilateral loans from Sweden and Denmark Discussions have not yet commenced on the bilateral loans with Sweden and Denmark. It is anticipated that loans will be disbursed in tandem from the EU and IMF. Disbursements of the UK loan which is backloaded will commence following the IMF third review of Ireland's Memorandum of Understanding in September 2011.

It is important to note that the (blended) interest rate of 5.8% on these loans is at a far lower cost than would be available to Ireland in the financial markets. It is designed to avoid overburdening the Member State concerned or acting as an impediment to economic growth while at the same time providing an incentive to return to the markets. At present the yield on Irish government bonds is over 8% in the secondary markets as compared to the rate of 5.8% at which we will be borrowing under the EU-IMF Programme. We will not be obliged to drawdown any of these loans if there is an opportunity to return to the markets at sustainable rates or we can access funds at lower cost elsewhere.

There have been suggestions made that Ireland is being charged an excessive rate of interest compared to that available to Greece under the Euro Area Loan Facility. This is not correct. The loan facility to Greece is based on three-year loans – those to Ireland on 7.5 years. Moreover, as has widely been reported, the Greek authorities have sought to have their borrowing realigned on similar terms to Ireland's.

The conditionality attached to drawdown is provided for in the relevant loan agreements which will be laid before the Houses of the Oireachtas. It is not correct to suggest that Ireland will have to pay interest on money before it is drawn down. I might explain, however, that under the terms of the EFSF there is provision for the retention of a loan specific cash buffer in order to underpin the AAA rating attached to EFSF borrowings and there are as normal in such circumstances some transactions costs in this connection, details of which will be set out in the EFSF Loan Facility Agreement.