IRELAND last night agreed an €85bn (£72.2bn) bailout package after a crunch meeting with European finance ministers.
It accepted a total of €67.5bn in external support as well as raiding its state pension scheme for €12.5bn. A further €5bn from Ireland’s cash reserves was also committed.
The beleaguered nation will immediately inject €10bn to recapitalise its ailing banks, with a further €25bn being placed in a contingency fund.
The central bank yesterday revealed Bank of Ireland and Allied Irish Banks will require at least €7.5bn in extra funds to meet new capital requirement rules.
The remaining €50bn of the bailout will go towards the general running of the country, including paying the wages of public sector workers.
The €67.5bn of external support is made up of a €22.5bn loan from the International Monetary Fund (IMF); €22.5bn from the European Financial Stability Mechanism (EFSM); €17.7bn from the European Financial Stability Fund (EFSF); and €4.8bn in bilateral loans from non-Eurozone nations.
The UK will contribute a total of €7.9bn to the package. This consists of a €3.8bn bilateral loan; 4.5 per cent of the €22.5bn IMF contribution, totalling just over €1bn; and 13.8 per cent of the EFSM, coming to €3.1bn.
The average rate of interest on the loan will be 5.8 per cent over a seven year period. However, EU ministers determined to punish Ireland have slapped a six per cent rate of interest on the European portion of the loan, compared to just three per cent, rising to four per cent in 2013, on the IMF slice.
Interest payments on the loans will account for a staggering 20 per cent of Ireland’s tax revenue by 2014.
The EU hinted that private bondholders would need to take more of the pain when a replacement fund for the ESFM is formed in 2013.
German chancellor Angela Merkel has long argued for bondholders to take a so-called “haircut” when countries are bailed out.
George Osborne announced the UK will not be a part of the new fund, in a move seen as a concession for the UK’s contribution to the bailout.
The UK currently provides 13.8 per cent of the €60bn ESFM. It does not provide funds for the €566bn EFSF.
A dejected Prime Minister Brian Cowen attempted to put a positive spin on the announcement, saying Ireland will be allowed to keep its 12.5 per cent rate of corporation tax.
European nations led by Austria had campaigned for Ireland to be forced to increase the rate as punishment for accepting the rescue package.
Cowen also confirmed he will call a general election in the New Year after the bailout has been received.
The possibility of contagion spreading to the other peripheral nations – such as Portugal and Spain – appeared to grow at the end of last week, with yields on Portuguese bonds soaring to seven per cent. Spain’s yields also shot up to five per cent and Italy’s to four, sparking fears they could follow Greece, whose yields are at nine per cent.