UK throws Ireland a bone with an interest rate reduction on bilateral loan

In the UK, the general perception of Ireland’s bailout is that it is coming from the Troika of the EU/ECB/IMF and that our programme is only of academic interest. Alas for the UK, as part of our bailout, the UK is providing a GBP 3.227bn (€4.0bn) bilateral loan so there might be cause for more interest in how the money is being spent and the prospects of getting it repaid.

The UKbilateral loan is examined in some detail here. Originally it was to have the same punitive interest rates as the EU bailout, but following the EU Summit in July 2011 which saw our interest rate from the EFSF slashed, theUK also decided to cut their rates and provide the funds at more-or-less cost.

And this morning, the Financial Secretary to the Treasury, Mark Hoban MP, told the UK parliament that the UK was cutting the interest rate on the bilateral loan in line with the loan agreement, following declines in the UK’s own borrowing rates, which are at record lows. The bilateral agreement provides for the rate to be adjusted every six months in light of average UK borrowing rates for the previous six months. In addition to the UK’s own costs, they still charge us a 0.18% “handling fee” – equates to €7m per annum once the full €4.0bn is drawn down – to date we have only received €1.4bn.

No details were provided by Mark Hoban on the old rate and the new rate, but the UK10-yr bond appears to have been trading at around 2% for the past six months compared to around 2.5% for the previous six months. Ireland’s loans are for a period of 7.5 years. The UK 10-yr yield this morning was 1.67%

Unfortunately for Ireland, we must repay the bilateral loan to the UK in sterling which has been strengthening against the euro in the past year, so the interest rate reduction announced today is likely be offset by us having to pay back more in euros.

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