February 28, 2011

New Irish Government Seeks Bailout Changes; EU Considers Lower Rates

Coalition starting talks as Rehn says bailout interest rate under consideration

Fine Gael and Labour, the two parties that emerged victorious in Ireland’s election, were to launch talks on Monday to work on renegotiation of terms for the bailout package Ireland received from the European Union (EU) and International Monetary Fund (IMF).

At the same time, Olli Rehn, economic and monetary affairs commissioner for the EU, said that the EU will discuss the possibility of lowering the interest rate on Ireland’s rescue package.

Fine Gael, the center-right party led by Enda Kenny, looks set to win more than 75 seats in the parliamentary election held over the weekend, Reuters reported. Labour will apparently gain more than 35 seats, and the two parties are working to form a governing coalition. Chief among their objectives is a renegotiation of the terms of the bailout package, which they view as punitive. Fury among Irish citizens at the financial meltdown under the watch of Fianna Fail, the outgoing party, led to that group’s drubbing at the polls.

While a reduction of interest rates, one area of interest to the coalition, looks likely, the other goal—making senior bondholders accept haircuts—is not. Brussels is ready to discuss considering the former, but is strongly opposed to the latter. "We have a common goal for Ireland to revive its growth dynamic and succeed in ensuring debt sustainability," Rehn said on Monday.

"Pricing policy, I am referring to the interest rates, is one key issue here which will be discussed in the context of the comprehensive strategy of the European Union,” Rehn said. "I expect that this issue of pricing policy will be looked at from the overall European perspective of safeguarding financial stability in the euro area and ensuring debt sustainability of all its members."

While an interest rate cut would be a symbolic victory for the new ruling coalition, it wouldn’t do much toward offsetting the nation’s debt level. Of more value would be compelling bondholders to shoulder some of the losses from Irish banks. To this, however, the European Central Bank (ECB) is firmly opposed, fearing that such a measure will lead to contagion of the debt crisis. Kenny, however, may push for it regardless. The danger is that in exchange, Europe may insist that Ireland raise its corporate tax rate, which it views as hindering competition.

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