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The IMF says we can pay back our loans early - but what does that mean?

Early repayment could save hundreds of millions every year – but could also be a political minefield.

Image: Mark Stedman/Photocall Ireland

THE INTERNATIONAL MONETARY Fund has said that Ireland can repay the loans by the agency advanced under the troika bailout without any financial penalty.

In a letter to the Fianna Fail finance spokesman Michael McGrath, IMF mission chief for Ireland Craig Beaumont said:

The IMF accepts early repayments of credit with no fee or charge, nor any conditionality on the part of the IMF.

Several countries have repaid their IMF debt burden ahead of schedule in recent years, including Latvia, Hungary and Iceland.
http://cdn.thejournal.ie/media/2014/08/imf-letter-to-michael-mcgrath-td.pdf

The IMF employs a sliding interest rate scale based on how much it advances to countries – Ireland’s mammoth €22.5 billion package lent out under the bailout currently attracts an average interest rate of around 4.99%, McGrath pointed out.

Relatively benign credit conditions, mostly driven by a strong stance from the European Central Bank on the future of the Euro, have lowered the rate Ireland pays for debt on international money markets to around 2.3%.

IrelandBondSpread The falling interest rate on Irish government debt Source: TradingEconomics

Click here for a larger version

McGrath said: “Given the benign borrowing conditions at present, the €20 billion cash stockpile held by the NTMA and the fact that we are paying almost 5% on the IMF loans, it makes perfect sense for the government to pursue the possibility of repaying the loans early.”

Stumbling block

Ciaran Callaghan, a senior analyst with Merrion Stockbrokers, said that such a move would certainly make economic sense, but could prove to be politically difficult to implement given Ireland’s existing agreements with other debtors.

“The complication is due to the other loans advanced to us. The way the facilities are structured, if you want to pay back the IMF as proposed, the other guys may object over a perceived preferential status.”

Press Briefings 7th Troika Reviews Ministers Howlin and Noonan discuss a troika review during the bailout programme. Source: Sasko Lazarov/Photocall Ireland

Under the terms of the bailout and bilateral packages advanced to Ireland, all loans must be treated equally, Callaghan said.

“That’s the potential stumbling block, and it will take political will to get these guys on board.”

It’s going to take a bit of manoeuvring – but that’s not to say it can’t be done.

He added that political goodwill toward Ireland is quite strong at the moment, raising the prospect of a deal with the State’s other debtors.

Bill reduction

Citing figures provided by Finance Minister Michael Noonan, McGrath said that paying back €15 billion early to the IMF could save up to €375 million per year, reducing budgetary pressures on the exchequer.

“There is a golden opportunity to reduce Ireland’s annual interest bill. I will be putting pressure on Minister Noonan to deliver on this on the resumption of the Dáil in September.”

Read: ‘We’re a normal country now’: Brendan Howlin said goodbye to the IMF’s man in Dublin today>

Read: The IMF is back in town, and it’s not mad on the Government’s mortgage strategy>

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About the author:

Jack Horgan-Jones

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